The First of Long Island Corporation (NASDAQ:FLIC) Q1 2024 Earnings Call Transcript

The First of Long Island Corporation (NASDAQ:FLIC) Q1 2024 Earnings Call Transcript April 26, 2024

The First of Long Island Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to The First of Long Island Corporation’s First Quarter 2024 Earnings Conference Call. On the call today are Chris Becker, President and Chief Executive Officer; and Janet Verneuille, 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 at fnbli.com and on the earnings call webpage at https://www.cstproxy.com/fnbli/earnings/2024/Q1. Before we begin, the company would like to remind everyone that this call may contain certain statements that constitute forward-looking statements made under the Safe Harbor 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 companies’ filings with the U.S. Securities Exchange Commission.

Investors should also refer to our 2023 10-K filed on March 8, 2024 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.

Chris Becker: Thank you. Good afternoon, and welcome to The First of Long Island Corporation’s earnings call for the first quarter of 2024. Just last week, we held our annual stockholders meeting and covered a number of key topics of interest. Please visit the Investor Relations page of our fnbli.com website to replay that presentation. It focuses on the key strengths of our organization, the causes of the current earnings challenges, how an improving yield curve can lift performance, and the many benefits of our recent technology upgrades. Focusing on our strengths, capital remains strong at the end of the first quarter with a leverage ratio of 10% and a tangible common equity ratio of 8.9%. We had ample liquidity on March 31, 2024, of $1.5 billion, with a balance of collateral for potential borrowings at both the Federal Home Loan Bank of New York and the Federal Reserve Bank as we believe both are an appropriate source for day-to-day liquidity needs.

The Federal Reserve Bank is working to eliminate the stigma of being the lender of last resort, especially with recent reports and discussions regarding the Federal Home Loan Bank System’s charter of supporting low and moderate income housing initiatives versus its role as a primary source of liquidity for banks. Our C&I loans, including owner-occupied commercial mortgages, increased 6% since year end, and we are encouraged by recent activity that is not yet reflected in our March 31, 2024 loan pipeline of $113 million, up from $86 million at year-end 2023. Our credit quality remained rock solid through March 31, 2024, with charge-offs, non-performing loans, and past-due loans remaining at single-digit basis points as a percentage of total loans.

Non-interest income had a good first quarter and was slightly ahead of our guidance of $2.6 million per quarter in 2024. Non-interest expense was slightly below our guidance of $6.25 million per quarter in 2024. We have a new technology platform to support our future growth. We are opening our fourth branch on the east end of Long Island during the second quarter of this year, and continuing our growing momentum in that area. And we are staying disciplined in a difficult environment. We do not bend on credit quality. We focus on adding one relationship banker at a time and looking to build long-standing relationships. Our deposit base has a history of being loyal through good and bad news in the banking world, and we want to keep it that way.

As anticipated, our net interest margin was lower in the first quarter of 2024. The drop was largely related to our average funding mix as approximately $100 million shifted from average deposits to average wholesale funds when comparing the first quarter of 2024 to the fourth quarter of 2023. We also had $62.5 million of wholesale funding repriced from a weighted average cost of 1.36% to 4.78%. Regarding the drop in deposits during the fourth quarter of 2023. $34.2 million in tax escrow deposits were used to make real estate tax payments, and municipal deposits were down $97.5 million. Escrow deposits build back throughout the year as monthly loan payments are received. Municipal deposits were $46.6 million higher at March 31, 2024 when compared to the linked quarter.

The fluctuations in tax escrow and municipal deposits are common for our bank in the fourth quarter. Real estate tax payments are made every year in the fourth quarter, and municipal deposits have been down in the fourth quarter four of the last five years by an average of $54.4 million. Our commercial and consumer relationship deposits remain stable, and non-interest-bearing checking deposits were 33% of total deposits at the end of the first quarter. Please note, that while average deposits were lower during the quarter, quarter end deposits were higher than year end 2023 by over $55 million. As of the end of the first quarter, there are no significant tranches of wholesale funding, including any broker CDs that are not at or close to market rates.

