First of Long Island Q4 2022 Earnings Call Transcript

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January 27, 2023

There are 5 speakers on the call.

Operator

Welcome to the First of Long Island Corporation's 4th Quarter 2022 Earnings Call. On the call today are Chris Becker, President and Chief Executive Officer Jay McConey, Chief Financial Officer and Bill Aprigliano, Chief Accounting Officer. Today's call is being recorded. A copy of the earnings release is available on the corporate website at fnbli dotcom and on the earnings call webpage@https: www.cstproxy.com/fnbliearnings 20242022Q4. Before we begin, 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.

Operator

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 a set forth in the company's filings with the U. S. Securities and Exchange Commission.

Operator

Investors should also refer to our 2021 10 ks filed on March 11, 2022 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.

Speaker 1

Thank you. Good afternoon, and welcome to the First of Long Island Corporation's earnings call for the Q4 year end of 2022. The year marked our banking subsidiary's 95th anniversary. We celebrated the loyalty of our local markets with a community first volunteerism program. Our employees donated over 500 hours of their time to aid local charities In fighting food insecurity, helping seniors, caring for animals and building housing.

Speaker 1

It was inspirational And I want to thank the entire First National Bank LI team for meeting our mission of continually doing the right things to help our customers, employees And shareholders succeed while being socially accountable to the communities we serve. I'm gratified to announce another year of record performance. Net income and earnings per share both set new company highs in 2022 at $46,900,000 $2.04 respectively. The KBW Bank Honor Roll recognizes banks With more than $500,000,000 in total assets that have reported consecutive increases in annual earnings per share in each of the past 10 years. Stockholders should know that your company is on that list.

Speaker 1

We were also proud to be named to Piper Sandler's Small Bank All Stars in 2022, which recognizes companies with a market cap below $2,500,000,000 that outperformed the industry in growth, profitability, credit quality and capital strength. Year end and average total assets, loans and deposits all increased in 2022. Average non interest bearing checking deposits increased over 7% and averaged over 40% of total deposits during the year. We believe these numbers represent a true relationship oriented bank. I previously reported on the relocation of our corporate headquarters to 275 Broadhollow Road in Melville earlier this year.

Speaker 1

During the Q4, we completed the sale of 5 Glenhead buildings and closed a freestanding drive up ATM leased Location. 2022 also included moving our Port Jefferson branch to a new Main Street Village location And we are nearing completion on a new Bohemia location on Veterans Memorial Highway for the relocation of that branch. As the First National Bank of Long Island, we were missing a presence on the east end of the island. We corrected that oversight by establishing a branch in East Hampton in late 2021 and at Southampton branch in early 2022. Combined with our Riverhead branch opened in 2020, We are making a name for ourselves on the East End.

Speaker 1

We have been fortunate to hire some of the best bankers in these markets. Our team is dedicated to transforming this 95 year old institution to a modern commercially focused bank. Our growing banking teams are bringing in relationships, helping our balance sheet mix. Our new branding is being complemented as fresh and inviting. Our new website and social media presence continue to grow in terms of visits and impressions.

Speaker 1

Our commitment to technology upgrades and cybersecurity investments are recognized by our employees and customers And we're being acknowledged in the industry for our successes. We are moving forward while staying true to our history of strong fundamentals that deliver results, including consistent loan underwriting criteria. Looking forward, We see a challenging landscape in 2023. The Federal Reserve's increases in interest rates Have not been at this pace in over 40 years, putting downward pressure on the bank's net interest margin. Our bank's liability sensitive position makes us more susceptible to rising rates.

Speaker 1

Our net interest margin was 2.74% in the Q4 of 2022, but was 2.66% for the month of December. Our margin very likely will be lower than the December number in the Q1 full year of 2023. How much depends on the Fed's future moves and competitive conditions. Jay will speak to our deposit betas. Our political and regulatory message of removing so called junk fees is limiting the bank's ability to charge for Services we provide.

Speaker 1

Progress in fee income always seems to be offset by competitive reductions. Non interest income is currently projected at $2,500,000 per quarter in 2023. At the same time, regulatory oversight continues to pile on operational costs related to 3rd party management, information security, ESG and climate change among other areas, no matter an institution's size. Management efforts to create efficiencies through branch and back office consolidations have kept expense growth in check And 2023 non interest expenses should be in line with 2022 numbers. Non interest expenses are currently projected between $16,500,000 $17,000,000 per quarter in 2023.

