Q2 2023 The First of Long Island Corp Earnings Call
Okay.
Welcome to the first among corporations second quarter 2023 earnings conference call.
Call today are Chris Becker, President and Chief Executive Officer, David Hult Finance Officer.
Today's call is being recorded a.
A copy of the earnings release is available on the Corporation's website at F. N B L I dot com and the earnings webcast page.
H T T P F.
Holding or slash forward slash www Dot C. S proxy dotcom forward Slash F N B L. I, four slash earnings or slash 2023 or its last Q2.
Before we begin the company would like to remind everyone.
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 are set forth in the company's filings with the U S Securities and Exchange Commission.
Investors should also refer to our 2022 10-K filed on March 19, 2023, and supplemented by our 10-Q for the quarter ended March 31, 2023 for a list of risk factors that could cause such act 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 all on the Island Corporation's earnings call for the second quarter of 2023.
As the volatility of the first quarter settled down I am pleased to report that total assets total loans and total deposits all increased when comparing the end of the second quarter to the end of the first quarter in 2023.
Most important our deposit franchise has remained strong.
Deposit levels were only $12 million below year end 2022.
Which has allowed us to avoid adding more costly borrowings and broker deposits.
Regulators have generally frowned on continually funding loan growth through broker channels.
Our business model has allowed us to avoid that formula, which we believe speaks to the strength of our franchise.
While some customers have moved money to higher yielding options such as short term treasuries.
Our banking teams have been able to replace that funding with new relationship based deposits.
We remain focused on our key strategic initiatives of improving our balance sheet mix.
Optimizing our branch network and enhancing our technology as we manage for long term success.
With that in mind in the second quarter, we added a deposit gathering team to our Rockville center market and.
And celebrated the relocation of three legacy branches.
Our branch optimization plan has resulted in the closing of 14 branches since 2020 and the relocation of four others.
After a decade of rapid branch expansion. The current management team is getting the right number of branches in the right locations with the right people.
In October we plan to rollout upgrades to our business online banking, including a new business mobile app.
And our branches and back office will also see significant efficiencies from new systems.
Our loan pipeline was $135 million at the end of the second quarter, an increase from 96 million reported last quarter that reflects new commercial opportunities from the recent disruption in the market.
Our pipeline could be higher but we.
We have passed on several Cree deals that did not offer an acceptable spread over the cost of new borrowings at over 5%.
Our lending focus is meeting the needs of our current relationships and pursuing new commercial relationships with deposits attached.
Our earnings release refers to originating loans at $76 million with a weighted average rate of just under 6% during the second quarter.
No that is the outstanding amount at quarter end.
Given the fact that certain originations are lines that were not fully drawn at quarter end.
All in numbers higher total originations for the quarter were $101 million with a gross weighted average rate of 6.32%.
As expected from first National Bank ally credit quality continues to be excellent.
With non accruals again at zero at the end of the second quarter.
Makoni will now discuss our financial results for the quarter Jay Thank.
Thank you Chris Good afternoon, everyone as discussed last quarter. The bank completed two balance sheet repositioning transactions in March of 2023.
This is the two transactions is to help reduce the bank's liability sensitive position to rising rates to briefly recap. The first transaction was a 300 million interest rate swap that converted at fixed rate residential mortgage loans to floating rate for a period of three years.
<unk> pays a fixed rate of 382% who receives it floating rate based on the sofa overnight rate.
This transaction provided an additional 765000 in interest income and help increase our margin by seven basis points in Q2 2023.
Second transaction the bank sold the $149 million in fixed rate municipal securities, earning tax equivalent yield of approximately $3 three 2%.
Purchased 135 million of floating rate SBA securities with a projected yield of approximately $5 three eight over the life of the bonds. This transaction increased securities income by approximately 900000 in the second quarter when compared to the first quarter of 2023 in total these two transactions improved interest income by 1.7.
<unk> million in the second quarter of 2023.
These two transactions also increased the amount of securities and loans that repriced within one year to $832 million or 20% of total assets on June 32023.
We also anticipate approximately 90 million in quarterly cash inflows from both the securities and mortgage loan portfolios, which will be reinvested into new assets at current market rates over the next 12 months.
Quarterly cash inflows represents approximately 8% total assets on an annualized basis.
The bank purchased approximately $36 million in securities with an average yield of five 3% during the second quarter that will continue to add various government agencies carries a yield and some rate lock protection over the next several quarters.
These proactive steps taken by management have slowed the pace of the decline in net interest margin.
40 basis points in the first quarter to 17 basis points in the second quarter.
But at a slow pace margin client will likely continue through the second half of 'twenty, three three and potentially into early 'twenty 'twenty, four and Westbury therapy to see short term rates and the yield curve begins to steepen again.
On the funding side of the balance sheet total deposits have remained very stable at approximately $3 4 billion in 2023, the mix of deposits has changed with approximately a $100 million moving from noninterest bearing demand deposits to interest bearing deposits as customers seek higher rates.
