First of Long Island Q2 2024 Earnings Call Transcript

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Provided by Quartr
July 26, 2024

There are 5 speakers on the call.

Operator

Welcome to the First of Long Island Corporation's Second Quarter 2024 Earnings Conference Call. On the call today are Chris Becker, President and Chief Executive Officer and Janet Burnell, Senior Executive Vice President and 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.com /fnbliearnings2024q2. 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 2023 10 ks filed on March 8, 2024, as supplemented by our 10 Q for the quarter ended March 31, 2024, 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 of Long Island Corporation's earnings call for the Q2 of 2024. I'm pleased to report linked quarter improvements in many key financial ratios and financial statement line items, including increase in return on assets, increase in return on equity, improvement in efficiency ratio, growth in deposits, growth in loans, higher noninterest income, lower noninterest expense, higher net income, higher earnings per share and most importantly, increase in net interest margin. After 6 consecutive quarters of net interest margin decline from 2.97% for the 3 months ended September 30, 2022 to 1.79% for the 3 months ended March 31, 2024, our margin increased to 1.8% for the 3 6 months ended June 30, 2024. While not a substantial move up, certainly a positive indicator for stabilization.

Speaker 1

Repeating what I stated last quarter, barring any significant changes in our funding mix or short term rates moving higher, we believe our net interest margin should be at the bottom. The pace of interest earning assets repricing was basically in line with the pace of interest bearing liability repricing during the Q2 of this year and that trend is expected to continue, if not improve, in the quarters ahead. Managing the mix of the balance sheet will augment margin improvement and coupled with a more favorable yield curve, this improvement can accelerate. Talk of lower short term rates is encouraging for continued earnings growth moving forward. The bank had stronger loan originations during the Q2, closing $70,000,000 with a weighted average rate of approximately 7%.

Speaker 1

2nd quarter originations were driven by C and I and owner occupied commercial mortgages, highlighting our focus on relationship based business. Originations during the Q2 continued the progress made remixing our loan portfolio from consumer to commercial that began in 2020. During that period, relationship based C and I and owner occupied commercial mortgages increased 80% and other commercial real estate increased 30%. In total, our commercial lending business has grown $582,000,000 That growth has been masked by letting our residential lending business amortized down by $514,000,000 over the same period. Building our commercial relationship business has also resulted in an improved mix on the funding side as non interest bearing deposits represented 30% of our funding mix at June 30, 2024 compared to 25% on December 31, 2019.

Speaker 1

In the current environment, I believe it's important to note that our remix to commercial lending has not included any significant increase in multifamily loans outstanding. Our multifamily loans totaled 8 $68,000,000 at the end of the Q2 of 2024, up minimally from $835,000,000 at the end of 2019. The June 30, 2024 pipeline was $137,000,000 with a projected average rate until the closing, so the weighted average rates move with the market. The pipeline has increased from the end of the first quarter it was at $113,000,000 We have been closely monitoring rate resets and have provided detailed information in that regard in a Form 8 ks filed on March 1, 2024, supplemented by additional information in our Annual Shareholders Meeting presentation on April 16, 2024. During the second half of this year, based on rates as of June 30, 2024, we have $65,000,000 of multifamily and non owner occupied commercial mortgages repricing with a weighted average rate of 4.24% before the rate reset and a projected weighted average rate of 7% after the rate reset.

Speaker 1

Looking forward into 2025, based on rates as of June 30, 2024, we have $122,000,000 of multifamily and non owner occupied commercial mortgages repricing with a weighted average rate of 3.53% before the rate reset and a projected weighted average rate of 7.02% after the rate reset. For loans with projected cash flow stress, we have started to reach out to borrowers to discuss options for their consideration. Our criticized, classified, past due, non performing and charge off levels all remain low and we currently assess our credit quality as strong. On June 28, 2024, we opened a branch on the North Fork of Long Island in Southhold. We believe this location will be a great complement to the rest of the East End of Long Island presence that we established over recent years, including Riverhead, Southampton and East Hampton.

