Q1 2023 The First of Long Island Corporation Earnings Call
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 Makoni, Chief Financial Officer.
This call is being recorded.
B of the earnings release is available on the Corporation's website and F. N B L. I dot com and on the earnings call webpage at H P. P. P. S. Colon forward Slash sports Slash Www Dot C. S T proxy.
Hum forward Slash F N B L I Board Slash earnings forward.
Forward Slash 2023 forward Slash Q1.
Before we begin the company would like to remind everyone that this call me 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.
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 work hard to our 2022 T. K filed on March nine 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.
Thank you.
Good afternoon, and welcome to the first of all not incorporations earnings call for the first quarter 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 zero, and five and 10 year treasury yields averaging 164 and 2.16% respectively.
The fed has driven short term rates up to 5% over the past 12 months, while five year and 10 year Treasury yields are in the mid threes.
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.
And 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 first quarter.
We are proud that total deposits have held steady ranging from 3.4 to 3.5 billion during the quarter and averaging 3.47 billion.
All numbers are in line with total deposits at year end 2022, with only a $66 million reduction.
Checking deposits still represent 35% of total deposits.
And we were able to maintain our deposit levels without any increase in brokered 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.
Deposit betas have been plus or minus 35%.
Through the end of the first quarter. These.
These deposit betas in the current rate cycle are approximately 28%.
One interpretation could be we are nearing the end of repricing deposits higher.
However.
Our historical tracking of deposit betas does not include our near 500 basis point rate increase over 12 months with four 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.
Our uninsured and uncollateralized deposit levels.
I 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 $250000 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 million dollars to operate their business.
Versus a bank that takes in large concentrations of private equity funds earmarked for startups.
Our monthly net interest margin continues to be impacted by the current environment.
Recent monthly margins had been $2 66 in December .
245 in January to 25 in February and $2 34 in March.
February numbers are always lower due to the short month.
With the fed still talking about the possibility of higher rates.
<unk>, our short term rates remaining high for an extended period.
Our cost of funds should continue to outpace.
Any increases in the average yield on earning assets through the remainder of 2023.
Though 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 million at March 31, 2023.
Loan demand was weaker during the first quarter.
And our focus this year is skewed towards commercial relationship lending and related deposits.
Borrowing at five plus percent to put on commercial or residential mortgages at.
At 5.5% to 6% is not overly enticing to us.
Especially on the residential side when they were just refinance immediately after rates fall.
The reduction in C&I loans during the quarter was related to lower line utilization as customers have reacted to higher interest rates and 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 as zero on March 31 2023.
Jay Makoni will now take you through the first quarter results Jack.
Thank you Chris.
While the bank remains liability sensitive at March 31, 2023 managed we proactively completed two balance sheet repositioned transactions during the first quarter to help us reduce our sensitivity to rising interest rates.
In March the bank entered into an interest rate swap to convert $300 million of fixed rate residential mortgage loans to floating rate for a period of three years tobacco pay fixed rate of 382% who receive at floating rate based on the sofa overnight rate.
This transaction was immediately accretive to annual interest income by approximately $2 9 million if rates remain unchanged.
The bank also sold $149 million in fixed rate municipal securities, earning a tax equivalent yield of 332%.
Purchased $135 million of floating rate SBA securities projected to yield $5 three 8% at the time of purchase.
As noted the bank recognized a $3 5 million pre tax loss and expects the earn back to be one two years.
Transaction was also immediately accretive to annual interest income by approximately $2 8 million.
The first quarter results do not reflect a full quarters 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.
First reversing the decline in net interest income and margin will take time for assets re pricing to catch up to liability re pricing or until the federal reserve bank reduces short term rates.
Straight swaps and security repositioning transactions results in loans and securities repricing within one year nearly doubling during the quarter to $813 million or 21% of total securities and loans at March 31 2023.
The bank Securities portfolio was $655 million and comprised 16% of total assets at the end of the quarter.
Portfolio has a duration of approximately 3.6 years approximately 36% of the invest portfolio is comprised of floating rate assets. The bank has the $135 million in SBA floating rate securities with the current yield as of the end of the month of $5 seven 7% that repriced quarterly off the prime rate and represent 21% of the invest.
<unk> portfolio.
<unk> has $116 million of floating rate corporate bonds with a current yield of approximately $3 eight 4% that reprice correlate well if the 10 year swap rate.
Thanks.
Government agency fixed rate mortgage security portfolio, including Cmos was 260 million and comprised 40% of the investment portfolio.
This portfolio has a current yield of approximately 1.85%.
The bank expects approximately $50 million 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 at currently yields 3.84%.