Speaker 1

We have persevered through past challenges to remain a valuable franchise with strong capital, Strong asset quality, a strong deposit base and dedicated directors, employees, customers and stockholders. I thank them all for their years of support, and we remain committed to doing the right things for them. Jay McCone will now take you through some highlights for the full year and Q4. Jay?

Speaker 2

Thank you, Chris. As Chris mentioned, the bank had a record earnings of $46,900,000 and earnings per share of $2.04 in 2022. Interest income improved to $8,900,000 or 8.3 percent to $115,700,000 and our margin increased 15 basis points to 2.89 percent in 2022, up from 2.74% in the prior year. The growth in net income for the year was mostly attributable to a $300,000,000 increase in average loans for the year, Stable non interest income of $12,400,000 and a slight decline in non interest expense of $1,100,000 to $67,600,000 for the year. The bank's asset quality remains excellent with no non accrual loans on December 31, 2022 and our capital position remains strong with leverage ratio of 9.83 percent.

Speaker 2

For the year, the bank originated approximately $656,000,000 in mortgage loans With the weighted average rate of approximately 3.69 percent, mortgage originations slowed to $63,000,000 during the Q4 due to higher rates less demand from consumers and businesses, but the average rate improved to 5.44 percent and the yield on our C and I portfolio at the end of the year increased 6.34%. In previous quarters, the bank reported a loan pipeline of committed but not yet closed mortgage loans. On September 30, 2022, that number was $68,000,000 On December 31, 2022, the committed but not yet closed mortgage loans were 51,000,000 This reporting period and going forward, we report a loan pipeline consistent of issued letters of intent, loans and underwriting and committed but not yet closed loans. That number on December 31 was $127,000,000 compared to $181,000,000 at September 30, 2022. We believe our broader definition of the loan pipeline is a better indicator of loan demand and activity in the upcoming quarter.

Speaker 2

Bank expects overall loan growth to be in the low single digits in 2023 given the increase in rates, concerns for recession and the inverted yield curve. Net income for the Q4 of 2022 declined $2,600,000 when compared to the Q3 of 2022 $3,100,000 increase in interest expense, primarily due to higher borrowing costs and seasonal deposit outflows from average checking deposits into interest bearing liabilities. During the 1st 9 months of 2022, the bank was able to lag increasing the rate it pays on non maturity deposits. Federal Reserve's aggressive push to increase federal fund rates by 4.50 basis points since March of 2022 And expectations they will continue to increase short term rates to possibly 5.25 percent in the first half of twenty twenty three has increased the cost of funds we pay on these types of deposits. The bank's cumulative deposit beta on non maturity interest bearing deposits through December 31st was 21%.

Speaker 2

The bank's historical cumulative deposit betas on non maturity interest bearing deposits has been plus or minus about 35%. The cost of retail deposits and wholesale funding also increased with the cost of funds on interest bearing liabilities rising from 48 basis points to 123 basis points since September 30, 2022. The bank has approximately $348,000,000 in wholesale funding that matures during 20 using seasonal deposit inflows and monthly cash flows from our securities and loan portfolio in 2022 to repay a portion of our wholesale funding position. The bank is liability sensitive with approximately $410,000,000 or 10% of our interest earning assets either maturing or repricing in 2023 And approximately $340,000,000 or an additional 8% of interest earning assets in annual cash flows from securities and loans. These cash flows will be reinvested at current market rates or be available to repay wholesale funding.

Speaker 2

Management regularly analyzes potential balance sheet restructures that help improve our liability sensitive position. The bank's quarterly core non interest income run rate excluding one time items has been approximately $3,000,000 over the past 4 quarters. We expect this run rate will decline to approximately $2,500,000 in 2023. The $553,000 on the disposition of premises and fixed assets relating to several of the bank's former Glen Head locations, $531,000 in costs relating to the branding initiative in branch locations and $210,000 for 2 branch relocations. We expect non interest expense to be $16,500,000 to $17,000,000 in 2023, flat when compared to 2022.

Speaker 2

As we previously noted, the bank moved its corporate headquarters to Melville in April 2022 in an effort to have a more convenient location for our customers and employees. Between the disposition of the Glenhead assets, the new Melville headquarters and the various branch openings, closings and relocation, bank expects occupancy and equipment expense to be lower in 2023 versus 2022. As noted in our earnings release, the bank repurchased 915,868 shares or 17,900,000 in common stock in 2022. The bank has approval to purchase up to an additional $15,000,000 in its outstanding plan. Finally, we anticipate a tax rate for 2023 to be approximately 18.5%.

Speaker 2

With that, I'll turn it back to the operator for questions.

