The First of Long Island Corporation (NASDAQ:FLIC) Q3 2022 Earnings Conference Call October 27, 2022 3:00 PM ET
Company Participants
Chris Becker – President and Chief Executive Officer
Jay McConie – Chief Financial Officer
Bill Aprigliano – Chief Accounting Officer
Conference Call Participants
Alex Twerdahl – Piper Samer
Chris O’Connell – KBW
Operator
Welcome to the First of Long Island Corporation’s Third Quarter 2022 Earnings Conference Call. On the call today are Chris Becker, President and Chief Executive Officer; Jay McConie, 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 corporation’s website at snbli.com and on the earnings call web x at https//www.cstproxy.com/snbi/earnings.
Before it begins, the company would like to remind everyone that this call may be – 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 2021 10-K 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
Chris Becker
Thank you. Good afternoon, and welcome to the First of Long Island Corporation’s earnings call for the third quarter of 2022. We believe the third quarter and first 9 months of 2022 and are the direct result of the strategic initiatives our management team has focused on since January 2020. We have highlighted the initiatives in numerous communications to shareholders and the broader investment community.
They include supporting the growth of our balance sheet with profitable relationship banking business, improving the quality of technology through continuing digital enhancements, optimizing our branch network across a larger geography, using new branding and a community first focus to improve name recognition, enhancing our website and social media presence, recruiting additional seasoned banking professionals with long-standing relationships and focusing on strong cybersecurity and environmental, social and governance practices.
Specific results on these initiatives during the third quarter include completing the relocation of our Melville branch to our new corporate headquarters location at 275 Broad Hollow Road, Melville, New York. Earlier this month, we held a ribbon-cutting for Melville, combined with the celebration of the First National Bank of Long Island’s 95th anniversary. We are proud to be the longest-standing truly independent bank on Long Island that opened approximately a century ago.
A notification was mailed to our Port Jefferson branch customers that the relocation of that branch is scheduled for December 1st of this year. Regarding our branding, we are completing a significant amount of branch renovations to better complement our new logo. These efforts will continue throughout the fourth quarter.
We signed a new 7-year contract with our primary technology service provider, Fiserv Inc., which includes our core conversion to their DNA solution. The conversion project kicked off in September 2022 and is anticipated to be completed in October 2023. We believe this investment will provide the best available technology to our customers today and the open architecture for future enhancements.
I have reported on the progress on establishing a middle market team and branch presence on the East end of Long Island. We are proud of the results of these two relatively new initiatives. As of September 30, 2022, they have brought in approximately $140 million in new deposits. During the third quarter of 2022, we rolled out a new ESG web cast [ph] page in the Corporate Governance section of our Investor Relations site. Please visit the site to learn more about corporate integrity at the First of Long Island Corporation.
These initiatives have helped produce our best 9-month performance in the company’s history, and I want to recognize our Board of Directors and employees for their hard work and dedication to the company’s success. Looking forward, we see definite near-term challenges being caused by Fed rate increases not seen in over 40 years.
Deposit customers are demanding higher rates and wholesale borrowing rates are generally well north of 4%, putting pressure on our net interest margin. The margin for the first 9 months of 2022 was 2.95%. The margin for the third quarter of 2022 was 2.97%. However, the margin for the month of September 2022 was 2.85%, reflecting my comments.
Our bank is liability sensitive, especially in rate shock scenarios. Rates of modeling shows downward pressure on our net interest margin as liabilities reprice faster than assets followed by widening margins as asset repricing catches up.
Based on the current indications from the Fed regarding short-term rate increases, it is likely our margin will fall during at least the first half of 2023. Ultimate changes in the margin, including future improvements are based on how high the Fed moves rates, how long rates stay high, the resulting shape of the yield curve and reactions of competitors.
As reported in our earnings release, the mortgage loan pipeline is at $68 million about half the level of last quarter end. I stated last quarter that we anticipate new loan originations in the second half of 2022 will be lower than the first half of 2022. That anticipation is coming to fruition and will likely continue into the first half of 2023.
