The First of Long Island - Q2 2024

Executive Summary

• Q2 2024 showed linked-quarter stabilization and slight improvement: net interest margin ticked up to 1.80% (from 1.79% in Q1), EPS rose to $0.21 (from $0.20), noninterest income improved, and noninterest expense declined; year-over-year results remain pressured by higher funding costs, with EPS down from $0.31 in Q2 2023.
• Management reiterated margin has likely “bottomed,” highlighting NIM sensitivity of roughly 4–5 bps for each 25 bps Fed cut, and noted wholesale/CD repricing is largely behind them—setting up for gradual expansion if rates ease and funding mix improves.
• Credit quality remains strong despite a single new nonperforming multifamily loan; ACL coverage stayed at 0.88% of total loans, nonaccruals were $2.37m, and net charge-offs were ~ $421k in the quarter (specific reserve of ~$276k).
• Operating discipline continued: noninterest income and noninterest expense beat internal guidance for the second straight quarter; management now expects service charge improvements to remain stable and expenses to be comparable to H1 levels for the rest of 2024.
• Street consensus from S&P Global was unavailable for FLIC this quarter, so an external beat/miss framing isn’t possible; near-term catalysts include incremental NIM lift if rates fall, continued remix toward commercial lending, and expense control persistence.

What Went Well and What Went Wrong

• What Went Well

  • Margin and earnings stabilized: “our margin increased to 1.8% … certainly a positive indicator for stabilization,” with linked-quarter improvements in ROA, ROE, efficiency, NII, and EPS.
  • Fees and costs outperformed guidance: “our noninterest income and noninterest expense beat our guidance for the second straight quarter,” with noninterest income at $2.86m and noninterest expense at $15.85m in Q2.
  • Funding mix and liquidity improved: average interest-bearing deposits rose $73.1m, average higher-cost borrowings decreased $52m; total available liquidity of ~$1.4b at quarter-end.

• What Went Wrong

  • Y/Y compression persisted: NII fell $3.4m vs Q2 2023 and NIM was 1.80% vs 2.17% last year; EPS declined to $0.21 from $0.31.
  • Modest uptick in nonperformers: nonaccrual loans rose to $2.37m (from $1.17m in Q1), driven by one multifamily credit (partial charge-off ~$175k); net charge-offs totaled ~$421k.
  • Deposit repricing drag still evident: cost of interest-bearing liabilities increased to 3.56% in Q2 (from 3.47% in Q1 and 2.51% in Q2’23), reflecting ongoing competitive funding pressures.

Transcript

Operator (participant)

Welcome to The First of Long Island Corporation's Second 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/Q2. 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 8, 2024, as supplemented by our 10-Q for the quarter ended March 31st, 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 Becker (President and CEO)

Thank you. Good afternoon and welcome to The First of Long Island Corporation's earnings call for the second quarter of 2024. I'm pleased to report linked quarter improvements in many key financial ratios and financial statement line items, including increase in return on assets, increase in return on equity, improvement in efficiency ratio, growth in deposits, growth in loans, higher non-interest income, lower non-interest expense, higher net income, higher earnings per share, and most importantly, increase in net interest margin. After six consecutive quarters of net interest margin decline from 2.97% for the three months ended September 30th, 2022, to 1.79% for the three months ended March 31, 2024, our margin increased to 1.8% for the three and six months ended June 30th, 2024. While not a substantial move-up, certainly a positive indicator for stabilization.

Repeating what I stated last quarter, barring any significant changes in our funding mix or short-term rates moving higher, we believe our net interest margin should be at the bottom. The pace of interest-earning assets repricing was basically in line with the pace of interest-bearing liability repricing during the second quarter of this year, and that trend is expected to continue, if not improve, in the quarters ahead. Managing the mix of the balance sheet will augment margin improvement, and coupled with a more favorable yield curve, this improvement can accelerate. Talk of lower short-term rates is encouraging for continued earnings growth moving forward. The bank had stronger loan originations during the second quarter, closing $70 million with a weighted average rate of approximately 7%. Second quarter originations were driven by C&I and owner-occupied commercial mortgages, highlighting our focus on relationship-based business.

