The First of Long Island Corporation (NASDAQ:FLIC) Q4 2022 Earnings Conference Call January 27, 2023 2:00 PM ET
Company Participants
Chris Becker – President and Chief Executive Officer
Jay McConie – Chief Financial Officer
Conference Call Participants
Alex Twerdahl – Piper Sandler
Chris O’Connell – KBW
Operator
Welcome to the First of Long Island Corporation’s Fourth 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 page at https://www.cstproxy.com/fnbli/earnings/2022/q4.
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 [Technical Difficulty]
Chris Becker
[Technical Difficulty] I’m gratified to announce another year of record performance. Net income and earnings per share both set new company highs in 2022 at $46.9 million and $2.04 respectively. The KBW Bank Honor Roll recognizes banks with more than $500 million 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.
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 $2.5 billion that outperform 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 Broad Hollow Road in Melville earlier this year. During the fourth quarter, we completed the sale of five 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 a South Hampton branch in early 2022. Combined with our Riverhead branch opened in 2020, we are making a name for ourselves on the East end. 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. Our commitment to technology upgrades and cybersecurity investments are recognized by our employees and customers. And we’re be 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.
Our net interest margin was 2.74% in the fourth quarter of 2022, but was 2.66% for the month of December. Our margin very likely will be lower than the December number in the first quarter and full-year of 2023. How much depends on the Fed’s future moves and competitive conditions. Jay will speak to our deposit betas.
A political and regulatory message of removing so-called junk fees is limiting the bank’s ability to charge for the more fundamental services we provide. Progress in fee income always seems to be offset by competitive reductions. Non-interest income is currently projected at $2.5 million per quarter in 2023. At the same time, regulatory oversight continues to pile on operational costs related to third-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 $16.5 million and $17 million per quarter in 2023. 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 McConie will now take you through some highlights for the full-year and fourth quarter. Jay?
Jay McConie
Thank you, Chris. As Chris mentioned, the bank had a record earnings of $46.9 million and earnings per share of $2.04 in 2022. Bank’s return on assets and equity were 1.11% and 12.13% respectively. Net interest income improved $8.9 million or 8.3% to $115.7 million and our margin increased to 115 basis points to 2.89% in 2022, up from 2.74% in the prior year.
The growth in net income for the year was mostly attributable to a $300 million increase in average loans for the year, stable non-interest income of $12.4 million and a slight decline in non-interest expense of $1.1 million to $67.6 million 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 a leverage ratio of 9.83%.
For the year, the bank originated approximately $656 million in mortgage loans with a weighted average rate of approximately 3.69%. Mortgage originations slowed to $63 million during the fourth quarter, due to higher rates and less demand from consumers and businesses, but the average rate improved to 5.44% and the yield on our C&I portfolio at the end of the year increased to 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 million. On December 31, 2022 they are committed, but not yet closed mortgage loans were $51 million. This reporting period and going forward, we report a loan pipeline consisting of issues letters of intent, loans in underwriting and committed, but not yet closed loans. That number on December 31 was $127 million, compared to $181 million 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. The Bank expects overall loan growth to be in the low single-digits in 2023 given the increase in rates, concerns for a recession and the inverted yield curve.
Net income for the fourth quarter of 2022 declined $2.6 million, when compared to the third quarter of 2022, due to a $3.1 million increase in interest expense, primarily due to higher borrowing cost and seasonal deposit outflows from average check and deposits into interest bearing liabilities.
During the first nine months of 2022, the Bank was able to lag increasing the rate it pays on non-maturity deposits. The Federal Reserve’s aggressive push to increase federal fund rates by 450 basis points since March of 2022 and expectations, they will continue to increase short-term rates to possibly 5.25% in the first half of 2023 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 31 was 21%. 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 million in wholesale funding that matures due in 2023 with the current weighted average cost of 2.28%. The bank — based on the current interest rate environment, we anticipate 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 million or 10% of our interest earning assets, either maturing or repricing in 2023 and approximately $340 million 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. Management regularly analyzes potential balance sheet restructures that could help improve our liability sensitive position.
The bank’s quarterly core non-interest income run rate excluding one-time items has spent approximately $3 million over the past four quarters. We expect this run rate will decline to approximately $2.5 million in 2023. The decline is due to a non-service component of the bank’s pension expense.
The bank’s non-interest expense was $18.4 million during fourth quarter, an increase of $1.4 million, when compared to the third quarter. The increase was due to several one-time charges, including a net loss of $553,000 on the disposition of premises and fixed assets relating to several of the banks’ former Glenhead locations. $531,000 in costs relating to the branding initiative in branch locations and $210,000 for two branch relocations.
We expect non-interest expense to be $16.5 million to $17 million in 2023, flat when compared to 2022. 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 Melfield headquarters and the various branch openings, closings and relocation, the 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 $17.9 million in common stock in 2022. Bank has approval to purchase up to an additional $15 million in its outstanding plan. Finally, we anticipate a tax rate for 2023 to be approximately 18.5%.
With that, I’ll turn it back to the operator for questions.
Question-and-Answer Session
Operator
Thank you. Our first question for today comes from Alex Twerdahl, Piper Sandler. Alex, you may ask your question.
Alex Twerdahl
Hey, good afternoon, guys.
Jay McConie
Hey, Alex.
Chris Becker
Hi, Alex.
Alex Twerdahl
Hey, first off, Jay, you went through the cash flows on the securities and expected deposit flows kind of quickly. Do you mind just saying those again?
Jay McConie
Sure, sure. Let me just pull that. Yes, so we have approximately $410 million 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’d like to do is I look at last year’s full-year annual cash flows 2021, I look at 2022s, I look at estimates from our dialing system and then I kind of look at our quarterly run rate and based on that, I’m projecting about $340 million or about another 8% in interest earning assets from securities and loan cash flows.