On a positive note, our banking teams have been very successful bringing in new deposit relationships and we believe that momentum will continue into 2023. It’s also anticipated that our efforts to consolidate branches and back office staff will result in lower occupancy and equipment expenses in 2023.
Jay McConie will now take you through some highlights of the third quarter and year-to-date. Jay?
Jay McConie
Thank you, Chris. Net income for the third quarter and 9 months ended September 30, 2022, grew by 9.1% and 8.7%, respectively, to $12.5 million and $37 million when compared to the same period last year. The growth in net income for both the quarter and 9 months ended was driven by significant increases in our average loan balances since the prior year. The average loan growth was funded by decreases in excess cash held in interest-earning bank balances, higher checking deposits and time deposits.
Period-end loan balances were $3.3 billion on September 30, 2022, flat when compared to June 30, 2022, but up over $200 million year-to-date. Mortgage loan originations of $130 million for the third quarter were offset by liquidations and paydowns.
The weighted average rate on new mortgage loans continues to improve and was 4.51% for the quarter and should increase as our current loan pipeline of $6.8 million has a weighted average rate of 5.51%.
Our mortgage loan pipeline decreased from June 30, 2022, as the pace and frequency of rate hikes by the Fed Reserve have more than doubled loan offering rates in just 6 months and have suppressed borrower demand.
Residential refinancing activity has completely dried up and new purchase activity has slowed dramatically as buyers are waiting for home prices to decline, while sellers are hopeful that low inventory levels will allow them to get the price they want.
We continue to see activity in the commercial mortgage market, but at rates not significantly higher than what is available in investment securities and not currently attractive to management. Our net interest margin for the quarter was 2.97%, an increase of 26 basis points when compared to the same quarter last year. The improvement in our margin was due to the following factors, the bank utilized lower-yielding interest-earning assets to fund loan volume, reinvestment rates on mortgage-backed securities continued to improve throughout the year, the $119 million floating rate corporate bond portfolio, which we priced quarterly based on a 10-year swap rate continued to improve with the increase in long-term rates, and the average balance on noninterest-bearing checking accounts improved $96 million or 7% to $1.5 billion.
The Federal Reserve has increased short-term rates by 325 basis points since March of 2022 and is expected to increase rates an additional 125 basis points to 4.50% by the end of the year. This is 100 basis points higher than their published Fed funds target rate on June 30, 2022. The frequency and size of the rate increases is causing all banks to review their current rate structure on core deposits to not only retain deposits, but attract additional funds as well.
With current Federal Home Loan Bank wholesale funding cost between 4.80% to 5% on terms between 6 months to 5 years, focusing on core deposit funding, which has always been a key part of our strategic initiatives is even more important during this rising rate environment. An extended period of persistent flat and, in some cases, inverted yield curve is likely to result in downward pressure on both net interest income and margin.
Our ability to leverage the balance sheet and take advantage of high offering rates in the securities and loan market is limited as the high cost of new core or wholesale funds could be at lower margins.
Moving to asset quality. The bank had no nonaccrual loans on September 30, 2022, and the bank had approximately $732,000 in net charge-offs during the current year. We had a provision of $1.1 million for the quarter, which was mostly attributable to charges for current and forecasted economic conditions and net charge-offs.
The bank’s reserve coverage ratio was 94 basis points on September 30, 2022, a decrease of 2 basis points from December 31, 2021. Noninterest income increased $192,000 for the 3 months ended September 30, 2022. The increase includes higher fees and debit and credit card activity and additional income from bank-owned life insurance as we purchased additional $20 million in December of 2021.
As noted in our earnings release, the increase in noninterest expense, excluding prior year branch optimization charges was due to higher salary and benefit costs, including new hires and incentive costs and occupancy costs related to the relocation of our corporate offices and new East End branches.
