The First of Long Island - Q1 2024

Transcript

Operator (participant)

Welcome to The First of Long Island Corporation's First Quarter 2024 Earnings Conference Call. On the call today are Chris Becker, President and Chief Executive Officer, and Janet Verneuille, Senior Executive Vice President and Chief Financial Officer. Today's call is being recorded. A copy of the earnings release is available on the corporation's website at fnbli.com, and on the earnings call webpage at https://www.cstproxy.com/fnbli/earnings/2024/Q1. Before we begin, the company would like to remind everyone 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 2023 10-K, filed on March 8th, 2024, for a list of risk factors that could cause actual results to differ materially from those indicated or implied by such statements. I would now like to turn the call over to Chris Becker.

Chris J. Becker (President and CEO)

Thank you. Good afternoon, and welcome to The First of Long Island Corporation's earnings call for the first quarter of 2024. Just last week, we held our annual stockholders meeting and covered a number of key topics of interest. Please visit the investor relations page of our fnbli.com website to replay that presentation. It focuses on the key strengths of our organization, the causes of the current earnings challenges, how an improving yield curve can lift performance, and the many benefits of our recent technology upgrades. Focusing on our strengths, capital remained strong at the end of the first quarter, with a leverage ratio of 10% and a tangible common equity ratio of 8.9%.

We had ample liquidity on March 31st, 2024, of $1.5 billion, with a balance of collateral for potential borrowings at both the Federal Home Loan Bank of New York and the Federal Reserve Bank, as we believe both are an appropriate source for day-to-day liquidity needs. The Federal Reserve Bank is working to eliminate the stigma of being the lender of last resort, especially with recent reports and discussions regarding the Federal Home Loan Bank System's charter of supporting low and moderate-income housing initiatives versus its role as a primary source of liquidity for banks. Our C&I portfolio loans, including owner-occupied commercial mortgages, increased 6% since year-end, and we are encouraged by recent activity that is not yet reflected in our March 31st, 2024 loan pipeline of $113 million, up from $86 million at year-end 2023.

Our credit quality remained rock solid through March 31st, 2024, with charge-offs, non-performing loans, and past due loans remaining at single-digit basis points as a percentage of total loans. Non-interest income had a good first quarter and was slightly ahead of our guidance of $2.6 million per quarter in 2024. Non-interest expense was slightly below our guidance of $6.25 million per quarter in 2024. We have a new technology platform to support our future growth. We are opening our fourth branch on the East End of Long Island during the second quarter of this year, and continuing our growing momentum in that area, and we are staying disciplined in a difficult environment. We do not bend on credit quality. We focus on adding one relationship banker at a time and looking to build long-standing relationships.

Our deposit base has a history of being loyal through good and bad news in the banking world, and we want to keep it that way. As anticipated, our net interest margin was lower in the first quarter of 2024. The drop was largely related to our average funding mix, as approximately $100 million shifted from average deposits to average wholesale funds when comparing the first quarter of 2024 to the fourth quarter of 2023. We also had $62.5 million of wholesale funding reprice from a weighted average cost of 1.36% to 4.78%. Regarding the drop in deposits during the fourth quarter of 2023, $34.2 million in tax escrow deposits were used to make real estate tax payments, and municipal deposits were down $97.5 million.

Escrow deposits build back throughout the year as monthly loan payments are received. Municipal deposits were $46.6 million higher at March 31st, 2024, when compared to the linked quarter. The fluctuations in tax escrow and municipal deposits are common for our bank in the fourth quarter. Real estate tax payments are made every year in the fourth quarter, and municipal deposits have been down in the fourth quarter, four of the last five years by an average of $54.4 million. Our commercial and consumer relationship deposits remained stable, and non-interest-bearing checking deposits were 33% of total deposits at the end of the first quarter. Please note that while average deposits were lower during the quarter, quarter-end deposits were higher than year-end 2023 by over $55 million.

As of the end of the first quarter, there are no significant tranches of wholesale funding, including any brokered CDs, that are not at or close to market rates. Our retail CDs maturing over the next 12 months are largely at current market rates, especially after approximately $87 million in maturities in April and May, that are paying very close to 4% and are expected to reprice at an estimated 50-70 basis points higher. Barring any significant changes in our funding mix or short-term rates moving higher, we believe our margin should be at the bottom.

