First Of Long Island: Above Average Bank At A Below Average Price (FLIC)

2023 has kicked off with a whimper for stocks, and regional banks continue to offer some of the best deals on the market today. In an effort to gain more customers, regional banks have been introducing innovative platforms that offer a variety of conveniences and services.

These include online and mobile banking, as well as attractive interest rates on loans and savings accounts, thereby attracting customers from larger banks like JPMorgan Chase (JPM) and Bank of America (BAC).

This brings me to First of Long Island (NASDAQ:FLIC), which as shown below, is down materially over the past 12 months, falling by 17%. In this article, I highlight why FLIC is a worthy income and growth stock at its current level, so let’s get started.

Why FLIC?

First of Long Island Corp. is a local bank that was founded nearly a century ago in 1927 in Glen Head, New York, and primarily serves customers on Long Island and in New York City, with 41 branch locations.

FLIC is known for having steady and growing results through a conservative management practices, and this is reflected by its track record of paying an increasing dividend for over 20 years, including during the Great Financial Crisis of 2008-2009. In addition, FLIC has a strong revenue growth track record over the past 10 years. As shown below, FLIC has nearly doubled its revenue over this timeframe.

Meanwhile, FLIC continues its track record of growth, with net income growing by 9% YoY in the first nine months of 2022. Higher interest rates played a strong hand in this growth, as net interest income grew by 11% during this timeframe.

Moreover, FLIC is seeing loan growth as well, with average loans outstanding rising by $284 million since the end of 2021 to $3.3 billion. This was driven in large part to a robust third quarter, during which FLIC originated $130 million of loans with a weighted average interest rate of 4.5% and earned a respectable return on equity of 12.8%, sitting above the 11.7% among FLIC’s nationwide peers.

Notably, FLIC maintains a strong efficiency ratio (calculated as total operating expenses divided by total revenues) of close to 50%, sitting well below the 62% nationwide average, and loans on nonaccrual remain at very low levels close to 0%. FLIC also maintains a reasonable amount of leverage, with a Tier 1 Capital Ratio of 9.75%, sitting comfortably above the 6% minimum requirement.

Looking forward, FLIC continues to make investments in technology to enhance its payments and online banking platform. This is supported by the recent signing of a contract with leading global fintech firm, Fiserv (FISV), as highlighted during the recent conference call:

We signed a new 7-year contract with our primary technology service provider, Fiserv Inc., which includes our core conversion to their DNA solution. The conversion project kicked off in September 2022 and is anticipated to be completed in October 2023. We believe this investment will provide the best available technology to our customers today and the open architecture for future enhancements.

Importantly for income investors, FLIC currently pays a respectable 4.6% dividend yield that is well covered by a 40% payout ratio. It also has a 5-year dividend CAGR of 7.2% and has a dividend growth history that spans over 2 decades.

Near term risks to FLIC include potential for lower mortgage demand amid higher interest rates. However, mortgage rates have trended down in recent months, as shown below, and this should bode well for new homeowners and existing homeowners looking to make a switch.

Moreover, Freddie Mac this month indicated the potential for continued easing of mortgage rates this year as follows:

Mortgage application activity sank to a quarter century low this week as high mortgage rates continue to weaken the housing market. While mortgage market activity has significantly shrunk over the last year, inflationary pressures are easing and should lead to lower mortgage rates in 2023.

Homebuyers are waiting for rates to decrease more significantly, and when they do, a strong job market and a large demographic tailwind of Millennial renters will provide support to the purchase market. Moreover, if rates continue to decline, borrowers who purchased in the last year will have opportunities to refinance into lower rates.

Meanwhile, FLIC appears to be value-priced at $18.46 with a forward PE of just 8.8, sitting well below its normal PE of 14.2. Analysts have a conservative average price target of $20, which could still translate to a one-year total return of 13% including dividends.

Investor Takeaway

FLIC is a well-managed community bank that has weathered through economic cycles with strong revenue growth, and is benefiting from higher rates with increased net interest income. While higher rates could potentially provide headwinds to loan growth, there are signs that mortgage rates are moderating.

Moreover, FLIC appears to be making the right moves by investing in new technology and continues to demonstrate strong efficiency. Given the above and FLIC’s track record, I view the stock as being attractively priced at its current well-below average valuation for long-term income and growth investors.