Q4 2023 First of Long Island Corp Earnings Call
Okay.
Welcome to the first of long Island Corporation's fourth quarter 2023 earnings conference call on the call today are Chris Becker, President and Chief Executive Officer, and Jennifer Kneale, Senior Executive Vice President and Chief Financial Officer.
Today's call is being recorded.
A copy of the earnings release is available on the Corporation's website.
B L I dot com and on the earnings call webpage at H P. T. P. S colon org Flashboard slash Www Dot C. S. T proxy Dotcom board Slash F N B L. I forward Slash earnings.
Or it's last 2023 fourths last Q4.
We'll 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 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 Investor.
Investors should also work or to our 2022 10-K filed on March nine 2023 as supplemented by our 10-Q for the quarter ended September 32023 for a list of risk factors that 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 fourth quarter and year end of 2023.
I'm proud to say key aspects of our transformation strategy, which began in 2020 are largely in the rearview.
The bank has a fresh look.
Topnotch technology innovative partnerships are more efficient branch network.
Bankers focused on commercial relationship growth.
Our proven history of strong asset quality.
Quality, all of which is underpinned by a strong capital position with leverage and tangible capital ratios of 10, 1% and 9% respectively.
Combined with the optimism about short term rates moving lower especially for a bank that remains generally liability sensitive.
We entered 2024 with a bright outlook for the future.
As reported in our first quarter 2023 earnings call, we proactively completed two balance sheet repositioning transaction.
Converted approximately $450 million of fixed rate assets to floating rates to lessen our liability sensitivity.
These two transactions were generating over $2 million and quarterly pretax earnings as we entered 2024.
It was the right move and our early 2023 as.
As we considered similar transactions throughout the remainder of the year.
The benefit of rates staying flat or moving up did not outweigh the risk of rates moving down.
We will consider additional strategies for 2024.
But based on the current sentiment for rates. We believe we have struck an appropriate balance. So our net interest margin can begin begin to bounce back nicely as short term rates come down.
The technology upgrades announced in the summer of 2022 are built tested and plan to go live in early in February 2024.
Upgrades to our technology include Fiserv, DNA core processing system business online banking busy.
Business mobile App.
Branch platform and tower systems.
Diametric identification and paper eliminating efficiencies.
I cannot thank our team enough for their outstanding work and dedication to this project.
We believe our new best in class systems will enhance customer experience and provide our bankers with the tools needed to service, our clients and generate new relationship based business.
The transition to a more commercially focused institution that began in 2020 continued.
<unk> continued to make progress in 'twenty twenty-three thanks to the hard work of our commercial lending teams and their branch partners.
A key component of this objective is growing our commercial and industrial loan and owner occupied mortgage business.
This combined relationship based portfolio has increased 12% per year on average since 2020.
And our total commercial loan portfolio has grown a half a billion dollars over the same period.
Other moves such as consolidating our back office operations into a new administrative headquarters selling vacated buildings closing branches and adjusting branch hours are all starting to pay dividends.
Refreshing, our brand and building, our social media presence or getting the bank notice.
We believe the bank is now a much better company with a solid footing, both physically and digitally.
Our team is 25% smaller than it was just four years ago.
But much more adept at meeting today's challenges.
Janet for now will now take you through financial highlights of the full year and fourth quarter Janet.
Thanks, Chris Good afternoon, everyone.
Net income for 2023 totaled $26 2 million and fully diluted earnings per share were $1 16. The company's return on average assets was <unk>, 62% and its return on average equity was 7.14%.
Our performance for 2023 did not match up to the record net income and fully diluted earnings per share performance. The company produced in 2020 to.
$46 9 million and $2.04, respectively in 2022 our L. A was 1.11% and our O E was 12 point, 13%.
The overwhelming reason for the decline in earnings is the drop in net interest margin to 2.16% in 2023 from 2.89% in 2022.
The pace of decline in the net interest margin has slowed significantly throughout 2023 with the quarterly margin declining 57 basis points in the first half of the year compared to 17 basis points in the second half of the year.
The bank's noninterest income excluding net losses on sales of securities and two credits and other one time items was relatively flat when comparing 'twenty to 'twenty, three and 2022.
The bank's non interest expense for 2023, a 64 million decreased 3 million from 67 million in 2022.
Salaries and employee benefits declined by $3 7 million, mostly due to lower incentive and stock based compensation expense as the bank fell short of its performance metrics. This year.
An increase of over 700000 in FDIC insurance expense due to higher assessment rates, partially offset the savings and incentive compensation.