This shift increased the average cost of funding on interest bearing deposits by 112 basis points to 2.17% when comparing the second quarter of 2023 to the fourth quarter of 2020 'twenty two.
The bank's cumulative deposit beta on non maturity deposits was approximately 34% through June 32023, which is close to our historical average in a rising rate environment. However, it is that both the pace and size of increases has not been seen in over 40 years, our deposit betas could be higher in this rising rate cycle, especially.
Given the fact that the fed reserve has indicated there could be additional rate hikes in 2023 and that rates could remain elevated well into 2024.
The bank's total wholesale funding, including broker deposits was 559 million or 13% of total assets at June 30.
It had a weighted average cost of funds of $4 four 9% and an average maturity of nine months.
In addition, the bank has $330 million in retail time deposits that mature over the next 18 months with an average cost of funds.
Funds of 367 as this funding matures. It could result in some additional upward cost pressure in each of these categories.
The bank's uninsured and unclear as deposits with 38% of total deposits on June 30, the same percentage as on March 31 2023.
The bank continues to have ample liquidity, we maintained $1 4 billion and collateralized borrowing lines with the federal home loan Bank of New York and the Federal Reserve Bank. We also have $173 million in unencumbered cash and securities. In total we have approximately $1 6 billion of available liquidity, which is well in excess of our uninsured and uncollateralized deposits.
The bank had net income of $6 9 million and earnings per share of <unk> 31 cents to the second quarter of 2023 compared to $12 5 million or 54 cents per share for the same period 2022 banks return on assets and equity were 66 basis points and seven 4% respectively.
The decline in net interest income continues to be caused by the federal reserve's aggressive monetary policy, which is increase short term rates by 550 basis points and caused further versions of the yield curve.
The spread between the three months and a 10 year U S. Bond is currently embedded by approximately 140 basis points banks.
<unk> interest expense increased $13 1 million when compared to the second quarter of 2023 to the same quarter last year was only partially offset by $5 2 million increase in interest income.
The bank's quarterly noninterest income was $2 $7 million, which was consistent with expectations. The current buy rate should continue throughout 2023.
Thanks, Noninterest expense was $16 5 million during the second quarter flat when compared to both the linked and prior year quarter. We expect noninterest expense to remain near the current level for the remainder of 2023 management is very mindful of expense controls given the current environment is making every effort to keep the run rate steady or decrease and as we move forward.
The bank's efficiency ratio was 64, 3% for the six months ended June 32023 up from 49, 4%. The prior year. This increase is mostly mostly attributable to a decline in net interest income the bank's ratio of non interest expense to average total assets remained fairly flat at one five.
At 1.5 to six months ended June 32023, and 2022, respectively.
Our capital position remains strong with a leverage ratio of 10.11% from June 32023, an increase of 17 basis points from 994 on March 31 2023.
Bank did not repurchase any shares during the second quarter of 2023, we have we still have approximately $15 million authorized under the most recent board approved stock repurchase plan Bank declared its quarterly cash dividend of 21 to shareholders on June 32029.
June 30, 29 of 2023.
Board and management continue to evaluate dividends and repurchases to provide the best opportunity to maximize shareholder value.
The bank's effective tax rate decreased to 13, 8% in the second quarter of 2023 from $19 eight one in the second quarter of 2022.
A decline in the effective tax rate is mainly due to an increase in the percentage of pre tax income derived from the banks real estate investment Trust and bank owned life insurance, we anticipate our tax rate between 23 to be between 11% to 13% with that I'll turn it back to our operator for questions.
Our first question for today comes from Alex <unk> of Piper Sandler Alex. Please proceed with your question.
Hey, good afternoon guys.
Oh, Hey out.
Yes, I think Jay last quarter, you were able to give us the the NIM by months and the exit NIM for the quarter and I was wondering if you had that Andy and really what I'm trying to figure out is.
I guess sort of the trajectory of the decline this quarter and whether or not.
There is maybe some more stabilization to come.
Later this year.
Yes.
On a monthly basis April was 219 May was $2 23 and June was 210.
Maybe in a little bit higher because of the extra day, you get a little bit higher.
<unk>.
On 31 days.
Okay.
And I guess as I.
As I think about.
I tried to figure out the NIM is going to be for the next couple of quarters of work. It shake out just in terms of the deposit.
Rates that youre paying.
The exit I guess exit rates from the quarter similar to what the average rate for the quarter are they much higher than I guess for that so that your categories you guys breakout in the.
And the average balance sheet.
On average basket, a little bit higher I mean, when you look at it I look at it this way Alex.
We're very happy with the pace of increase on non maturity deposits funding has slowed significantly this quarter. It was 40 basis points of NIM contraction Q1 17 basis.