Speaker 1

We currently have 41 branches covering Nassau and Suffolk Counties in the boroughs of Manhattan, Queens and Brooklyn. Our branch count is down from a high of 52 branches at the end of 2019, but our total deposits have increased by approximately 220,000,000 dollars over that period, a much more efficient model. We continue to evaluate prospects for geographic expansion as well as efficiencies within our existing branch network. Our company has been around for nearly a century because we stay focused on the fundamentals of strong credit quality and meaningful customer relationships. We believe our fundamentals have built and will continue building a strong franchise.

Speaker 1

Growth and margins have been challenged over the past 18 months, but we remain optimistic about future opportunities to build shareholder value. Janet Vernel will now take you through financial highlights of the quarter year to date. Janet?

Speaker 2

Thank you, Chris. Good afternoon, everyone. Following up on some of Chris' comments, positive trends quarter over quarter included the following: an increase in return on assets from 0.42 percent to 0.45 percent, an increase on return on equity from 4.72% to 5.15%, increase in net interest margin from 1.79% to 1.8 percent, improvement in the efficiency ratio to 73.6% from 76.5%. Although these are slight improvements, they can be forward facing indicator of the trending stabilization of our net interest margin. Coupled with the recent heightened market anticipation of a Fed funds cut in September, we expect to maintain this trend.

Speaker 2

Company recognized net income of $4,800,000 for the Q2 of 2024, dollars 4,400,000 for the linked quarter and $6,900,000 for the same quarter last year. Earnings per share were $0.21 for the quarter equal to the per share dividend declared by our Board of Directors in June of 2024. EPS for the linked quarter and the same quarter last year were $0.20 and $0.31 respectively. The increase from the linked quarter was largely attributed to the increase in net interest income by 270,000 dollars and decrease in salaries and employee benefits of $474,000 primarily due to decreases in employee incentive accruals. These are partially offset by a $570,000 provision for loan losses.

Speaker 2

The decline from the Q2 of 2023 is largely attributed to the decrease in the net interest income by 3,400,000 dollars a $570,000 provision for loan losses, partially offset by a decrease in the provision for income tax expense of $1,000,000 attributable to lower earnings and a decrease in the effective tax rate. Non interest income of $2,900,000 exceeded non interest income recorded in the linked quarter of $2,800,000 and the same quarter last year of $2,700,000 Improved results from service charges on deposit accounts, merchant card services and bank owned life insurance were the main contributors to the increase. Management had guided in analyst calls to quarterly non interest income totals of approximately $2,600,000 Based on deposit account service charge collection improvements after our system upgrade, management currently believes recent increases in monthly service charge revenue will remain stable. Although merchant card service income can fluctuate, we now expect for the last two quarters of 2024, these revenues will trend consistent to the 1st two quarters. Non interest expense totaled $15,800,000 for the current quarter as compared to $16,200,000 in the linked quarter and $16,500,000 in the same quarter last year.

Speaker 2

Earlier in the year, management had guided in analyst calls to quarterly non interest expense totals of approximately $16,250,000 We did have some open staffing positions during the Q2, but we also lowered the incentive compensation accrual rates. We anticipate non interest expenses for the last two quarters of 2024 will be comparable to the 1st two quarters. During the Q2, we used excess cash to pay down about $143,000,000 of wholesale borrowings, leading to a small deleveraging of the balance sheet of 40 $6,000,000 even though we had deposit growth of $37,000,000 and loan growth of $14,000,000 Loan growth was better than the net number reflects as C and I loans increased $27,000,000 and commercial mortgages increased by $15,000,000 Commercial growth was offset by the residential mortgage decreasing $27,000,000 as we continue to remix the loan portfolio toward commercial lending. The overall loan yield of 4.22 was up 8 basis points quarter over quarter. The 2nd quarter saw a notable increase in average non maturity interest bearing deposits of $85,000,000 and certificates of deposit of 15,000,000 dollars average non interest bearing checking deposits increased by $11,000,000 and represent 33% of total deposits.

Speaker 2

The weighted average cost of interest bearing non maturity deposits was 2.84% and for CDs it was 4.24%. As of the close of the second quarter, the repricing of wholesale funding, FHLB borrowings and brokered CDs to current market rates remained largely behind us. Although at a slower pace, we continue to approve upward interest rate adjustments based on the overall customer relationship. The purchase of the fixed or floating swap in March of 2023 continues to pay dividends adding $1,200,000 to the net interest income in the Q2. SWAP matures in March of 2026.

