Q3 2022 First of Long Island Corp Earnings Call
Welcome to the first on long Island corporations third quarter 2022 earnings conference call on the call today are Chris Baker, <unk>, President and Chief Executive Officer, Jamie Carney, Chief Financial Officer, and Bill Quigley, Our Chief Accounting Officer.
Today's call is being recorded a copy of the earnings release is available on the Corporation's website S.
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Earnings call webpage at H.
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Four slash earnings.
Before we begin the company would like to remind everyone. This call may be may contain certain statements that constitute forward looking statements.
Made under the Safe Harbor provisions of the U S. Private Securities Litigation Reform Act of 1995 and such.
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.
Investors should also refer to our 2021 and 10-K filed on March 11, 2022, or 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 Baker.
Thank you.
Good afternoon, and welcome to the first of all on the Island Corporation's earnings call for the third quarter of 2022.
We believe the third quarter and first nine months of 'twenty 'twenty. Two are the direct result of the strategic initiatives. Our management team has focused on since January 2020.
We have highlighted the initiatives are numerous communications to shareholders and the broader investment community.
They include supporting the growth of our balance sheet with profitable relationship banking business.
Improving the quality of technology through continuing digital enhancements.
Optimizing our branch network across a larger geography.
Using new branding and the community first focus to improve name recognition.
Enhancing our website and social media presence.
Recruiting additional seasoned banking professionals with long standing relationships.
And focusing on strong cyber security and environmental social and governance practices.
Specific results on these initiatives during the third quarter include.
Completing the relocation of our Melville branch to our new corporate headquarters location at $2 75, Broad Hollow Road Melville New York.
Earlier this month, we held a ribbon cutting for Melville combined with the celebration of the first national Bank of long island's 95th anniversary.
We are proud to be the longest standing truly independent bank on long island that opened approximately a century ago.
Our notification was mailed to our port Jefferson branch customers.
The relocation of that branch is scheduled for December one of this year.
Regarding our branding we are completing a significant amount of branch renovations to comp better complement our new logo. These.
These efforts will continue throughout the fourth quarter.
We signed a new seven year contract with our primary technology service provider Pfizer Bank, which includes our core conversion to their DNA solution. The.
The conversion project kicked off in September 2022, and is anticipated to be completed in October 2023.
We believe this investment will provide the best available technology to our customers today and the open architecture for future enhancements.
I have reported on the progress on establishing a middle market team and branch presence on the east end of long Island.
We are proud of the results of these two relatively new initiatives as of September 30th 2022 they have brought in approximately $140 million in new deposits.
During the third quarter of 2022, we rolled out a new ESG web page in the corporate governance section of our Investor Relations site.
Please visit the site to learn more about corporate integrity at the first of all on the Island Corporation.
These initiatives have helped produced our best nine month performance in the company's history, and I want to recognize our board of directors and employees for their hard work and dedication to the company's success.
Looking forward, we see definite near term challenges being caused by fed rate increases not seen in over 40 years.
Deposit customers are demanding higher rates and wholesale borrowing rates are generally well north of 4% putting pressure on our net interest margin.
The margin for the first nine months of 2022 was 2.95%.
Our margin for the third quarter of 2022 was 2.97%.
However, the margin for the month of September 2022 was 2.85%, reflecting my comments.
Our bank is liability sensitive.
Especially in rate shock scenarios.
The rates up modeling shows downward pressure on our net interest margin as liabilities reprice faster than assets, followed by widening margins as asset repricing catches up.
Based on the current indications from the fed regarding short term rate increases it is likely our margin will fall during at least the first half of 2023.
Ultimate changes in the margin, including future improvements are based on how high the fed moves rates, how long rates stay high.
The resulting shape of the yield curve.
And reactions of competitors.
As reported in our earnings release, the mortgage loan pipeline is at $68 million about half the level of last quarter end.
I stated last quarter that we anticipate new loan originations in the second half of 2022 will be lower than the first half of 2020 to.
That anticipation is coming to fruition and will likely continue into the first half of 2023.
On a positive note our banking teams have been very successful, bringing in new deposit relationships and we believe that momentum will continue into 2023.
It's also anticipated that our efforts to consolidate branches and back office staff will result in lower occupancy and equipment expenses in 2023.
Jay Makoni will now take you through some highlights of the third quarter and year to date, Jack Thank you Chris.
Net income for the third quarter and nine months ended September 32022 grew by nine 1% and eight 7%, respectively to $12 5 million and $37 million when compared to the same period last year.
Growth in net income for both the quarter and nine months ended was driven by significant increases in our average loan balances since the prior year.
Average loan growth was funded by decreases in excess cash held in interest, earning bank balances higher checking deposits and time deposits.
Period end loan balances were $3 3 billion on September 32022, flat when compared to June 32022, but up over $200 million year to date.
