Q3 2023 The First of Long Island Corp Earnings Call
Welcome to the FERC for long Island Corporation's third quarter 2023 earnings conference call on the call today are Chris Becker, President and Chief Executive Officer, Jane Mcauliffe, Chief Financial Officer, and Jennifer now Chief Risk Officer.
This call being recorded a copy of the earnings release is available on the Corporation's website at F. N B O I's to dot com and on the earnings call webpage at H P. P. P S colon or slash sports Slash Www Dot C. S. T proxy dotcom forest Slash F N b.
I work Slash earnings for last 2023 or its last Q3.
Before we begin the company would like to remind everyone that called me concerned 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 Companys filings with the U S Securities and Exchange Commission.
Investments should also refer to our 2022 10-K filed on March nine 2023, and supplemented by our 10-Q for the quarter ended March 31, 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 call over to Chris Becker.
Thank you.
Good afternoon, and welcome to the first from Long Island Corporation's earnings call for the third quarter of 2023.
I'm pleased to report that third quarter net income of 6.8 million and earnings per share of <unk> 30.
We're consistent with the prior quarter.
Most importantly, our net interest margin only decreased four basis points from the previous quarter.
After averaging declines of 27 basis points over the prior three quarters.
Assuming the fed is done raising short term rates.
Which may not be the correct assumption internal projections anticipate that the margin should bottom out.
Over the next two quarters.
Average total assets average total loans and average total deposits.
All increased when comparing the third quarter of 2023 to the linked quarter.
These averages all decreased during the second quarter of 2023.
After the shock of some large regional bank failures.
Our wholesale funding consisting of federal home loan bank borrowings and broker deposits.
Main consistent from the end of the second quarter to the end of the third quarter.
Overall.
Wholesale funding is down $28 million from the prior year end.
Commercial customers continue.
Continue to consider higher yielding options such as short term treasuries.
For funds in excess of the normal operating needs.
Consumer customers looking for higher rates are generally satisfied with our certificate up deposit offerings.
But some have moved money to our first investments program or other non deposit investment providers.
Well I, we're banking teams have been able to replace funding that has moved out of deposit accounts with new relationship based deposits.
Net growth remains challenging in the current environment.
Expense management is a continued focus.
We recently announced another branch consolidation coming in December of this year.
Our Manhasset branch.
As closing and consolidating into our great neck branch, which is approximately two miles away.
This branch closing will be the 15th under our ongoing branch optimization strategy.
In prior consolidations, we retained over 90% of the deposits.
Earlier this year.
We adjusted branch hours, including eliminating Saturday hours in several branches that did not have justifiable activity.
Staffing levels are being adjusted down through attrition based on these changes.
We recently announced a new co marketing referral agreement with rocket mortgage the nation's leading mortgage lender.
This partnership is a timely response to industry changes in demand, while still providing our one end clients with best in class solutions to meet their mortgage needs.
As a result of this new relationship we eliminated our residential mortgage department saving nearly $1 million in annual expense going forward.
Should the bank want to add residential mortgages rates portfolio that can be done through purchases.
We previously reported the sale of six buildings in Glen head we.
<unk>, our future occupancy expense.
And the large majority of our rebranding expenses are behind us.
Yeah.
The expense savings just outlined should offset pressure to maintain competitive salaries and benefits.
Upgrade technology to meet customer expectations and protect against cyber security threats.
Hey, rising corporate insurance rates as.
As well as other general and administrative expense increases due to higher inflation rates over the past two years.
Our planned technology upgrades for this quarter have been postponed until 'twenty 'twenty four but when implemented will bring additional back office efficiencies.
While we are just beginning our 'twenty 'twenty four budget process. Our goal is to reduce noninterest expenses below 20 twenty-three actual.
We will provide more specific guidance on 'twenty 'twenty four noninterest expenses in our year end earnings call.
I will now address the upcoming executive management changes announced in our earnings release.
Jay Makoni has been an excellent chief financial officer for the company over the past four years.
While the board of directors and I had all the confidence in the world and Jay when we named him to the position in January of 2020.
He still exceeded our expectations, especially as we have navigated through one of the most difficult banking environment and over 40 years.