The bank's effective tax rate was 11% for 2023 down from 19.4% in 2022 the.
The decline in the effective tax rate was due to an increase in the percentage of pretax income derived from the banks real estate investment Trust in the bank on life insurance.
Net income for the fourth quarter of 2023 totaled $6 1 million down 741000 from the linked quarter.
The decrease is mostly due to lower net interest income of 1.5 million, resulting from alternative higher priced funding that replaced seasonal deposit outflows. Additionally, the provision for credit losses increased 1.1 million as 1.1 dollars 6 million in net charge offs were partially offset by.
Net improvements in various qualitative and quantitative factors in our ACL model.
These items were partially offset by lower salaries and employee benefits expense and lower income tax expense for the same reasons mentioned previously for the full year of 2023.
Net interest margin was 2% in the fourth quarter compared to 2.13% in the linked quarter. The 13 point decrease in the net interest margin in the fourth quarter was largely due to seasonal outflow of lower cost non maturity deposits being replaced by higher wholesale funding cost.
The bank's quarterly noninterest income was $2 4 million, which is consistent with prior guidance and prior quarters.
The bank's noninterest expense decreased 1.4 million to 14.8 million compared to the linked quarter. The decline is mostly attributable to lower incentive and stock based compensation expense. The same reason as for the full year net income for the fourth quarter of 2023 was down $3 8 million.
When compared to the fourth quarter of 2022 the decrease was mainly attributable to the reasons cited with respect to the year over year linked quarter changes, including a 7.8 million decline in net interest income and increase in the provision for credit losses, and 818000, a decline in salaries and employee.
<unk> expense of $2 7 million and a decline in income tax expense of $1 7 million.
The yield curve has been inverted for approximately 18 months one of the longest periods in history and it continues to make it difficult for banks to utilize their excess capital to leverage the balance sheet.
As far as the balance sheet is concerned on the asset side. The bank continues to deploy approximately $80 million to $90 million and quarterly cash flows from our securities and loan portfolios into new assets at current market rates. The bank has approximately $860 million or 21% of interest earning assets mature.
During a repricing within one year, but remains a liability sensitive.
On the liability side of the balance sheet pricing pressure continued through year end, although the bank price competitively to maintain deposit balances total deposits on a linked quarter declined 4.85% to $3 3 billion, mostly due to seasonally lower municipal and tax escrow.
Posits the depositary placed like overnight borrowings and F. H L. B advances the bank's total wholesale funding, including broker deposits was $648 7 million or 15% of total assets on December.
2023, and had a weighted average cost of funds of 4.66% and an average maturity of six months. In addition, the bank has 352 million in retail time deposits that mature in 'twenty 'twenty four with an average cost of funds of four 2%.
As far as funding matures in the coming quarters, we anticipate some final additional upward cost pressure. However management believes additional interest expense from liability repricing will be largely offset by additional income and asset cash flows reprice higher leading tomorrow, but margin step stabilization.
Once the federal reserve begins to lower short term rates, we believe margin expansion should follow shortly thereafter.
The liquidity indicators remain ample we maintained $1 1 billion and collateralized borrowing lines with the federal home loan Bank of New York and the Federal Reserve Bank. We also had 386 million and unencumbered cash and securities.
In total we had approximately $1 5 billion of available liquidity at the end of the quarter, which is well in excess of our uninsured and uncollateralized deposits.
The bank did not repurchase any shares during 2023 we still have approximately 15 million authorized under the most recent board approved stock repurchase plan and given our strong capital levels likely will resume the buyback program in 2020 for Chris.
Chris will talk a little bit now about 'twenty 'twenty four Chris Thanks.
Thanks Janet.
In preparing for today's remarks are reviewed our fourth quarter 2022 earnings call, which included forward looking challenges for 2023.
I specifically cited.
The federal reserve's increases in interest rates have not been at this pace in over 40 years, putting downward pressure on the banks net interest margin, we projected a lower margin.
I mentioned, the political and regulatory message of removing so called junk fees is limiting the bank's ability to charge for the fundamental services we provide.
We projected noninterest income of $2 5 million per quarter in 2023.
I stated that regulatory oversight continues to pile on operational cost no matter an institution size, but.
But management efforts to create efficiencies through branch and back office consolidations have kept expense growth in check we.
We projected noninterest expenses between 16, and a half and $17 million per quarter in 2023.
As we all know now the federal reserve increased rates for more times during 2023.
Putting more pressure on our net interest margin than anticipated.