Mortgage loan originations of $130 million for the third quarter were offset by liquidations and pay downs.
Weighted average rate on new mortgage loans continues to improve and was 4.51% for the quarter and should increase as our current loan pipeline at $6 8 million has a weighted average rate of 551%.
Our mortgage loan pipeline decrease from June 32022, as the pace and frequency of rate hikes by the fed reserve has more than doubled loan offering rates in just six months and have suppressed borrower demand.
Residential refinancing activity has completely dried up and new purchase activity has slowed dramatically as buyers are waiting for home prices to decline while salaries are hopeful that low inventory levels will allow them to get the price they want.
We continue to see activity in the commercial mortgage market, but at rates not say fix it not significantly higher than what is available and investment securities and not currently attractive to management.
Our net interest margin for the quarter was $2 nine 7% an increase of 26 basis points when compared to the same quarter last year. The improvement in our margin was due to the following factors to bank utilize lower yielding interest, earning assets to fund loan volume.
That's what rates of mortgage backed securities continued to improve throughout the year.
$19 million floating rate corporate bond portfolio, which repriced quarterly based on a 10 year swap rate continued to improve with the increase in long term rates and the average bounce on noninterest bearing checking accounts improved $96 million or 7% to one 5 billion.
The Federal Reserve has increased short term rates by 325 basis points. Since March of 2022 is expected to increase rates, an additional 125 basis points to 450% by the end of the year. This is the 100 basis points higher than their published fed funds target rate on June 32022.
Frequency and size of the rate increases is causing all banks to review their current rate structure on core deposits to not only retain deposits, but attract additional funds as well.
With current federal home bank wholesale funding costs between 4.82% to 5% on terms between six months to five years, focusing on core deposit funding, which has always been a key part of our strategic initiatives is even more important during this rising rate environment and.
An extended period of persistent flat and in some cases, we've already deal curve is likely to result in downward pressure on both net interest income and margin.
Our ability to leverage the balance sheet and take advantage of high offering rates in the securities in the home market is limited as the high cost of new core wholesale funding could be at lower margins.
Moving to asset quality, the bank had no nonaccrual loans on September 32022.
Bank had approximately 732000 and net charge offs during the current year we.
We had a provision of $1 1 million for the quarter, which was mostly attributable to change charges booked current and forecasted economic conditions and net charge offs banks reserve coverage ratio was 94 basis points on September 30 of 2022, a decrease of two basis points from December 31 2021.
Noninterest income increased 192000 for three months ended.
September 32022, the increase includes higher fees and debit and credit card activity and additional income from bank owned life insurance as we purchase additional $20 million in December of 2021.
As noted in our earnings release, the increase in non interest expense, excluding prior year branch optimization charges was due to higher salary and benefit costs, including new hires and incentive costs and occupancy costs related to the relocation of our corporate offices and new east and branches during.
During the quarter, we repurchased approximately 209579 shares at 19056 cents, we have approximately 19 million remaining in our current authorization and we anticipate this program will continue during the fourth quarter, given our strong leverage ratio of 975%.
In addition on September 32022, we announced the declaration of our third quarter dividend of <unk> 21 cents per share, which represents a 5% increase over the dividend paid the same quarter last year. The dividend was paid out on October 21 2022.
And I turn it back to our operator for questions.
Thank you our first question for today comes from Alex Torno Piper Sandler Alex. Please proceed with your question.
Hey, good afternoon.
Hey afternoon al.
I'm just wondering if you could.
Obviously tough interest rate environment and I appreciate your comments on expectations for the NIM over the next couple of quarters. I was just wondering you know in in those.
Expectations, how you could maybe just give us a little bit more color on how the overall balance sheet look so we see a little bit of shrinkage.
And then maybe just talk a little bit in the same context.
About the liquidity position and what kind of cash flows youre getting from your securities portfolio on a on a quarterly basis.
I think Alex.
As Chris to say with loan growth going down.
Looking at probably a flat to slightly decreasing the own portfolio I'd say over the next several quarters because.
We want to really look too.
Allow that cash flow to come in and as we have some wholesale borrowings that might be coming too that are at lower rates and repricing higher we think it makes a little bit more sense to use that cash flow and pay down those dose wholesale borrowings. Obviously, we have our lending teams, but what kind of trial would probably be a little bit more out of the broker market, but we're still working with all the teams that we.
Hired to continue to bring in core relationships that provide DDA lines of credit.
And build franchise value over the long term even during this disembodied, but again that might not be more than what pays down in cash flows for the for each quarter, but we take it as a prudent method to do.
Got it and then.
A question on cash flows.
Yes, I was just curious.
Oh yeah.
Yeah, just curious portfolios look in probably about 10% of the portfolio, excluding the corporate bonds. So if you back that $119 million out of R. R.
