The First of Long Island Corporation

Welcome to the first of Long Island Corporation's first quarter 2023 earnings conference call. On the call today are Chris Becker, President and Chief Executive Officer, and Jane McHoney, 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.fnbli.com. Before we begin, the company would like to remind everyone that this call meets 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 2022 10-K filed on March 9, 2023, 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 floor over to Chris Becker.

Thank you. Good afternoon, and welcome to the first of Long Island Corporation's earnings call for the first quarter of 2023. As mentioned in my remarks at our recent annual meeting of stockholders, 2023 is proving to be most challenging. After a decade of short-term rates near zero and five- and ten-year Treasury yields, averaging 1.64 and 2.16 percent, respectively. The Fed has driven short-term rates up to 5 percent over the past 12 months, while five-year and 10-year Treasury yields are in the mid-threes. The margins of community and small regional banks generally do not respond well to a 475 basis point rate shock and big yield curve inversions. Add concerns over recent bank failures and the cost of interest bearing liabilities is escalating rapidly and margin compression is generally beyond analyst expectations. With that backdrop, I am pleased to report that our customers have remained loyal and we have ample liquidity at March 31, 2023. Throughout the turmoil of the first quarter, We are proud that total deposits have held steady ranging from 3.4 to 3.5 billion during the quarter and averaging 3.47 billion. All numbers are in line with total deposits at year end 2022 with only a $66 million reduction. Checking deposits still represent 35 percent of total deposits and we were able to maintain our deposit levels without any increase in broker deposits and minimal increases in CDs. When we look at deposit betas internally, we focus on cumulative non-maturity interest-bearing deposit betas. That is the cumulative change in savings, now, and money market deposits compared to the cumulative change in Fed funds. Historically, in rising rates, these deposit betas have been plus or minus 35 percent. Through the end of the first quarter, these deposit betas in the current rate cycle are approximately 28 percent. One interpretation could be we are nearing the end of repricing deposits higher. However, Our historical tracking of deposit betas does not include a near 500 basis point rate increase over 12 months with four consecutive 75 basis point moves. As a result, we cannot be totally confident that our historical betas will hold in this current rate cycle. Based on the current pace of deposit rate increases, deposit betas could easily exceed 40 percent. The bank's uninsured and uncollateralized deposits were 38 percent of total deposits at March 31, 2023. Our uninsured and uncollateralized deposit levels have been consistent and trending lower over the past couple of years. Many peers that operate in our market have similar ratios of uninsured and uncollateralized deposits, mainly from working with businesses that need amounts greater than $250,000 in their accounts to operate and meet payroll. We believe there's a clear distinction between being a relationship-oriented commercial bank like ours with business customers needing a few million dollars to operate their business versus a bank that takes in large concentrations of private equity funds earmarked for startups. Our monthly net interest margin continues to be impacted by the current environment. Recent monthly margins have been 266 in December, 245 in January, 225 in February, and 234 in March. February's numbers are always lower due to the short months. With the Fed still talking about the possibility of higher rates and or short-term rates remaining high for an extended period, our cost of funds should continue to outpace any increases in the average yield on earning assets for the remainder of 2023. Although, Jay will take you through some specifics that could slow the pace of decrease in the net interest income throughout the remainder of the year. Our loan pipeline was 96 million at March 31, 2023. Loan demand was weaker during the first quarter, and our focus this year is skewed towards commercial relationship lending and related deposits. Borrowing at five plus percent to put on commercial or residential mortgages at five and a half to six percent is not overly enticing to us. especially on the residential side when they will just refinance immediately after rates fall. The reduction in CNI loans during the quarter was related to lower line utilization as customers have reacted to higher interest rates in the way they operate their business. New opportunities have increased with the recent disruption in the market. As expected, From First of Long Island, credit quality continues to be excellent with non-accruals again at zero on March 31, 2023. Jay McHoney will now take you through the first quarter results.