Unfortunately that environment, along with other personal reasons have caused you to rethink his desire to continue in his role as our Chief Financial Officer.
We are grateful for all he has accomplished for the company.
And that he has agreed to continue in a consulting role through at least March of 'twenty 'twenty, four but with no defined end date.
On the positive side.
We have a strong executive bench and will move forward without missing a step.
Janet Brunelle is highly qualified to take over the chief financial officer role.
She has been a trusted executive partner of mine for over 20 years, both here and at two previous institutions, including as my Chief Financial Officer, When we worked together a bridge bancorp.
In her role as the Chief risk Officer.
Janet works closely with Jay and other executives.
As a senior executive Vice President and our next Chief Financial Officer. She will continue to bills aren't built on Jay's advancements and move the company forward.
Tan and Sari will take over as our new Chief risk Officer.
Tan works closely with Janet on an everyday basis and over the past eight years also work directly with me.
As a seasoned banker in our in House counsel. He is well prepared for this opportunity and excited to take on the additional responsibilities.
Chris Hilton is a key leader in our transformation to make the bank more commercially focused under his guidance the bank improved organic growth in our small and mid sized business relationships, resulting in an improved loan product mix and funding position.
With this well deserved promotion to senior executive Vice President.
He will be assuming additional sales responsibilities over digital banking and cash management.
With that I would like to have Janet for now make a few comments.
Good afternoon.
Well I have not had the pleasure of addressing the investor community.
Joining the company as Chief Risk Officer in mid 2019, I worked closely with Chris and Jay commenting on the press releases and other Investor communications, revealing our SEC filings and enhancing our control environment.
My banking experience started in the branches.
Years ago subsequently I transferred into the loan back office later became a small business lender and after a stint with KPMG to obtain my CPA license I returned to banking, mainly in Treasury and finance.
I spent years as the Chief financial Officer, and banking and for three years also served as the lead financial officer in two different municipalities.
When Chris contacted me about moving into the Chief risk officer position at first of long Island. It was both an opportunity and a challenge the CRO views the company through a different lens and the role allowed me to use my diverse experience to augment positive changes.
Returning to the CFO role now will be another challenge, especially in the current environment.
In my years as to see CRO here at the bank I became intricately familiar with our risk appetite corporate governance and bank wide processes, Jay and I will work together closely these upcoming weeks and he leaves me with a strong team to further support the transition.
I am confident in my ability to also develop strong a mutually respectful relationship outside the bank with the analysts and the Investor community.
Makoni will now discuss our financial results for the quarter Jay. Thank you Janet and good afternoon, everyone, adding to Chris's comments on the margin. The bank's net interest margin was 2.13% in the current quarter compared to 2.17% in the second quarter of 2023, the four basis point decline with a significant improvement.
Margin declines of 40 basis points, and 17 basis points in the first and second quarters of 2023, respectively.
The slowdown of margin compression also result in a much small decline in net interest income of 409000, or one 9% when compared to the linked quarter.
Quarterly net income of $6 8 million was down slightly from the second quarter of 2023 is a credit provision for credit losses of 171000, and a decline in nine interest income expense of 350000, and lower income taxes, partially offset lower net interest income and non interest income.
The company's ROA and ROE were at 63 basis points to seven 3.34% respectively for the quarter.
The decline in net interest income continues to be fueled by the federal reserve banks aggressive monetary policy, which has increased short term rates by over 550 basis points. The yogurt has been inverted for over 15 months, making it difficult for the bank to utilize its excess capital to increase net interest income by adding leverage to our balance sheet.
Thanks correlate noninterest income was $2 $2 million, which is consistent with prior guidance in prior quarters as current run rate is anticipated to continue in the fourth quarter.
The bank's noninterest expense was $16 1 million during the third quarter, a decrease of 353000 when compared to the linked quarter. We expect noninterest expense to remain between 16 million to $16 five in Q4 of 2023.
As Chris noted in his comments management is ever mindful of expense control given the current environment and the bank is making every effort to lower the run rate as we move into 2024.
Thanks efficiency ratio was 65, 3%.
