Q4 2022 First of Long Island Corp Earnings Call
Welcome to the first of long Island Corporation's fourth quarter 2022 earnings call.
On the call today are Chris Becker, President and Chief Executive Officer, K, Makoni, Chief Financial Officer, and Bill <unk>, Chief Accounting Officer.
Today's call is being recorded a.
A copy of the earnings release is available on our corporate website at F N B L I dot.
Forward Slash sports Slash Www Dot C. S T proxy dotcom sports Slash F N B L. I forward Slash earnings forward Slash 2022 forward Slash Q4.
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.
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 set forth in the company's filings with the U S Securities and Exchange Commission.
Investors should also refer to our 2021 10-K filed on March 11 2022.
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.
Thank you.
Good afternoon, and welcome to the first of long Island Corporation's earnings call for the fourth quarter and year end of 2022.
The year marked our banking subsidiaries 95th anniversary, we celebrated the loyalty of our local markets with our community first volunteerism program.
Our employees donated over 500 hours of their time to aid local charities and fighting food insecurity, helping seniors caring for animals and building housing.
It was inspirational and I want to thank the entire first national Bank ally team for meeting our mission of continually doing the right things to help our customers employees and shareholders succeed while being socially accountable to the communities we serve.
I'm gratified to announce another year of record performance.
Net income and earnings per share both set new company highs in 2022 at $46 9 million and $2.04 respectively.
The K B W Bank honor roll recognizes banks with more than $500 million in total assets that have reported consecutive increases in annual earnings per share in each of the past 10 years.
Stockholders should know that your company is on that list.
We were also proud to be named to Piper Sandler small bank all stars in 2022.
It recognizes companies with a market cap below two 5 billion.
Outperformed the industry in growth profitability and credit quality and capital strength.
Yearend and average total assets loans and deposits all increased in 2022.
Average noninterest bearing checking deposits increased over 7%.
And averaged over 40% of total deposits during the year.
We believe these numbers represent a true relationship oriented bank.
I previously reported on the relocation of our corporate headquarters to $2 75 broad Hollow road in Melville earlier this year.
During the fourth quarter, we completed the sale of five Glen had buildings.
And closed a freestanding drive up a T M leased location.
'twenty 'twenty. Two also included moving our Port Jefferson branch to a new main street village location and.
And we are nearing completion on a new Bohemia location on veterans Memorial Highway for the relocation of that branch.
As the first National Bank of long Island, we were missing a presence on the east end of the island.
We corrected that oversight by establishing a branch in east stamped in in late 2021.
And the South Hampton branch in early 2022.
Combined with our Riverhead branch opened in 2020.
We are making a name for ourselves on the east and.
We have been fortunate to hire some of the best bankers in these markets.
Our team is dedicated to transforming this 95 year old institution to a modern commercially focused bank.
Our growing banking teams are bringing in relationships, helping our balance sheet mix.
Our new branding is being complemented his freshman biting our new website and social media presence continues to grow in terms of visits and impressions.
Our commitment to technology upgrades and cyber security investments are recognized by our employees and customers.
And will it be being acknowledged in the industry for our successes.
We are moving forward, while staying true to our history of strong fundamentals that deliver results, including consistent loan underwriting criteria.
Looking forward, we see a challenging landscape in 2023.
The federal reserve's increases in interest rates interest rates have not been at this pace in over 40 years, putting downward pressure on the banks net interest margin.
Our bank's liability sensitive position makes us more susceptible to rising rates.
Our net interest margin was 274% in the fourth quarter of 2022.
But was 266% for the month of December .
Our margin very likely will be lower than the December number in the first quarter and full year of 2023.
How much depends on the fed's future moves and competitive conditions.
Jay will speak to our deposit betas.
Our political and regulatory message of removing so called junk fees is limiting the bank's ability to charge for the more fundamental services we provide.
Progress in fee income always seems to be offset by competitive reductions.
Noninterest income is currently projected at $2 5 million per quarter in 2023.
At the same time regulatory oversight continues to pile on operational costs related to third party management information security ESG.
And climate change among other areas no matter in institutions size.
Management efforts to create efficiencies through branch and back office consolidations have kept expense growth in check and 2023 noninterest expenses should be in line with 2022 numbers.
Noninterest expenses are currently projected between 16, 5% and $17 million per quarter in 2023.
We have persevered through past challenges to remain a valuable franchise with strong capital strong asset quality, a strong deposit base and dedicated directors employees customers and stockholders.
Thank them all for their years of support and we remain committed to doing the right things for them.
Jay Makoni.
