Decisive Shifts And Financial Management Propel Bank Toward Robust Earnings Growth

Key Takeaways

• Shift towards commercial lending and reduction in residential loans underscores a strategic refocus on higher-margin, relationship-based business operations.
  
• Diversification of revenue streams, particularly through noninterest income from service charges and merchant services, indicates improved earnings stability and growth potential.
  
• Diverse challenges such as reliance on commercial lending, potential for increased loan defaults, and anticipation of interest rate cuts could impact future financial stability.

Catalysts

Operates as the holding company for The First National Bank of Long Island that provides financial services to small and medium-sized businesses, professionals, consumers, municipalities, and other organizations.

• Continuously improving financial metrics such as the increase in return on assets, return on equity, and net interest margin suggest strong operational management which is essential for future earnings growth.
  
• The strategic shift in loan portfolio towards commercial lending, evidenced by significant growth in commercial loans and the reduction in residential lending, indicates a focus on more lucrative and relationship-based business, likely enhancing revenue quality and sustainability.
  
• Increase in noninterest income, particularly from service charges on deposit accounts and merchant card services, shows diversification of revenue streams, which is a positive sign for future earnings stability and growth.
  
• Active management of interest rate exposure and the beneficial impact of fixed to floating interest rate swaps on net interest income highlight prudent financial risk management, expected to positively influence net margins in fluctuating interest rate environments.
  
• Indication of rebound in net interest margin through strategic asset-liability management and potential future federal funds rate cuts could result in decreased funding costs and improved earnings capacity in the upcoming periods.

Assumptions

• Analysts are assuming First of Long Island's revenue will grow by 16.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 23.5% today to 37.9% in 3 years time.
• Analysts expect earnings to reach $51.3 million (and earnings per share of $2.24) by about November 2027, up from $19.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.7x on those 2027 earnings, down from 15.4x today. This future PE is lower than the current PE for the US Banks industry at 12.8x.
• Analysts expect the number of shares outstanding to grow by 0.53% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.27%, as per the Simply Wall St company report.

Risks

• The recent slight improvements in financial ratios, such as return on assets and net interest margin, might not be sustainable if unexpected economic downturns or shifts in market conditions occur, potentially impacting future net income and earnings per share.
  
• The reliance on commercial lending and a significant shift from consumer to commercial loans, particularly in a challenging economic environment, could lead to increased default rates, impacting the bank's revenue and net margins.
  
• Exposure to multifamily and non-owner occupied commercial mortgages with upcoming rate resets might result in higher default rates if borrowers are unable to meet the new payment requirements, adversely affecting the bank's credit quality and provision for loan losses.
  
• The steady decrease in branch count while attempting geographic expansion could limit the bank's market reach and customer base growth, potentially impacting deposit growth and overall revenue.
  
• Anticipation of Federal Reserve interest rate cuts could lead to narrower interest rate spreads, making it challenging to improve or maintain the current net interest margin, directly affecting net interest income.

Valuation

• The analysts have a consensus price target of $14.49 for First of Long Island based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $135.3 million, earnings will come to $51.3 million, and it would be trading on a PE ratio of 7.7x, assuming you use a discount rate of 7.3%.
• Given the current share price of $13.57, the analyst's price target of $14.49 is 6.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.