We expect it will fluctuate within a narrow band for the remainder of 2024, although continued improvement in our funding mix or more favorable yield curve may improve margin in the second half of the year. Janet Verneuille will now take you through other financial highlights of the first quarter. Janet?

Janet Verneuille (Senior EVP and CFO)

Thank you, Chris. Good afternoon, everyone. The company recognized net income of $4.4 million for the first quarter of 2024, down from $6.5 million in the first quarter of 2023. The decrease was largely attributed to lower net interest income of $5.5 million, a $1.1 million credit provision for loan losses in 2023, partially offset by the loss on sale of securities of $3.5 million in the first quarter of 2023. Net income was also down $6.1 million in the linked quarter. That decrease was mainly the result of lower net interest income of $1.8 million, and an increase in salaries and employee benefits of $1.9 million due to the reversal of incentive accruals taken in the linked quarter.

After excluding the loss on the sale of securities in 2023, non-interest income of $2.8 million exceeded non-interest income recorded in the first quarter of 2023 of $2.5 million. The quarter's non-interest income also exceeded the linked quarter total of $2.4 million. Better service charge income on deposit accounts and BOLI income helped in both quarter comparisons. Non-interest expense totaled $16.2 million, which is a decline of $365,000, or 2.2%, compared to the first quarter of 2023. The linked quarter had a lot of noise related to the reversal of incentive accruals, so the comparison is not as meaningful.

Gross loans declined $11.5 million from the prior quarter end, mainly related to $21.2 million of amortization and other paydowns of residential mortgages and home equity lines. This decline was offset by continued growth in our commercial portfolios, as Chris mentioned. The overall loan yield of 4.14% was up five basis points from the linked quarter. Loan yield for the first quarter of 2023 was 3.70%. Total deposits increased $55.5 million from year-end. The mix of deposits continues to change as customers move out of non-interest-bearing checking accounts and into interest-bearing alternatives. As Chris mentioned, average deposits were down approximately $100 million from the linked quarter.

The average cost of deposits was 2.64% for the first quarter of 2024, 2.43% for the linked quarter, and 1.40% for the first quarter of 2023. Other borrowings averaged $523.1 million for the first quarter, as the drop in deposits was supplemented partially by these advances. The average cost of these borrowings was 4.82% in the first quarter of 2024, 4.59% in the linked quarter, and 3.79% in the first quarter of 2023. Net interest income and the net interest margin for the first quarter reflects the challenges described above.

The purchase of the fixed-to-floating swap and the repositioning of a portion of the investment securities portfolio in the first quarter of 2023 continued to positively impact the income statement above the line. Yet the pace of the repricing of the liability side of the balance sheet continued to outpace the repricing of the assets on the balance sheet. Net interest income for the first quarter of 2024 declined $1.8 million from the linked quarter, and $5.5 million from the first quarter of 2023. The net interest margin calculated to 1.79% in the first quarter of 2024, 2.0% in the linked quarter, and 2.34% in the first quarter of 2023.

The yield on total earning assets was 4.10% in the first quarter of 2024, 4.0% in the linked quarter, and 3.61% in the first quarter of 2023. Cost of total interest-bearing liabilities is 3.47% in the first quarter of 2024, 3.15% in the linked quarter, and 1.96% in the first quarter of 2023. No provision was booked to the allowance for credit losses during the quarter. The commercial real estate market remains under heightened scrutiny, especially in the New York metropolitan area, in the wake of credit problems disclosed by New York Community Bank at year-end 2023.

Although the New York State Housing Stability and Tenant Protection Act passed in 2019, most recently, the ripple impact of the legislation is negatively affecting the rent-regulated multifamily real estate market in the New York metropolitan area. Management has provided detailed disclosures on our CRE portfolio, including our multifamily portfolio, in an 8-K furnished on March 1st, 2024, and in our recent annual meeting presentation. We believe the credit quality of the loan portfolio remains strong. The reserve coverage ratio on March 31, 2024, is 88 basis points, compared to 89 basis points at year-end 2023. Book value per share was $16.78 on March 31st, 2024, versus $16.043 on March 31st, 2023.

