The First of Long Island Corporation (NASDAQ:FLIC) Q2 2022 Earnings Conference Call July 28, 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 Sandler
Chris O’Connell – KBW
Operator
Welcome to The First of Long Island Corporation’s Second 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 fnbli.com. And on the earnings call webpage at www.cstproxy.com/fnbli/earnings.
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 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 quarterly earnings call of The First of Long Island Corporation. Our company works on a mission of continually doing the right thing to help our customers, employees, and shareholders succeed. While being socially accountable to the communities we serve. We are committed to making a meaningful impact on stakeholders through ethical intent and strong business practices. And believe these efforts create long-term sustainable value for our constituents. This week, we rolled out a new webpage dedicated to showcasing corporate integrity at The First of Long Island Corporation.
Turning to our results. We believe the second quarter and first six months of 2022 positively reflect the strategic initiatives. We have worked seamlessly to implement during the past two years, despite the pandemic. Some of these key initiatives include supporting the growth of our balance sheet with profitable relationship banking business, loans have shown three quarters of strong growth and deposit growth continues as our relationship teams have been successfully onboarding new customers.
Our recent loan growth has exhausted the bank’s excess cash position, management is focused on future asset and loan growth being driven from increases in core deposits. A second initiative has been recruiting seasoned banking professionals with longstanding relationships. Increasingly as bankers have become frustrated with the lack of responsiveness at their bank, they are seeking us out. The word is getting out that we are the go-to-bank in the market for both customers and bankers looking to make a change.
A third initiative over the past two years has been optimizing our branch network across a larger geography. We established a three branch presence on Eastern Long Island in Riverhead, East Hampton and South Hampton. At June 30, 2022, these branches has deposits totaling nearly $60 million. We successfully consolidated 14 branches with minimal customer disruption.
We are currently working on three branch relocations to much more visible and convenient buildings in Bohemia, Port Jefferson and Melville. We continue to look for appropriate de novo branch locations to expand our geography. A fourth initiative has been our new branding and a community-first focus to improve name recognition and enhancing our website and social media presence.
We celebrate the bank’s 95th anniversary on October 1st of this year. We have been using that milestone as the catalyst for our marketing in 2022. Finally, we have been working on moving to a new administrative space in Melville to support our growth. I’m pleased to report that move was completed in the second quarter. Also I’m happy to report. We just entered a conditional contract to sell several buildings in Glen Head. While these initiatives have been successful and helped produce our best six month performance in the Company’s history.
We do see some headwinds in the second half of 2022. Deposit customers are starting to demand higher rates and term borrowing rates are generally well north of 3%, putting pressure on our net interest margin. We anticipate the margin could decline over the second half of 2022. How much depends on among other things, the number and level of fed moves. The mortgage pipeline is at $125 million, which is down from an average of $164 million from the prior three quarters.
We are starting to see customers rethink real estate deals in this high rate and inflationary environment. We currently anticipate new loan originations in the second half of 2022 will be lower than the first half of 2022. There could be pressure on fee income as the bank recently revamped its consumer overdraft charges by instituting a grace limit of $50, where there will be no charge. Reducing our overdraft charge from $38 to $15 for overdrafts over $50, charging for one item, not multiple items eliminating the daily charge for remaining overdrawn and eliminating the charge on return items, these changes will take effect August 1, 2022.
Jay McConie will now take you through some highlights of the second quarter and year-to-date. Jay?
Jay McConie
Thank you, Chris. Net income for the second quarter and six months ended June 30, 2022 grew by 8.4% and 9.6%, respectively to $12.5 million and $24.6 million when compared to the same period last year. The growth in net income was driven by another strong quarter of mortgage loan originations of $236 million, bringing total mortgage loan originations to $497 million for the year. Weighted average rate on new mortgage loans continues to improve and was 3.51% for the quarter and should increase significantly as our current loan pipeline of $125 million at weighted average rate of 4.40%.