During the quarter, we repurchased approximately 209,579 shares at $19.56 and – we have approximately $19 million remaining in our current authorization and we anticipate this program will continue during the fourth quarter, given our strong leverage ratio of 9.75%. The – in addition, on September 30, 2022, we announced a declaration of our third quarter dividend of $0.21 per share, which represents a 5% increase over the dividend paid in the same quarter last year. The dividend was paid out on October 21, 2022.
With that, I turn it back to our operator for questions.
Question-and-Answer Session
Thank you. Our first question for today comes from Alex Twerdahl at Piper Samer. Alex, please proceed with your question0
Q – Alex Twerdahl
Hi. Good afternoon.
Jay McConie
Good afternoon, Alex.
Alex Twerdahl
I’m just wondering if you could – obviously, a tough interest rate environment, and I appreciate your comments on expectations for the NIM over the next couple of quarters. I was just wondering, in those expectations, how you could maybe just give us a little bit more color on how the overall balance sheet looks. So we see a little bit of shrinkage. And then maybe just talk a little bit in the same context about the liquidity position and what kind of cash flows you’re getting from your securities portfolio on a quarterly basis?
Jay McConie
I think, Alex, as Chris to say, with loan growth going down, we’re looking at probably a flat to slightly decreasing loan portfolio, I’d say, over the next several quarters because we want to really look to allow that cash flow to come in. And as we have some wholesale borrowings that might be coming due that are at lower rates and repricing higher, we think it makes a little bit more sense to use that cash flow and pay down those wholesale borrowings.
Obviously, we have our lending teams. We’re going to probably be a little bit more out of the broker market, but we’re still working with all the teams that we’ve hired to continue to bring in core relationships that provide DDA, lines of credit and build the franchise value over the long term even during this environment. But again, that might not be more than what pays down in cash flows for each quarter, but we think it’s a prudent method to do.
Alex Twerdahl
Got it. And then…
Jay McConie
And then you had a question on cash flows?
Alex Twerdahl
Yes, I was just curious…
Jay McConie
Yes. The securities portfolio is looking probably about 10% of the portfolio, excluding the corporate bonds. So if you back that $119 million out of our – our book value, not the fair value, our book value, if you look at our 10-Q and get that amount, it’s about 10%, which probably is between $60 million over the next year in cash flows in our securities portfolio. And again, back out to corporate bonds because they reprice and don’t mature until 2028.
And then for our security – our loan portfolio, probably 10% of that portfolio matures reprices in the next year. And then with cash flows coming in, you’re probably looking about 15% to 17% of cash flows, so meaning 10% of your bonds mature reprice and then the other 6% to 7% is cash flows coming in that can be reinvested. And again, we’ll use that cash flow to either grow key relationships or to look to pay down wholesale funding.
Alex Twerdahl
Okay. And then as you as you look to build some of these core relationships and bring in deposits, are you seeing – obviously, we’re seeing some pressure in the markets, everyone is with respect to deposit costs. I’m just curious if there’s certain pockets of the market that you’re seeing more pressure? Or if you’ve seen that deposit pressure ramp up even more over the last couple of weeks.
Jay McConie
Yes. I think when you look at it, – we’re kind of looking at it like that by the end of the year, it’s going to be up between up 400, up 500 type scenario in 9 months. But I think for most banks, when you look at their non-maturity deposits, they probably have reacted in an up 50 to 100 basis points through that first kind of 9 months. And where we’re giving this guidance about pressure on margin is we think going forward, they’re going to kind of increase on a cumulative basis, right? Eventually, everything will get back to what is a shock 400 or 500 level. So we think that, that will start to accelerate.
And I think you’re starting to see that a little bit with business customers and municipal deposits with their ability to go to the treasury market and seeing a 2-year treasury in that 450 level. And as the Fed continues to raise, maybe gets more into the 3 months where they don’t have to lock up their funds as much, so you see a little bit more pressure going into your kind of money market and now accounts is that duration factor kind of leaves a little bit.