Our retail CDs maturing over the next 12 months are largely at current market rates, especially after approximately $87 million in maturities in April and May that are paying very close to 4% and are expected to reprice at an estimated 50 basis points to 70 basis points higher. Barring any significant changes in our funding mix or short-term rates moving higher, we believe our margin should be at the bottom. We expect it will fluctuate within a narrow band for the remainder of 2024, although continued improvement in our funding mix or a more favorable yield curve may improve margin in the second half of the year. Janet Verneuille will now take you through other financial highlights of the first quarter. Janet.

Janet Verneuille: Thank you, Chris. Good afternoon, everyone. The company recognized net income of $4.4 million for the first quarter of 2024, down from $6.5 million in the first quarter of 2023. The decrease was largely attributed to lower net interest income of $5.5 million, a $1.1 million credit provision for loan losses in 2023, partially offset by the loss on sale of securities of $3.5 million in the first quarter of 2023. Net income was also down $6.1 million in the linked quarter. That decrease was mainly the result of lower net interest income of $1.8 million and an increase in salaries and employee benefits of $1.9 million due to the reversal of incentive accruals taken in the linked quarter. After excluding the loss on the sale of securities in 2023, noninterest income of $2.8 million exceeded noninterest income recorded in the first quarter of 2023 of $2.5 million.

The quarter’s noninterest income also exceeded the linked quarter total of $2.4 million. Better service charge income on deposit accounts and bully income helped in both quarter comparisons. Noninterest expense totaled $16.2 million, which is a decline of $365,000 or 2.2% compared to the first quarter of 2023. The linked quarter had a lot of noise related to the reversal of incentive accruals, so the comparison is not as meaningful. Gross loans declined $11.5 million from the prior quarter end, mainly related to $21.2 million of amortization and other paydowns of residential mortgages and home equity lines. This decline was offset by continued growth in our commercial portfolios, as Chris mentioned. The overall loan yield of 4.14% was up 5 basis points from the linked quarter.

Loan yield for the first quarter of 2023 was 3.70%. Total deposits increased $55.5 million from year end. The mix of deposits continues to change as customers move out of non-interest-bearing checking accounts and interest-bearing alternatives. As Chris mentioned, average deposits were down approximately $100 million from the linked quarter. The average cost of deposits was 2.64% for the first quarter of 2024, 2.43% for the linked quarter, and 1.40% for the first quarter of 2023. Other borrowings averaged $523.1 million for the first quarter as the drop in deposits was supplemented partially by these advances. The average cost of these borrowings was 4.82% in the first quarter of 2024, 4.59% in the linked quarter and 3.79% in the first quarter of 2023.

Net interest income and the net interest margin for the first quarter reflects the challenges described above. The purchase of the fixed-to-floating swap and the repositioning of a portion of the investment securities portfolio in the first quarter of 2023 continued to positively impact the income statement above the line. Yet the pace of the repricing of the liability side of the balance sheet continued to outpace the repricing of the assets on the balance sheet. Net interest income for the first quarter of 2024 declined $1.8 million from the linked quarter and $5.5 million from the first quarter of 2023. The net interest margin calculated to 1.79% in the first quarter of 2024, 2.0% in the linked quarter, and 2.34% in the first quarter of 2023.

The yield on total earning assets was 4.10% in the first quarter of 2024, 4.0% in the linked quarter, and 3.61% in the first quarter of 2023. Cost of total interest-bearing liabilities is 3.47% in the first quarter of 2024, 3.15% in the linked quarter, and 1.96% in the first quarter of 2023. No provision was booked to the allowance for credit losses during the quarter. The commercial real estate market remains under heightened scrutiny, especially in the New York metropolitan area, in the wake of credit problems disclosed by New York Community Bank at year end 2023. Although the New York State Housing Stability and Tenant Protection Act passed in 2019, most recently the ripple impact of the legislation is negatively affecting the rent regulated multifamily real estate market in the New York metropolitan area.