Speaker 2

Net interest income for the Q2 of 2024 increased $270,000 compared to the linked quarter and decreased $3,400,000 from the same quarter last year. Our net interest margin of 1.8% for the Q2 of 2024 compares to 1.79% for the linked quarter and 2.17% for the same quarter last year. Yield on total interest earning assets was 4.1 6% for the 2nd quarter, 4.8% for the linked quarter and 3.78% for the same quarter last year. Cost of total interest bearing liabilities was 3.56% for the Q2 of 2024, 3.47% for the linked quarter and 2.51% for the same quarter last year. The allowance for credit losses as of June 30, 2024 was $28,500,000 The provision was booked to the ACL of 570,000 dollars during the quarter.

Speaker 2

The quarterly provision was largely due to $276,000 Pacific Reserve on 1 non performing loan and about $421,000 of net charge offs. The reserve coverage ratio at June 30, 2024 remained flat at 0.88% compared to the linked quarter. The capital position remains strong with a leverage ratio of approximately 9.9% at June 30, 2024. Book value per share was $16.71 at June 30 versus $16.22 at June 30, 2023. The accumulated other comprehensive loss component of stockholders' equity is mainly comprised of a net unrealized loss and available for sale securities portfolio due to higher market interest rates.

Speaker 2

There were no share repurchases in the Q2 of 2024. The effective tax rate for the Q2 of 2024 decreased to 1 point 6% as compared to 6.2% for the linked quarter, the annualized effective tax rate is now expected to be approximately 4%. The change was due to a reduction in 2024 projected income with the rate staying higher for longer than anticipating causing a greater impact of the tax exempt items on the effective tax rate. With that, I turn it back to our operator

Operator

Mark, please proceed with your question.

Speaker 3

Thank you for taking my question and good afternoon and happy Friday.

Speaker 1

Hey, good afternoon, Mark.

Speaker 4

Hi, happy Friday.

Speaker 3

If the Fed follows the forward curve and we see 2 more cuts this year, I'm curious how much you think the net interest margin might be able to snap back by the end of the year?

Speaker 1

Well, in a previous call, we had indicated that each 25 basis point cut could improve margin by 4 to 5 basis points, and we haven't updated that further. So that still seems to be pretty good estimate. Okay.

Speaker 3

And then secondly, I was curious, credit obviously here is terrific, but what drove that $1,800,000 uptick in nonperforming loans? And could you also share with us what net charge offs were in the quarter?

Speaker 1

Yes. Net charge offs were a little over $400,000 for the quarter. And the it was one loan that went nonperforming where we took that's the loan that had the specific reserve and had a partial charge off down to the appraised value. The charge off was about 175,000

Speaker 3

dollars Okay. And what type of loan is that?

Speaker 1

That was a multifamily loan. That's our only multi family loan in non performing.

Speaker 3

All right. And then I heard the numbers that you mentioned on the call about multi family and non owner occupied commercial real estate that's rolling from sort of 4.25% up to 7% or 3.5% up to 7% on the $122,000,000 I guess I'm curious, have you guys done an analysis that sort of looks at whether the cash flow on those buildings will be sufficient once the rate basically doubles?

Speaker 1

Yes, absolutely. We've looked at every loan from that's repricing between now and the end of 2025 to calculate their repricing rate and their cash flow. And that's where I'd mentioned anything that's showing some possible stress, we're reaching out in advance to those customers to see what type of strategies we can do to help relieve any of that stress. We've had success in that regard. We've had situations where the borrower has refinanced early and paid down.

Speaker 1

We've had other situations where we've gotten additional piece of collateral or by combining 2 loans into 1, one that had stronger cash flow, one that maybe was showing signs of stress at the reset to combine them to make the cash flow better overall. So borrowers have been receptive to us reaching out early and because obviously they don't want to get into a situation and especially there's a current option for a rate that might be a little bit less than what they would reset at, say, 5 or 6 months down the road.

Speaker 3

Okay. And then the last question I had was around the tax rate. I heard, Janet, your comments, the effective rate for the year will be around 4%. What will it look like in 2025? Like what's sort of a normalized run rate for you all?

Speaker 2

Well, assuming that income goes up, the effective tax rate will go up, obviously, because the tax exempt items will be a smaller percentage of income. I hesitate to give a number. I don't know, maybe I'd say, I don't know, probably maybe about 7%, I would estimate at this point. But really it's going to depend on where income comes in and how we manage those tax exempt items.