Strong loan originations over the past two quarters increased our period end total loan balance to $3.3 billion, an increase of $230 million or 7.4% when compared to December 31, 2021. Commercial industrial loans, which were $108 million at June 30, 2022, an increase of $17.7 million or 19.5% compared to December 31, 2021 is a key part of our strategic initiatives as we continue to grow our relationship business and further diversify our portfolio. 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. First, reinvestment rates on mortgage backed securities have improved and were in the 3.75% to 4.40% range depending on average life and duration. Second, the $119 million floating corporate – floating rate corporate bond portfolio, which reprises quarterly based on a 10 year swap rate, continued to improve with the increase in long-term rates. Third, the cost of funds on interest bearing liabilities improved by 16 basis points, as the Bank was able to maintain the cost of funds on its $1.7 billion savings now on money market deposit portfolio at 18 basis points. Fourth, the maturity and downward repricing on certain broker time deposits and thorough home bank advances over the past year. And finally, the average balance on non-interest bearing checking accounts improved $140.9 million or 11% to $1.5 billion.
As Chris mentioned in his remarks, customers are starting to demand higher rates. The pressure to increase deposit rates could intensify with the Federal Reserve Bank just announcing another 75 base point increase in the fed funds rate at their July meeting and remain on target to increase that rate to between 3.25% to 3.50% by the end of 2022. Current wholesale funding costs were near 3.5% on all terms between six months and five years as the yield curve continues to flatten. A flattening or inverted curve – yield curve could result in downward pressure on both net interest income and margin as our ability to delay increasing deposit rates on nonmaturity deposits becomes more difficult the longer the duration of the rising rate cycle. Additionally, our ability to further increase yields on interest earning assets could be limited to offset a rising funding costs if the yield curve remains flat or inverted for an extended period.
Moving on to asset quality. The Bank’s non-accrual loans were just $260,000 on June 30, 2022, and we have had $125,000 in net charge-offs during the current year. We had the provision of $726,000 for the quarter, which was mostly attributable to loan growth, partially offset by lower historical loss rates. Bank’s reserve coverage ratio was 93 basis points on June 30, 2022, a decrease of 3 basis points from 96 base points on December 31, 2021.
While the banking industry released reserves during 2021 and the first quarter of 2022 due to improving economic conditions as the COVID pandemic waned, current inflation rates and aggressive tightening by the fed reserve, as well as the slowdown in GDP could see this industry trend reverse in coming quarters. Management is cognizant of the economic headwinds and has not relaxed our lending standards during this period of loan growth.
Moving on, non-interest incomes increased $695,000, excluding $606,000 gains on sales of securities in 2021 for the six months ended June 30, 2022. As noted in our earnings release, the increase was due to a final transition payment of $477,000 from LPL Financial for the conversion of the Bank’s retail broker and advisory accounts. The increase includes higher fees from a pick-up in debit and credit cards activity and additional income from bank-owned life insurance as we purchased an additional $20 million in December 2021. We currently anticipate a run rate of approximately $3 million per quarter for the second half of 2022.
Non-interest expense came in at $16.4 million for the second quarter, an increase of approximately $600,000 when compared to the same period last year and three months ended March 31, 2022. As noted in our earnings release, the increase in non-interest expense was due to higher salary and benefit costs as open positions were filled during the quarter, higher incentive costs due to loan origination volumes and additional occupancy costs related to the relocation of our new corporate office location. We currently anticipate a quarterly run rate of approximately $16.7 million per quarter for the second half of 2022.
Our priorities on capital remain to grow the balance sheet profitably, pay dividends to our shareholders and win appropriate repurchase shares. During the quarter we bought back approximately 286,011 shares at price of $18.49. We have approximately $23 million remaining in our current authorization, and we anticipate this program could continue during the second half of 2022, given our strong leverage ratio of 9.8%.
In addition, on July 1, 2022, we announced the declaration of a second quarter dividend of $0.20 per share, which represents a 5.3% increase over the dividend paid the same quarter last year. Finally, we anticipate our tax rate for the remainder of 2022 to be approximately 20%.
With that, I turn it back to our operator for questions.
Question-and-Answer Session
Operator
Thank you. Our first question for today comes from Alex Twerdahl from Piper Sandler.
Alex Twerdahl
Hey, good afternoon, guys.
Jay McConie
Hey, Alex. How are you?