Operator

Thank you. Our first question for today comes from Alex Twerdahl, Piper Sandler. Alex, you may ask your question.

Speaker 3

Hey, good afternoon guys.

Speaker 2

Hey Alex. Hi Alex.

Speaker 4

Hey, first off, Jay, you went through the cash on the securities and expected deposit flows kind of quickly. Do you mind just saying those again?

Speaker 1

Sure, sure.

Speaker 2

Let me just pull it up. Yes, so we have approximately $410,000,000 or 10% of our interest earning assets That mature or reprice in 2023. And then based on prepayment speeds, we kind of Alex, what I like to do is I look at last full year annual cash flows 2021. I look at 2022s. I look at estimates from our Darling System and then I kind of look at our quarterly run rate and based on that I'm projecting about $340,000,000 or about another 8% And interest earning assets from securities and loan cash flows.

Speaker 4

Okay. And Do you have

Speaker 2

a are you able to

Speaker 4

give us a sense for the portion of that that might be loans that would reprice higher Like what kind of pickup you might potentially get? I

Speaker 2

mean on the loans on actual repricings that Re price off of prime each quarter, that's more about $289,000,000 or about $300,000,000 in re pricing That would come up and those are the ones that are really repricing up with prime each quarter. So that would be the best indication

Speaker 1

The remainder is priced off of typically the 5 year treasury plus a margin. So it depends on when it was booked. It was booked 5 years ago. Obviously, it would be the increase in the 5 year Yes. Treasury during that time.

Speaker 2

Right. So to clarify, dollars 300,000,000 is kind of flow to a prime each quarter and about $100,000,000 is based on CRE loans that are coming up for that reset date.

Speaker 4

Okay. And the reset date just depends on where I guess 5 years

Speaker 2

or 4. Exactly. And a It was depending, but mostly would probably be off the 5 year treasury, maybe some a little bit off to 7.

Speaker 4

Okay, got it. And then in terms of deposit flows that might be expected early in 2023, can you just give a sense if the sort of line of sight on any Deposit inflows or outflows? And then maybe talk a little bit about the deposit strategy today?

Speaker 2

Yes. I mean typically like Chris said, For the year, we saw interest bearing or DDA increase and we were very comfortable with that amount coming up. Right at the end of the quarter, right in December, we've always had kind of seasonal outflows and it was probably about $200,000,000 For the Q4, we've had some of it come back in. It usually comes back in throughout the Q1 And from there, so we're looking at those seasonal inflows to come in and then try to use those as well as Funds coming in from the cash flows we talked about both for loans and securities and use a portion of those to pay down wholesale borrowings and then also look to utilized some of it to for growth in securities and a little bit growth in loans.

Speaker 1

And our deposit strategy continues to be building relationships So with the loan teams that we've added or beefed up over the past 3 years, They continue to bring in new relationships. And obviously, with that, you get a percentage of DDA And you need to be competitive on the interest bearing deposit side.

Speaker 4

Got it. And then I also just wanted to ask you guys have always been conservative on your credit underwriting. And I'm not sure we're seeing a lot of cracks at least visibly in what's going on in the market with respect Real Estate, multifamily, those types of loans. I'm just curious from where you guys sit, if there's anything that you're seeing out there that is starting to look like early indications of Potential pain or anything that you guys are worried about? Any color would be helpful.

Speaker 1

We really haven't seen any cracks at this point. I would say In our most recent, we do obviously a CRE analysis every quarter. We look at market data. So A very slight uptick in multifamily vacancies, but nothing that's causing us concern at this point.

Operator

Thank you. Our next question is from Chris O'Connell at KBW. Chris, you can proceed with your question.

Speaker 3

So I was hoping to just get a little bit of clarification As to the fee guidance and where that's coming out of to start the year, I think you said $2,500,000 a quarter for 2023. Just like which I guess is that an immediately starting at that level 1Q 2023 and where's like the variance, which line items is that coming out of the most Relative to where we were in the Q4?

Speaker 2

Right. So Chris, we expect our Core non interest income and all the various lines. Obviously, we have some going up, some coming down, but our core interest income It's going to be about that $2,500,000 throughout the quarter. As Chris alluded to, we're seeing some pickup in Debit card, credit card activity and then we're anticipating some loss in NSF fees just because of regulatory and competition within The real reason for the decline is our pension. So for the past 4 or 5 years, our net pension expense It has been a credit to the bank, usually about $100,000 $135,000 we get a net credit.

