The First of Long Island Corporation (NASDAQ:FLIC) Q3 2023 Earnings Call Transcript

The First of Long Island Corporation (NASDAQ:FLIC) Q3 2023 Earnings Call Transcript October 27, 2023

Operator: Welcome to The First of Long Island Corporation Third Quarter 2023 Earnings Conference Call. On the call today are Chris Becker, President and Chief Executive Officer; Jay McConie, Chief Financial Officer; and Janet Verneuille, Chief Risk 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/2023/Q3. 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 the company’s filings with the U.S. Securities and Exchange Commission.

Investors should also refer to our 2022 10-K filed on March 9, 2023, as supplemented by our 10-Q for the quarter ended March 31st, 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.

Chris Becker: Thank you. Good afternoon and welcome to The First of 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 $0.30 were consistent with the prior quarter. Most importantly, our net interest margin only decreased 4 basis points from the previous quarter after averaging declines of 27 basis points over the prior three quarters. Assuming the Fed has 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, remained 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 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 of deposit offerings, But some have moved money to our First Investments Program or other non-deposit investment providers. While our 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 is 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 to its portfolio, that can be done through purchases. We previously reported the sale of six buildings in Glenhead, reducing our future occupancy expense, and the large majority of our rebranding expenses are behind us. The expense savings just outlined should offset pressure to maintain competitive salaries and benefits, upgrade technology to meet customer expectations and protect against cybersecurity threats. Pay rise in corporate insurance rates, 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 2024, but when implemented, will bring additional back office efficiencies. While we are just beginning our 2024 budget process, our goal is to reduce noninterest expenses below 2023 actual. We will provide more specific guidance on 2024 noninterest expenses in our year-end earnings call. I will now address the upcoming executive management changes announced in our earnings release. Jay McConie 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 in 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 environments in over 40 years.

Unfortunately, that environment, along with other personal reasons, have caused Jay 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 2024, 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 Verneuille 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 work together at 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 build on Jay’s advancements and move the company forward. Tan Ansari 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 worked directly with me. As a seasoned banker and 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 midsized 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 Verneuille make a few comments.

A real estate investment banker sitting in a plush office, reviewing financials and papers.

Janet Verneuille: Good afternoon. While I have not had the pleasure of addressing the investor community since joining the company as Chief Risk Officer in mid-2019, I work closely with Chris and Jay commenting on the press releases and other investor communications, reviewing 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 in 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 the 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 and mutually respectful relationships, outside the bank with the analysts and the investor community. Jay McConie will now discuss our financial results for the quarter. Jay?

Jay McConie: Thank you, Janet. Good afternoon, everyone. Adding to Chris’ 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 4 basis point decline was a significant improvement from margin declines of 40 basis points and 17 basis points in the first and second quarters of 2023, respectively. The slowdown in margin compression also resulted in a much smaller decline in net interest income of $409,000 or 1.9% when compared to the linked quarter. Quarterly net income of $6.8 million was down slightly from the second quarter of 2023, as a credit provision for credit losses of $171,000, a decline in noninterest income expense of $350,000 and lower income tax expense, partially offset lower net interest income and noninterest income.

The company’s ROA and ROE were 63 basis points and [7.34%] respectively, for the quarter. The decline in net interest income continues to be fueled by the Federal Reserve Bank’s aggressive monetary policy, which has increased short-term rates by over 550 basis points. The yield cut 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. Bank’s quarterly noninterest income was $2.2 million, which is consistent with prior guidance in prior quarters. This 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 $353,000, when compared to the linked quarter.

We expect noninterest expense to remain between $16 million to $16.5 million 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. Bank’s efficiency ratio was 65.3% for the 9 months ended September 30, 2023, up from 49.7% in the prior year period. The increase is 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 9 months ended September 30, 2023 and 2022, respectively. Bank’s effective tax rate decreased to 11.5% in the third quarter of 2023 from 18.01% in the third quarter of 2022. Decline in effective tax rate is mainly due to an increase in the percentage of pretax income derived from the Bank’s 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 in mortgage-backed securities with yields of approximately 6% during the third quarter. Bank also originated approximately $50 million in mortgage loans with a gross weighted average rate of 6.23% the quarter. Bank has approximately $840 million or 20% of interest earnings assets maturing repricing within one year, but remains liability-sensitive. On the funding side, 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.