Our $3 3 billion loan portfolio is comprised of 1.9 billion in commercial real estate loans, $1 2 billion in residential mortgages and $197 million $97 million in commercial and industrial loans.
Approximately $560 million or 18% put repriced by March 31, 2024 of which $300 million related to the interest rate swap transaction previously discussed and 115 million loans that reprice on a monthly basis, such as home equity and C&I loans.
We expect approximately $75 million of cash flows from the loan portfolio per quarter.
<unk> expects, an additional 178 million or 6% of the loan portfolio reprice from approximately 397% to $6 six 2% from March 31, 2024 to March 31, 2025 based on current market rates.
The bank had $383 million in outstanding Federal home loan bank advances with a weighted average cost of $4 three 1% and an average maturity of four three years at the ended the quarter Bank.
Bank has one remaining advance that will mature in 2023.
$50 million with the current cost of funds at 262% and will mature on June one 2023.
Homelife advance.
Federal home loan bank advances decreased $28 million during the quarter.
The bank has brokered time deposits that totaled $176 million or 5% of total deposits at March 31.
That number is the same as year end 2022, the broker time deposits have a weighted average cost of $3 one 2%.
Average maturity of approximately six months.
$85 million or 48% will mature in the second quarter of 2023 with an average cost of funds of $2 six 1%. The current reinvestment rate for both federal home Bank advances and broker time deposit market is currently between five to five in a quarter.
We expect that a significant portion of our current wholesale borrowings.
Our 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 maintained over one 5 billion in available collateralized borrowing lines with the federal loan Bank and Federal Reserve Bank.
The bank had over $143 million of cash and unencumbered securities that'll be to be pledged.
This liquidity exceed the $1 3 billion in uninsured and uncollateralized deposits that the bank held at March 31.
The bank had net income of $6 5 million and earnings per share of <unk> 29 for the first quarter of 2023 compared to $12 1 million or <unk> 52 per share for the same period 2022.
Bank return on assets and equity were <unk>, six two and seven <unk> respectively.
The key drivers that cause net income to decline for a decrease in net interest income of $4 4 million and a loss on sale of securities of $3 5 million. These two items were partially offset by a decline in income tax expense of $2 5 million.
A decrease in the provision for credit losses of $1 5 million.
The decline in net interest income of $4 4 million.
It was due to the federal reserve bank, increasing short term rates by over 475 basis points and the inversion of the yield curve.
Spread between the three month and 10 year U S. Bond is currently embedded over 150 basis points a level not seen in over 40 years.
The magnitude of these rate increases has caused the cost of our deposits and wholesale funding to increase at a faster pace than the yield on interest earning assets.
Interest expense increased $9 4 million when compared to the prior year quarter. It was only partially offset by a $5 million increase in interest income.
Our cost of interest bearing liabilities increased to 196% in the current quarter, an increase of 142 basis points.
Non interest, earning assets increased 35 basis points.
The bank's quarterly net interest.
Quarterly non interest income excluding losses on sale of Securities was $2 5 million.
This result was consistent with expectations and this run rate should continue throughout 2023.
Also consistent with expectations to bank noninterest expense was $16 5 million during the first quarter, an increase of $802000 from the first quarter of last year.
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 noninterest expense to be 16 $5 million to $17 million per quarter for the remainder of the 2023 managed.
Management is very mindful of expenses during the current environment, we will 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 994 at March 31, two times 2023, and an increase of 11 points between eight three at December 31 2020 to.
Accumulated other comprehensive loss net of tax improved by $3 8 million or five 9% since year end 2022.
The bank did not repurchase any shares shares during the first quarter of 2023 and future repurchases will be decided based on maximizing shareholder value. We still have approximately $50 million authorized under the most recent board approved stock repurchase plan.
The effective tax rate declined to nine 1% in the first quarter 'twenty three from 26% when compared to the first quarter of 2022.
The decline in the effective tax rate is mainly due to an increasing percentage of pre tax income derived from the banks real estate investment Trust.
Securities portfolio and bank on life insurance.
Anticipate our tax rate between 23 to be between 10% to 12%.
With that I'll turn it back to our operator for questions.
Thank you our first question for today comes from Alex toward all of Piper Sandler Alex. Please proceed with your question.
Okay.
Hey, good afternoon guys.
Hi, good afternoon.
Hey, first off Chris in your prepared remarks.
You commented about some opportunities that might be presenting themselves I was hoping you could expand on that comment just a little bit more.
I I don't have.
Firewall numbers on the loan side I mean, we've brought in.
Approximately $15 million in new deposits.
From a signature bank and first Republic specifically.
We've been tracking them.
And we have opportunities on the on the credit side.
Lines of credits term loans, and such that Oh that theyre looking for a new bank, so, but I don't have a total numbers on that.
