First of Long Island Corp
NASDAQ:FLIC
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First of Long Island Corp
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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 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 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.
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 remained 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, nonperforming loans and past due loans remaining at single-digit basis points as a percentage of total loans.
Noninterest income had a good first quarter and was slightly ahead of our guidance of $2.6 million per quarter in 2024. Noninterest 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, 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 1 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 reprice 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 4 of the last 5 years by an average of $54.4 million.
Our commercial and consumer relationship deposits remained stable, and noninterest-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 brokered 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 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?
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 BOLI 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 a 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 yields 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 noninterest-bearing checking accounts and into 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-sale 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.
Our first question for today comes from Alex Twerdahl at Piper Sandler.
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, a 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, the commercial portfolio overall, and where you think it over time might eventually get to as a percentage of the overall loan book.
So the commercial -- well, let's break it down, right? The C&I portfolio and owner-occupied portfolio was at 11% of the total portfolio. And then obviously, we have the commercial real estate portfolio, which is over half of 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 4 equal slices. I'd love to see about 25% in multifamily, about 25% in other CRE, about 25% in residential, and about 25% in C&I and owner-occupied. But it's going to take -- it's going to take some time for the C&I and owner-occupied to get there. And when I say some time, you're talking years, not months. But that's certainly the direction we're moving.
And we've just hired another middle market lender. As you know, we've grown our middle market team over the past 4 years, and some activity is 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 rightsized because of the current interest rate environment, and not everybody is 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.
Yes, that makes sense. I mean, as you kind of think about those 4 equal slices over time, and totally get, 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 does the overall loan book grow as well? And I guess when you think about loan growth for this year and the pipeline, 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?
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 -- or earnings releases, depending on where we talk about them, and then you look at what we closed 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 I see closings for the quarter, they're not very large. And there seems to be, to me, a little bit of a 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.
Understood. Thanks for that color. As you -- I think, Janet, as you're going through some of the repricing on the borrowing and sort of what new stuff is coming on today and you kind of look at it against 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 -- either similar to what you did last year or something else, to come and get rid of some of that leverage that maybe is upside-down right now?
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.
The earn-back periods on some of the things we looked at, if you start getting out to 5 or 6 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 loan side.
Yes. I mean totally get it. Are there pieces of the securities portfolio that are -- have a shorter weighted average life or sort of cash flows that you could see over the next year or 2 that you could accelerate and do something today just to give us a near-term boost to the NIM?
Not at the moment. I would say we'll continue to look at that, but there's nothing when we look at the investment portfolio -- I mean munis are paying down, but some of the mortgage-backeds that pay longer, the CMOs.
The mortgage-backed portfolio is similar to our residential portfolio. There's 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%.
Yes. Okay. I wanted to -- I really liked all the disclosure you guys put in the -- in your slide deck with respect to multifamily, and was looking at the weighted average debt service coverage ratio after reset for some of the stuff that's resetting in '24 and '25, 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 often guess 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 2? Or how do you think about that piece of the equation for the debt service coverage ratio?
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.
Right. Okay. I mean I guess when you guys think about underwriting these things and resetting them, then at what sort of a magic number on debt service coverage ratio that you feel comfortable with?
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 -- weighted average debt service coverage ratio of 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 '24 and '25, and we assumed a -- 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 were in good shape.
But looking at those changes, right, 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 difference. Some have a minimum of 1.15, some 1.20, 1.25. But if you had 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 '24 and '25, then that loan would go down to about 1:1. So it would obviously be more of a stretched 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 it's -- 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 is kind of looking at the same rates and everybody is kind of looking at the same type of properties.
That's really helpful color, Chris. I appreciate all the comments.
Thanks, Alex. Appreciate it.
Our next question comes from Chris O'Connell at KBW.
Following up on the multifamily discussion, the slide of debt service coverage ratios, it shows the 2025 free market at like 2 -- almost 2.2x. 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.
No, there is nothing unusual on that. I mean we're pretty consistent in the way we underwrite, and it's -- there's nothing unusual on 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 and some below.
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? .
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.
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?
So what we've 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 use 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.
Yes, no problem. I guess what I'm getting at is, after we get past the second quarter with some of these May and April final CD repricings, you seem to be a little bit more tepid on the back end of the year, NIM rebounding this quarter, and 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 being conservative or do you think the NIM is going to be going up in the second half of the year?
I think we're being conservative, because whenever you're not conservative, something seems to come back. Just like everybody thought going into this year or the market was certainly thinking there was going to be 7 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 2 or 3, 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. But when you look at our overall liability side, as we've said, the higher cost stuff, the wholesale funding, any brokered CDs, the retail CDs, I mean that is really largely repriced, right? There's a few little things here and there, but nothing real significant. So that's largely repriced.
When we look at our nonmaturity deposits, savings now, money market accounts, they've been continuing to go up, but at a decreasing pace. And you can see those numbers in our NIM tables for the past several quarters and those numbers have moved down from an average of about 17 basis points a month when you go back to the first quarter of last year, down to about 7 basis points a month when you look at the first quarter of this year.
So when you look at that and if you look at that on, say, about $1.6 billion, and you apply, well, how much extra interest cost is that going to be, and then if we look at our cash flow that we talked about coming in, the $80 million to $90 million a quarter coming in on loans and securities. And if we look at a number of, say, 2% or 3%, 2.5% on that repricing up, and just simply taking a 3.5% loan and saying it's going to reprice to 6%, for argument's sake, and use that number. That repricing on that asset side, that small group of assets coming in because it's going to be a much larger repricing than where we currently are on the nonmaturity deposits, there's upside potential there, right?
And we believe that that trend in the nonmaturity deposits coming down from that 17 basis points a month to 7, it's been coming down fairly consistently over that period of time, so that could very well continue. But if something happens, it could go back up a little bit.
So I think we're being on the conservative side a little. When you boil it down to what's really repricing now and where the pressures may be, I would say it leans towards the upside. But there's always the unknowns every quarter, right? We had it -- we went down 21 basis points in margin this quarter, which was higher than I would have expected it to go down. But we had -- we just had an unfortunate change in mix from quarter-to-quarter. That seems to be correcting now as we see the end of the first quarter numbers. But you do -- there is always the unexpected in there.
Understood. And just on the capital position, you guys bought back a little bit of shares this quarter. You were a little cautious on the buyback last quarter. Is it something that you think you will continue from here?
We take a look at it every quarter. And depending on the capital position, we would consider buying back shares, for sure, in the upcoming months.
Great. And then last one for me is just, what's a good go-forward tax rate?
Well, I know we guided to 12% at the beginning of the year, we came in at 6.25%. We're starting to max out on the tax benefit as a REIT. So I do think the tax rate is going to be going up, I would say somewhere in the middle of the 6.25% and the 12% that we guided at the beginning of the year.
Thank you. This concluded our question-and-answer session. I will turn the floor back over to Chris Becker for closing comments.
Yes. Thank you for your attention and participation on the call today. And we look forward to talking to everybody at the end of the second quarter. Have a good rest of the day.