The First of Long Island Corporation

Welcome to the first of Long Island Corporation's fourth quarter 2022 earnings call. On the call today are Chris Becker, President and Chief Executive Officer, Jay McHoney, Chief Financial Officer, and Bela Pregliano, Chief Accounting Officer. Today's call is being recorded. A copy of the earnings release is available on the corporation's website at fnbli.com and on the earnings call webpage at https. colon forward slash forward slash www.cstproxy.com forward slash FNBLI forward slash earnings forward slash 2022 forward slash Q4. 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 risk, uncertainties, and other factors that may cause actual results to differ materially from those contained in any such statements, including a set forth in the company's filings with the U.S. Securities and Exchange Commission. Investors should also refer to our 2021 10-K filed on March 11, 2022, for a list of risk factors that could cause actual results to differ materially from those indicated or implied by such statements. I would now like to turn the call over to Chris Becker.

Thank you. Good afternoon, and welcome to the first of Long Island Corporation's earnings call for the fourth quarter and year end of 2022. The year marked our banking subsidiary's 95th anniversary. We celebrated the loyalty of our local markets with a community-first volunteerism program. Our employees donated over 500 hours of their time to aid local charities in fighting food insecurity, helping seniors, caring for animals, and building housing. It was inspirational, and I want to thank the entire First National Bank LI team for meeting our mission of continually doing the right things to help our customers, employees, and shareholders succeed while being socially accountable to the communities we serve. I'm gratified to announce another year of record performance. Net income and earnings per share both set new company highs in 2022 at $46.9 million and $2.04, respectively. The KBW Bank Honor Roll recognizes banks with more than $500 million in total assets that have reported consecutive increases in annual earnings per share in each of the past 10 years. Stockholders should know that your company is on that list. We were also proud to be named to Piper Sandler's Small Bank All-Stars in 2022, which recognizes companies with a market cap below $2.5 billion that outperformed the industry in growth, profitability, credit quality, and capital strength. Year-end, an average total assets, loans, and deposits all increased in 2022. Average non-interest-bearing checking deposits increased over 7 percent and averaged over 40 percent of total deposits during the year. We believe these numbers represent a true relationship-oriented bank. I previously reported on the relocation of our corporate headquarters to 275 Broad Hollow Road in Melville earlier this year. During the fourth quarter, we completed the sale of five Glen Head buildings and closed a freestanding drive-up ATM leased location. 2022 also included moving our Port Jefferson branch to a new Main Street Village location, and we are nearing completion on a new Bohemia location on Veterans Memorial Highway for the relocation of that branch. As the first National Bank of Long Island, we were missing a presence on the east end of the island. We corrected that oversight by establishing a branch in East Hampton in late 2021 and a South Hampton branch in early 2022. Combined with our Riverhead branch opened in 2020, we are making a name for ourselves on the East End. We have been fortunate to hire some of the best bankers in these markets. Our team is dedicated to transforming this 95-year-old institution to a modern, commercially-focused bank. Our growing banking teams are bringing in relationships, helping our balance sheet mix. Our new branding is being complemented as fresh and inviting. Our new website and social media presence continue to grow in terms of visits and impressions. Our commitment to technology upgrades and cybersecurity investments are recognized by our employees and customers, and we're being acknowledged in the industry for our successes. We are moving forward while staying true to our history of strong fundamentals that deliver results, including consistent loan underwriting criteria. Looking forward, we see a challenging landscape in 2023. The Federal Reserve's increases in interest rates have not been at this pace in over 40 years, putting downward pressure on the bank's net interest margin. Our bank's liability-sensitive position makes us more susceptible to rising rates. Our net interest margin was 2.74 percent in the fourth quarter of 2022, but was 2.66 percent for the month of December. Our margin very likely will be lower than the December number in the first quarter and full year of 2023. How much depends on the Fed's future moves and competitive conditions. Jay will speak to our deposit baiters. A political and regulatory message of removing so-called junk fees is limiting the bank's ability to charge for the fundamental services we provide. Progress in fee income always seems to be offset by competitive reductions. Non-interest income is currently projected at $2.5 million per quarter in 2023. At the same time, regulatory oversight continues to pile on operational costs related to third-party management, information security, ESG, and climate change, among other areas, no matter an institution's size. Management efforts to create efficiencies through branch and back office consolidations have kept expense growth in check, and 2023 non-interest expenses should be in line with 2022 numbers. Non-interest expenses are currently projected between $16.5 and $17 million per quarter in 2023. We have persevered through past challenges to remain a valuable franchise with strong capital, strong asset quality, a strong deposit base, and dedicated directors, employees, customers, and stockholders. I thank them all for their years of support, and we remain committed to doing the right things for them. Jay McHoney will now take you through some highlights for the full year and fourth quarter. Jay?

