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 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 web page 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 31, 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.
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 3 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 2 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 2 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 6 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 2 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 4 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 2 previous institutions, including as my Chief Financial Officer, when we worked 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 8 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.
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 Officer in banking and for 3 years, also served as the lead financial officer in 2 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 respect all relationships, outside the bank with the analysts and the investor community. Jay McConie will now discuss our financial results for the quarter. Jay?
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 curve 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% for the quarter. Bank has approximately $840 million or 20% of interest-earning assets maturing and repricing within 1 year, but remains liability sensitive.
On the funding side, 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 uncollateralized 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. Bank [indiscernible] cash dividend of $0.21 per share on September 28, 2023.
With that, I turn it back to the operator for any questions.
Our first question for today comes from Alex Twerdahl of Piper Sandler.
First off, Jay, it's been a pleasure working with you in 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.
Thank you.
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.
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?
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 there are 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% 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 2, 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 one quarter, but fairly flat as far as total assets.
Alex, when you look kind of on a linked quarter, our ROA has kind of stabilized at about 60 basis points and 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.
Yes. Makes sense. I guess, I mean, sort of on the same lines, and maybe this comes a little bit at -- 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?
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.
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?
Yes. It's about $126 million of pipeline, predominantly commercial with us stepping out of the residential business. We'll still purchase residential mortgages, but not originate. And with the yield curve steepening in the 5-year and 10-year getting up into the $480 million range and we originate with a spread, you're starting to see those yields be in the high 6s to low 7s. On the flip side, you're starting to see demand really kind of come down as you get into the 7 handles as obviously, there's no refinancing activity going on. It's new purchases and those people looking for new purchases are -- get a little bit cold-feeted into 7 handles.
Yes. Okay. Makes sense. And then you mentioned that you guys are still liability-sensitive. I mean is the goal over time to become more neutral? And I know you did a little balance sheet restructuring, which I think looking back was a pretty good move. Back earlier this year, are you looking at additional similar types of transactions to help boost NIM in the future?
Right now, probably not. We felt those 2 moves, the securities restructuring and the swap, where we converted $300 million of residential to floating. Where time is right, we do feel that we're kind of in the eighth and ninth inning of this rising rate cycle, and we're going to kind of take it quarter-by-quarter. We think NIM has stabilized. We think a lot of our wholesale for the most part, have repriced and take it quarter by quarter and see what the Fed does, before we make any decisions to do any larger type of restructurings or additional swaps.
Our next question comes from Chris O'Connell of KBW.
I just want to add the same sentiment -- it's been great working with you, Jay, and wish you all the best in your next steps and look forward to working with you, Janet.
Thank you.
Thank you, Chris.
So yes, I was hoping to start off on the margin. I mean, obviously, the compression this quarter was a lot less onerous than the past couple, I think in prior quarters, you've sometimes given the monthly margins. I was wondering if you had that for the July, August, September periods.
We do. In July, it was $216, in August, it was $220 and September was $202. $202 is a little obviously lower than you want to see, but we did have some prepayments on some of the SBA flow orders we have in the investment portfolio, which caused that yield to be kind of considerably lower that month, which put on pressure in that 30-day month. And that's the other issue. In the 30-day month, our margins throughout the year and a 30-day month, they always are a little bit lower. So we don't want that $202 to be overly indicative of going forward, but it should be seen.
Got it. And I know you guys mentioned the margin you're hoping to bottom all else equal on the rates here over the next couple of quarters. Any sense as to the magnitude of the pressure of where that could bottom either just on a trajectory for Q4 or kind of the ultimate level of bottom?
Yes. It's been hard, as you know, Chris, throughout the cycle to try to give very good guidance on the margin. And I think you've seen that there's been a lot of misses on that throughout the year for many banks. But what we're seeing as we're looking at our internal projections is that so much of our liability side has repriced, so even if there's still some small repricing in things that have already repriced but maybe come up again over the next few quarters.
There's obviously not as much upside from where they are now. So that's being fully priced in, now we see the asset side, those $90 million in quarterly cash flows, that Jay talked about. We see those starting to be able to offset the liability pricing, and that's why we kind of see the margin bottoming out over the next 2 quarters.
What that exactly means? Is it the same in the fourth quarter and the first quarter? Does it bottom out in one or the other? It's hard to get that specific on it. But we do see over the next 2 quarters, we see that trough. And then the liability side, assuming, again, the Fed stops with the rate increases, we see the liability side being done and the asset side little by little can start to tick up.
And obviously, if the Fed makes some moves in the other direction and we get some steepness in the yield curve, that's when you'll see it turn around more rapidly. So it's kind of difficult to tell where that bottom is, best-guess scenario and you hate to say guess, but looking at the best at we have at this point in using certain assumptions.
Could it go down and bottom out over the next 2 quarters and another 5, 10 basis points? Maybe a little bit more, it could. It's just -- it's very difficult to tell. But we just have to kind of see what the Fed does and what the market does.
Yes. No, I hear you. That's helpful, though. I appreciate it. I know it's a difficult thing to discern at this point. And then, well, just quickly, so for that -- the tax rate for this year, obviously, we are at the 11.5% to 12% range. Is that where you think it will remain next year? Or should it tick up a bit?
Yes. I'm kind of working on that forecast now and have to go through that. I mean, preliminary, I would say, probably budget between maybe 13% to 14% because as we kind of come out of this and hopefully yield curve steepens, we can start to look for expanding margins if get a steeping yield curve, but I would keep it around that 13%, 14%.
Okay. Great. And you mentioned in the prepared remarks, you pushed out some of the planned IT upgrades into 2024 that can bring inefficiencies. Can you just provide us with a little bit of color as to what those upgrades are and how you guys plan to bring those on?
Sure. We've been working on a core conversion, we talk also -- plans to upgrade our business online banking and our branch teller and platform systems. And along with that, in the back office, our item processing is -- would be outsourced, so the combination of all those things, we believe, certainly in the back office with the item processing brings back about some staffing efficiencies. And we just felt that we were -- this is a long project -- these types of projects go on 18 to 24 months.
And as we were getting closer to a target date, we felt working with our [indiscernible] that it would be best to put it off a few months. So we're still evaluating and we haven't picked another date yet, but we anticipate that to be done in early 2024.
Great. And then on the credit side, I mean, everything on your individual metrics looks fantastic. Especially relative to the industry, which has seen a couple of issues pop up this quarter. How are you guys seeing your credit on a go-forward basis and things in your market? Is there any cracks anywhere, anything that you're concerned about?
No, we're not concerned with our portfolio on the whole is, I think in conversations with customers and in the market, you're starting to hear some things where maybe things are slowing down for certain businesses.
I think people get a little bit about nervous about what's going on in the economy and also the world in general. But obviously, our numbers are not showing any specific problems like that, any numbers ticking up. But the -- even with us, there's always a couple of loans on the problem loan list that something could happen, but nothing in a big sense that's concerning us.
Thank you. This concludes our question-and-answer session. I'll turn the floor back to Chris Becker for final closing comments.
Yes. Thank you all for your attention and participation on today's call. Janet Verneuille and I will look forward to talking to you at the end of the year. Have a good rest of the day.