Originations during the second quarter continued the progress made remixing our loan portfolio from consumer to commercial that began in 2020. During that period, relationship-based C&I and owner-occupied commercial mortgages increased 80%, and other commercial real estate increased 30%. In total, our commercial lending business has grown $582 million. That growth has been masked by letting our residential lending business amortize down by $514 million over the same period. Building our commercial relationship business has also resulted in an improved mix on the funding side, as non-interest-bearing deposits represented 30% of our funding mix at June 30, 2024, compared to 25% on December 31, 2019. In the current environment, I believe it's important to note that our remix to commercial lending has not included any significant increase in multifamily loans outstanding.

Our multifamily loans totaled $868 million at the end of the second quarter of 2024, up minimally from $835 million at the end of 2019. The June 30, 2024, pipeline was $137 million, with a projected average rate of approximately 6.75%. Please keep in mind that many loans in the pipeline are floating off an index plus a margin until the closing, so the weighted average rates move with the market. The pipeline has increased from the end of the first quarter when it was at $113 million. We have been closely monitoring rate resets and have provided detailed information in that regard in a Form 8-K filed on March 1, 2024, supplemented by additional information in our annual shareholders' meeting presentation on April 16, 2024.

During the second half of this year, based on rates as of June 30, 2024, we have $65 million of multifamily and non-owner-occupied commercial mortgages repricing with a weighted average rate of 4.24% before the rate reset and a projected weighted average rate of 7% after the rate reset. Looking forward into 2025, based on rates as of June 30, 2024, we have $122 million of multifamily and non-owner-occupied commercial mortgages repricing with a weighted average rate of 3.53% before the rate reset and a projected weighted average rate of 7.02% after the rate reset. For loans with projected cash flow stress, we have started to reach out to borrowers to discuss options for their consideration. Our criticized, classified, past due, non-performing, and charge-off levels all remain low, and we currently assess our credit quality as strong.

On June 28, 2024, we opened a branch on the North Fork of Long Island in Southold. We believe this location will be a great complement to the rest of the East End of Long Island presence that we established over recent years, including Riverhead, Southampton, and East Hampton. We currently have 41 branches covering Nassau and Suffolk counties in the boroughs of Manhattan, Queens, and Brooklyn. Our branch count is down from a high of 52 branches at the end of 2019, but our total deposits have increased by approximately $220 million over that period, a much more efficient model. We continue to evaluate prospects for geographic expansion as well as efficiencies within our existing branch network. Our company has been around for nearly a century because we stay focused on the fundamentals of strong credit quality and meaningful customer relationships.

We believe our fundamentals have built and will continue building a strong franchise. Growth and margins have been challenged over the past 18 months, but we remain optimistic about future opportunities to build shareholder value. Janet Verneuille will now take you through financial highlights of the quarter and year to date. Janet.

Janet Verneuille (Senior EVP and CFO)

Thank you, Chris. Good afternoon, everyone. Following up on some of Chris's comments, positive trends quarter over quarter included the following: an increase in return on assets from 0.42%-0.45%, an increase in return on equity from 4.72%-5.15%, an increase in net interest margin from 1.79%-1.8%, and an improvement in the efficiency ratio to 73.6% from 76.5%. Although these are slight improvements, they can be a forward-facing indicator of the trending stabilization of our net interest margin. Coupled with the recent heightened market anticipation of a Fed funds cut in September, we expect to maintain this trend. The company recognized net income of $4.8 million for the second quarter of 2024, $4.4 million for the linked quarter, and $6.9 million for the same quarter last year.

Earnings per share were $0.21 for the quarter, equal to the per-share dividend declared by our board of directors in June of 2024. EPS for the linked quarter and the same quarter last year were $0.20 and $0.31, respectively. The increase from the linked quarter was largely attributed to the increase in net interest income by $270,000 and a decrease in salaries and employee benefits of $474,000, primarily due to decreases in employee incentive accruals. These were partially offset by a $570,000 provision for loan losses. The decline from the second quarter of 2023 is largely attributed to the decrease in the net interest income by $3.4 million, a $570,000 provision for loan losses partially offset by a decrease in the provision for income tax expense of $1 million attributable to lower earnings and a decrease in the effective tax rate.

