Past performance might not be a guarantee for future returns, but a smoothly ascending long-term stock price chart can at least be a sign that you are looking at a decent business.
First of Long Island Corp. (NASDAQ:FLIC) arguably fits that description quite nicely. This New York State-based lender definitely isn't flashy, but it has chugged along quite nicely this past decade, growing earnings, dividends and tangible book value per share at a tidy 6-7% annualized clip. Throw in a decent dividend yield, and it's not been the worst place for a long-term investor to park their cash.
FLIC doesn't have the kind of core deposit franchise I usually look for in a bank, but that's not the be-all and end-all by any means, and it does have a couple of other things going for it. Similarly, this one will not get the positive short-term kick to revenue from rate hikes that other lenders will, but the dividend looks quite nice, and the valuation is similarly undemanding on both a P/TBV and P/E basis. At the very least I feel it's one for value-oriented investors to keep on their radars.
FLIC operates 40 branches in total, mainly in Suffolk County and Nassau County, Long Island, but with a handful of branches spread out across three New York City boroughs (Queens, Brooklyn and Manhattan). Average total assets were around $4.15bn during 2021.
Primarily a real estate lender, FLIC is very much your bread-and-butter bank. Residential mortgages made up almost 40% of the loan book at last count, followed by commercial real estate loans, of which around half are in multifamily loans. Net interest income represents approximately 90% of the bank's revenue.
Absent a funding cost advantage, there aren't all that many ways for banks to set out their stall and differentiate themselves from the pack, especially ones that are dependent on net interest income to the degree that FLIC is. With that in mind, the bank's profitability metrics don't immediately jump off the page, averaging a 10% ROTE these past ten years, which are probably the minimums that you'd want to see from a prospective bank investment.
That said, FLIC has historically been a very efficient operator, with its 10-year average efficiency ratio of ~55% coming in well below the peer group average.
Asset quality has also been a big plus point here - something that is perhaps very easy to overlook outside of recessions. It's one thing to make a lot of money (and therefore also post good profitability metrics) in the good times, but averaging things out across a full business cycle can often help to separate the deceptively attractive from the genuinely attractive.
FLIC does score well on that measure, having breezed through the last global financial crisis with non-accrual loans peaking at just 0.44% of total loans back in 2010. Between 2007 and 2011, incorporating all of the downturn, the bank didn't post an annual return on tangible equity below 11%, increasing its assets in each year in the process.
Like a lot of banks, last year was a little bit mixed for FLIC, with weak loan growth offset by provision-fueled profit growth and, in this case, a bump to net interest spreads from lower interest rates.
The period-end gross loan balance was up $71.6m year-on-year to $3.1bn, good for around 2.4% YoY growth. PPP balances were obviously a headwind, declining over $100m over the course of the year, while C&I was also weak, with balances falling 10% as line utilization remains subdued. Core loan growth was better - coming in at over 7% in 2021, with the performance in the second half of the year much stronger than the first half.
Annual net interest income rose 4.7% to $106.8m, with a fall in interest income more than offset by a larger fall in interest expenses - helped by the fall in interest rates and the subsequent impact on interest-bearing liabilities. Interestingly, the average rate on its loan balance improved 5bps to 3.57%, with management doing a good job on shifting the loan mix toward higher-yielding commercial loans while decreasing the reliance on lower-yielding broker-originated residential mortgage loans.
With its interest-bearing liabilities repricing faster than a large chunk of its securities and loan portfolio, FLIC is liability sensitive. It's not going to see the boost to NII that many other banks will in the current rising interest rate environment, at least in the short run. Indeed, the standard sensitivity disclosure in its latest 10-K had a shock 100bps upward move in rates leading to a 2% reduction in 2022 NII. While these disclosures always need to be taken with a pinch of salt - being more of a guide than a prediction - it does give investors a rough idea as to what to expect in the near term.
The bank's top line won't get a short-term boost from rising rates, then, but it's not all bad news here. Expenses are guided broadly flat this year for one, which at the very least won't be a drag on the bottom line. The bank should continue to post modest reported loan growth, too, with declining PPP balances only representing a slight headwind in 2022 (roughly $30.5m remained on the balance sheet at the end of 2021 versus $140m in 2020).
At the same time, the valuation isn't exactly demanding either. FLIC stock trades for around $20.40 at the time of writing, putting it at just 1.15x tangible book value and around 11x my rough FY22 EPS estimate. The dividend yield is 3.9% based on the latest quarterly payout of $0.20 per share. Given the bank's ROTE and earnings growth profile, that looks like a pretty honest deal - perhaps more so given that cheap banks aren't currently easy to come by.
Sure, the near-term is going to be soft from an earnings perspective, and I'm only expecting flat EPS at best for fiscal 2022. Beyond that, though, I don't see why the bank won't get back to posting mid-single-digit annualized growth. Combined with the current dividend yield, that sets up the prospect of high single-digit annualized returns - not unattractive given where broader equity valuations are right now. Buy.
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