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spk02: 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 Burnell, 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:// forward slash forward slash www.cstproxy.com forward slash FNBLI forward slash earnings forward slash 2024 forward slash 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 companies' filings with the U.S. Securities and Exchange Commission. Investors should also refer to our 2023 10-K filed on March 8, 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.
spk01: 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 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 remains strong at the end of the first quarter with a leverage ratio of 10%, and a tangible common equity ratio of 8.9 percent. We had ample liquidity on March 31, 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 loans, including owner-occupied commercial mortgages, increased 6 percent since year-end, and we are encouraged by recent activity that is not yet reflected in our March 31, 2024 loan pipeline of $113 million, up from $86 million at year-end 2023. Our credit quality remained rock solid through March 31, 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 31, 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 remain 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 percent and are expected to reprice at an estimated 50 to 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 Vernell will now take you through other financial highlights of the first quarter. Janet.
spk00: 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 360%. 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 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 percent for the first quarter of 2024, 2.43 percent for the linked quarter, and 1.40 percent 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 percent in the first quarter of 2024, 2.0 percent in the linked quarter, and 2.34 percent 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 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 8K furnished on March 1, 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 $16.43 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 21 cents 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.
spk02: Thank you. Our first question for today comes from Alex Hordall at Piper Sandler. Alex, please proceed with your question.
spk06: Good afternoon.
spk05: Good afternoon, Alex.
spk03: First on the loan outlook, Chris, 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 commercial portfolio overall and where you think it over time might eventually get to as a percentage of the overall loan book?
spk01: So the commercial, well, let's break it down, right? The CNI portfolio and owner-occupied portfolio, was that 11% of the total portfolio? And then obviously we have the commercial real estate portfolio, which is over half of the portfolio. 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. And the CNI and owner-occupied piece is the piece we want to grow. If I can 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 Cree, about 25% in residential, and about 25% in C&I and owner-occupied. But it's going to take some time for the C&I and owner-occupied to get there. And when I say some time, you're talking years, not months, but that's certainly the direction we're moving. And, 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 the, 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.
spk07: Yeah, that makes sense.
spk03: I mean, as you kind of think about those four equal slices over time and totally get it's going to take a while to get there, do you see it kind of being sort of a flattish overall loan book or is the overall loan book grow as well? And I guess when you think about loan growth for this year and the pipeline 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?
spk01: 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 in the commercial side. So, when you look at our pipeline numbers that we talk about in our earnings calls or state in 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. And 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 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 looking at our number, which is probably a little bit more on the conservative side,
spk03: the way we report it is probably why it looks maybe a little bit lower than some others okay understood um thanks for that color um you know as you i think jen as you're going through some of the repricing on the on the borrowing and sort of what new stuff's going on today and you kind of look at it against um you know 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 going to 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 leverage that maybe is upside down right now?
spk00: 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.
spk01: The year-and-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 makes a lot of sense. But we continue to monitor that. We look at that on both the securities and loan side.
spk03: 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 a near-term boost to the NIM?
spk05: No. Not at the moment.
spk00: 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.
spk01: The mortgage-backed portfolio is similar to our residential portfolio. 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%.
spk03: Yeah, okay. I wanted to, you know, I really liked all the disclosure you guys put in your slide deck with respect to the multifamily and was looking at the weighted average debt service coverage ratio after reset for the sum of the stuff that's resetting in 24 and 25, 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 of what the rates are going to 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?
spk01: 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 triple, 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 that reset and the expenses. So, it's not necessarily related to the regulations and to the 2019 legislation that was passed.
spk06: Right. Okay.
spk03: I mean, I guess when you guys think about underwriting these things and resetting them, then what's sort of the magic number on debt service coverage ratio that you feel comfortable with?