Alex Twerdahl
I’m good. Thanks. Basically the first earnings call here. I wanted to ask a couple questions, a couple follow ups from your prepared remarks. First off, Chris, I think you mentioned that the fairly strong loan growth that you’ve seen in the last couple quarters is likely to abate a little bit in the second half of the year. But I noticed that the mix shift is a little bit different this quarter and you actually put on a bit more residential relative to the commercial real estate. And I’m just curious if those comments applied to the overall portfolio or just to the commercial real estate portfolio? And maybe you can make up some of the excess with a bit more on the resi side?
Chris Becker
No. It’s actually both portfolios. The residential side because of the rate increases, obviously you’re seeing refis dry up on that. And also the very high housing prices I think is keeping some people on the sidelines combined with the high interest rates. So you’re seeing both pipelines. We give you a total pipeline number, but both pipelines are reducing.
Alex Twerdahl
Okay. And then I know that you guys have brought on a number of new bankers over the last couple of years early across your market. I was wondering if you could kind of share with us sort of where you are in that process of, and I know you mentioned, being the go-to bank for not just customers, but also for bankers. But sort of, if there’s a little bit of a pipeline that’s built from some of these people coming on board and whether or not that could continue even in the higher rate environment?
Chris Becker
It is. I mean, we’ve added, as you know, a middle market team of four, we rebuilt our residential team. We added recently a South Fork team leader for the East End South Fork on the East End. And we’ve added some people to both our Nassau and Suffolk teams. And that business has been good as I indicated in my comments, their onboarding new customers, focus on relationships, bringing in commercial deposits lines of credit, our line utilizations have been up a little bit.
So that business has been good. As you know, that’s a smaller percentage of our portfolio. But it is growing. I think when you look at the slowdown it’s related mainly to the mortgage business. So we’ll say, the CRE business, multifamily, residential mortgages, our momentum is pretty good on the C&I side.
Alex Twerdahl
Okay, great. And then just another question for me, I think you mentioned you’re selling some buildings in Glen Head. Is that going to have any impact on gains or book value or anything like that in the third quarter?
Jay McConie
Right now, we’re not going to disclose the financials of the contract. But those properties, Alex, back at 12/31 we did in our Q this is available for sale. And so any property would’ve been reduced to mark-to-market there, so they’re carried at that cost.
Alex Twerdahl
Okay, great. Thanks for taking my questions.
Chris Becker
Thank you, Alex.
Operator
All right. Our next question for today comes from Chris O’Connell with KBW. Please proceed with your question.
Chris O’Connell
Hey, good afternoon.
Jay McConie
Hi, Chris.
Chris Becker
Good afternoon, Chris.
Chris O’Connell
So wanted to start on the deposit comments around deposit rates kind of increasing going forward. Maybe quantifying where you guys are at on deposit rates now, or where you think you’re going to be moving rates to in the third quarter or any beta assumptions that you might be using for this cycle?
Jay McConie
Hi. It’s Jay, Chris. How are you?
Chris O’Connell
Good.
Jay McConie
Good. We’re not going to disclose beta assumptions, but looking at it, obviously the Bank – the reason why we kind of discussed some of those things in our open remarks is, the Bank is liability sensitive, it’s traditionally been that way with having a little bit more longer duration fixed assets and a little bit less C&I portfolios as other commercial banks. So, right now looking at a increase of say 100 point, shock, we’re probably about – viability sense of about negative 3% or so in a up 100 basis points, which we think is kind of the most likely scenario being where we are with the fed and, hopefully where we think they have to go from this point forward based on their guidance of where the fed funds target rate would be.
Chris Becker
And Chris, this is Chris. Specifically on rates on our on CD rates pretty much from one year out through five years, we’re at 2% and 2% plus on those rates. Our money market now and savings, like most banks, those rates remain low to see some pressure on that both from business and consumer and also municipal customers. And those rates are starting to move up quickly. And you can see some rates in those accounts now north of 1%.
Chris O’Connell
Got it. That’s helpful. And for the securities book, what’s the duration on the overall book. And then is there any plans to move the securities book into loans and mix shift a little bit going forward or do you expect that to hold more or less kind of back going forward?