Speaker 2

And part of that is in the Non interest income and part of it is in salary expense. They make you break out each piece. This year, our pension, we have a fully funded pension. The bank hasn't contributed had to Contribute for well over 5, 6 years to fund it. It's over 100% funded, but because of the decline in assets or the increase in Interest rates and the decline in the fair value of the assets, the GAAP accounting requires you to amortize a loss and The assets decreased more than the liabilities and that's causing the income on non interest income going down $2,600,000 So that's really and you divide that by 4.

Speaker 2

So that's what's driving. It's a non cash item. If interest rates decline and we The funding position increases, you could see that kind of switch the following year. So it's a non cash item that's really not related to the core business.

Speaker 3

Got it. So that's going to come out of like the other fees line item for you guys and then like correspondingly on the compensation For the most part?

Speaker 2

Yes, exactly. And we are getting some benefit in less salary expense. So I would look at it overall that We're going from $135,000 call it net credit to about a $1,400,000 expense. So that's the actual overall impact. It's just that it's broken out in 2 pieces.

Speaker 2

And unfortunately, the decline in the return on assets and the amortization of this Loss because of the funding position, closest us have to decrease non interest income $2,500,000 for the year.

Speaker 3

Understood. And on the expense side, For the $16,500,000 to $17,000,000 is there just you guys have kind of a lot moving On the different branch relocations and openings and things like that, I mean, is there any particular cadence that start off the year At the higher end or the lower end in build or reduced throughout the year? Is there just any seasonality to that?

Speaker 2

I would say it's pretty consistent, maybe a little bit higher in the Q1 just because of payroll expenses and FICA and so forth that Add up and maybe trending down, but not anything significant.

Speaker 3

Got it. And just going back to the margin discussion, so I appreciate the guidance as So where you guys were in December and how it's going to trend for the 1st part of the year lower? Any sense as to based on, I guess, assuming 2 call it 2 more hikes here And then a pause as to the trajectory of the NIM or where it could bottom either on timing Or on the level?

Speaker 2

Yes. I mean, it's getting really based on the volatility and the pace and increase, it's hard for us to That's why we tried to kind of ease you that for the quarter the NIM was 2.74 for a month it was about 2.66. Like we said, our beta year to date is 21%. The way we come up with our beta was we just take since our low point, which was probably in For non maturity deposits, we take that increase over the from that point through December and we just simply divided over the Where the Fed funds rate is now, which is 4.50%, and we get 21%. And historically, when you look back probably since 2000, when we look at our deposit beta studies, Obviously, the Fed is going to pause, but deposits still continue to increase.

Speaker 2

So when you look at the full rate cycle when they stop and then kind of Deposits kind of reached their seek their level in that current rate cycle. It's been probably plus or minus 35%. So if you look at where Fed funds is going to wind up and you kind of take 35% of that, historically, that's where we've kind of ended up. But we do caution that this is the pace magnitude, the shortness of the increase Could cause that to be a little bit higher. And a lot of those previous rate cycles, Fed funds went up 25 basis points over a 2%, 2.5 year And inflation was below 2%.

Speaker 2

Here we're 40 year high inflation and they went up 500 basis points In under a year. So that's why we're cautious on giving guidance. We're trying to give you as much pieces as we can and Help you out with that.

Speaker 3

Yes, absolutely. And then lastly, you guys have a bit left here on the buyback authorization And are pretty well capitalized. Loan growth is kind of slower from a macro How are you guys thinking about the utilization of the buyback on a go forward basis?

Speaker 2

Yes. We're going to be in the market Time to time in the quarter, we might be a little bit more cautious in the first half. Just we want to kind of see how this kind of plays out with the Fed. There's a little battle going on between the Fed raising rates to between 5% 6% when you see an economist and you look at the Fed Funds futures Great. And they have the short end kind of coming down and you can see the inversions get a little bigger with the 10 year trading in that 3.5 Down maybe 75 basis points over the last quarter.

Speaker 2

So we're getting more of an inversion and more of a disconnect and whether it's a soft landing or hard landing. So we're going to be a Maybe in the first half just to preserve capital and then kind of see how things play out and then might be a little bit more aggressive in the second half.

Operator

Thank you. Our next question comes from Nicole Giuliano from American Capital Partners. Nicole, you may proceed with your question.

Speaker 2

Any question in the call or are we okay?

Operator

That concludes our question session. I'll turn the floor back over to Chris Becker for some final closing comments.

Speaker 1

Well, thank you all for your attention and participation on today's call. We're certainly very pleased to present the results of another record

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Earnings Conference Call
First of Long Island Q4 2022
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