The First of Long Island Corporation (NASDAQ:FLIC) is a bank holding company that operates through its wholly-owned subsidiary, The First National Bank of Long Island. The bank has a long and storied history, having been founded in 1927 and serving the Long Island and New York City metropolitan area for nearly a century. Despite the challenges faced by the banking industry in recent years, FLIC has demonstrated its resilience and ability to adapt to changing market conditions.

Financials

In the fiscal year 2023, FLIC reported annual net income of $26.2 million, annual revenue of $161.6 million, annual operating cash flow of $32.4 million, and annual free cash flow of $29.5 million. These financial results highlight the bank's consistent profitability and strong cash flow generation, which are essential for supporting its growth and shareholder value creation.

During the second quarter of 2024, FLIC reported net income of $4.8 million, a slight increase from the $4.4 million reported in the previous quarter. Earnings per share for the quarter were $0.21, on par with the $0.21 per share dividend declared by the company's Board of Directors. This performance represents a decline from the $6.9 million in net income and $0.31 in earnings per share reported in the same quarter of the prior year.

The primary driver of the year-over-year decline in earnings was a decrease in net interest income of $3.4 million, which was partially offset by a $1.0 million reduction in income tax expense. The decrease in net interest income was largely attributable to the current interest rate environment's impact on the bank's liability-sensitive balance sheet, as the cost of interest-bearing liabilities increased by 151 basis points while the yield on interest-earning assets increased by only 52 basis points.

Strategic Initiatives

However, the company has taken proactive steps to mitigate the impact of the challenging interest rate environment. In March 2023, the bank entered into a three-year interest rate swap with a notional amount of $300 million, which was designated as a fair value hedge of certain fixed-rate residential mortgages. This transaction has contributed $1.2 million to the bank's net interest income in the second quarter of 2024.

Additionally, FLIC has been actively managing its funding mix, with a focus on growing its commercial lending business and increasing the proportion of non-interest-bearing deposits. During the second quarter, the bank's commercial and industrial (C&I) loans and owner-occupied commercial mortgages increased by $27 million and $15 million, respectively, while residential mortgages decreased by $27 million as the bank continued to remix its loan portfolio.

This strategic shift has resulted in an improved funding mix, with non-interest-bearing deposits representing 33% of total deposits as of June 30, 2024, compared to 25% at the end of 2019. The bank's management believes that this focus on commercial lending and deposit mix optimization will help to stabilize the net interest margin and support future earnings growth.

Credit Quality

In terms of credit quality, FLIC's loan portfolio remains strong, with low levels of past due, nonperforming, and criticized loans. During the second quarter, the bank recorded a provision for credit losses of $570,000, primarily due to a $276,000 specific reserve on a single nonperforming multifamily loan and $421,000 in net charge-offs. The allowance for credit losses as a percentage of total loans remained flat at 0.88% compared to the previous quarter.

Outlook

Looking ahead, FLIC's management is cautiously optimistic about the company's prospects, particularly in light of the potential for interest rate cuts by the Federal Reserve later this year. The bank has provided guidance that each 25-basis-point rate cut could improve the net interest margin by 4 to 5 basis points. Additionally, the bank's pipeline of commercial loan originations remains robust, with $137 million in the pipeline as of June 30, 2024, at an average projected rate of approximately 6.75%.

Risks and Challenges

However, the bank is closely monitoring its multifamily and non-owner-occupied commercial real estate portfolios, as a significant portion of these loans are scheduled to reprice in the second half of 2024 and throughout 2025. FLIC has proactively reached out to these borrowers to discuss potential strategies for mitigating any cash flow stress that may arise from the rate resets.

Geographic Footprint

In terms of the bank's geographic footprint, FLIC operates 41 branches covering Nassau and Suffolk counties in Long Island, as well as the boroughs of Manhattan, Queens, and Brooklyn. The bank recently opened a new branch on the North Fork of Long Island, which management believes will complement its existing presence on the East End of Long Island.

Liquidity

From a capital perspective, FLIC remains well-capitalized, with a leverage ratio of approximately 9.9% as of June 30, 2024. The company has a stock repurchase program in place, with $13 million remaining under the current authorization. Management has indicated that they will continue to evaluate the use of capital management tools, such as share repurchases and dividends, to maximize shareholder value.

Conclusion

The First of Long Island Corporation is a well-established community bank that has demonstrated its ability to navigate challenging market conditions. While the bank has faced headwinds in the form of a liability-sensitive balance sheet and the need to manage its loan portfolio in a rising rate environment, FLIC's focus on commercial lending, deposit mix optimization, and proactive credit risk management have positioned the company for potential future success. As the banking industry continues to evolve, investors will be closely watching FLIC's ability to adapt and capitalize on emerging opportunities.