Non-interest income of $2.9 million exceeded non-interest income recorded in the linked quarter of $2.8 million and the same quarter last year of $2.7 million. Improved results from service charges on deposit accounts, merchant card services, and bank-owned life insurance were the main contributors to the increase. Management had guided in analyst calls to quarterly non-interest income totals of approximately $2.6 million. Based on deposit account service charge collection improvements after our system upgrade, management currently believes recent increases in monthly service charge revenue will remain stable. Although merchant card service income can fluctuate, we now expect for the last two quarters of 2024 these revenues will trend consistent to the first two quarters. Non-interest expense totaled $15.8 million for the current quarter, as compared to $16.2 million in the linked quarter and $16.5 million in the same quarter last year.

Earlier in the year, management had guided in analyst calls to quarterly non-interest expense totals of approximately $16.25 million. We did have some open staffing positions during the second quarter, but we also lowered the incentive compensation accrual rates. We anticipate non-interest expenses for the last two quarters of 2024 will be comparable to the first two quarters. During the second quarter, we used excess cash to pay down about $143 million of wholesale borrowings, leading to a small deleveraging of the balance sheet of $46 million, even though we had deposit growth of $37 million and loan growth of $14 million. Loan growth was better than the net number reflects, as C&I loans increased $27 million and commercial mortgages increased by $15 million. Commercial growth was offset by the residential mortgages decreasing $27 million as we continued to remix the loan portfolio toward commercial lending.

The overall loan yield of 4.22 was up eight basis points quarter-over-quarter. The second quarter saw a notable increase in average non-maturity interest-bearing deposits of $85 million and certificates of deposit of $15 million. Average non-interest-bearing checking deposits increased by $11 million and represent 33% of total deposits. The weighted average cost of interest-bearing non-maturity deposits was 2.84%, and for CDs, it was 4.24%. As of the close of the second quarter, the repricing of wholesale funding, FHLB borrowings, and brokered CDs to current market rates remained largely behind us. Although at a slower pace, we continue to approve upward interest rate adjustments based on the overall customer relationship. The purchase of the fixed-to-floating swap in March of 2023 continues to pay dividends, adding $1.2 million to the net interest income in the second quarter. Swap matures in March of 2026.

Net interest income for the second quarter of 2024 increased $270,000 compared to the linked quarter and decreased $3.4 million from the same quarter last year. Our net interest margin of 1.8% for the second quarter of 2024 compares to 1.79% for the linked quarter and 2.17% for the same quarter last year. Yield on total interest-earning assets was 4.16% for the second quarter, 4.8% for the linked quarter, and 3.78% for the same quarter last year. Cost of total interest-bearing liabilities was 3.56% for the second quarter of 2024, 3.47% for the linked quarter, and 2.51% for the same quarter last year. The allowance for credit losses as of June 30, 2024, was $28.5 million. A provision was booked to the ACL of $570,000 during the quarter. The quarterly provision was largely due to $276,000 specific reserve on one non-performing loan and about $421,000 of net charge-offs.

The reserve coverage ratio at June 30, 2024, remained flat at 0.88% compared to the linked quarter. The capital position remained strong with a leverage ratio of approximately 9.9% at June 30, 2024. Book value per share was $1,671 at June 30 versus $1,622 at June 30, 2023. The accumulated other comprehensive loss component of stockholders' equity is mainly comprised of a net unrealized loss in available-for-sale securities portfolio due to higher market interest rates. There were no share repurchases in the second quarter of 2024. The effective tax rate for the second quarter of 2024 decreased to 1.6% as compared to 6.2% for the linked quarter. The annualized effective tax rate is now expected to be approximately 4%.