The accumulated other comprehensive loss component of the stockholders' equity is mainly comprised of a net unrealized loss in the available-for-sale securities portfolio due to the higher market interest rates. The company repurchased shares during the first quarter of 2024 at a cost of $2 million, and the bank declared its quarterly cash dividend of $0.21 per share. The effective tax rate for the first quarter of 2024 was 6.2%, as the tax-advantaged assets of loans in our REIT subsidiary, municipal bonds and BOLI, were a larger portion of taxable income during the quarter. With that, I turn it back to our operator for questions.

Operator (participant)

Thank you. Our first question for today comes from Alex Twerdahl at Piper Sandler. Alex, please proceed with your question.

Alex W. Twerdahl (Equity Research Analyst)

Good afternoon.

Chris J. Becker (President and CEO)

Good afternoon, Alex.

Alex W. Twerdahl (Equity Research Analyst)

First on the loan outlook, Chris, I mean, you talked a little bit about the commercial loan growth you saw this quarter and that pipeline building. It's still, however, a pretty small percentage of the overall pie. So I was hoping maybe you can just help us frame sort of the opportunity and the outlook for that, the commercial portfolio overall, and where you think it, over time, might eventually get to as a percentage of the overall loan book.

Chris J. Becker (President and CEO)

Well, let's break it down, right? The C&I portfolio and owner-occupied portfolio, you know, is at, was at 11% of the total portfolio. And then obviously we have the commercial real estate portfolio, which is over half of the portfolio. So we like, we certainly, we're happy with the size of where the commercial real estate portfolio is. We still want that piece of the pie in the residential side, which is still over 35% of the portfolio, to come down. The C&I and owner-occupied piece is the piece we want to grow. If I could look forward and look at that pie, I'd love to see four equal slices.

I'd love to see about 25% in multifamily, about 25% in other CRE, about 25% in residential, and about 25% in C&I and owner-occupied. But it's gonna take some time for the C&I and owner-occupied to get there. And when I say some time, that you're talking years, not months. But that's certainly the direction we're moving. And we've, you know, we've just hired another middle market lender. As you know, we've grown our middle market team over the past four years. And you know, some activity is picking up there. You see our pipeline is up a little bit quarter-over-quarter. And you know, we want to keep growing that, but you know, the activity has been quiet.

You know, the rates are obviously impacting that. Some of the, on the real estate side, commercial real estate side, you know, we're seeing some opportunities from other banks, but quite often the loans have to be right-sized because of the current interest rate environment. And not everybody's willing to do that. So, it does remain challenging out there, and that's why you see very low growth rates in the industry and some banks shrinking a little bit.

Alex W. Twerdahl (Equity Research Analyst)

Yeah, that makes sense. I mean, as you kind of think about those four equal slices over time, and totally get it, it's gonna take a while to get there. Do you see it kind of being sort of a flattish overall loan book, or does the overall loan book grow as well? And I guess, when you think about loan growth for this year and the pipelines and the opportunities, are they sufficient to keep the loan book at a current level, just running against that amortization and the payoff activity that you alluded to earlier in the call?

Chris J. Becker (President and CEO)

I think so. We're still thinking, you know, low single digit growth for the year, even though we were down a little bit in the first quarter, mainly related to payoffs in the residential portfolio, not on the commercial side. So when you look at our pipeline numbers that we talk about in our earnings calls and or state in our press release or our earnings releases, depending on, you know, where we talk about them, and then you look at what we close in a quarter, the numbers are much more in line with each other. I think every bank, you know, decides how to disclose their pipeline numbers a little bit differently.

I hear pipeline numbers of some banks that are very large, but then when I see closings for the quarter, they're not very large. And there seems to be, to me, a little bit of disconnect. But I just think that's the way everybody looks at it. When we look at our pipeline, we look at obviously, loans that are approved and ready to close, and we look at you know, LOIs that are signed and agreed upon, and we've already vetted those credits closely, and they have a very high probability of getting to closing. So, I think, you know, looking at our number, which is probably a little bit more conservative on the conservative side, the way we report it, is probably why it looks maybe a little bit lower than some others.