Okay and would you say looking for a new bank you talk to customers.
Loan officers all of the above.
We are talking to both people and customers.
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 turn again look back at the transcript for all the details, but it kind of boiling it down to.
So the NIM is it safe to assume the starting point is really that <unk> 34 from March plus about I think it was 14 basis points from the deleveraging in the.
Swap transactions, so really closer to $2 50, and then it sounded like pressure was going to continue as those liabilities, especially the wholesale stuff.
<unk> continues to reprice during the quarter so.
When you think about the outlook from here can you can you just help us boil it down to sort of what the near term expectation for the NIM is in the second quarter.
Yeah, I mean, I think you're right on the two transactions I mean, like we said, it's about $5 7 million. So its probably like $1 4 million a quarter if interest rates stay flat right to the swap in SBA floaters. If rates go up obviously would be a little bit more income there and then I tried to provide you with the wholesale.
Our home loan bank and brokerage because when you look at that we feel that when the other three price what I kind of talked about when you read the transcript you 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, obviously if rates continue to go up they can trying to a little bit.
But the big bulk of the increase stop repricing from one to four and a half is kind of a carton 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 suggests that when you have deposits that are in the 25 basis points to 1% customers are coming in with demands for treasuries and money market mutual funds you take it each time, we currently track our cost of funds on a daily basis and CEO .
Kind of a 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 wild for one when does the fed pauses may dine or two PCE just came out with higher rates or they're talking already may be potentially June . So do we have one or two and the other one is the yield curve and a lot of people talking about the inversion, but we have plenty of capital one.
The things, we can do to help alleviate.
Margin compression is leveraging up the balance sheet, but with an inverted yield curve. It makes it very very difficult to do that because anything that you're borrowing against us at either the same rate or actually lower so.
So we're going to continue to kind of look each quarter.
At the things we did this quarter of a bunch of singles kind of look at our investment portfolio each quarter. If there's anything we can do small repositioning 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 eighth or ninth inning. So that if rates go down at that kind of helped but start to hurt. So we were trying to be a little bit more or less.
City Center and get a little closer to neutral itself.
But I do agree with what you said $2 34, you put those additive and then you kind of have to kind of back out where we are 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.
And Alex as I 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 which would lead to some further compression.
We also know Alex that loan loans are down a little bit, but we also realized a pipeline to $96 million.
And we understand you know we wanted to see that pipeline yield from here going forward to the end of the year kind of be more flattish hopefully slightly up and we do realize the need that.
You know like I talked about the MBS and CMO, Sara yielding 185 that we have to take that cash flow get get assets on in the 5%, 0.55% range with locked out because we do think.
Yes.
It's six months or 18 months that the yield curve will eventually steepen and because it always does and that to 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 to have prepayment penalties and investments that have lockout.
Residential because we know that the residential portfolio once rates come down.
Refinance literally right away from yourself, who focus on the commercial business.
Yeah. Okay. That's all really helpful. First of all long island historically has been.
Very very clean on credit and.
Yeah.
I don't say thrived, because it's not necessarily the right word but.
When when other banks pullback has created opportunity for you guys.
Would you would you say you're starting to see any other than the specific steps you mentioned, Chris from signature and first Republic.
And any any additional opportunity is on the commercial real estate side or multifamily side in New York City.
Certainly.
Certain categories in the city and become a little bit more hot button subject to investors.
There are other banks trying to pull back that could create opportunities for you guys.
We are seeing opportunities but.
Unfortunately, because of the rates.
Sometimes the.
The numbers don't work for us and sometimes they don't they don't work for the borrowers so big.
Because they might have to pay down their current outstanding bounds to refinance with us if they are 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 staying true to who we are.
We're being very careful so that 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 two different things for us.
Understood. Thank you for taking my questions.
Thanks, Alex.
Okay. Our next question comes from Chris O'connell at K VW, Chris. Please proceed with your question.
Hey, good afternoon.
Okay.
<unk>.
She still bit of a follow up on the margin discussion.
I understand.
The factors that are driving that pressure.
Kevin.
The timing of the transaction.
Late in the quarter.
And the timing of some.
Wholesale repricing.
Do you expect that the margin compression will be.
Greater.
<unk> Q or in the third quarter on a quarter over quarter basis.
Okay.
I can't give actual guidance on it but we do think.
Logically.
As a wholesale kind of repriced to market and when I say market, Chris lately, we have stuff thats been repriced at let's call. It $4 75, and then we have some stuff that might be on there at 185, So I'm, saying that by the end of Q2 everything is kind of repriced to call it the 475% to 5%.
<unk> 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 its non maturity deposits in any DTA migration and you would think that that should start to slow down because you start to have it in your run rate.