The change was due to a reduction in 2024 projected income, with the rate staying higher for longer than anticipated, causing a greater impact of the tax-exempt items on the effective tax rate. With that, I turn it back to our operator for questions.

Operator (participant)

Thank you. Our first question for today comes from Mark Fitzgibbon from Piper Sandler. Mark, please proceed with your question.

Mark Fitzgibbon (Managing Director)

Thank you for taking my question, and good afternoon and happy Friday.

Chris Becker (President and CEO)

Hey, good afternoon, Mark.

Janet Verneuille (Senior EVP and CFO)

Happy Friday.

Mark Fitzgibbon (Managing Director)

If the Fed follows the forward curve and we see two more cuts this year, I'm curious how much you think the net interest margin might be able to snap back by the end of the year?

Chris Becker (President and CEO)

Well, in a previous call, we had indicated that each 25 basis point cut could improve margin by 4-5 basis points, and we haven't updated that further. That still seems to be a pretty good estimate.

Mark Fitzgibbon (Managing Director)

Okay. And then secondly, I was curious, credit obviously here is terrific, but what drove that $1.8 million uptick in non-performing loans? And could you also share with us what net charge-offs were in the quarter?

Chris Becker (President and CEO)

Yeah. Net charge-offs were a little over $400,000 for the quarter. It was one loan that went non-performing where we took, that's the loan that had the specific reserve and had a partial charge-off down to the appraised value. The charge-off was about $175,000.

Mark Fitzgibbon (Managing Director)

Okay. What type of loan is that?

Chris Becker (President and CEO)

That was a multifamily loan. That's our only multifamily loan in non-performing.

Mark Fitzgibbon (Managing Director)

All right. And then I heard the numbers that you mentioned on the call about multifamily and non-owner-occupied commercial real estate that's rolling from sort of 4.25% up to 7% or 3.5% up to 7% on the $122 million. I guess I'm curious, have you guys done an analysis that sort of looks at whether the cash flow on those buildings will be sufficient once the rate basically doubles?

Chris Becker (President and CEO)

Yes, absolutely. Absolutely. We've looked at every loan that's repricing between now and the end of 2025 to calculate their repricing rate and their cash flow. And that's where I'd mentioned anything that's showing some possible stress, we're reaching out in advance to those customers to see what type of strategies we can do to help relieve any of that stress. We've had success in that regard. We've had situations where the borrower has refinanced early and paid down. We've had other situations where we've gotten an additional piece of collateral or by combining two loans into one, one that had stronger cash flow, one that maybe was showing signs of stress at the reset, to combine them to make the cash flow better overall.

Borrowers have been receptive to us reaching out early because obviously they don't want to get into a situation, and especially if there's a current option for a rate that might be a little bit less than what they would reset at, say, five or six months down the road.

Mark Fitzgibbon (Managing Director)

Okay. And then the last question I had was around the tax rate. I heard, Janet, your comments, the effective rate for the year would be around 4%. What will it look like in 2025? What's sort of a normalized run rate for you all?

Janet Verneuille (Senior EVP and CFO)

Well, assuming that income goes up, the effective tax rate will go up, obviously, because the tax-exempt items will be a smaller percentage of income. I hesitate to give a number. I don't know. Maybe I'd say, I don't know, probably maybe about 7%, I would estimate at this point. But really, it's going to depend on where income comes in and how we manage those tax-exempt items.

Mark Fitzgibbon (Managing Director)

Great. Thank you.

Chris Becker (President and CEO)

Thank you, Mark.

Operator (participant)

All right. Our next question for today comes from Chris O'Connell at KBW. Chris, please proceed with your question.

Chris O'Connell (Director of Equity Research)

Hey, good afternoon.

Chris Becker (President and CEO)

Hey, how are you doing, Chris?

Chris O'Connell (Director of Equity Research)

Good. Just wanted to start off with you provided the multifamily and non-owner-occupied CRE repricing in the second half of the year. Just curious, how much of the multifamily and non-owner-occupied repriced in the first half of 2024?