Management has provided detailed disclosures on our CRE portfolio, including our multifamily portfolio in an 8-K furnished on March 1, 2024, and in our recent annual meeting presentation. We believe the credit quality of the loan portfolio remains strong. The reserve coverage ratio on March 31, 2024, is 88 basis points compared to 89 basis points at year-end 2023. Book value per share was $16.78 on March 31, 2024, versus $16.43 on March 31, 2023. The accumulated other comprehensive loss component of the stockholders’ equity is mainly comprised of a net unrealized loss in the available-for-sales securities portfolio due to the higher market interest rates. The company repurchased shares during the first quarter of 2024 at a cost of $2 million, and the bank declared its quarterly cash dividend of $0.21 per share.

The effective tax rate for the first quarter of 2024 was 6.2% as the tax-advantaged assets of loans in our REIT subsidiary, municipal bonds, and BOLI were a larger portion of taxable income during the quarter. With that, I turn it back to our operator for questions.

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Q&A Session

Operator: Thank you. Our first question for today comes from Alex Twerdahl at Piper Sandler. Alex, please proceed with your question.

Alex Twerdahl: Hey, good afternoon.

Chris Becker: Good afternoon, Alex.

Alex Twerdahl: First, on the loan outlook, Chris, you talked a little bit about the commercial loan growth you saw this quarter and that pipeline building, it’s still, however, pretty small percentage of the overall pie. So I was hoping maybe you can just help us frame sort of the opportunity and the outlook for that commercial portfolio overall and where you think it over time might eventually get to as a percentage of the overall loan book.

Chris Becker: So the commercial — well, let’s break it down, right? The C&I portfolio and owner-occupied portfolio was that 11% of the total portfolio, And then, obviously, we have the commercial real estate portfolio, which is over half the portfolio. So we like — we certainly — we’re happy with the size of where the commercial real estate portfolio is. We still want that piece of the pie in the residential side, which is still over 35% of the portfolio to come down. And the C&I and owner occupied piece is the piece we want to grow. If I can look forward and look at that pie, I’d love to see four equal slices. I’d love to see about 25% in multifamily, about 25% in other [CRE] (ph), about 25% in residential, and about 25% in C&I and owner occupied.

But it’s going to take some time for the C&I and owner occupied to get there. And when I say sometime that we are talking years, not months, but that’s certainly the direction we are moving. And we’ve just hired another middle market lender. As you know, we’ve grown our middle market team over the past four years. And some activities picking up there. You see our pipeline is up a little bit quarter-over-quarter. And we want to keep growing that, but the activity has been quiet. The rates are, obviously, impacting that. Some of the — on the real estate side, commercial real estate side, we’re seeing some opportunities from other banks, but quite often the loans have to be right-sized because of the current interest rate environment and not everybody’s willing to do that.

So it does remain challenging out there and that’s why you see very low growth rates in the industry and some banks shrinking a little bit.

Alex Twerdahl: Yes, it makes sense. I mean, as you kind of think about those four equal slices over time and totally get it, it’s going to take a while to get there. Do you see it kind of being sort of a flattish overall loan book or is the overall loan book grow as well? And I guess when you think about loan growth for this year and the pipeline and the opportunities, are they sufficient to keep the loan book at a current level, just running against that amortization and the payoff activity that you alluded to earlier in the call?

Chris Becker: I think so. We’re still thinking low single digit growth for the year, even though we were down a little bit in the first quarter, mainly related to payoffs in the residential portfolio, not on the commercial side. So when you look at our pipeline numbers that we talk about in our earnings calls and/or state in our press — our earnings releases, depending on where we talk about them. And then you look at what we close in a quarter. The numbers are much more in line with each other. And I think every bank decides how to disclose their pipeline numbers a little bit differently. I hear pipeline numbers of some banks that are very large, but then when I see closings for the quarter, they’re not very large. And this seems to be, to me, a little bit of disconnect.

But I just think that’s the way everybody looks at it. When we look at our pipeline, we look at, obviously, loans that are approved and ready to close and we look at LOIs that are signed and agreed upon, and we’ve already vetted those credits closely, and they have a very high probability of getting to closing. So I think, looking at our number, which is probably a little bit more on the conservative side, the way we report it, is probably why it looks maybe a little bit lower than some others.