Alex W. Twerdahl (Equity Research Analyst)

Okay, understood. Thanks for that color. You know, as you-- I think, Jan, as you're going through some of the repricing on the, on the borrowing and sort of what new stuff's coming on today, and you kind of look at it against, you know, the securities portfolio, I mean, it's clear that there's some, you know, less efficient leverage on the balance sheet today that I know is not necessarily gonna be super cheap to get out of, but you have a pretty healthy capital position. So as you think about using capital today, you know, how do you weigh, you know, some restructuring similar to, either similar to what you did last year or something else, you know, to kind of get rid of some of that, that leverage that maybe is upside down right now?

Janet Verneuille (Senior EVP and CFO)

We, well, we have modeled various scenarios out. We usually look at the payback period to see if it makes sense. We will consider, you know, as we go forward, and we have some room with liquidity, maybe putting some investment securities on. But for the first quarter, it just didn't make sense.

Chris J. Becker (President and CEO)

The earn back periods on some of the things we looked at, if you start getting out to five or six years, we don't think that that makes a lot of sense. So but we continue to monitor that. We look at that on both the securities and loan side.

Alex W. Twerdahl (Equity Research Analyst)

Yeah. I mean, totally get it. Are there pieces of the securities portfolio that have a shorter weighted average life or sort of cash flows that you could see over the next year or two, that you could accelerate and do something today just to give us some near-term boost to the NIM?

Janet Verneuille (Senior EVP and CFO)

Not, not at the moment. I would say, we'll continue to look at that, but there's nothing when we look at the investment portfolio. I mean, the munis are paying down, but, some of the mortgage backs, they're longer than the CMOs.

Chris J. Becker (President and CEO)

You know, the mortgage-backed portfolio is similar to our residential portfolio. There's, you know, a lot of the underlying loans in the mortgage-backed portfolio, not a lot of prepayments coming in if the underlying mortgage is at 3% or 3.5%.

Alex W. Twerdahl (Equity Research Analyst)

Yeah. Okay. I wanted to, you know, I really liked all the disclosure you guys put in the in your slide deck with respect to the multifamily, and was looking at the weighted average debt service coverage ratio after reset for some of the stuff that's resetting in 2024 and 2025, which is pretty helpful, and I haven't seen a lot of that. So thanks for giving us that information. I was wondering if you had at your fingertips, and maybe you don't, just, you know, we kind of all can guess at what the rates are gonna do and sort of the interest in the debt service.

But, you know, in terms of the net operating income of some of these properties, you know, for both the regulated and the free market, do you have a sense for whether or not those NOIs are starting to come down in the next year or two? Or how do you think about that piece of the equation for the debt service coverage ratio?

Chris J. Becker (President and CEO)

I don't have specific numbers for you, but I do see NOIs coming down, and the NOIs are coming down because of inflation. I mean, we're seeing. When we're looking at new opportunities or when you're looking at loans that are up, you know, for a rate reset, we're just doing annual reviews. You know, certain areas, utility expenses, insurance. We've seen insurance rates on some loans tripled, you know, since the loan was originally booked. So the expense side is really also a challenge, right?

When you think about the multifamily, you do have a lot of rent-regulated properties in that space. But if you see properties that look like they may have some stress on cash flow, it's more related to the higher interest rates at reset and the expenses. It's not so it's not necessarily related to the regulations and to the 2019 legislation that was passed.

Alex W. Twerdahl (Equity Research Analyst)

Right. Okay. I mean, I guess when you guys think about underwriting, these things and resetting them, then, you know, like, what's sort of the magic number on debt service coverage ratio that you feel comfortable with?

Chris J. Becker (President and CEO)

Well, listen, if it's new stuff, I mean, we. You know, if you look at policy and, you know, you'll go down to maybe 1.25, but if you look at reality, where we book things, and we've talked about it, and obviously provide a lot of guidance on it, you know, we generally book things at the weighted average debt service coverage ratio about 1.8 times and, you know, 50% LTVs. And that's consistent with the information that we put out there in both our annual meeting and the 8-K. So, you know, that leaves you a lot of room.

