The First of Long Island Corporation (NASDAQ: FLIC) recently reported its Q1 2024 earnings, and while the headline numbers tell a story of margin compression and tepid loan growth, a deeper dive into the transcript reveals a subtle but potentially significant shift in the bank's approach to capital management. This shift, largely unnoticed by analysts, hints at the possibility of a dividend cut in the not-so-distant future.

Throughout the call, management emphasized their commitment to returning to historical performance metrics. This sentiment, while seemingly benign, takes on a different tone when viewed against the backdrop of the bank's recent dividend history. The First of Long Island boasts an enviable streak of annual dividend increases, a streak deeply ingrained in its investor narrative. However, this commitment to growth, while attractive in good times, can become a burden when earnings falter, as they have in recent quarters.

The transcript subtly hints at this growing tension. While reaffirming their commitment to paying a quarterly dividend, management repeatedly emphasizes a "quarter-by-quarter" approach, a stark departure from their previous pronouncements of annual increases. This shift in language suggests a newfound pragmatism, a willingness to deviate from tradition if circumstances demand it.

Adding fuel to this speculation is the bank's status as a national bank, which, as Chris Becker (President and CEO) explains, imposes restrictions on the amount of money that can be dividended up to the holding company based on retained earnings. This regulatory constraint, combined with the bank's projected lower earnings in the first half of 2024, further tightens the noose on the dividend.

"Chris Becker: "I think we've talked before that as a National Bank, we do watch our dividend ability to dividend money up to the holding company based on the prior two years retained earnings in the current year. So we do monitor that also. So that's also something that could be a little bit of a governor on how much money we dividend up to the holding company. So that's why it's kind of a quarter-by-quarter item that we have to consider." - Q4 2023 Earnings Call Transcript"

Consider this: The First of Long Island paid out $9.46 million in dividends during Q1 2024, a significant portion of its $4.43 million net income. While share buybacks are back on the table, management remains non-committal, offering no concrete guidance on the size or timing of any potential repurchase activity. This leaves the dividend as the primary outlet for capital deployment, potentially exacerbating the strain on earnings.

Net Interest Margin Projections

The bank projects its net interest margin to bottom out over the next two quarters. While margin expansion is anticipated in the second half of the year, contingent on the Fed's actions, the extent of the recovery remains uncertain. This uncertainty, coupled with the bank's cautious approach to loan growth, raises concerns about the sustainability of the current dividend payout.

The First of Long Island is not alone in facing this dilemma. Many banks, particularly those with high dividend payout ratios, are grappling with the challenge of balancing investor expectations with the realities of a compressed margin environment. While a dividend cut remains a possibility, it is not a foregone conclusion. The bank's strong capital position provides a buffer, and management's commitment to expense control could mitigate some of the earnings pressure.

However, the transcript's subtle shift in tone, the bank's regulatory constraints, and the looming uncertainty surrounding the margin recovery all point to the possibility of a dividend cut. Investors, accustomed to the bank's consistent dividend growth, may be in for a rude awakening if management chooses to prioritize financial flexibility over preserving its long-standing streak.

Key Financial Data (Q1 2024)

The First of Long Island, known for its iconic clock tower in Melville, Long Island, has long been a symbol of stability and consistent growth. However, the bank's current earnings challenges and the subtle shift in its capital management approach suggest that this image of unwavering stability may be facing its first real test. The coming quarters will reveal whether the bank can navigate this turbulent period while maintaining its dividend streak or whether tradition will give way to a more pragmatic approach to capital management.

"Fun Fact: The First of Long Island Corporation's stock has been publicly traded since 1995, providing investors with nearly three decades of access to the bank's performance and growth story."