Backing out our net loss on sales of Securities we were spot on with our 2023 projected noninterest income averaging close to 2.5 million per quarter.
And while thousands of more pages of regulatory guidance were issued.
Our noninterest expenses came in lower than projected principally due to lower incentive compensation expense.
Other than incentive compensation noninterest expenses were in line with 2023 projections.
Let's consider the same three areas as we enter 2024.
First our net interest margin.
Our 'twenty 'twenty four projections include the federal reserve beginning to lower rates during the second half of the year.
As Janet reported our net interest margin in the fourth quarter of 'twenty twenty-three was 2%.
We currently believe there will be downward pressure during the first quarter of 2024 with a leveling out during the second quarter of the year.
During the third and fourth quarters of 2024, we are projecting the net interest margin to begin to recover as short term rates begin to come down.
Our current thinking is consistent with my comments during our third quarter earnings call that the margin should bottom out over the next two quarters, referring to the fourth quarter of 2023 in the first quarter of 'twenty 'twenty four.
Next our noninterest income during 2023 we fine tuned our business checking account analysis program.
And adjusted service charges on consumer checking accounts to encourage more debit card and E statement usage.
These changes should produce some additional fee income in 'twenty 'twenty four and as such we are projecting noninterest income to average 2.6 million per quarter in 2024.
Lastly, our noninterest expenses.
Even though we are investing in new technology. Our continued success with our branch optimization plan back office consolidations selling vacated buildings and eliminating our residential mortgage group among other initiatives have reduced our run rate of noninterest expenses.
We are projecting noninterest expenses to average 6.25 million per quarter in 2024, or 250 to 500000 lower than 2023 guidance.
Please note that our noninterest income and noninterest expense guidance are averages and quarterly barren so likely.
With that I will turn it back to our operator for questions.
Thank you.
Our first question for today comes from Chris O'connell from K VW, Chris. Please proceed with your question.
Hi, Yeah, just just on the a and the last item on the guide.
You should fix two five.
Seems low.
16 point to drive.
Speaker Change: Sorry, Okay.
Great.
That's helpful and just because the compensation line and that kind of reset back to normal immediately for the for the first quarter.
Yeah, It will reset back to normal for the first quarter and but we do have some efficiencies going in there as from some of the branch consolidations of back office consolidations are our computer upgrades and such and just just from the work we've done throughout the throughout the year.
Air on staffing in the branches. So we realize an entire year's benefit of that in 2024.
Great.
And then on the margin.
It sounds like maybe down a little bit.
First quarter, but.
The pace of that should should probably slow.
Based on.
The funding cost kind of having a little bit less pressure into.
Into the first quarter and some of them.
Deposits, maybe coming back in on seasonality.
Yes, if you look at the fourth quarter with some of the deposit outflows, which were the bulk of that was some municipal deposit outflows in.
And in November December each year, we pay out.
From our escrow accounts, the real estate tax bills. So that number alone was $35 million and with those outflows and you know as John had mentioned.
That money going into overnight borrowings that's more expensive so that obviously pushed down the fourth quarter margin a little bit.
So far we've already brought 35 million back in this first quarter.
So youll skills that will also help relieve some of that pressure is that that money flows back in.
Okay.
And rigs.
Regarding the second half of the year.
With fed cuts you know, maybe you guys could provide a little bit of color as to how you see the margin reacting.
<expletive>.
Pending on the level or the pace of fed cuts.
How much kind of upward mobility.
Okay. So for every 25 basis points at the fed cuts.
Over time, we would predict predicting that the marginal improved four to five basis points. Again. This is over time depends obviously on many factors, but that's where we're projecting it to increase.
Great.
And last one for me just.
Yeah.
What's a good go forward tax rate for 'twenty 'twenty four.
So I'm looking at between 12 and 13%.
And the next year some of the benefits of the REIT a capping out so it's going up slightly.
Speaker Change: Great. Thanks for taking my question.
Thank you Chris.
Yes.
Our next question comes from Alex Turtle of Piper Sandler Alex. Please proceed with your question.
Hey, good afternoon.
Hey, good afternoon, Alex I ask.
I just wanted to I guess I'll start with sort of the outlook for the loan portfolio. Obviously, you guys have plenty of capital.
Liquidity, obviously, not as much and maybe there's a more strained but as you kind of set yourself up for for potential rate cuts and maybe some some easing.
Liquidity.
Speaker Change: <unk> funding cost do you think we could.
See a little bit more loan growth in 2024.
We do we do think there will be some growth in 'twenty 'twenty four.