Our book value not the fair value of our book value. If you look at our 10-Q and get that that amount, it's about a 10%, which probably is between $60 million over the next year and cash flows and our securities portfolio and again back out the corporate bonds, because that they reprice and don't mature.
Until 2028, and then for our security our loan portfolio.
10% of that portfolio matures re prices in the next year and then with cash flows coming in.
Probably looking about 15% to 17% of cash flows so meaning 10% of Europe .
Bonds mature or reprice and then the other 6% to 7% is cash was coming in that can be reinvested and again, we'll use that cash flow to either grow key.
And chips or two look to paid out wholesale funding.
Okay.
And then as it.
As you.
As you look to build some of these correlation chips and bring in deposits are you seeing obviously, you're seeing some pressure in the market everyone is with respect to deposit costs I'm just curious if theres certain pockets of the market that you're seeing more pressure are you now.
If you've seen that that deposit pressure ramp up even more over the last couple of weeks.
Yeah, I think when you look at it.
Sure.
We're kind of looking at it like that by the end of the year, it's going to be.
Up between up 400 up 500 type scenario in nine months, but I think for most banks when you look at their non maturity deposits.
They probably have reacted in a up 50 to 100 basis points to that first kind of nine months and where we're giving this guidance about pressure on margin as we think.
Going forward take any kind of increase on accumulative basis right. Eventually everything will get back to what is a shock 400 or 500 level. So we think that that pressure will start to accelerate and I think you're starting to see that a little bit with that business customers in municipal deposits with that.
Their ability to go to the treasury market, you've seen with two year Treasury.
450.
Level and and as the fed continues to raise maybe gets more into three months, where they don't have to lock up that funds as much. So you see a little bit more pressure going into your kind of money market and now accounts is that duration back to kind of leaves a little bit.
Okay.
Then maybe you can just give us some comment on on credit obviously pretty.
Pretty.
Not seeing any any real pressure on credit, but it's.
Loan growth slows should we expect that provision to basically head back down towards zero over the next several quarters.
Yeah, I think Chris has had kind of mentioned.
We see kind of loan growth declining potentially offsetting any potential future.
Adjustments.
For additional reserves for economic conditions, obviously GDP unemployment there.
Fed with with increasing rates in and trying to drive that inflation is obviously trying to increase.
Unemployment and slow down demand so if that results in the trends in our forecast to go there, but yeah. We think that if the portfolio loan portfolio stays fairly flat led to something unforeseen, we think provision would be fairly modest again, but unless something.
Really changes on the economic forecasting front.
Okay and then just final question for me could you maybe I missed it in your prepared remarks, just what's going on with salaries during the third quarter.
Yeah. So when we had that that really kind of stems back more from I would say end of Q2 into Q3, we're in most of our branches or branches throughout the first half of the year. There was a really a lot of adjustments from competition and banks had to.
Kind of look at Ara Sally.
Structure with them.
Minimum wage rates going up and so forth. So that was just kind of a one time adjustment to get our wages kind of in line with competition.
To try to prevent turnover.
Got it 10 file because there was a lot of there was a lot of pressure from from competitors.
On on rates for certain branch positions.
And we made we made adjustments proactively too.
For retention purposes.
Perfect Yeah, Youre not the only one seeing that pressure.
But 10, five thats the right starting point for heading into the fourth quarter for salaries.
Yes, I mean, I would think when you're looking at really noninterest expense overall, Alex I would think for fourth quarter may be about 17, five and five.
<unk> being a little bit as Chris alluded to we're trying to finalize with our rebranding efforts with updating some of our branches and some are branches just haven't had updates in years, which is kind of norm.
No.
Repairs and maintenance on them.
We think that would be a little bit of more of a one time expense and then right now obviously, we're going through we're going to be updating our budgets just like every other bank out there and really doing a top to bottom approach and we realize with with.
The flat to inverted yield curve, that's even give me more critical to really maintain and watch expenses, which does become a little bit more difficult on salaries with inflation, but yeah right now I would preliminary think $17 million in 2023 for noninterest expense overall, but we will revisit that and also give you guidance at the end of the fourth quarter.
When we update and give up.
2023.
<unk> guidance.
Okay, great. Thanks for taking my questions.
Thanks, Alex.
Okay. Our next question comes from Chris O'connell CBW, Chris. Please proceed with your question.
Hey, yeah.
Just wanted to follow up on the expense comments there.
Not this year, but in past years.
Usually have a pretty good uptick.
Yes.
First quarter of the year end seasonality.
With expenses.
Do you expect to see that next year and kind of average down over the course of the year or.
Be a little bit different this summer.
I'm trying to think what the seasonality I don't know if this is really I think it might have just been timing of it.
It was payroll taxes, and sometimes adjustments to incentive accruals that might come in with.
Both cash and restricted stock units, sometimes dose based on performance matrix and you get the true up.