Two things that happened is deploy 75% to 5% current market.
Six weeks from now or is a five and five in a quarter.
I think when we all start at the beginning of this year, we thought that fab is going to pause and we got a couple of bad inflation reports and they've kind of continue to go and exciting to see maybe this year is going to be a 100 basis point increase pipe by June 30th.
And again it comes to the steepness of the yield curve.
No.
Short and keeps going up by five in the quarter, the 10 year and a five year stay locked in at that three and a half range. So yes.
There are a lot of banks out there that are kind of trying to grow through this.
Putting on.
Borrowings at 5% with five and a half in loans or securities of five and a half with the hopes that rates stand kind of go back and steepen and we think that's a prudent strategy to a point I mean, so you have to kind of balance that growth.
With where the fed and what we've been taken a cautious the first two quarters until we can kind of get some guidance that the fed is done and hopefully something with the status. 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.
Got it.
And.
I think in your prepared remarks, you said there is about 50 $50 million of securities cash flows for the remainder of 2023 did you say that.
You were planning to reinvest those cash flows or can you play into it goes kind of roll off the balance sheet.
And help kind of keep.
The higher cost funding for yeah.
Yeah, I think we're going to try to invest those into adds I mean, we try to manage both I think the first half, especially the first quarter. It was 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 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 Internet of global hopefully decline in interest rates and then again, it's key that we tried to put stuff on it has lockout.
And that gives us maybe Q3 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 bouncing that so I would think you'd start to see a little bit more.
Asset flat or of course slight growth.
Yes got it.
And as far as.
Share repurchases go.
Forward basis, you guys are pretty robust capital levels here it sounds like balance sheet growth is going to be.
Barely.
Flattish to slightly up.
Are you guys thinking about kind of utilizing the buyback from here.
Yeah. So.
As you know we didn't do anything.
In the first quarter as far as share repurchases and it's.
It's really going to be based based on a an opportunity to maximize shareholder value we're not.
No we're not.
Really given any guidance on if we're going to have share repurchases are not in the second quarter.
Gonna do what we think is best for the company and quite frankly that decision hasn't been made yet.
Okay got it.
And then.
The expense run rate.
That's helpful guidance.
Yes.
It does that.
Does the expense growth.
Being delayed or put off and does that kind of in a normalized or increase as we go into 2024 or do you guys still think there's opportunities to.
To drive some efficiencies.
That havent been explored yet and keep growth further.
Fair enough along as we go into next year.
Well as you.
No.
We've generally had.
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.
Cut cut branch staffing levels.
So we're looking wherever we can.
To squeeze out some efficiency I won't say, we are putting off.
Expenses.
But we're just just being mindful there there are certain things you do it at one level that possibly you could do it at a lower level for a year and go back to the normal normal level. The following year, but I wouldn't say, we're putting off I mean, we're operating the bank for the long term.
But obviously being mindful of managing expenses. This year. So Jay gave gave the guidance we think we could see.
Stay towards that lower end at 69, and a half number.
So some of that depends on staffing if there's opportunities.
There was questions by Alex earlier about or we're looking at people if theres opportunities for us.
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 as we have in the past. So some of those things are why you can't say exactly it's going to be here, it's going to be there because there's always moving pieces.
Great.
And also on for me.
On the tax rate.
And some of the factors that are driving that.
Considerably lower this year.
Can that range of 10% to 12%.
Do you think that will hold as you go into next year or does some of those factors.
Pull back in.
<unk> start to tick up a bit.
Now they'll slowly as as we get through this rate increase and hopefully a pauses in the yield curve Steepens and you start to see kind of margin pick up it will kind of revert back up to that 20%. It's just temporary Alex we we have a REIT most of our loans are in the we do have loans on the bank's books.
Obviously, all the deposit cost is on the bank's books, so basically what happens as interest expense goes up there's less income on the bank more in 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 it as a consolidated is smaller that benefit as a bigger percentage.
And that's why it's declined so much so.
As the banks kind of cost of funds goes down our assets reprice up youll see that tick up but I think it would just based on where we're at be kind of a gradual pick up and as we keep going and we work with our tax consultant mark them into projections out we always do a tax protection on a full year as we just it will adjust our guidance for you, but I'll stay with that 10% to 12%.
<unk> right now.
Okay great.
Thanks for taking care of it obviously with where the fed goes.
Yes, yes.
Got it thanks for all the detail.
And thanks for taking my questions Okay.
Okay. Thanks, Chris.
Okay.
Thank you. This concludes our question and answer session I will turn the floor back to Chris Becker for some final closing comments.
Yeah. 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.
Okay.
The meeting will go on air and as scheduled time on the meeting web page.
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