Chris Becker (President and CEO)

Yeah. It's similar to what's going on in the second. I don't have that number right in front of me, but it was very similar to what's repricing in the second half.

Chris O'Connell (Director of Equity Research)

Got it. And as far as the funding side goes, with CDs up probably pretty close to market rates at this point, I mean, how much more do you think has left to reprice upwards in the second half of the year?

Janet Verneuille (Senior EVP and CFO)

There's very little bit. We just had one small piece that repriced that was at a low rate on the brokered side. And as far as the retail CDs, they're pretty much at market. I would say it's minimal what's left to reprice to market rates.

Chris O'Connell (Director of Equity Research)

Got it. So then I'm just curious because you did have a decent amount of CD repricing, especially kind of earlier in the year, as well as the borrowings. Why not a little bit more positive on the margin in the interim between now and when rate cuts begin, given that it seems like similar asset repricing on the other side of the balance sheet?

Chris Becker (President and CEO)

Yeah. I think as we looked at the second quarter, it was pretty well even as far as what repriced on both sides of the balance sheet. And we still have on the non-maturity side in our money market deposit accounts, you still have those one-off relationship discussions, and we still had some increase in those rates throughout the second quarter. And I think that's why we're still being a little cautious on this. We're looking closely at those, but that's where the numbers still went up for us in the second quarter.

Chris O'Connell (Director of Equity Research)

Got it. On the loan growth, it sounds like pipelines are up, improved the past couple of quarters, good originations. Are you still thinking inclusive of the residential planned runoff on net low single-digit growth for this year?

Chris Becker (President and CEO)

Yes.

Chris O'Connell (Director of Equity Research)

If we're getting into a rate-cutting environment as we get towards the back half of 2024 to 2025, is that residential strategy, do you think that will continue or moderate if there's less funding pressures and lead to higher kind of net loan growth into 2025?

Chris Becker (President and CEO)

It will continue. We don't plan to begin originating residential mortgages. We stopped originating them towards the second half of last year. We don't plan to begin originating them now. We may consider purchasing loans if we wanted to have some diversification in the portfolio, but we really want to focus on continuing to grow the relationship-based C&I and owner-occupied commercial mortgages. If you look at our—if you look at our loan portfolio kind of pie chart, that's still the smallest slice while it's up from a low of 7% a handful of years ago to about 12% or so now. Ideally, we'd like kind of like four equal buckets of multifamily, other commercial real estate relationship, C&I, and owner-occupied, and then residential. So the residential still has a ways to go to get down to that quarter if you look at those four pieces of the pie.

At that point, we would possibly consider, as I said, buying some residential.

Chris O'Connell (Director of Equity Research)

Got it. That's helpful. And then as you guys have reached out to what you said in the multifamily customers and the ones that look tight, any sense of how big that customer segment is, either on a percentage basis of the book or on a dollar amount, even if it's kind of just ballparking?

Chris Becker (President and CEO)

Yeah. I can tell you for the remainder of this year, it's six loans. So it's a small number of borrowers.

Chris O'Connell (Director of Equity Research)

Great. As you guys start to see the margin come up and get a little bit more comfortable with the overall earnings and profitability profile year in the back half of the year into 2025, do you think you start to revisit the buyback conversation?

Chris Becker (President and CEO)

Yeah. I certainly think that that's something. I mean, we did buy back some stock in the first quarter of this year. That's something we look at every quarter along with the dividend and make those decisions. Certainly, we have 13 million still under the buyback program that we have outstanding. Absolutely, we would look at that.

Chris O'Connell (Director of Equity Research)

Great. Appreciate all the comments. Thanks, Chris, Janet. Great quarter.

Chris Becker (President and CEO)

Thank you.

Janet Verneuille (Senior EVP and CFO)

You're welcome.

Operator (participant)

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

Chris Becker (President and CEO)

Yes. Thank you for your attention and participation on the call today. We remain focused on making the right decisions to increase shareholder value over the long term. I thank our employees for their continued dedication to service our customers and communities. Enjoy the upcoming weekend.