Speaker 3

Great. Thank you.

Speaker 1

Thank you, Mark.

Operator

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

Speaker 4

Hey, good afternoon. Hi, how are you doing? Good. Just wanted to start off with you provided the multifamily and non owner occupied CRE repricing in the second half of the year. Just curious, how much of the multifamily and non owner occupied repriced in the first half of twenty twenty four?

Speaker 1

Yes. It was it's similar to what's going on in the second. I don't have that number right in front of me. But it was very similar to what's repricing in the second half.

Speaker 4

Got it. And as far as the funding side goes, with CDs are up probably pretty close to market rates at this point. I mean, how much more do you think has left to reprice upwards in the second half of the year?

Speaker 2

There's very little bit. We just had one small piece that repriced that was at a low rate on the brokered side. And as far as the retail CDs, they're pretty much at market. I would say it's a minimal what's left to reprice to market rates.

Speaker 4

Got it. So I mean, I'm just curious because you did have a decent amount of CD repricing, especially kind of earlier in the year as well as the borrowings. Why not a little bit more positive on the margin in the interim between now and when rate cuts begin, given that it seems like similar asset repricing on the other side of the balance sheet?

Speaker 1

Yes. I think as we looked at the second quarter, right, it was pretty well even as far as what repriced on both sides of the balance sheet. And we still have on the non maturity side in our money market deposit accounts, you still have those one off relationship discussions, and we still had some increase in those rates throughout the Q2. And I think that's why we're still being a little cautious on this. We're looking closely at those, but there's still that's where the numbers still went up for us in the Q2.

Speaker 4

Got it. And on the loan growth, it sounds like pipelines are up, improved the past couple of quarters, good originations. Are you still thinking inclusive of the residential planned runoff on net low single digit growth for this year?

Speaker 1

Yes.

Speaker 4

And if you're getting into for getting into a rate cutting environment as we get towards the back half of 'twenty four to 2025. Is that residential strategy, do you think that will continue or moderate if there's less funding pressures and lead to higher kind of net loan growth into 2025?

Speaker 1

It will continue. We don't plan to begin originating residential mortgages. We stopped originating them towards the second half of last year. We don't plan to begin originating them. Now we may consider purchasing loans if we wanted to have some diversification in the portfolio, but we really want to focus on continuing to grow the relationship base, C and I and owner occupied commercial mortgages.

Speaker 1

If you look at our loan portfolio kind of pie chart, that's still the smallest slice while it's up from a low of 7% a handful of years ago to about 12% or so now. Ideally, we'd like kind of like 4 equal buckets of multifamily, other commercial real estate relationship, C and I and owner occupied and then residential. So the residential still has a ways to go to get down to that quarter, if you look at those four pieces of the pie. And at that point, we would possibly consider, as I said, buying some residential.

Speaker 4

Got it. That's helpful. And then as you guys have reached out to what you said in the multifamily customers and the ones that look tight. Any sense of how big that customer segment is either on for

Speaker 1

the remainder of this year, it's 6. For the remainder of this year, it's 6 loans. So it's a small number of borrowers.

Speaker 4

Great. And as you guys start to see the margin come up and get like a little bit more comfortable with the overall earnings and profitability profile here in the back half of the year into 2025. Do you think you start to revisit the buyback conversation?

Speaker 1

Yes. I certainly think that that's something. I mean, we did buy back some stock in the Q1 of this year. And that's something we look at every quarter along with the dividend and make those decisions. But certainly, we have $13,000,000 still under the buyback program that we have outstanding.

Speaker 1

So absolutely, we would look at that.

Speaker 4

Great. Appreciate all the color. Thanks, Chris, Janet. Great quarter. Thank you.

Speaker 4

You're welcome.

Operator

All right. Thank you. This concluded our question and answer session. I will turn the floor back to Chris Becker for closing comments.

Speaker 1

Yes. Thank you for your attention and participation on the call today. We remain focused on making the right decisions to increase shareholder value over the long term. I thank our employees for their continued dedication to service our customers and communities. Enjoy the upcoming weekend.

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Earnings Conference Call
First of Long Island Q2 2024
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