The First of Long Island Corporation

Welcome to the first of Long Island Corporation's second quarter 2023 earnings conference call. On the call today are Chris Becker, President and Chief Executive Officer, and Jay McCone, 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 web call page at https colon forward slash forward slash www.cstproxy.com forward slash FNBLI forward slash earnings forward slash 2023 forward slash 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 2022 10-K filed on March 9, 2023, as supplemented by our 10-Q for the quarter ended March 31, 2023, for a list of risk factors that could cause such acts 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 second quarter of 2023. As the volatility of the first quarter settled down, I'm pleased to report that total assets, total loans, and total deposits all increased when comparing the end of the second quarter to the end of the first quarter in 2023. Most important, our deposit franchise has remained strong. Deposit levels were only $12 million below year-end 2022, which has allowed us to avoid adding more costly borrowings and broker deposits. Regulators have generally frowned on continually funding loan growth through broker channels. Our business model has allowed us to avoid that formula, which we believe speaks to the strength of our franchise. While some customers have moved money to higher-yielding options, such as short-term treasuries, our banking teams have been able to replace that funding with new relationship-based deposits. We remain focused on our key strategic initiatives of improving our balance sheet mix, optimizing our branch network, and enhancing our technology as we manage for long-term success. With that in mind, in the second quarter, we added a deposit gathering team to our Rockville center market and celebrated the relocation of three legacy branches. Our branch optimization plan has resulted in the closing of 14 branches since 2020 and the relocation of four others. After a decade of rapid branch expansion, the current management team is getting the right number of branches in the right locations with the right people. In October, we plan to roll out upgrades to our business online banking, including a new business mobile app. And our branches? and back office will also see significant efficiencies from new systems. Our loan pipeline was $135 million at the end of the second quarter, an increase from $96 million reported last quarter that reflects new commercial opportunities from the recent disruption in the market. Our pipeline could be higher, but we have passed on several Cree deals that did not offer an acceptable spread over the cost of new borrowings at over 5%. Our lending focus is meeting the needs of our current relationships and pursuing new commercial relationships with deposits attached. Our earnings release refers to originating loans of $76 million with a weighted average rate of just under 6% during the second quarter. Please note that is the outstanding amount at quarter end. Given the fact that certain originations are lines that were not fully drawn at quarter end, the all-in number is higher. Total originations for the quarter were 101 million with a gross weighted average rate of 6.32%. As expected from First National Bank LI, credit quality continues to be excellent with non-accruals again at zero at the end of the second quarter. Jay McHoney will now discuss our financial results for the quarter.

Jay? Thank you, Chris. Good afternoon, everyone. As discussed last quarter, the bank completed two balance sheet repositioning transactions in March of 2023. The purpose of the two transactions was to help reduce the bank's liability-sensitive position to rising rates. To briefly recap, the first transaction was a $300 million interest rate swap that converted fixed-rate residential mortgage loans the floating rate for a period of three years. The bank pays a fixed rate of 3.82% and receives a floating rate based on the SOFA overnight rate. This transaction provided an additional $765,000 of interest income and helped increase our margin by seven base points in Q2 2023. In the second transaction, the bank sold $149 million in fixed rate municipal securities, earning a tax equivalent yield of approximately 3.32%, and purchased $135 million of floating rate SBA securities with a projected yield of approximately 5.38 over the life of the bonds. This transaction increased securities income by approximately $900,000 in the second quarter when compared to the first quarter of 2023. In total, these two transactions improved interest income by $1.7 million in the second quarter of 2023. These two transactions also increased the amount of securities and loans that repriced within one year to $832 million, or 20% of total assets, on June 30, 2023. We also anticipate approximately $90 million in quarterly cash inflows from both the securities and mortgage loan portfolios, which will be reinvested into new assets at current market rates over the next 12 months. Quarterly cash inflows represents approximately 8% of total assets on an annualized basis. The bank purchased