We will now take you through some highlights for the full year and fourth quarter.
Thank you Chris as Chris mentioned, the bank had a record earnings of $46 9 million and earnings per share of $2.04 in 2022 banks return on assets and equity were 1.11% and 12, 3% respectively.
Net interest income improved $8 9 million or eight eight.
Eight 3% to $115 7 million and our margin increased $115 15.
<unk> 15 basis points to 289% in 2022 upfront to seven 4% prior year.
The growth in net income for the year was mostly mostly attributable to a $300 million increase in average loans for the year stable noninterest income of $12 4 million and a slight decline in noninterest expense of $1 1 million to $67 6 million for the year.
The bank's asset quality remains excellent with no non accrual loans on December 31, 2022, and our capital position remains strong with a leverage ratio of 983%.
For the year the bank originated approximately 600.
$656 million in mortgage loans with a weighted average rate of approximately $3 six 9%.
Mortgage origination slowed to $63 million during the fourth quarter due to higher rates and less demand from consumers and businesses, but the average rate improved to 544% and the yield on our C&I portfolio at the end of year increased to $6 three 4% and.
In previous quarters, the bank reported a loan pipeline of committed but not yet closed mortgage loans.
On September 32022 that number was 68 million on December 31, 2022 committed but not yet closed mortgage loans were $51 million.
This reporting period and going forward, we report a loan pipeline consistent issued letters of intent loans in underwriting and committed but not yet closed loans.
That number on December 31 was $127 million compared to 181 million at September 32022, we believe a broader definition of the loan pipeline is a better indicator of loan demand and activity in the upcoming quarter. The bank expects overall loan growth to be in the low single digits in 2003 2023, given the.
Increase in rates concerns for recession, and the inverted yield curve.
Net income for the fourth quarter of 'twenty to 2022 declined $2 6 million when compared to the third quarter of 2022 due to a $3 1 million increase in interest expense, primarily due to higher borrowing cost and seasonal deposit outflows from average checking deposits into interest bearing liabilities.
During the first nine months of 2022, the bank was able to lag increasing the rate it pays on non maturity deposits the salaries or as aggressive push to increase federal fund rate by 450 basis points since March 2022, and expectations. They will continue to increase short term rates to possibly 525% in the first half.
2023 has increased the cost of funds we pay on these types of deposits.
Thanks cumulative deposit beta on non maturity interest bearing deposits through December 31 was 21% the bank's historical cumulative deposit betas on non maturity interest bearing deposits has been plus or minus about 35%.
The cost of retail deposits and wholesale funding also increased with the cost of funds on interest bearing liabilities rising from 48 basis points to 123 basis points since September 32022.
The bank has approximately $348 million in wholesale funding net matures during 2023 with the current weighted average cost of $2 two 8%.
The bank based on the current interest rate environment, we anticipate using seasonal deposit inflows and monthly cash flows from our securities and loan portfolio in 2022 to repay a portion of our wholesale funding position.
The bank is liability sensitive with approximately $410 million or 10% of our interest earning assets either maturing or repricing in 2023.
And approximately $340 million or an additional 8% of interest earning assets and annual cash flows from securities and loans. These cash flows will be reinvested at current market rates or be available to repay wholesale funding management regularly analyze potential balance sheet restructuring that could help improve our liability sensitive position.
The bank's correlate core noninterest income run rate, excluding one time items has been approximately $3 million over the past four quarters. We expect this run rate will decline to approximately $2 5 million in 2023. The decline is due to a nine service component of the bank's pension expense.
The bank's noninterest expense was $18 4 million during the fourth quarter, an increase of $1 4 million when compared to the third quarter. The increase was due to several onetime charges, including a net loss of 553000 on the disposition of premises in fixed fastest relating to several of the banks for Mcmahon head locations.
531000 in costs relating to the branding initiatives and branch locations and 210000 for two branch relocation, we expect noninterest expense to be $16 5 million to $17 million in 2023 flat when compared to 2022.
As we've previously noted the bank moved its corporate headquarters to Melville in April 2022, and effort to have a more convenient location for our customers employees.
Between the disposition of the Glen had assets the new medical headquarters and the various branch openings closings and relocations the bank expects occupancy and equipment expense to be lower in 2023 versus 2022.
As noted in our earnings release, the bank repurchased 915868 shares were $17 9 million in common stock in 2022 Bank has approval to purchase up to an additional $15 million of its outstanding plant.
Finally, we anticipate a tax rate between 23 to be approximately 18, 5% with that I'll turn it back to the operator for questions.
Okay.
Thank you.