Alex Twerdahl
Okay. And then maybe you can just give us some comment on credit. Obviously, pretty not seeing any real pressure on credit. But if loan growth slows, should we expect that provision to basically head back down towards 0 over the next couple of quarters?
Jay McConie
Yes. I think Chris had kind of mentioned we see kind of loan growth declining potentially offsetting any potential future adjustments for additional reserves for economic conditions, obviously, GDP unemployment, the Fed with increasing rates and trying to drive down inflation is obviously trying to increase unemployment and slow down demand.
So if that results in the trends in our forecast to go there. But yes, we think that if the portfolio — loan portfolio stays fairly flat, unless there’s something unforeseen, we think provisioning would be fairly modest, again, but unless something really changes on the economic forecasting front.
Alex Twerdahl
Okay. And then just final question for me. Could you — maybe I missed in your prepared remarks just what’s going on with salaries during the third quarter?
Jay McConie
Yes. So when we had that, that really kind of stems back more from, I’d say, end of Q2 into Q3, where in most of our branches or branches throughout in the first half of the year, there was really a lot of adjustments from competition and banks had to kind of look at their salary structure with minimum wage rates going up and so forth. So that was just kind of a onetime adjustment to get our wages kind of in line with competition to try to prevent turnover.
Chris Becker
There was a lot of pressure from competitors on rates for certain branch positions and we made adjustments proactively to – for retention purposes.
Alex Twerdahl
Perfect. You’re not the only one seeing that pressure. But 10.5, that’s the right starting point for heading into the fourth quarter for salaries?
Jay McConie
Yeah. I mean I would think when you look at it, really noninterest expense overall, Alex, I would think for the fourth quarter, maybe about 17.5 and with five being a little bit, as Chris alluded to, we’re trying to finalize with our rebranding efforts with updating some of our branches. And some of our branches just haven’t had updates in years, just kind of normal repairs and maintenance on them. We think that’s a little bit of more of a onetime expense.
And then right now, obviously, we’re going through, we’re going to be updating our budgets just like every other bank out there really doing a top to bottom approach. And we realize we the flat inverted yield curve, that’s even more critical to really maintain and watch expenses, which does become a little bit more difficult on salaries with inflation.
But right now, I would preliminary think $17 million in 2023 for noninterest expense overall, but we’ll revisit that and also give you guidance at the end of the fourth quarter when we update and give for 2023 updated guidance.
Alex Twerdahl
Thanks, Alex.
Chris Becker
Thank, Alex.
Operator
Okay. Our next question comes from Chris O’Connell of KBW. Chris, please proceed with your question.
Chris O’Connell
I just wanted to follow up on the expense comments there. Not this year, but in past years, you usually have a pretty good uptick in the first quarter of the year on seasonality with expenses. Do you expect to see that next year and kind of average down over the course of the year? Or would it be a little bit different this summer?
Jay McConie
I’m trying to stick with the seasonality. I don’t know if it was really I think it might have just been timing of – it was payroll taxes and sometimes adjustments to incentive accruals that might come in with both cash and restricted stock units, sometimes those are based on performance metrics and you get the true up.
And then it also could have been just coincidence maybe with some hiring teams quarter-over-quarter and so forth. But we think like headcount next year is going to be fairly flat. So we think that for the most part, it should be a fairly consistent other than those kind of salary items from quarter-to-quarter next year.
Chris O’Connell
Okay. Got it. And then circling back on the securities cash flows in that book as you go forward with minimal kind of loan growth outlook. Are you expecting to reinvest those back in? Or do you expect to try and use those to pay off some of the wholesale fundings? Or I guess what’s the use of cash flows coming off that book going to be?
Jay McConie
Yeah. I think it’s a combination. Our first thing right now with rates going up so quickly, and customers starting to request higher rates is to protect liquidity and make sure that we maintain our relationships and maintain our liquidity levels. And as we build up cash, we think it’s prudent to take a portion of those and pay down wholesale, but we also think it’s prudent that – these are some of the best rates we’ve seen in 10, 15 years on the asset side.