Alex Twerdahl: Okay, understood. Thanks for that color. I think, Janet, as you’re going through some of the repricing on the borrowing and sort of what new stuff’s coming on today and you kind of look at it against the securities portfolio. I mean, it’s clear that there’s some less efficient leverage on the balance sheet today that I know is not necessarily going to be super cheap to get out of, but you have a pretty healthy capital position. So as you think about using capital today, how do you weigh some restructuring similar to what you did last year or something else to kind of get rid of some of that leverage that maybe is upside down right now.

Janet Verneuille: We have modeled various scenarios out. We usually look at the payback period to see if it makes sense. We will consider as we go forward, and we have some room with liquidity, maybe putting some investment securities on, but for the first quarter, it just didn’t make sense.

Chris Becker: The year-end back periods on some of the things we looked at, if you start getting out to five or six years, we don’t think that makes a lot of sense. But we continue to monitor that. We look at that on both the securities and loans side.

Alex Twerdahl: Yes. I mean — I totally get it. Are there pieces of securities portfolio that are have a shorter weighted average life or sort of cash flows that you could see over the next year or two that you could accelerate and do something today just to give us a near-term boost to the NIM?

Janet Verneuille: Not at the moment. I would say, we’ll continue to look at that, but there’s nothing when we look at the investment profile. I mean, the [muni’s] (ph) are paying down, but some of the mortgage backs, they’re longer than the CMOs.

Chris Becker: The mortgage-backed portfolio is similar to our residential portfolio. A lot of the underlying loans in the mortgage backed portfolio, not a lot of prepayments coming in if the underlying mortgage is at 3% or 3.5%.

Alex Twerdahl: Yes. Okay. I wanted to — I really liked all the disclosure you guys put in your slide deck with respect to the multifamily and was looking at the weighted average debt service coverage ratio after reset for some of the stuff that’s resetting in 2024 and 2025, which is pretty helpful and haven’t seen a lot of that. So thanks for giving us that information. I was wondering if you had at your fingertips and maybe you don’t just, we kind of often guess at what the rates are going to do and sort of the interest in the debt service. But in terms of the net operating income of some of these properties, for both the regulated and the free market. Do you have a sense for whether or not those NOIs are starting to come down in the next year or two, or how do you think about that piece of the equation for the debt service coverage ratio?

Chris Becker: I don’t have specific numbers for you, but I do see NOIs coming down. And the NOIs are coming down because of inflation. I mean, we’re seeing — when we’re looking at new opportunities or when you’re looking at loans that are up for a rate reset, we’re just doing annual reviews. Certain areas, utility expenses, insurance, we’ve seen insurance rates on some loans triple since the loan was originally booked. So the expense side is really also a challenge, right? When you think about the multifamily, you do have a lot of rent regulated properties in that space. But if you see properties that look like they may have some stress on cash flow, it’s more related to the higher interest rates at reset and the expenses. So it’s not necessarily related to the regulations and to the 2019 legislation that was passed.

Alex Twerdahl: Right. Okay. I mean, I guess when you guys think about underwriting these things and resetting them, then what’s sort of the magic number on debt service coverage ratio that you feel comfortable with?

Chris Becker: Well, listen, if it’s new stuff, I mean, we — if you look at policy and you’ll go down to maybe 1.25%, but if you look at reality where we book things and we’ve talked about it and obviously, provide a lot of guidance on it. We generally book things at the average rate — average debt service coverage ratio about 1.8 times and 50% LTVs. And that’s consistent with the information that we put out there in both our annual meeting and the 8-K. So that leaves you a lot of room. And when we also put the additional information in our annual meeting, when we talked about what the — looking at what was resetting in 2024 and 2025, and we assumed that they all reset at March 31 of this year. The debt service coverage ratios basically went from the 1.80s to the 1.40s.