Our first question for today comes from Alex toward all.
Piper Sandler Alex you May ask your question.
Hey, good afternoon guys.
Hi, Alex.
Hey, first off Jay you went through the cash flows on the securities and expected deposit flows kind of quickly do you mind, just saying those again.
Sure sure.
Yes so.
We have approximately $410 million or 10% of our interest earning assets that mature or reprice in 2023.
And then based on prepayment speeds, we kind of Alex what I like to do is I look at last year's full year annual cash flows 'twenty 'twenty. One I look at 2020 twos I look at estimates from our Darling system, and then I kind of look at our quarterly run rate and based on that I'm projecting about 300.
$40 million or about another 8% in interest, earning assets from securities and loan cash flows.
Okay.
Do you have are you able to give us a sense for the portion of that that might be.
Loans that will reprice higher sort of.
Like what kind of pick up you might potentially get.
I mean on the allowance on actual re pricings.
That.
Reprice off of Prime East quite that's more about 289 or about $300 million and repricing that would come up and those are the ones that are really repricing up with prime each quarter.
So that that would be the best indication there the remainder is price off of.
Typically the five year Treasury plus.
Plus a margin so it depends on.
When it was booked it was booked five years ago.
Obviously, it would be the increase in the five year.
Treasury during that time.
Alright, so sorry to clarify $300 million is kind of floats with prime each quarter and about $100 million is based on.
Courier <unk> loans that are coming up for the reset date.
Okay, and the reset date and downward I guess five years exactly and a price off at a pace that would depending but mostly we would probably be at the five year Treasury, maybe some a little bit of up to seven.
Okay got it.
And then in terms of deposit flows that might be expected early in 2023 can you just give a sense if the sort of line of sight on that.
Deposit inflows or outflows and then maybe talk a little bit about the deposit strategy today.
Yeah, I mean, typically like Chris said for the year, we saw our interest bearing or DDA increase and were very comfortable with that debt amount coming up but right at the end of the quarter right December we've always had kind of seasonal outflows and it was probably about 200 million for the fourth.
Last quarter, we have had some of it come back and it usually comes back in.
Throughout the first quarter.
And from there. So we're looking at those seasonal inflows to come in and then try to use those as well as funds coming in from the Casuals, we talked about both for loans and securities and use a portion of that was to pay down and wholesale borrowings and then also look to utilize some of it to for growth and securities and a little bit quoting.
<unk> loans.
And our deposit strategy continues to be building relationships with the.
With the loan teams that we've added are beefed up over the past three years, they continue to to bring in new relationships and obviously with that you get you get a percentage of DDA.
And you need to be competitive on the.
Yeah.
Interest bearing deposit side.
Got it.
<unk>.
And then.
I also just wanted to ask you guys have always been very conservative on your credit underwriting and.
I'm not sure we're seeing a lot of cracks at least visibly.
And what's going on in the market with respect to commercial real estate multifamily those types of loans I'm. Just curious from where you guys said, if theres anything that youre seeing out there that is starting to look like early indications of potential pain or anything that you guys are worried about.
Any color would be helpful.
We really haven't seen any.
Any cracks at this point I would say in our most recent we do obviously a.
Korea analysis every quarter, we look at it.
Market data.
A very slight uptick in multifamily vacancies, but.
Nothing that's causing us concern at this point.
Okay. Thanks for taking my questions.
Thanks Alan.
Thank you. Our next question is from Chris O'connell of Tw, Chris You could proceed with your question.
Sure.
So I was hoping could.
Could you just get a little bit of clarification.
As Judy.
Fee guidance.
It's coming out of <unk> to start the year I think you said $2 5 million a quarter for 2023.
Okay.
I guess is that it immediately starting at that level in <unk> 23.
The variance.
Which line items is that coming out of the most relative to where we were in the fourth quarter.
Right right. So Chris we expect our core core noninterest income and all of the various lines. Obviously, we have some going up some coming down by our core interest income is going to be about that two and a half million dollars throughout the quarter.
As Chris alluded to we're seeing some pickup in like debit card credit card activity and then we're anticipating some loss in NSF fees, just because of regulatory.
Regulatory and competition within the industry. The real reason for the decline is our pension so for the past four or five years, our net pension expense in our financials has been a credit to the to the bank Q3 about 100 $135000, we get a net credit and part part of that is in the non <unk>.
Income and part of it is in salary expense. They make you breakout each piece this year our pension we have a fully funded pension the bank hasn't contribute had to contribute for well over five six years to find it it's over 100% funded but because of the decline in assets.
The increase in interest.