The nine months ended September 32023 up from 49, 7% in the prior year period. The increase was mostly attributable to a decline in net interest income the bank's ratio of noninterest expense to average total assets remained flat at 1.55% for the nine months ended September 32023.
In 2022, respectively.
The bank's effective tax rate decreased to 11, 5% in the third quarter of 2023 from 18.01% at third quarter of 2022 decline in effective tax rate is mainly due to increase in the percentage of pretax income.
Derived from the banks real estate investment Trust and bank owned life insurance, we anticipate our effective tax rate for the full year of 2023 to be between 11, 5% to 12%.
On the asset side of the balance sheet. The bank continues to deploy approximately $90 million in quarterly cash flows from our securities and loan portfolios into new assets at current market rates. The bank purchased approximately $35 million mortgage backed securities with yields of approximately 6% during the third quarter Bank also originate approximately $50 million of mortgage loans with the weighted average rate.
<unk> of six 3% for the quarter.
<unk> has approximately $840 million or 20% of interest, earning assets maturing repricing within one year, but remain liability sensitive.
On the funding side of the balance sheet of the balance sheet total deposits remained very stable at approximately $3 4 billion in 2023, but the mix of deposits has changed with approximately 136 moving from noninterest bearing demand deposits to interest bearing deposits as customers seek higher rates to ship increase the average cost of funding on interest bearing.
Positive by 153 basis points to 2.58% when comparing to the third quarter of 2023 to the fourth quarter of 2022.
<unk> cumulative deposit beta on non maturity deposits was approximately 38% through September 32023, which close to our historical average in a rising rate environment given the both the pace and size of increases our deposit betas could be higher when this rising rate cycle finally ends.
The bank's total wholesale funding, including broker deposits was $559 million or 13% of total assets at September 32023, and had a waiver weighted average cost of funds of $4 five 3% and average maturity of eight months edition to bank at $366 million in retail deposits that mature.
Over the next 15 months with an average cost of funds of what 0.08% as this funding matures in coming quarters. It could result in some additional upward cost pressure in each of these categories. However management believes the digital into expense from liability pricing largely offset as it is interest income from assets reprice lead to margin stabilization.
The bank's uninsured and uncollateralized deposits remained stable at 38% of total deposits at September 32023 same percentage as June 32023 Bank continues to have ample liquidity, we maintained $1 3 billion and collateralized borrowing lines with the federal home loan Bank of New York and the Federal Reserve Bank.
$271 million in unencumbered cash and securities in total we have approximately $1 6 billion of available liquidity at the end of the quarter, which is well in excess of our uninsured and unclear as deposits.
Capital position remained strong with the leverage ratio of 10%.
<unk> to 10, 1% on June 32003.
Not repurchase any shares during the third quarter of 2023, we still have approximately $15 million authorized under the most recent board approved the stock repurchase plan.
Declared its quarterly cash dividend of <unk> 21 per share on September 30 September 28, 2023 with that I'll turn it back to the operator for any questions.
Thank you our first question for today comes from Alex toward all of Piper Sandler Alex. Please proceed with your question.
Hey, good afternoon.
Good afternoon Alex.
Hi, Alex first.
First off.
Jay it's been a pleasure working with you over the last couple of years wish you. The best in the next chapter for you and Janet I look forward to meeting and working with you.
Over the next.
The future from now.
Thank you. Thank you Alex so it's been a pleasure working with you as well and attending some of the conferences and so forth. Thank you.
When I look at the I guess some of the things that Youre doing.
Some of the reorganization with the rocket mortgage and and I've.
The loan growth numbers. This quarter I was just can you just talk about your appetite to grow.
Assets and loans, particularly over the next couple of quarters I know the fundings, obviously, a challenge I'm just trying to figure out. It's you know if the plant should be to grow through it or if it's kind of just churning in place or how we should be thinking about that.
I think certainly for now.
Kind of staying in place and it's just largely because of the the.
The yield curve.
Yeah.
If you're able to bring in new relationship deposits that have a good blended yield low enough.
It certainly makes sense to grow but but the challenge remains as I said in my comments you do have.
