2023 Annual Report
The events and conditions of 2023 necessitated a focus on liquidity, capital and asset quality industrywide, and I’m happy to report that our Company is well-positioned in these areas. An inverted yield curve, as the one experienced throughout 2023, resulting from the Fed moving short-term rates up to the mid 5’s is unusual and largely unkind to the banking industry’s net interest margins. The shape of the curve in 2023 combined with The First National Bank of Long Island’s liability-sensitive Balance Sheet resulted in a 74-basis point drop in our net interest margin to 2.16% in 2023 from 2.89% in 2022.
Net income and fully diluted earnings per share for 2023 totaled $26.2 million and $1.16, respectively. The Company’s return on average assets (ROA) was 0.62% and its return on average equity (ROE) was 7.14%. Owing primarily to the aforementioned margin compression, the metrics for 2023 did not match up to the record net income and fully diluted earnings per share performance the Bank produced in 2022 of $46.9 million and $2.04, respectively. In 2022, ROA was 1.11% and ROE was 12.13%. Non-interest expenses were managed carefully and were 4.4% lower in 2023 totaling $64.1 million compared to $67.0 million in 2022.
Interest rates and the slope of the yield curve will eventually change. A historically normal upward shaped yield curve is expected to benefit the Bank and allow our performance metrics to return to historical norms. The yield curve inversion between the two-year and ten-year Treasuries started in July 2022 and remains so through the drafting of this letter. The good news is that inverted yield curves historically last approximately eighteen months.
With interest rates beyond our control, we remain focused on our primary strategic initiatives as follows:
• Recruit bankers that build relationship business.
• Structure the Balance Sheet to optimize financial performance.
• Optimize the current and prospective branch network.
• Improve the quality and utilization of technology.
• Improve the Company’s name recognition and community standing.
• Attract, retain and motivate employees that support our objectives.
With that in mind, during 2023 we added deposit gathering bankers in several markets and celebrated the relocation of three legacy branches. Our branch optimization plan has resulted in the closing of 15 branches since 2020, which has reduced annual operating expenses by approximately $5 million. To expand our reach on Long Island, we successfully opened three branches on the East End over the same period with those branches attracting $119 million in new deposit relationships of which 41% is in noninterest-bearing checking accounts as of yearend 2023. We plan to open a branch on Long Island’s North Fork in Southold during the second quarter of 2024, which will complete our initial expansion plan on the East End. Our leadership team is focused on business growth through efficiency – providing the right number of branches, in the right locations, with the right people to best serve our clients, communities and shareholders.
Large regional bank failures and short-term Treasury yields not seen since prior to the Great Recession caused some deposit market disruption in 2023. I am proud that average total deposits held steady at $3.4 billion during 2023. That compares to average total deposits in 2022 of $3.5 billion. Noninterestbearing checking deposits still represent 35% of total deposits highlighting the relationship focus in our deposit mix. As markets settle and rates stabilize, we believe our banking teams will capitalize on the constantly shifting banking landscape in our market area. Our loyal customers appreciate the stability of our Bank, and we believe the same is desired by our target markets of small and middle market businesses, professional service firms, not-for-profits, municipalities and service-conscience consumers.
Management proactively completed two balance sheet repositioning transactions during the year to help reduce our sensitivity to rising interest rates. In March, the Bank entered into an interest rate swap to convert $300 million of fixed rate residential mortgage loans to floating rate for a period of 3 years. During 2023, this transaction added $3.1 million to pre-tax earnings. Also in March, the Bank sold $149 million in fixed rate municipal securities and purchased a similar dollar amount of floating rate SBA securities. The Bank recognized a $3.5 million pre-tax loss and earned back approximately $2.7 million of the pre-tax loss through year end 2023.
As we ended 2023, these two transactions were generating approximately $2.2 million in quarterly pre-tax earnings above what would have been earned without these moves. Our planned technology upgrades were completed over the first weekend of February 2024. New technology includes Fiserv’s DNA core processing system, business online banking, business mobile app, branch platform and teller systems, biometrics identification and numerous paper-eliminating efficiencies. Our team has been working on implementing these new systems for 18 months.
I cannot thank them enough for their outstanding work and dedication to this project. We believe our new best-in-class systems will enhance customer experience and provide our bankers with the tools needed to service our clients and generate new relationship-based business.
The transition to a more commercially focused institution that began in 2020 continued to make progress in 2023 thanks to the hard work by our commercial lending teams and their branch partners. A key component of this objective is growing our commercial and industrial loan and owner-occupied mortgage business. This combined portfolio has increased from $223 million at the beginning of 2020 to $350 million at the end of 2023. While the pace of growth in this area slowed in 2023 to 6.3%, it has still exceeded 12% per year on average since 2020.
Our total commercial loan portfolio has grown from $1.5 billion to $2.0 billion over the past four years. Offsetting the success of this management team’s commercial transition has been the legacy residential mortgage business. Since year end 2019, our management team has allowed the portfolio to paydown by $454 million, which has disguised our success in growing the commercial portfolio as outlined in the previous paragraph. In 2023, the Bank announced a new co-marketing referral agreement with Rocket Mortgage®, the nation’s leading mortgage lender. As a result of this new relationship, we eliminated the need for a residential mortgage department saving nearly $1 million in annual noninterest expense going forward, while expanding financing options and benefits for our customers. The support of a strong marketing team sets the tone for our key initiatives. We continue to get compliments on the fresh look of our branding at new and relocated branch locations. Many of our existing locations have also received facelifts to five star reviews. Our new social media and refreshed traditional media advertising has been recognized by customers and prospects with positive feedback. In particular, our new “Meet the Bankers” series on social media was a big hit in 2023.
I am proud to say key aspects of our transformation strategy which began in 2020 are largely in the rearview. The Bank has a fresh look, top notch technology, innovative partnerships replace legacy stalemate business lines, a more efficient branch network, bankers focused on commercial relationship growth, a proven history of strong asset quality all of which is underpinned by a strong capital position with leverage and tangible capital ratios of 10.05% and 8.97%, respectively. Combined with optimism about short-term rates moving lower, especially for a Bank that remains generally liability-sensitive, we enter 2024 with a bright outlook for the future.
Before closing, I would like to recognize a few people for their many contributions over the years. After five years as our Chief Investment Officer and four years as our Chief Financial Officer, Jay McConie has decided to step away from day-to-day management. He has been a key executive partner in many of the initiatives discussed in this letter and prior communications. I thank him for his tremendous efforts and dedication to the Company over these past 9 years.
We have two director retirements in 2024. Alexander L. Cover will retire effective April 16, 2024, after 20-years of service on our Board of Directors. He was a long-time Chair of our Audit Committee. Alex joined the Board of Directors after a distinguished career in public accounting with Ernst & Young LLP. Stephen V. Murphy retired effective January 31, 2024, after 18-years of service on our Board of Directors. He was a long-time Chair of our Board Loan Committee prior to becoming a long-time Chair of our Board Asset Liability Committee. Steve was a career investment banker specializing in financial institutions. Both gentlemen worked tirelessly as committee chairs and board members to assure the proper oversight of our Company. Their combined experience made them a formidable duo and their contributions to the Boardwill be missed. On behalf of the Board of Directors, Management and staff, thank you both for your many years of dedicated service and valuable insight. Also, thank you to all directors for bringing their unique perspectives to the governance of our Company. Thank you to our customers and employees who are the reason we continue to succeed.
Lastly, I want to reassure our loyal shareholders that the Board of Directors and Management Team are focused on returning to our historical performance metrics and making the right decisions.
Sincerely,
Christopher Becker
President and Chief Executive Officer