When we also, you know, put the additional information in our annual meeting, when we talked about what the you know, looking at what was resetting in 2024 and 2025, and we assumed that they all reset at March 31st of this year, the debt service coverage ratios you know, basically went from the 1.8s to the 1.4s. Still a strong debt service coverage ratio and, and certainly loans, if it was a new loan coming in that, you know, that we would look at, you know, seriously, assuming all the other metrics were in good shape. But looking at those changes, right, that's basically about a 20% drop in the debt service coverage ratio, okay?

So if you were to write loans at a minimum debt service coverage ratio, and banks have different, some have, you know, a minimum of 1.15%, some 1.20%, 1.25%. But if you had a 1.25%, and if you did book a full loan, and it was at a 1.25% debt service coverage ratio at the time you booked it, and that 20%, you know, decrease kinda held on across the board, that, you know, you're seeing on average from what we showed you for 2024 and 2025, then that loan would go down to about one-to-one. So, you know, it would obviously be in a more of a stressed situation, but it would be, you know, covering itself.

There just would be no excess cash flow for the borrower, but they would be able to cover their expenses. So, you know, it's that 20% threshold for us, from what we're seeing, kind of seems to be the number where things are falling. I would guess that's probably pretty consistent throughout the industry, because everybody's kind of looking at the same rates, and everybody's kind of looking at the same type of properties.

Alex W. Twerdahl (Equity Research Analyst)

That's a really helpful color, Chris. I appreciate all the comments. Thanks for taking my questions.

Chris J. Becker (President and CEO)

Thanks, Alex. Appreciate it.

Operator (participant)

Thank you, Alex. Our next question comes from Chris O'Connell at KBW. Chris, you can proceed with your question.

Chris O'Connell (Director)

Thanks. Following up on the multifamily discussion, you know, the slide with that debt service coverage ratios, it shows the 2025 free market at, like, almost 2.2 times. Is there anything unusual in that? It just seems like, you know, really, really strong for it to be that high before the rate resets kick in.

Chris J. Becker (President and CEO)

There is nothing unusual in that. I mean, we're, you know, we're pretty consistent in the way we underwrite, and, you know, it's, there's nothing unusual in that number. I mean, when you look at our overall portfolio and it's, you know, it's 190, you know, when the entire CRE portfolio, it's certainly not gonna be unusual to have some segments above two and some below.

Chris O'Connell (Director)

Got it. And then, you know, circling back to just the overall, you know, loan growth discussion, can you give us what the yield on that $118 million pipeline is?

Chris J. Becker (President and CEO)

You know, the yield on the pipeline is always tough because a lot of them are, you know, floating off of an index until they close. But I can tell you in the first quarter, the closings for the first quarter were just about 7%, within a few basis points of 7%. So, based on the fact that rates haven't changed that much, I know we've seen some ups and downs in the Treasury curve, but I'm gonna say it's probably pretty close to that. But I don't have an exact number on that, but shouldn't be too different from the 7% number.

Chris O'Connell (Director)

Got it. And for the remainder of the year or next 12 months, you know, I know you gave us on the combined basis, I think last quarter. But do you have just, you know, what the dollar amount of, you know, loans, either repricing or maturing are, and then securities, but, you know, the separate balances of each?

Chris J. Becker (President and CEO)

So what we put out there is we generally have about $80 million-$90 million in quarterly cash flow coming in. I know that's not necessarily loans repricing, but that's quarterly cash flow coming in repricing. I don't have, other than what we've put out on CRE, and what's repricing on the multifamily portfolio, I don't have the total amount, because again, when you look at the C&I side, right, you have lines of credit you know, paying up, paying down and moving around. So, you can't always tell when the usage, when the line usage is gonna be up or be down a little bit from quarter to quarter, and that does fluctuate. So I don't have specific numbers on that, but that's something that we can try to put together better for the next quarter for you.