You do have depositors that theres strong relationship, let's say have some excess funds and they're saying well Gee I can get five 5% short term treasury I'm going to move some of the excess funds into that and we're not really interested in paying $5 five.
<unk> percent on deposits. So you lose you lose some money they are in.
It's difficult with some of those movements to to grow and again just repeating.
What I said earlier so.
Really for the for the foreseeable future next next quarter or two it's probably going to be similar to what you've seen in the past quarters, where you might have a little bit of growth one quarter, a little bit of contraction one quarter.
But but fairly fairly flat as far as total assets.
Yeah, Alex when you look kind of on a linked quarter are always kind of stabilize at about 60 basis points ROA in the mid seven range and so forth. So we really want to kind of.
Call it stabilization and until we start seeing a positively sloped yield curve. Then we can take advantage of some of our excess leverage ratio at 10%, we don't want to leverage up at such a low margin right now.
Low.
Spread in India in the curve.
Yeah. It makes sense I guess, I mean sort of on the same lines and maybe this comes a little bit of luck, but I'm just.
I know the FDA is currently selling some loans.
Your market does it kind of uniquely positioned with the <unk>.
Expertise in some of the categories in which they might be selling some of these pools.
And you know who knows where the pricing could look like but there is some pretty interesting structures.
<unk> is participating in something like that something you would ever consider doing.
We would consider purchasing assets again, if if the spread was reasonable.
If we have to go out and purchase something at a 50 basis point spread.
Not really attractive to us if you can get something obviously in line with the current margin or ideally better than your current margin.
We absolutely would consider something like that.
Okay.
Can you I think in the past and again you mentioned in your prepared remarks, the yield on new production. During the quarter can you just let us know sort of where the pipeline is and how the loan yields have progressed over the course of the quarter.
It's up about $126 million of pipelines.
Nominally commercial.
With us.
Stepping out of the residential business will still purchase residential mortgages, but not at originate.
And with the yield curve steepening in the five year and 10 year getting up into the $4 80 range.
We originate with a spread you're starting to see those yields being a high sixes to low sevens on a flip side.
You're starting to see demand really kind of come down as you get into the seven handles.
Obviously, there's no refinancing activity going on it's new purchases and those people looking for new purchasers, there get a little bit cold feet it into seven handles.
Yes, Okay makes sense and then you mentioned that you guys are still liability sensitive.
The goal over time to become more neutral.
Balance sheet restructuring, which I think looking back was a pretty good move.
Back earlier this year are you looking at additional similar types of.
Transactions too to help those NIM in the future.
Right now probably not we felt those two moves the securities restructuring and swap where we compared to 300 million of residential to floating.
Where times right, we do feel that we're kind of in the eighth and ninth inning of this rising rate cycle, and we're going to kind of take it quarter by quarter, we think.
<unk> has stabilized we think a lot of our wholesale for the most part have repriced and take it quarter by quarter and see what the fed does before we make any decisions to do any.
Larger type of restructuring or additional swaps.
Okay.
Great. Thanks for taking my questions.
Thanks Al.
Okay.
Our next question comes from Chris O'connell of Kw, Chris. Please proceed with your question.
Hey, good afternoon.
And just want to add.
Nicole.
It's been great working with you Jay and wish you luck in your next steps and look forward to working with you Janet.
Thank you thank you Chris.
Yeah.
So yes, it's hoping to start off on the margin I mean, obviously.
The compression this quarter was a lot less onerous.
In the past couple.
I think in prior quarters, you've sometimes given the monthly margins.
I was wondering if you had that for the July August September periods.
We do.
In July was 216 in August It was 220 in September was 20220 twos a little.
A little obviously lower than you want to see but we did have.
Some prepayments on.
Some of the SBA floaters, we have in the investment portfolio, which.
Which caused that yield to be.
Kind of.
Considerably lowered that month, which put on pressure in that <unk>.
30 day month, and that's the other issue and the 30 day month deal.
Margins throughout the year and a 30 day month, you're always always are a little bit lower so we don't want to that 202 to be overly indicative of of.
Going forward, but.
To be seen.
Got it and I know you guys mentioned the margin.
Hoping to bottom.
All else equal on the rates here.
Over the next couple of quarters.