Jay McConie
Chris, it’s Jay, the average life on the portfolio is probably right around five years. And as far when you look at our liquidity levels, when security rates were like 1% or so, we really kind of looked at it and said, we want to lower the security portfolio and put more money into loans now with rates, where they are and in the MBS sector, we can kind of get a little bit above four handle. We’re actively looking to put a little bit more money into the security portfolio at, really just replacement as securities roll off. We’re going to replace and go into and keep it around flat. Whereas maybe a year ago we were letting those securities portfolios security cash flows go into loans. So it should be fairly flat for the rest of the year.
Chris O’Connell
Got it. That makes sense. And on the opening comments, I think you said with the new origination yield was on the pipeline into 3Q. I believe it had a four handle on it, but I missed it. Do you mind repeating that?
Jay McConie
Yes, it was right around 440, the average – weighted average yield, up from what was booked in the first quarter. It was about 350.
Chris O’Connell
Yes, really nice pick up there. Great. And on the fee income, I appreciate the guidance there, just trying to figure out the parts for the NSF fees. What do you think that that impact in and of itself is going into the third quarter?
Chris Becker
The change in the – this is Chris, the change in the program on the consumer side, and we didn’t change anything on the business side, but on the consumer side, on an annualized basis that could be approximately $200,000 annually. Now we’ve been picking up some momentum on the debit card interchange fees and some service charges, things like that, that were down during the pandemic. So that’s why we’re still kind of guiding the quarterly non-interest income number to be fairly consistent. But those are the impacts of the pieces.
Jay McConie
Hey, Chris, it’s Jay. Also and I put in my remarks, we purchased an additional $20 million of borrowing. So that incremental income will help to offset somewhat, if there’s a loss in overdraft fees and again, the borrowing portfolio, while it increases as the cash lender value goes up each quarter. So you get a little bit more income, just through the cash surrender value increasing. And then as interest rates go up, it’s part of the insurance company’s portfolio. You should see the yield on that also contribute. So we do think there is some tailwinds to allow the borrowing income to also increase and compliment the credit card activity as well.
Chris O’Connell
Great. That’s helpful. And on the expense side, again, appreciate the guidance there, very helpful. How are you thinking about, there’s a lot of moving parts that you guys mentioned between the Glen Head sales, the new admin space, potential de novo adds and some other relocations going on, how are you thinking about the growth as you go into 2023? I mean, do these – all these kind of moves in terms of the building and space management wash out on a net basis or does it put you at a little bit of a higher growth rate or a lower growth rate going into the next year?
Jay McConie
Yes, Chris, it’s Jay, I mean, I agree. We have done a lot. We kind of break it down to two pieces. If you remember last year, we closed about we had to branch location closures, and that saved us probably about $1 million dollars in annual non-interest expense. And if you look at it, from that standpoint, we’ve also added the Eastern locations to three locations there. And we also as Chris alluded to put on some of the lending staff. So we kind of look at those two kind of offsetting each other. And then when you look at the move to Melville with our new location here and the cost of that, we look in, and while we announced that we have a contract to sell some of those buildings, once those buildings are liquidated and we’re out of those over to here, that should be fairly cost neutral.
So, all-in-all, while a lot of moving parts with the guidance, where it’s 16.5 this quarter, we have it up a little bit around 16.7, which is just really kind of a full head count run. And also as everybody sees, we have vendors too, high inflationary rates, we’re negotiating with all vendors but very cognizant that with deposit pricing pressure that we have to maintain expense levels fairly flat.
So that’s why we gave that guidance, but our goal is with all those moving parts is they’re pretty much neutral. And it’s part of our planning as we do something we’re always saying, okay, we want to improve here. How do we cut costs here to try to keep that and maintain expense discipline?
Chris O’Connell
Yeah, absolutely. Makes sense. All right, great. That’s all I had. Thanks for taking my questions.
Jay McConie
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. I want to thank everyone for their attention and participation on the call today. Once again, we’re very pleased with the quarter and look forward to providing additional updates in the common quarters enjoy the rest of your day.
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