Interest rates and a decline in the fair value of the asset.
The GAAP accounting requires you to amortize a loss in that DP assets decreased more than the liabilities and that's closing.
Income on non interest income going down to $6 million. So that's really and you divide that by four so that that's what's driving it is a noncash item.
Interest rates decline and.
The funding.
<unk> increases you could see that kind of switched the following year. So it's a noncash item that is really not related to the core business.
Got it so that's going to come out of like the other fees line item for you guys and then correspondingly.
Compensation expense for the most part yes.
Yes, exactly and we are getting some benefit in less salary expense. So I would look at it overall that we're going from $135000 correlate net credit to about a $1 4 million dollar <unk>.
Expense. So that's the actual overall impact it's just that it's broken out in two pieces and unfortunately, the decline in our return on assets and the amortization of this.
Loss because of the funding position clauses that have to decreased nine interest income $2 5 million for the year.
Understood and.
On the expense side.
Could the 16 $5 million to $17 million.
Is there just.
You guys had kind of a lot moving.
On the different branch relocations and openings and things like that I mean is there any particular cadence as it start off the year.
At the higher end or the lower end and builder of reduced throughout the year.
Is there any seasonality to that.
I would say, it's pretty consistent maybe a little bit higher in the first quarter, just because of payroll expenses and FICA and so forth that kind of add up and may be trending down but not anything significant.
Got it.
Okay.
And just going back to the margin discussion.
So.
Appreciate the guidance as to where you guys were in December .
And how it's going to trend.
Sure.
For the first part of the year lower.
And any sense as to.
<unk>.
Based on I guess, assuming two call it two more hikes here.
The trajectory of the NIM are aware.
It could bottom either on timing or or or in the level.
Yeah.
It's getting really.
Based on the volatility and the pace and increase its hard for us to provide that number. That's why we tried to kind of issue that for the quarter that Dan was $2 74 for a months. It was about $2 66, like we said are better year to date is 21% the way we come up with our beta is we just take since our low point, which was probably <unk>.
Q4, non maturity deposits, we take that increased over from from that point through December and we just simply divided over the.
Where the fed funds rate is now which is $4 15, we get 21% and historically when you look back probably since 2000, when we look at our deposit beta studies, obviously, the fed is going to pause, but deposits still continued to increase so when you look at the full rate cycle when they stop and then kind of.
Deposits kind of reach there.
Seek their level in that current rate cycle, it's been probably plus or minus 35%. So if you look at where fed funds is going to wind up and you kind of take 35% of that historically, that's where we've kind of ended up.
But we are we do caution that this is.
That pace magnitude the shortness of the increase.
Could cause that to be a little bit higher and a lot of those previous rate cycles fed funds went up 25 basis points over a two two and a half year period and inflation was below 2%.
Here were 40 year high inflation and they went up 500 basis points in under a year. So that's why we're cautious on.
Giving guidance, we're trying to give you as much pieces as we can in <unk>.
Help you out with that.
Yes, absolutely.
Yes.
And then lastly.
You guys have.
That's a bit left here on the buyback authorization.
<unk> are pretty well capitalized long growth.
Kind of slower from a macro perspective, how are you guys thinking about.
The utilization of the buyback kind of on a go forward basis, yes.
Yes, we're going to be in the market from time to time in the quarter, we might be a little bit more cautious in the first half just.
Wanted to kind of see how this kind of plays out with the fed.
Theres a little.
Battle going on between the fed raising rates to between five and 6% when you're seeing economies. So when you look at the fed funds futures right and they have to show it and kind of coming down and you can see the comparisons get a little bigger with the 10 year trading in that three and a half.
Down maybe 75 basis points over the last quarter. So we're getting to more of an inversion in more of a disconnect and.
Whether it's a soft landing of heartland, and so we're going to be a little bit cautious maybe in the first half just to preserve capital and then kind of see how things play out and then.
Be a little bit more aggressive in the second half.
Great. Thanks, Chris Thanks, Jay I appreciate the time, thanks for taking my question. Thank you.
Thank you. Our next question comes from Nicole.
Galena from American capital partners.
Yeah.
Nicole you May proceed with your question.
Okay.
Good question.
A question of the call are we okay.
Okay.
That concludes our question session.
I will turn the floor back over to Chris Becker for some final closing comments.
Well. Thank you all for your attention and participation on today's call.
We're certainly very pleased to present the results of another record year and we look forward to talking to you at the end of the first quarter have a great rest of the day.
Okay.
Yes.
The meeting will go on air and as scheduled time on the meeting web page.
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Okay.
Yes.
Yes.
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