Still a strong debt service coverage ratio, and certainly loans, if it was a new loan coming in that we would look at seriously assuming all the other metrics, we’re in good shape. But looking at those changes, that’s basically about a 20% drop in the debt service coverage ratio. Okay. So if you were to write loans at a minimum debt service coverage ratio, and banks have different, some have a minimum of 1.15%, some 1.20%, 1.25%, But if you had a 1.25%, and if you did book a full loan and it was at a 1.25% debt service coverage ratio at the time you booked it, and that 20% decrease kind of held on across the board that you’re seeing on average from what we showed you for 2024 and 2025, then that loan would go down to about one-to-one. So it would, obviously, be more of a stress situation, but it would be covering itself.

There just would be no excess cash flow for the borrower, but they would be able to cover their expenses. So, that 20% threshold for us from what we’re seeing kind of seems to be the number where things are falling. And I would guess that’s probably pretty consistent throughout the industry because everybody’s kind of looking at the same rates and everybody’s kind of looking at the same type of properties.

Alex Twerdahl: That’s really helpful color, Chris. I appreciate all the comments. Thanks for taking my questions.

Chris Becker: Thanks, Alex. Appreciate it.

Operator: Thank you, Alex. Our next question comes from Chris O’Connell at KBW. Chris, you can proceed with your question.

Chris O’Connell: Thanks. Following up on the multifamily discussion, the slide with debt service coverage ratio shows that 2025 pre market at like 2 times, almost 2.2 times. Is there anything unusual in that? It just seems like really, really strong — for it to be that high before the rate resets kick in?

Chris Becker: No, there is nothing unusual in that. I mean, we’re pretty consistent in the way we underwrite. And there’s nothing unusual in that number. I mean, when you look at our overall portfolio, and it’s 1.90, the entire CRE portfolio, it’s certainly not going to be unusual to have some segments above 2 time and some below.

Chris O’Connell: Got it. And then, circling back to just the overall loan growth discussion, can you give us what the yield on that $118 million pipeline is?

Chris Becker: The yield on the pipeline is always tough because a lot of them are floating off of an index until they close. But I can tell you in the first quarter, the closings for the first quarter were just about 7%. It was within a few basis points of 7%. So based on the fact that rates haven’t changed that much, I know we’ve seen some ups and downs in the treasury curve. But I’m going to say it’s probably pretty close to that. But I don’t have an exact number on that. But it shouldn’t be too different from the 7% number.

Chris O’Connell: Got it. And for the remainder of the year or next 12 months, I know you gave us on the combined basis I think last quarter. But do you have just what the dollar amount of loans, either repricing or maturing are, and then securities, but the separate balances of each?

Chris Becker: So what we put out there is, we generally have about $80 million to $90 million in quarterly cash flow coming in. I know that’s not necessarily loans repricing, but that’s quarterly cash flow coming in repricing. I don’t have — other than what we’ve put out on CRE and what’s repricing on the multifamily portfolio, I don’t have the total amount because, again, when you look at the C&I side, right, you have lines of credit paying up, paying down and moving around. So you can’t always tell when the usage, when the line usage is going to be up or be down a little bit from quarter-to-quarter and that does fluctuate. So I don’t have specific numbers on that, but that’s something that we can try to put together better for the next quarter for you.

Chris O’Connell: Yep, no problem. I guess what I’m getting at is, after we get past the second quarter with some of these, May and April, kind of final CD repricings, you seem to be a little bit more tepid on the back end of the year, NIM rebounding this quarter. It seems like the CDs will pretty much fully reprice, the borrowings are more or less fully repriced and you’re going to be getting improvement, although slow with the asset side. Just are you thinking about just being conservative or do you think that NIM going to be going up in the second half of the year?

Chris Becker: I think we’re being conservative because whenever you’re not conservative, it seems to come back just like everybody thought going into this year or the market was certainly thinking there was going to be seven rate decreases. And now, we don’t know if there’s going to be any, right? So the Fed is still saying they’re going to do something, maybe two or three or what have you, but there’s others saying that maybe it doesn’t happen until next year. So you do get a little conservative and then you have some unexpected changes in the mix a little bit, then you’d still do have money moving out of DDA. So, conservatively we say, hey, if the mix is good and we get some relief on the rate side, we see margin being able to move up.