approximately 36 million in securities with an average yield of 5.23% during the second quarter. Management will continue to add various government agency securities with higher yields and some rate lock protection over the next several quarters. These proactive steps taken by management have slowed the pace of decline in net interest margin from 40 basis points in the first quarter to 17 basis points in the second quarter. By a slow pace, margin client will likely continue through the second half of 2033 and potentially into early 2024 unless the Federal Reserve reduces short-term rates and the yield curve begins to steepen again. On the funding side of the balance sheet, total deposits have remained very stable at approximately $3.4 billion in 2023. The mix of deposits has changed with approximately $100 million moving from non-interest-bearing demand deposits to interest-bearing deposits as customers seek higher rates. This shift increased the average cost of funding on interest-bearing deposits by 112 basis points to 2.17 percent when comparing the second quarter of 2023 to the fourth quarter of 2022. The bank's cumulative deposit beta on non-maturity deposits was approximately 34 percent through June 30, 2023, which is close to our historical average in a rising rate environment. However, since both the pace and size of increases has not been seen in over 40 years, our deposit status could be higher in this rising rate cycle, especially given the fact that the Federal Reserve has indicated there could be additional rate hikes in 2023, and that rates could remain elevated well into 2024. The bank's total wholesale funding, including broker deposits, was $559 million, or 13 percent of total assets, at June 30th, and had a weighted average cost of funds of 4.49 percent and an average maturity of nine months. In addition, the bank has 330 million in retail time deposits that mature over the next 18 months with an average cost of funds of 3.67. As this funding matures, it could result in some additional upward cost pressure in each of these categories. The bank's uninsured and uncollaborated deposits were 38 percent of total deposits on June 30th, the same percentage as on March 31st, 2023. If bank continues to have ample liquidity, we maintain $1.4 billion in collateralized borrowing lines with the Federal Home Bank of New York and the Federal Reserve Bank. We also have $173 million in unencumbered cash and securities. In total, we have approximately $1.6 billion of available liquidity, which is well in excess of our uninsured and uncollateralized deposits. The bank had a net income of $6.9 million and earnings per share of $0.31 for the second quarter of 2023, compared to $12.5 million, or $0.54 per share, for the same period, 2022. The bank's return on assets and equity were 66 base points and 7.44% respectively. The decline in net interest income continues to be caused by the Fed Reserve's aggressive monetary policy, which has increased short-term rates by 550 base points and caused further inversion of the yield curve. The spread between a three-month and a 10-year U.S. bond is currently inverted by approximately 140 base points. The bank's interest expense increased $13.1 million when compared to the second quarter of 2023 to the same quarter last year and was only partially offset by a $5.2 million increase in interest income. The bank's quarterly non-interest income was $2.7 million, which was consistent with expectations. The current run rate should continue throughout 2023. Bank's non-interest expense was $16.5 million during the second quarter, flat when compared to both the linked and prior year quarter. We expect non-interest expense to remain near the current level for the remainder of 2023. Management is very mindful of expense control given the current environment and is making every effort to keep the run rate steady or decreasing as we move forward. Bank's efficiency ratio was 64.3% for the six-month end of June 30, 2023, up from 49.4% the prior year. This increase is mostly attributable to a decline in net interest income. The bank's ratio of non-interest expense to average total assets remain fairly flat at 1.57 and 1.52 for the six months ended June 30th, 2023 and 2022, respectively. Our capital position remains strong with a leverage ratio of 10.11% on June 30th, 2023 an increase of 17 base points from 9.94 on March 31st, 2023. Bank did not repurchase any shares during the second quarter of 2023. We still have approximately $15 million authorized under the most recent Board-approved stock repurchase plan. Bank declared its quarterly cash dividend of 21 cents to shareholders on June 30th, 29 of 2023. The Board of Management continued to evaluate dividends and repurchases to provide the best opportunity to maximize shareholder value. Bank's effective tax rate decreased to 13.8% in the second quarter of 2023 from 19.81 in the second quarter of 2022. The decline in the 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 and bank-owned life insurance. We anticipate our tax rate for 2023 to be between 11 to 13%. With that, I turn it back to our operator for questions.