First of Long Island - A Fair Deal At 1.15x Tangible Book Value

Mar. 23, 2022 12:58 PM ETThe First of Long Island Corporation (FLIC)5 Likes
Mark Dockray profile picture
Mark Dockray
898 Followers

Summary

  • First of Long Island has historically been a pretty dependable bank, rating highly on efficiency and asset quality.
  • Loan growth has been weak recently while the bank's liability-sensitive balance sheet means it won't benefit in the short term from rising interest rates.
  • That said, the valuation compensates for this, with the stock currently trading for around 1.15x tangible book value and 11x 2022 EPS estimates.

Montauk Point Light, Lighthouse, Long Island, New York, Suffolk

Meinzahn/iStock via Getty Images

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.

First of Long Island stock price
Data by YCharts

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.

A Very Brief Overview Of The Bank

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.

A Historically Solid Operator

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.

First of Long Island Efficiency Ratio

Author calculations using data from company 10-Ks

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.

First of Long Island Asset Quality Data 2011 to 2021

First of Long Island Non-accrual Loans Data (2011 Form 10-K)

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.

A Tough Year In Fiscal 2021

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.

The Outlook

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.

This article was written by

Mark Dockray profile picture
898 Followers
I like to take a long term, buy-and-hold approach to investing, with a bias toward stocks that can sustainably post high quality earnings. Mostly found in the dividend and income section. Blog about various US/Canadian stocks at 'The Compound Investor', and predominantly UK names on 'The UK Income Investor'.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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