Alex Twerdahl
Okay. And do you have — are you able to give us a sense for portion of that, that might be loans that would reprice higher, sort of, like what kind of pickup you might potentially get?
Jay McConie
I mean, on the loans, on actual repricing that reprice what the prime is core, that’s more about $289 million or about $300 in repricing 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 there.
Chris Becker
The remainder is price off of typically the five-year treasury plus a margin, so it depends on when it was booked, it was booked five years ago. Obviously, it would be the increase in the five-year treasury during that time, right.
Jay McConie
So to clarify $300 is kind of flows with prime each quarter and about $100 is based on CRE loans are coming up with a reset date.
Alex Twerdahl
Okay. And the reset date just depends on, I guess five years…
Jay McConie
Exactly. And a price off of either were depending, but mostly would probably be off the five-year treasury, maybe some a little bit up to seven.
Alex Twerdahl
Okay, got it. And then in terms of deposit flows that might be expected early in 2023. Can you just give a sense of the sort of line of sight on any deposit inflows or outflows? And then maybe talk a little bit about the deposit strategy today?
Jay McConie
Yes. I mean typically like Chris said, for the year, we saw interest-bearing or DDA increase. And we’re very comfortable with that amount coming up. But right at the end of the quarter right in December, we’ve always had, kind of, seasonal outflows and it was probably about $200 million for the fourth quarter. We’ve had some of it come back in. It usually comes back in throughout the first quarter 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 utilize some of it to — for growth in securities and a little bit of growth in loans.
Chris Becker
And our deposit strategy continues to be building relationships with the loan teams that we’ve added or beefed up over the past three 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.
Alex Twerdahl
Got it. And then, you know, I also just wanted to ask you guys have always very conservative on your credit underwriting. And I’m not sure we’re seeing a lot of cracks at least visibly. And what’s going on in the market with respect to commercial real estate, multifamily, those types of loans? I’m just curious from where you guys said, 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?
Chris Becker
We really haven’t seen any cracks at this point. I would say in our most recent, we do obviously a pre-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.
Chris Becker
Okay. Thanks for taking my questions.
Jay McConie
Thanks, Alex.
Chris Becker
Thanks, Alex.
Operator
Thank you. Our next question is from Chris O’Connell of KBW. Chris, you could proceed with your question.
Chris O’Connell
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 $2.5 million a quarter for 2023. So which I guess is that an immediately start at that level in 1Q ’23, and where is like the variance which line items is that coming out of the most relative to where we were in the fourth quarter?
Jay McConie
Right, 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 is going to be about that $2.5 million throughout the quarter. As Chris alluded to, we’re seeing some pickup in like debit card, credit card activity and then we’re anticipating some loss in NSF fees just because of regulatory and competition within the industry.
The real reason for the decline is our pension. So for the past four or five years, our net pension expense in our financials has been a credit to the bank, usually about $100,000 to $135,000 we get a net credit. 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 contribute — had to contribute for well over five, six 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 in that — the assets decreased more than the liabilities and that’s closing the income on average income — our non-interest income going down to $2.6 million. So that’s really — I need to buy that by four, 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 to file on the year. So it’s a non-cash item that’s really not related to the core business.
Chris O’Connell
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 expense for the most part?
Jay McConie
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 $1.4 million expense. So that’s the actual overall impact. It’s just that it’s looking in two pieces. And unfortunately, the decline in the return on assets and the amortization of this loss, because of the funding position closets have to decrease non-interest income $2.5 million for the year.
Chris O’Connell
Understood. And on the expense side for the $16.5 million to $17 million, 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 as it start-off the year at the higher end or the lower end and build or reduce throughout the year? Is there just any seasonality to that?
Jay McConie
I would say it’s pretty consistent, maybe a little bit higher in the first quarter just, because of payroll expenses in FICO and so forth that, kind of, add up and maybe trending down, but not anything significant.
Chris O’Connell
Got it. And just going back to the margin discussion. So I appreciate the guidance as to where you guys were in December. And how it’s going to trend for the first part of the year lower? And any sense as to — based on I guess assuming call it two 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?
Jay McConie
Yes. I mean, it’s getting really — based on the volatility and the pace and increase, it’s hard for us to provide that number, that’s why we tried to kind of easier that for the quarter, but then it 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 betas, we just take since our low point, which was probably in June for non-maturity deposits, we take that increase over the — from that point through December. And we just simply divide it over the — where the Fed funds rate is now, which is 4.15% 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 deposit still continue to increase. So when you look at the full rate cycle when they stop and then kind of deposits, kind of, reach 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 period and inflation was below 2%. Here were 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.
Chris O’Connell
Yes, absolutely. And then lastly, you guys have a bit left here on the buyback authorization. Pretty well capitalized. Loan growth is kind of slower from macro perspective. How are you guys thinking about the utilization of the buyback on a go forward basis?
Jay McConie
Yes. We’re going to be in the market from 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% and 6% when you see economists and you look at Fed Fund futures rate and they have the short end kind of coming down. And you can see the emergence get a little bigger with the 10-year trading in that 3.5 down maybe 75 basis points over the last quarter. 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 little bit cautious 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.
Chris O’Connell
Great. Thanks, Chris and Jay. Appreciate the time. Thanks for taking my questions.
Chris Becker
Thank you.
Operator
Thank you. Our next question comes from Nicole Gulino from American Capital Partners. Nicole, you may proceed with your question.
Chris Becker
No question. Any question in the call? Or we okay. Okay.
Operator
That concludes our question session. I’ll turn the floor back over to Chris Becker for some final comments — closing comments.
Chris Becker
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 year, and we look forward to talking to you at the end of the first quarter. Have a great rest of the day.
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