And what we don’t want to do is not purchase anything and then — the thought is when inflation comes down, rates will come down, we don’t want to say we missed the opportunity to reinvest in some of these higher rates.
So we will be looking to take a portion of those cash flows lock in maybe some treasuries in the 3- to 5-year bucket. And then we’re also deploying to CMOs and MBS is. We’re a little hesitant on CMOs and MBSs because like everything when rates eventually come down, those cash flows come streaming in and that yield goes away. So we like to lock in a little bit of that at higher yield. But we’re being mindful of paying our wholesale and also people demanding higher cost of funds, so monitoring our liquidity and having that cash available.
Chris Becker
And I’d like to add, it’s really going to be deposit driven. We think in this environment that we don’t know how high and how long the Fed is going to be increasing. And obviously, the wholesale rates are going up tremendously. So as Jay said, while we would like to take advantage of these higher security yields right now, we really think it’s important to be core deposit driven.
Chris O’Connell
Yes. And then given the balance sheet being fairly flat going forward, I hear you that there’s going to be pressure on NII with some NIM decline here. But does that allow – I mean, does that allow you to kind of limit, I guess, the NIM pressure as you get into 2023 to a certain extent, — and do you have any outlook as to like what you’re shooting for in terms of NII or how much that’s going to be declining over the first half of the year?
Jay McConie
I mean obviously, we don’t give guidance on NII, especially in our rate environment where rates are moving so quickly in the last 40 years. But what I would kind of point you to, Chris, is if you look at our June 30 10-Q and our 9/30 10-Q, the net interest tables with the various shock analysis. You can look in there and you’ll see a plus 200 plus 300, knowing where we’ve come from, right. We’ve already kind of up at 300 and kind of look at those, and they’ll give you the kind of the percentages for a decline in NII and so forth.
Again, that’s a shock up. As Chris said, a lot of things factor into that, the steepness of the acute inversion of the yield curve. And again, how long April remains – we think the Fed is towards the end of this rate cycle by the end of the year, as they’ve said a little bit more in Q1.
We’re hearing some economists say it could go up a little higher. We’re seeing other economists saying that place is going to drop dramatically, and they’re going to have to pause or may be cut. So those factors could change the magnitude of NII. But we’re dipping lease. So that’s why we’re being cautious.
Chris Becker
But we do think that it will minimize the downside. If you think about it now, wholesale borrowing costs and where you can put money in the investment securities and really even loans because loan yields have not really fully reacted to the rate increases yet.
The spread is very minimal on those to and that would put further pressure on the margin. If we were to borrow funds at 4.75% or 5%, and investment of 5.25 or 550 or 6% and would put further pressure on the margin.
So we do think it will help preserve the margin if as those wholesale borrowings come due if we have excess cash flow, the better option may be to pay those down. And of course, every quarter that goes by every month that goes by as things change. We react to what we think the best opportunity is at that time.
Chris O’Connell
Yes. That’s good color and helpful. And then last one for me is just – what’s a good tax rate for going forward?
Jay McConie
I would say about 19.5 would be a good rate for the remainder of the year – for a full year.
Chris O’Connell
All right. Got it. And what about just going forward into 2023?
Jay McConie
2023, I would say probably right around 19.5 to 20 would be a good tax rate. we don’t expect — obviously, there’s been nothing coming out from Congress with any changes in federal tax rates. And our REIT is still applicable because that’s over $8 billion. That really exclusion goes away. So we would keep it right around 20%.
Chris O’Connell
Great. Thanks for taking my questions.
Chris Becker
Thanks, Chris.
Operator
Thank you. This concludes our question-and-answer session. I’ll turn the floor back to Chris Becker for some final closing comments
Chris Becker
Thank you for your attention and participation on today’s call. We’re very pleased with the – to present the results of another solid quarter and update you on some of our key initiatives, and we look forward to talking to you about our year-end results next quarter. Have a good rest of the day.
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