And then it also could have been just coincidence, maybe with some hiring teams quarter over quarter and so forth but.
We think like head count next year, it's going be fairly flat. So we think that for the most part it should be fairly consistent other than those are kind of salary items.
From quarter to quarter next year.
Okay got it.
And then circling back on the securities cash flows in that book.
As you go forward with.
Minimal.
Kind of the loan growth outlook.
Are you expecting to reinvest those.
Back in or do you expect to try and use those to pay off from some the wholesale fundings or I guess whats the with the use of cash flows coming off that book can be.
Yes, I think it's a combination of our first thing right now with rates going up so quickly and customers starting to request higher rates is is to protect liquidity and make sure that.
Maintain our relationships.
Maintain our liquidity levels and as we build up cash.
Think it's prudent to take a portion of those and pay down wholesale but we also think it's prudent that.
These are some of the best rates, we've seen in 10 15 years on the asset side and what we don't want to do is is not purchased anything in.
The thought is when inflation comes down rates will come down we don't wanted to say, we missed the opportunity to reinvest in some of these higher rates. So we will be looking to take a portion of those cash flows lock in maybe some treasuries.
Three to five year bucket.
And then also deploying to CMO and MBS is low.
A little hesitant on CMO and MBS is because like everything when rates eventually come down those those cash flows come screaming into net yield goes away. So we locked liked to lock in a little bit of that at higher yield so, but we're being mindful of pay up wholesale and also people demanding.
Higher cost of funds, so monitoring our liquidity and having that cash available.
I would like to add it's really going to be deposit driven.
We think in this environment.
We don't know how high and how long the fed is going to be increasing and obviously the.
Wholesale rates were going up tremendously so as Jay said, why we would like to take advantage of these higher security yields right now, we really think it's important to be.
Core deposit driven.
Yes.
<unk>.
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And then given the balance sheet.
Fairly.
Flat going forward.
Yes, I hear you that theres going to be.
Sure.
NII.
With the NIM decline here does that allow I mean does that allow you to kind of.
I guess, the NIM pressure as you get into 2023.
To a certain extent.
And do you have any outlook as to like.
What you're shooting for in terms of.
NII or how much.
That's going to be declining over the first half of the year.
I mean, obviously, we don't we don't give guidance on NII, especially in our.
Rate environment, where rates are moving so quickly.
The last 40 years, but what I would kind of point you to Chris is if you look at our June 30, 10-Q, and our 930 10-Q.
Net interest tables with the various shock analysis.
Can look in there and Youll see.
200, plus 300, knowing where we've come from right. We've already kind of up at 300 and kind of look at those and I'll give you the kind of the percentages.
For a decline in NII and so forth again.
Jacques up as Chris said, a lot of things factor into that the steepness of the yield curve inversion of the yield curve and and again how long April remain.
We think the fed is towards the end of this rate cycle by the end of the year as Dave said, a little bit more in Q1.
We're hearing some economists say it could go up a little higher we seen other economists, saying that inflation is going to drop dramatically and they're going to have to pause or maybe cut so.
These factors could change.
<unk>.
NII.
But frequently so that that's why we're being cautious, but we do think that it will.
Minimize the downside if you think about it now wholesale.
Wholesale borrowing costs and.
Where you can put money in the investment securities and really even loans because loan yields have not really fully reacted.
To the rate increases yet the spread is very minimal on those too.
That would put further pressure on the margin if we were to borrow funds that at $4 75, or 5% and invest them at five in a quarter or $5 $50 or 6% would put further pressure on the margins. So we do think it will help preserve the margin if as those wholesale borrowings come due if we have excess cash flow.
Better option may be to pay those down and of course every quarter that goes by every month that goes by and CS.
Change.
We react to what we think the best opportunity is at that time.
Yes.
That's good color.
Helpful. And then last one from me is just.
What's your J D.
Good tax rate for going forward.
I would say about $19 five would be a good rate for that for the remainder of the year.
For full year.
Okay.
Hi.
Got it.
What about just going forward into 2023.
2023, I would say probably right right around 19, 5% to 20 would be a good tax rate. We don't expect obviously, there's been nothing coming out from Congress with any changes in federal tax rates.
<unk> is still applicable cadets over eight 8 billion debt REIT excludes an exclusion goes away. So we would.
Keep it right around 20%.
Great. Thanks.
Thanks for taking my questions no problem.
Thanks Bruce.
Thank you.
Concludes our question and answer session I'll turn the floor back to Chris Becker for some final closing comments.
Yes.
Thank you for your attention and participation on today's call.
So we're very pleased with the <unk> to present the results of another solid quarter.
And update you on some of our key initiatives and we look forward to talking to you about our year end results next quarter have a good rest of the day.
Okay.
The meeting will go on air and as scheduled time on the meeting web page.
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