This quarter and the monthly pace on non maturity deposits was probably about I would say on average 17 basis points in Q1 and for July were down to about seven basis points. So we've definitely seen in non maturity deposits a very significant slowdown.
And the rate of increase which were happy with.
But we're just cautious about providing guidance because obviously, we just had the rate increase yesterday.
They are saying higher for longer and we just don't know where if theres going to be additional rate hikes are approaching the end of this cycle.
It seems to be kind of as it could inflation print today, but it just seems to be at 50 50 chance in markets, assuming we're near the end and the fat is really trying to push that theres still some work to be done to tackle inflation.
Understood.
And then maybe Chris you can give us just a little bit more on sort of the outlook for loan growth. It looks like the pipeline actually did increase.
An amount into the end of the quarter relative at least to the.
At the end of March.
I guess first sort of what youre seeing for the demand out there.
Sort of what sort of.
If anything's changed in the market. Obviously, there is a big player that's gone away.
How that's impacted you and then just sort of the complexion I guess of the pipeline would be the third parts of the question.
Just a little surprised to see that overall yield I guess of the pipeline looks like it came down a little bit I'm wondering if that's just a function of mix shift in there.
Yeah. So the.
As I said the pipeline is up a little bit and that's that's from some additional opportunities that have come from the disruption in the market.
So we're pleased to see that and then when you when you look at our pipeline.
It's it's closer to what we close in the upcoming quarter and that that kind of track.
Tracks historically, and if you look at last quarter's pipeline when we gave a $96 million pipeline in our actual.
Closings for the month were 101 million I know thats as I said that that's a little higher than what's in the release, what's in the release was how much.
Funded but we have lines of credits that were unfunded and and again those those lines at our unfunded generally carry a higher rate than.
Some of the mortgages that were funded so.
That's why that raise a little bit higher so.
Around 6% as far as Outstandings.
Is because thats all your mortgages are fully outstanding but lines that might be it at prime or prime plus that arent fully drawn.
We're not fully outstanding so so there is a little discrepancy there but.
But our but are looking at our whole year originations the weighted average.
Gross rate on those is more like it.
North of six and a half it's about $6 six 1%.
So yes, we're not disappointed with where those numbers are coming in and as the lines are drawn.
That will certainly help improve our yield because of the higher rate items. So overall the pipeline looks good it's mainly relationship based business not doing as much a Cree right now as we said and.
So we were I would kind of look at that pipeline. As you know is a pretty good proxy of where we think.
Closings will be in the.
In the third quarter, obviously things things come in during the quarter that get closed during the quarter that arent werent there at quarter end and obviously others.
Other things can fall out, but I think that would be a pretty good proxy.
Where the closings would be a little bit a little bit higher in the third quarter than the second quarter.
Okay. So I guess.
Alex This is Jay we are definitely seeing no that debt.
Rates for loan to are starting to co ops. The inversion was kind of keeping competition for create allowance and loans to spreads a little bit lower than the rates, you're getting in and Thats definitely starting to change as we go into the second half of the year with funding costs. I think just as you train itself is realizing net debt debt spread tactical higher it.
And you need to be paid for the risks that youre getting.
Got it so I guess would it be fair to say based on the pipeline today that and assuming similar sort of pay off amortization activities. You saw in the second quarter that the overall portfolio can shanghai or it kind of a mid single digit annualized pace in the back half of the year.
We think that.
We can see some growth in the second half of the year I don't know if it would be as high as mid single digits I would think that would probably be the top of it but.
We're we're certainly optimistic to see to see some continued growth in the second half of the year as we saw a little bit of growth in the in the second quarter.
And that's a little bit too we have a couple of demand lines, except for some of our larger customers and depending where those <unk> kind of come out they can kind of fluctuate up 15 to 20 million $25 million and if they are outstanding and up and loan footings, obviously up at a higher yield than if they're paid off that 10, a little bit.
So that kind of drives a little bit too that's hard to predict for our customers and our line usage as we have said in previous quarters, obviously, it was way down in the pandemic.
Came back a little bit but line usage is lower than historically, it's been.
And we believe that's a reflection of the rates and.
Some companies may be just.
Avoiding doing certain things, making certain purchases, maybe keeping inventory levels a little bit lower.
And trying not to use the line as much because of the current level of interest rates.
Got it that's helpful. Alright, I appreciate you taking my questions.
Thanks, Alex.
Alright. Thank you. This concludes our question and answer session.
Back over to Chris Becker for some final closing comments.
Thank you for your attention and participation on the call today.
We're halfway through a challenging 2023 due to the interest rate environment and shocks to the banking system from recent bank failures. We believe these events have highlighted the strengths of our organization.
Our strong deposit franchise strong asset quality ample liquidity and a proactive management team that continues to transition the bank for long term success. We look forward to talking to you next quarter have a good rest of the day.
Okay.
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The meeting will go on air and as scheduled time on the meeting web page.
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