Jay? Jay McHoney Thank you, Chris. While the bank remains liability sensitive at March 31, 2023, management proactively completed two balance sheet reposition transactions during the first quarter to help us 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 three years. The bank will pay a fixed rate of 3.82 percent and receive a floating rate based on the SOFR overnight rate. This transaction was immediately created to annual interest income by approximately $2.9 million if rates remain unchanged. The bank also sold $149 million in fixed-rate municipal securities, earning a tax-equivalent yield of 3.32 percent, and purchased $135 million of floating-rate SBA securities projected to yield 5.38 percent at the time of purchase. As noted, the bank recognized a $3.5 million pre-tax loss and expects the earn-back to be 1.2 years. This transaction was also immediately accreted to annual interest income by approximately $2.8 million. The first quarter results do not reflect a full quarter's benefit of these transactions since they were executed close to the end of the quarter. These transactions presently help increase interest income and will slow the pace of decline in net interest margin and income. Reversing the decline in net interest income and margin will take time for assets repricing to catch up to liability repricing or until the Federal Reserve Bank reduces short-term rates. The interest rate swaps and security repositioning transactions results in loans and security repricing within one year, nearly doubling during the quarter to $813 million, or 21 percent of total securities and loans, at March 31st, 2023. The bank securities portfolio was $655 million and comprised 16 percent of total assets at the end of the quarter. The portfolio has a duration of approximately 3.6 years. Approximately 36 percent of the investment portfolio is comprised of floating rate assets. The bank has the $135 million in SBA floating rates securities with a current yield as of the end of the month of 5.77 percent that reprice quarterly off the primary and represent 21 percent of the investment portfolio. That bank also has $116 million in floating rate corporate bonds with a current yield of approximately 3.84 percent that reprice quarterly off the 10-year swap rate. Government agency fixed rate mortgage security portfolio, including CMOs, was $260 million and comprised 40% of the investment portfolio. This portfolio has a current yield of approximately 1.85%. The bank expects approximately $50 million of cash flows from the investment securities portfolio in 2023 and will look to reinvest them in higher yielding agency mortgage securities that provide some lockout protection when rates eventually decline. The remaining 24 percent of the portfolio is invested in tax-exempt municipal bonds that currently yield 3.84 percent. Our $3.3 billion loan portfolio is comprised of $1.9 billion in commercial real estate loans, $1.2 billion in residential mortgages, and $197 million in commercial and industrial loans. Approximately $560 million, or 18 percent, will reprice by March 31, 2024. of which $300 million is related to the interest rate swap transaction previously discussed and $115 million in loans that reprice on a monthly basis such as home equity and C&I loans. We expect approximately $75 million of cash flows from the loan portfolio per quarter. The bank expects an additional $178 million or 6% of the loan portfolio repriced from approximately 3.97% to 6.62% from March 31st, 2024 to March 31st, 2025. based on current market rates. The bank had $383 million in outstanding federal home loan bank advances with a weighted average cost of 4.31 percent and an average maturity of 1.3 years at the end of the quarter. The bank has one remaining advance that will mature in 2023. It is for $50 million with a current cost of funds of 2.62 percent and will mature on June 1, 2023. Federal home loan bank advances decreased $28 million during the quarter. The bank has broker time deposits that totaled $176 million or 5% of total deposits on March 31st. That number is the same as year-end 2022. The broker time deposits have a weighted average cost of 3.12% and an average maturity of approximately six months. Eighty-five million or 48 percent will mature in the second quarter of 2023 with an average cost of funds of 2.61 percent. The current reinvestment rate for both Federal Home Bank advances and broker time deposit market is currently between five to five and a quarter. We expect that a significant portion of our current wholesale borrowings, meaning the Federal Home Bank advances and broker time deposits, will reprice the current markets by rates by the end of Q2 2023. With regard to liquidity, the bank maintains over $1.5 billion in available collateralized borrowing lines with the Federal Loan Bank and Federal Reserve Bank. In addition, the bank had over $143 million in cash and unencumbered securities available to be pledged. This liquidity exceeds the $1.3 billion in uninsured and uncollateralized deposits that the bank held at March 31st. The bank had net income of $6.5 million and earnings per share of 29 cents for the first quarter of 2023 compared to 12.1 million, or 52 cents per share, for the same period in 2022. The bank's return on assets and equity were 0.62 and 7.09, respectively. The key drivers that caused net income to decline were a decrease in net interest income of 4.4 million and a loss on sale of securities of 3.5 million. These two items were partially offset by a decline in income tax expense of 2.5 million and a decrease in the provision for credit losses of 1.5 million. The decline in net interest income of $4.4 million was due to the Federal Reserve Bank increasing short-term rates by over 475 basis points and the inversion of the yield curve. The spread between the three-month and 10-year U.S. bond has currently inverted over 150 basis points, a level not seen in over 40 years. The pace and magnitude of these rate increases has caused the cost of our deposits and wholesale funding to increase at a faster pace than the yields on our interest-earning assets. Bank's interest expense increased $9.4 million compared to the prior year quarter and was only partially offset by a $5 million increase in interest income. Our cost of interest-bearing liabilities increased to 1.96 percent in the current quarter, an increase of 142 base points, while our yield on interest-earning assets increased 35 base points. The bank's quarterly non-interest income, excluding loss on sales securities, was $2.5 million, This result was consistent with expectations, and this run rate should continue throughout 2023. Also consistent with expectations, the bank's non-interest expense was $16.5 million during the first quarter, an increase of $802,000 from the first quarter of last year. The increase was primarily due to an increase in rent expense related to the bank's corporate headquarters facility and higher FDIC insurance expense attributable to higher assessment rates. We expect non-interest expense to be 16.5 to 17 million per quarter for the remainder of the 2023. Management is very mindful of expenses during the current environment and will make every effort to keep the run rate towards the lower end of this range in 2023. Our capital position remains strong with a leverage ratio of 9.94 at March 31st, 2023, and an increase of 11.83 at December 31st, 2022. Cumulated other comprehensive laws that have tax improved by 3.8 million or 5.9 percent since year end 2022. The bank did not repurchase any shares during the first quarter of 2023 and future repurchases will be decided based on maximizing shareholder value. We still have approximately 15 million authorized under the most recent board approved stock repurchase plan. The bank's effective tax rate declined to 9.1 percent in the first quarter of 2023 from 20.6 percent when compared to the first quarter of 2022. The decline in effective tax rate is mainly due to an increase in the percentage of pre-tax income derived from the bank's real estate investment trust, municipal securities portfolio, and bank-owned life insurance. We anticipate our tax rate for 2023 to be between 10 to 12 percent. With that, I turn it back to our operator for questions.