spk01: 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 125, 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 average rate, 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 8K. Okay. So, you know, that leaves you a lot of room. And 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 24 and 25, and we assumed that they all reset at March 31 of this year, the debt service coverage ratios, you know, basically went from the 180s to the 140s. still a strong debt service coverage ratio and certainly loans, if it was a new loan coming in, that we would look at seriously, assuming all the other metrics were in good shape. But looking at those changes, that's basically about a 20% drop in the debt service coverage ratio. So if you were to write loans at a minimum debt service coverage ratio, and banks have different, some have a minimum of 115, some 120, 125. But if you had a 125, and if you did book a full loan and it was at a 125 debt service coverage ratio at the time you booked it, and that 20% decrease kind of held on across the board that you're seeing on average from what we showed you for 24 and 25, then that loan would go down to about one to one. So, you know, it would obviously be in more of a stress 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, that 20% threshold for us, from what we're seeing, kind of seems to be... seems to be the number where things are falling. And 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.
spk06: That's really helpful color, Chris. I appreciate all the comments. Thanks for taking my questions.
spk07: Thanks, Alex. Appreciate it.
spk02: Thank you, Alex. Our next question comes from Chris O'Connell at KBW. Chris, you can proceed with your questions.
spk07: Thanks.
spk04: Following up on the multifamily discussion, you know, the slide with that debt service coverage ratios, it shows the 2025 free market at like two, almost 2.2 times. Is there anything, you know, unusual in that? It just seems like, you know, really, really strong, you know, for it to be that high before the rate resets kick in.
spk01: No, there is nothing unusual in that. I mean, we're pretty consistent in the way we underwrite, and, you know, 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, the entire CREE portfolio, it's certainly not going to be unusual to have some segments above two and some below.
spk07: Got it.
spk04: And then circling back to just the overall, you know, loan growth discussion, can you give us what the yield on that $118 million pipeline is?
spk01: 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 going to say it's probably pretty close to that. But I don't have an exact number on that, but it shouldn't be too different from the 7% number. Got it.
spk04: 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?
spk01: So... What we put out there is we generally have about $80 to $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 CREE and what's repricing on the multifamily portfolio, I don't have The total amount, because, again, when you look at the CNI side, right, you have lines of credit, you know, paying up, paying down, and moving around. So you can't always tell when the line usage is going to 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.
spk07: Yep. No problem.
spk04: Um, I guess what I'm getting as, you know, after we get, you know, past the second quarter with some of these, you know, May and April, uh, you know, kind of final CD repricings, um, you know, you, you, you seem to be, you know, a little bit more tepid on the, on the back end of the year, you know, NIM rebounding, uh, you know, this quarter and, um, you know, it seems like the CDs will pretty much fully reprice, you know, the borrowings are, you know, more or less fully repriced and you're going to 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 the, just being conservative or do you think that it's going to be going up in the second half of the year?
spk01: I think we're being conservative because whenever you're not conservative, something seems to come back, just like everybody thought going into this year, or the market was certainly thinking there was going to be seven rate decreases, and now we don't know if there's going to be any, right? So 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 until next year. So you do get a little conservative, and then you have some unexpected changes in the mix a little bit, and you still do have money moving out of DDA. So conservatively, we say, hey, if the mix is good and we get some relief on the rate side, we see margin being able to move up. But When you look at our overall liability side, as we've said, the higher cost stop, 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 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 that are on NIM tables for the past several quarters. And, you know, those numbers have moved down from, you know, an average of about 17 basis points a month when you go back to the first quarter of last year, down to about seven 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 one point, $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 to $90 million a quarter coming in on loans and securities, and if we look at a number of, say, 2% to 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, 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 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 seven, 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 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 know, there is always the unexpected in there.
spk07: Understood.
spk04: And just on the capital position, 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?
spk00: We take a look at it every quarter. And depending on the capital position, we would consider buying back shares for sure in the upcoming months.
spk07: Great.
spk04: And then last one from me is just what's a good go-forward tax rate?
spk00: Well, I know we got it 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. I do think the tax rate is going to be going up. I would say somewhere in the middle of the six and a quarter and the 12 that we got it at the beginning of the year.
spk05: Okay, great. Thanks for your time. You're welcome. Thanks, Chris.
spk02: Thank you. This concluded our question and answer session. I will turn the floor back over to Chris Becker for closing comments.
spk01: 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.
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