The shift increased the average cost of funding on interest-bearing deposits by 153 basis points to 2.58% when comparing the third quarter of 2023 to the fourth quarter of 2022. The Bank’s cumulative deposit beta on nonmaturity deposits was approximately 38% through September 30, 2023, which is close to our historical average in a rising rate environment. However, given that both the pace and size of increases, our deposit betas could be higher when this rising rate cycle finally ends. Bank’s total wholesale funding, including broker deposits, was $559 million or 13% of total assets on September 30, 2023, and had a weighted average cost of funds of 4.53% and average maturity of 8 months. In addition, the Bank had $366 million in retail deposits that mature over the next 15 months with an average cost of funds of 4.08%.

As this funding matures in coming quarters, it could result in some additional upward cost pressure in each of these categories. However, management believes that digital entity expense from liability of pricing will largely be offset as interest income from assets we price lead to margin stabilization. The bank’s uninsured and uncollateralized deposits remained stable at 38% of total deposits on September 30, 2023, the same percentage as June 30, 2023. Bank continues to have ample liquidity. We maintain $1.3 billion in collateralized borrowing lines with the Federal Loan Bank of New York and the Federal Reserve Bank. We also had $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 uncollaterized deposits.

Our capital position remains strong with a leverage ratio of 10%, compared to 10.1% on June 30, 2003. The Bank did not repurchase any shares during the third quarter of 2023. We still have approximately $15 million authorized under the most recent Board approval stock repurchase plan. The Bank declared it’s quarterly cash dividend of $0.21 per share on September 28, 2023. With that, I turn it back to the operator for any questions.

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Q&A Session

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

Alex Twerdahl: Hi. Good afternoon.

Chris Becker: Good afternoon, Alex.

Alex Twerdahl: Yes. First off, Jay, it’s been a pleasure working with your 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 – in the future from now.

JanetVerneuille: Thank you.

Jay McConie: Yes. Thank you, Alex. It’s been a pleasure working with you as well and attending some of the conferences and so forth. Thank you.

AlexTwerdahl: When I look at the – I guess, some of the things that you’re doing, some of the reorganization with the Rocket Mortgage and then seeing 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 funding is obviously a challenge. I’m just trying to figure out if the plan should be to grow through it or if it’s kind of just churning in place or how we should be thinking about that?

Chris Becker: I think certainly for now, kind of staying in place. And it’s just largely because of the yield curve. 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 the challenge remains, as I said in my comments, you do have deposits that they’re strong relationship, but they have some excess funds and they’re saying, well, gee, I can get 5.5% in short-term treasury, I’m going to move some of the excess funds into that, and we’re not really interested in paying $5.5 million on deposits. So you lose some money there. And it’s difficult with some of those movements to grow. And again, just repeating kind of what I said earlier. So really, for the foreseeable future, the 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 on quarter, but fairly flat as far as total assets.

Jay McConie: Alex, when you look kind of on a linked quarter, our ROA has kind of stabilized at about 60 basis points of ROE in the mid-7% range and so forth. So we really want to kind of call the stabilization 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 or low spread in the curve.

Alex Twerdahl: Yes. Makes sense. I guess, I mean, sort of on the same lines, and maybe this comes a little bit at left – but I’m just – I know the FDA is currently selling some loans in your market. You guys are kind of uniquely positioned with expertise in some of the categories and where they might be selling some of these pools. And who knows what the pricing could look like, but there’s some pretty interesting structures. I mean is participating in something like that, something you’d ever consider doing?

Chris Becker: We would consider purchasing assets, again, if the spread was reasonable. If we have to go out and purchase something at a 50 basis point spread, that’s 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.

Alexa Twerdahl: Okay. Can you – I think in the past, you – Jay, 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?