We don't think it's going to be is as robust as we would all like but we do think that there'll be some.
Look lower single digit loan growth.
During this year last year of loans were pretty pretty flat throughout the year to down and.
With some hopefully some rate relief and really you've already seen some of that because <unk> seen five and 10 year rates come more for their high. So that does also provide some rate relief as well.
The loan rates are pricing off more of that.
At the end of the curve so.
We're anticipating to see some additional volume the pipeline at the end of the year was not overly robust at about $100 million.
At year end, but.
There was there's certainly some more conversations going on and some more activity. So we're we're encouraged that that pipeline is going to grow.
Got it and I think in the past you've given us sort of the average yield on the pipeline are you able to provide that.
The pipeline is always difficult right because it's there it's floating kind of with the rates moving every day, but.
But I can tell you that the loan closings that we had in the fourth quarter.
It was right in the year.
It was right around 7% so it's.
It should be pretty much in line with that shouldn't shouldn't stray too much from that.
Great and I just wanted to ask you you know.
How you guys are thinking about the dividend going forward.
Well Laurie we looked at the dividend, obviously every quarter, we analyze it and right now we're expecting that we'll continue to pay the dividend going forward.
I guess, yeah at the current levels I know you guys have a pretty extensive history of increasing the dividend annually and it's.
You know something that is probably has given you a lot of.
I don't know if they do rely on it but it's.
A nice a nice streak thats, a consideration or is it really it didn't take it sort of one quarter at a time and sort of look at it from a payout ratio standpoint and from a.
Our capital standpoint.
We appreciate that streak I. Thank our shareholders appreciate that strength is street, Kurt our board of directors appreciates that that streak and.
You know again in an environment like this.
You look at it quarter by quarter, but obviously, our board declared the fourth quarter dividend.
You know to keep it going it just we just just paid that out in early January and so at this point you know they've they've committed to continuing to pay the quarterly dividend.
You know last year, we did not have an inquiry, we usually do.
One increase a year last year, we did keep the.
The quarterly dividend flat at the 21 cents a share.
Okay, and then I guess you know generally I think you said in your prepared remarks that buybacks will be back on the table in the near term is can you just give us a sense for sort of what would trigger buybacks or <unk>.
Capital levels that you'd feel comfortable with things like that.
Capital levels at the capital ratios at 10%, so we're going to analyze that each quarter.
Take a look at it and if there's room for buybacks.
Like we said we didn't do any last year, we'll definitely based on where we project earnings to go for the year. We do have to watch that we would consider buying back but I don't think we have a number at this point I'm sorry, I think we've I think we've.
<unk> talked before that you know is a national bank, we do have we do watch our dividend.
Dividend ability to dividend money up to the holding company based on.
The prior two years retained earnings in the current year. So we do monitor that also so you know.
That's also something that could be a little bit of a governor on how much money, we we dividend up to the holding company. So that's why it's kind of a quarter bye bye bye quarter.
Item that we have to consider.
Understood and then just wanted to ask about the.
Sort of the pickup in Npls. This quarter, if you can give us a little bit more color.
Something that is relatively uncharacteristic figures.
Yes, yes, absolutely.
So unfortunately, when we seem to have any L. L. P. L. A it seems to be.
Come up so we.
We actually have a.
A grand total of about $1 million and our non accruals. There was there was one C&I relationship that we took the charge.
$1.4 million charge offs in the fourth quarter. It was a business that generally have longer term fixed rate contracts and.
And that created some losses due to pandemic price increases and delays and such.
And we take proactive steps to resolve that and and do it quickly, but we charged that are charged out is a partial charge off there's still about a 600000 dollar balance on that loan, which which we have fully reserved for but that's that 600000 is part of that.
And then we have one.
Small residential mortgage just over a little over 300000 deaths in that part of the state. So we're not too concerned about that and then there's a <unk>.
Even smaller less than 100000 dollar.
SBA small business line SBA guaranteed small business line.
That is in that list so.
The Grand total is is three loans and they are all below $1 million and in total it is $1 million.
Really appreciate taking my questions. Thanks.
Thank you al.
This concludes our question and answer session I will now turn the floor back Becker for closing comments.
Thank you for your attention and participation on the call today I want to reassure our loyal shareholders that the board of directors and management team are focused on returning to and improving on our historical performance metrics. We look forward to talking to you at the end of the first quarter have a good rest of the day.
The meeting will go on air and as scheduled time on the meeting web page.
[music].
Yes.
Okay.