First of Long Island: Beaten-Down Bank Is Attractive (NASDAQ:FLIC)

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The First of Long Island Corporation (NASDAQ:FLIC) is a regional bank that we covered in August. We felt that the bank was a buy if shares dipped under $20. After a horrific September, shares of the bank could be scooped up now for $17-$18.

We think this is a very attractive level. In general, we really like regional banks, and have recommended a bevy of stocks in the space in recent weeks. We have high conviction here. Very high conviction in fact. We believe these banks will flourish the next few years, especially as we emerge from what we think will be a mild recession, if one even happens. The risk here is that we are wrong and recession is severe and it destroys loan demand while also causing high levels of loan defaults. We just do not see this in the cards.

The market has bid these stocks down, and we are taking the contrarian side of the trade and buying because we are still seeing these banks grow, including expanding their loan portfolios in this higher-rate environment. The rate hike cycle is nearly complete. All new loans will have much higher rates attached to them, and recurring net interest income should increase for many quarters. While decreases in originations could hurt non-interest income in the short-term, we view this as a temporary phenomenon. We still think shares can be bought, and you can be paid a nice 4.5% yield to wait for the rebound.

In this column we check back in on the stock, as it has just reported earnings. Let us discuss the key metrics that we follow for regional banks to get a sense of how the company is doing, with rates having moved substantially higher the last few months.

First of Long Island Q3 2022 headline performance was strong

The company has grown its deposit base since the start of the year, and has seen its loan portfolio expand as well. The rising rates thus far have not slowed business. As a result of better net interest margin on more loans, The First of Long Island bank saw revenues beat expectations. The revenues also increased from a year ago. In Q3 2022, The First of Long Island reported $33.3 million in revenues. This was up from the sequential Q2 2022 quarter’s $32.7 million. In addition, The First of Long Island registered a 13.0% increase year-over-year on the top line. This was well above the estimates for $32.9 million.

Thus far, the Q3 reports of banks we have examined have largely outperformed expectations. Some banks have seen mixed performances, but that is the beauty of regional banks. You see, they reflect the economic activity in their areas, and that does not always jive with what is happening on the national scene. Long Island has seen a resurgence since emerging from COVID-19. It has taken longer (in our opinion) than other places in the country. That said, business is strong for this bank.

Now, that said, most banks are setting up for some delinquencies. So, while there was a big improvement on the top line, the company has upped its provisions for credit losses, which weighs on the bottom line. Through the first three quarters of 2022, the provision for credit losses increased $5.3 million from the credit of $3.1 million in the same 2021 period. Why? The bank is preparing for some losses due to the threat of the economy softening. Some of this was also due to the fact that there are simply more outstanding mortgage loans that have been given, but a lot of it is simple preparation “just in case” things worsen.

Now, unlike most banks, this one saw non-interest income increase, coming in at $887,000. Much of this was from a one-time transition payment stemming from conversion of retail brokerages. The real story is in net interest income. It is surging. It is due entirely to higher rates on new loans. All told, net interest margin for the first nine months of 2022 was 2.95% versus 2.70% for the 2021 period. That is solid growth. Net interest income grew by $8.5 million, or 10.7%. It led to a great bottom line. Net income widened from last year and was flat from Q2 2022. It came in at $12.5 million and increased $1.1 million, or 9.6%, from $11.4 million a year ago. This led to EPS of $0.55 this quarter, up $0.07 from last year, and up $0.01 per share from Q2 2022. Winning. We fully expect net interest income to continue to improve moving forward.

First of Long Island’s loans and deposits both grew

We love to see expanding loan portfolios as well as more deposits being taken in. There is a lot of competition for deposit dollars right now between banks. The average balance of loans increased $283.9 million, from Q3 2021 to $3.3 billion. Commercial mortgages continue to grow significantly since a year ago. As we mentioned, anecdotally having been there a few times this year, we can tell you that Long Island is booming again. Businesses are reopening and tourism is strong. Now, unlike a lot of banks we look at, deposits increased. Total deposits since the start of the year increased from $3.32 billion to $3.59 billion this year. Many banks are seeing declines since the start of the year. There was a very slight decline from Q2 on this metric however. The good news was that non-interest bearing deposits increased, helping the spread. With the threat of higher rates hurting borrowers and the economy, along with higher provisions for credit losses, we have to wonder about whether asset quality has declined.

First of Long Island’s asset quality

We love to see higher loan balances, but as the bank widened its provisions, we need to closely keep an eye on asset quality metrics. The bank has seen improvement here, folks. The allowance for credit losses to total loans was just 0.94% at the end of Q3 2022, and this was about flat from Q2 and was an improvement from the start of the year. Once again, nonaccrual loans, troubled debt restructurings, as well as loans past due 30 through 89 days still remain at low levels as well.

The return on assets improved to 1.14% from 1.08% a year ago. Further we saw the return on equity improve. It came in at 12.84% from 10.71% last year. These improvements are welcomed, but we will say these key metrics dipped ever so slightly from Q2’s 1.18% and 12.94% for return on assets, and equity, respectively. Provided there is not economic collapse, both of these key metrics should improve in 2023 as rates rise and the net interest spread widens.

Buybacks and a nice dividend

In Q3 the bank repurchased $4.1 million of stock, or nearly 210,000 shares. We like this because it boosts shareholder value and EPS power. Buybacks were a reason that EPS expanded to $0.55 from $0.54 per share despite the same net income in Q3 vs. Q2. As a reminder the company recently increased its dividend to $0..21, following a long line of increases. Based on the present share price of $18.10, the stock yields nearly 4.5%. We believe that this is a very handsome payout while you are paid to wait for this regional bank stock to rebound

Wrapping up

Despite what looks like a macro environment that would put pressure on the bank, we see that The First of Long Island Corporation’s key metrics are largely improving since a year ago and the start of 2022. Like many other banks, there is an increase in loan loss provisions. But Long Island’s local economy is booming again. We have seen growth in loans and deposits. Asset quality is strong. Finally, we love the shareholder-friendly buybacks and dividends. We rate The First of Long Island Corporation stock a buy.

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