Any sense as to the magnitude of the pressure.
Where that could bottom.
Either just.
The trajectory for Q4 or.
Or kind of the ultimate level of bottom.
Yeah.
It's been hard as you know Chris throughout the cycle to try to give.
Very good guidance on the margin and I think you've seen that.
There's been a lot a lot a lot of misses on that throughout <unk>.
Throughout the year for many banks.
But what we're seeing is we're looking at our internal projections isn't so much of our liability side has has repriced.
So even if there is still some small repricing and things that have already repriced, but maybe come up again.
Over the next few quarters.
There's obviously not as much.
Upside from where they are now so.
That's being fully fully priced in.
Now we see the asset side, those 90 million in quarterly cash flows that Jay talked about we see those starting to be able to offset the liability pricing and that's why we kind of see the margin.
Bottoming out over the over the next two quarters, what that exactly means is it the same in the fourth quarter and the first quarter does it bottom out in one or the other it's hard to get that specific on it but we do see.
Over the next two quarters, we see we see that that trough and then.
Then the the liability side, assuming again, the fed stops with the rate increases.
We see the liability side being done and the asset side little by little.
Can start to tick up and obviously, if the fed make some moves in the other direction and we get some steepness in the yield curve. That's that's when you'll see it turnaround.
More rapidly so it's kind of difficult to tell where that bottom is.
Best.
Best guess scenario when you say gas, but looking at the best data we have at this point and using certain assumptions.
Could it.
Could it go down and bottom out over the next few quarters and you know another 510 basis points.
Maybe a little bit more it could it's just it's very difficult.
Very difficult to tell but.
We just have to kind of see what the fed does and what the market does.
Yes, no I hear you.
That's helpful. I appreciate it.
It's difficult.
Difficult.
I think there is a sharing at this point.
And then.
Well just quickly.
The tax rate for this year, obviously loyalty 11, 5% to 12% range.
Is that where you think it will remain next year should it tick up a bit.
Yes.
Kind of working on that forecast now and you have to go through that I mean preliminary I would say probably budget between maybe 13%, 14% because as we kind of come out of this and hopefully yet yield curve steepens.
We can.
You start to look for.
Expanding margins.
If you get a steeping yield curve I would keep it around that 13, 14%.
Okay great.
And you mentioned in the prepared remarks.
You pushed out some of the planned IP upgrades into 2024.
Got it that can bring some efficiencies can you just provide us a little bit of color as to what those upgrades are.
How are you guys.
Plan to bring those on.
Sure we've been working on a core conversion, which also.
It plans to upgrade our business online banking and our branch teller platform systems.
And along with that in the back office.
Our item processing as would be outsourced.
So the combination of all those things.
We believe certainly in the back office with the item processing brings a maxim about some staffing efficiencies and we just felt that we were this is a long project.
These types of projects go on 18 to 24 months and as.
As we were getting closer to a target date, we felt.
Working with them through that it would be best to put it off a few months. So we're still evaluating we havent picked a another date, yet, but we anticipate that to be done.
And in early 2024.
Great.
<unk>.
And then on the credit side.
Everything.
Your individual metrics looks fantastic.
Especially relative to the industry, which has seen a couple of issues pop up this quarter.
How are you guys seeing.
Your credit or on a go forward basis and things in your market is there any cracks anywhere or anything that you're concerned about.
No we're not we're not concerned.
With our portfolio on the whole.
And in conversations with customers and in the market.
You're starting to hear some things, where maybe things are slowing down for certain businesses.
I think.
And people get a little bit about nervous about what's going on in the economy and also.
The world in general.
But obviously our numbers are not showing.
Any specific problems like that any numbers ticking up.
But there's all this even with US there's always a couple of loans on the problem loan list.
Something could happen but.
Nothing in a big.
<unk> sense Thats concerning us.
Got it that's helpful.
Okay, great. Thank you for taking my question.
Thanks, Craig Thank you.
Thank you. This concludes our question and answer session I'll turn the floor back to Christopher.
In closing.
Yes. Thank you all for your attention and participation on today's call Janet Parnell and I will look forward to talking to you at the end of the year 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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