Chris O'Connell (Director)

Yep, no problem. I guess what I'm getting at is, you know, after we get, you know, past the second quarter with some of these, you know, May and April, you know, kind of final CD re-pricings, you know, you seem to be, you know, a little bit more tepid on the back end of the year, you know, NIM rebounding, you know, this quarter. It seems like the CDs will pretty much fully reprice. You know, the borrowings are, you know, more or less fully repriced. You're gonna be getting, you know, improvement, you know, although slow, with, you know, the asset side. You know, just, are you thinking about, you know, that just being conservative, or do you think the NIM's going to be going up in the second half of the year?

Chris J. Becker (President and CEO)

I think we're being conservative because whenever you're not conservative, something seems to, you know, come back. Just like everybody thought going into this year, or the market was certainly thinking there was going to be seven, you know, rate decreases. And, you know, now we don't know if there's going to be any, right? So, you know, the Fed's still saying they're going to do something, maybe two or three or what have you, but there's others saying that maybe it doesn't happen till next year. So you do get a little conservative, and then you have, you know, some unexpected changes in the mix a little bit, then you'd still do have money moving out of DDA.

So, you know, conservatively, you know, we say, hey, if this, if the mix is good and we get some relief on the rate side, you know, we see margin being able to move up. But when you look at our overall liability side, as we've said, the higher cost stuff, the wholesale funding, any brokered CDs, the retail CDs, I mean, that is really largely repriced, right? There's a few little things here, and they have a very, you know, nothing real significant. So that's largely repriced. When we look at our non-maturity deposits, savings now, money market accounts, they've been continuing to go up but at a decreasing pace. And you can see those numbers in our NIM tables for the past several quarters.

You know, those numbers have moved down from an average of about 17 basis points a month when you go back to the first quarter of last year, down to about 7 basis points a month when you look at the first quarter of this year. So when you look at that, and if you look at that on, say, about $1.6 billion, and you apply, well, how much extra interest cost is that going to be?

And then if we look at our cash flow that we talk about coming in, the $80 million-$90 million a quarter coming in on loans and securities, and if we look at a number of, say, 2%-3%, 2.5% on that repricing up and just simply taking a 3.5% loan and saying it's going to reprice to 6%, for argument's sake, and use that number, you know, that repricing on that asset side, that small group of assets coming in because it's going to be a much larger repricing than where we currently are on this, the non-maturity deposits, there's upside potential there, right?

And we believe that that trend in the non-maturity deposits coming down from that 17, you know, basis points a month to 7, it's been coming down fairly consistently over that period of time, so that could very well continue. But if something happens, you know, it could go back up a little bit. So I think we're being on the conservative side a little. When you boil it down to what's, you know, what's really repricing now and where the pressures may be, I would say it leans towards the upside. But there's always the unknowns every quarter, right?

We went down 21 basis points in margin this quarter, which was, you know, higher than I would have expected it to go down. But we had, we just had an unfortunate change in mix from quarter to quarter. That seems to be correcting now, as we see the end of the first quarter numbers. But you do. You know, there is always the unexpected in there.

Chris O'Connell (Director)

Understood. And just, you know, on the capital position, you know, you guys bought back a little bit of shares this quarter. You were a little cautious on the buyback last quarter. Is it something that you think you will continue from here?

Janet Verneuille (Senior EVP and CFO)

We take a look at it every quarter, and depending on what, you know, the capital position, we would consider buying back shares for sure, for the, you know, in the upcoming months.

Chris O'Connell (Director)

Great. And then, last one for me is just, what, what's a good go-forward tax rate?

Janet Verneuille (Senior EVP and CFO)

Well, I know we guided to 12% at the beginning of the year. We came in at 6.25%. We're starting to max out on the tax benefit of the REIT. So I think, I do think the tax rate's going to be going up. I would say somewhere in the middle of the 6.25% and the 12% that we guided at the beginning of the year.

Chris O'Connell (Director)

Okay, great. Thanks for your time.

Janet Verneuille (Senior EVP and CFO)

You're welcome.

Chris J. Becker (President and CEO)

Thanks, Chris.

Operator (participant)

Thank you. This concluded our question and answer session. I will turn the floor back over to Chris Becker for closing comments.

Chris J. Becker (President and CEO)

Yeah, thank you for your attention and, participation on the call today, and we look forward to talking to everybody at the end of the second quarter. Have a good rest of the day!