Thank you, Chris. As Chris mentioned, the bank had a record earnings of 46.9 million and earnings per share of $2.04 in 2022. The bank's return on assets and equity were 1.11% and 12.13% respectively. Net interest income improved to 8.9 million or 8.3% to 115.7 million and our margin increased 115 basis points to 2.89% in 2022. up from 2.74% in the prior year. The growth in net income for the year was mostly attributable to a $300 million increase in average loans for the year, stable non-interest income of $12.4 million, and a slight decline in non-interest expense of $1.1 million to $67.6 million for the year. The bank's asset quality remains excellent with no non-accrual loans on December 31, 2022. and our capital position remains strong with a leverage ratio of 9.83%. For the year, the bank originated approximately $656 million in mortgage loans with a weighted average rate of approximately 3.69%. Mortgage origination slowed to $63 million during the fourth quarter due to higher rates and less demand from consumers and businesses, but the average rate improved to 5.44%, and the yield on our CNI portfolio at the end of the year increased to 6.34 percent. In previous quarters, the bank reported a loan pipeline of committed but not yet closed mortgage loans. On September 30th, 2022, that number was 68 million. On December 31st, 2022, the committed but not yet closed mortgage loans were 51 million. This reporting period and going forward, we report a loan pipeline consisting of issued letters of intent, loans in underwriting, and committed but not yet closed loans. That number on December 31st was $127 million compared to $181 million at September 30th, 2022. We believe our broader definition of the loan pipeline is a better indicator of loan demand and activity in the upcoming quarter. The bank expects overall loan growth to be in the low single digits in 2023, given the increase in rates, concerns for recessions, and the inverted yield curve. Net income for the fourth quarter of 2022 declined $2.6 million when compared to the third quarter of 2022 due to a $3.1 million increase in interest expense, primarily due to higher borrowing costs and seasonal deposit outflows from average checking deposits into interest-bearing liabilities. During the first nine months of 2022, the bank was able to lag increasing the rate it pays on non-maturity deposits. The Federal Reserve's aggressive push to increase federal fund rates by 450 basis points since March of 2022 and expectations they will continue to increase short-term rates to possibly 5.25% in the first half of 2023 has increased the cost of funds we pay on these types of deposits. The bank's cumulative deposit beta on non-maturity interest-bearing deposits through December 31st was 21%. The bank's historical cumulative deposit betas on non-maturity interest-bearing deposits has been plus or minus about 35 percent. The cost of retail deposits and wholesale funding also increased with the cost of funds on interest-bearing liabilities rising from 48 basis points to 123 basis points since September 30, 2022. The bank has approximately $348 million in wholesale funding that matures during 2023 with the current weighted average cost of 2.28%. Based on the current interest rate environment, we anticipate using seasonal deposit inflows and monthly cash flows from our securities and loan portfolio in 2022 to repay a portion of our wholesale funding position. The bank is liability-sensitive with approximately $410 million for 10% of our interest-earning assets either maturing or repricing in 2023, and approximately $340 million, or an additional 8 percent of interest-earning assets, in annual cash flows from securities and loans. These cash flows will be reinvested at current market rates or be available to repay wholesale funding. Management regularly analyzes potential balance sheet restrictions that could help improve our liability-sensitive position. The bank's quarterly core non-interest income run rate, excluding one-time items, has been approximately $3 million over the past four quarters. We expect this run rate will decline to approximately $2.5 million in 2023. The decline is due to a non-service component of the bank's pension expense. The bank's non-interest expense was $18.4 million during the fourth quarter, an increase of $1.4 million when compared to the third quarter. The increase was due to several one-time charges, including a net loss of $553,000 on the disposition of premises and fixed assets relating to several of the bank's former Glen Head locations. $531,000 in costs relating to the branding initiative in branch locations and $210,000 for two branch relocations. We expect non-interest expense to be $16.5 million to $17 million in 2023, flat when compared to 2022. As we previously noted, the bank moved its corporate headquarters to Melville in April of 2022 in an effort to have a more convenient location for our customers and employees. Between the disposition of the Glenhead assets, the new Melville headquarters, and the various branch openings, closings, and relocation, the bank expects occupancy and equipment expense to be lower in 2023 versus 2022. As noted in our earnings release, the bank repurchased 915,868 shares or $17.9 million in common stock in 2022. The bank has approval to purchase up to an additional $15 million in its outstanding plan. Finally, we anticipate a tax rate for 2023 to be approximately 18.5%. With that, I'll turn it back to the operator for questions.