ALPIB - Alpine Banks of Colorado: A Robust Performance

2023-10-04 10:01:00 ET

Summary

• Alpine Banks of Colorado reported a decrease in net interest income and net interest margin in the second quarter.
• The bank saw an increase in non-interest expenses, mainly due to higher salaries.
• The loan book has expanded, but a detailed breakdown of loans past due and non-accruing loans is not available.

Introduction

Despite only having an OTC listing, Alpine Banks of Colorado ( ALPIB ) is a pretty decent-sized bank with in excess of $6B in assets and a market capitalization of in excess of $400M. As it has been a year since I last discussed the company , I felt it was time for an update.

Pressure on the net interest income weighs on the profitability

During the second quarter, Alpine Banks of Colorado reported total interest income of $68.4M , which is an increase of approximately $5M compared to the first quarter of this year. Unfortunately interest expenses increased at a faster pace as they almost doubled to just over $19M, resulting in a net interest income of $49.4M. While that's about 1% higher than in the second quarter of last year, it does represent a QoQ decrease of approximately 8% and it goes without saying this had an impact all the way to the bottom line. The net interest margin decreased from 3.52% in Q1 to just 3.15% in Q2 so there definitely has been a margin deterioration.

The total non-interest income increased by $0.2M, but on the other side of the equation the total amount of non-interest expenses increased by $2.8M, mainly due to higher salaries. The combination of all this resulted in a pre-tax and pre provision income of $17.7M. Fortunately Alpine Banks of Colorado has traditionally been able to keep its loan loss provisions relatively low and the second quarter of the year was no exception: The bank set aside $0.4M for provisions and this resulted in an actual pre-tax income of $17.3M and a net profit of $14.6M.

This resulted in an EPS of $0.90 for the B-shares. As a reminder, there are two classes of shares. The just over 52,300 outstanding A-shares have voting rights while the B-shares (which are the ALPIB shares discussed in this article) have no voting rights. There are 8.51 million B-shares outstanding but considering the A-shares were not subject to the 150:1 stock split completed by ALPIB a few years ago, they're still worth 150 times the B-shares.

That’s why the pro forma share count consists of 8.51M B-shares plus 150 * 52,363 = 7.85 million A shares for a combined pro forma share count of 16.36M shares.

The bank currently pays a quarterly dividend of $0.20 per B-share and that dividend obviously is still very comfortably covered.

Unfortunately the bank does not provide a detailed overview of its loan book as it only publishes a more detailed breakdown in its annual reports. As you can see below, at the end of 2022, the loan book mainly consisted of real estate related loans, and although residential real estate represented the highest portion of the loans, Alpine Banks of Colorado also has a relatively high exposure to commercial real estate and I would have loved to see a more detailed update on that. So just to be very clear - the breakdown below represents the situation at year-end 2022.

This means I also would like to see an updated breakdown of loans past due and non-accruing loans. At the end of 2022 , ALPIB’s loan book looks very robust as only $6M of the almost $4B in loans were past due and less than 0.10% of the loans were on a non-accrual status.

Since the end of last year, the loan book has further expanded and Alpine Banks of Colorado ended the first semester with a $4.04B loan book. While that’s approximately $100M higher than the total size of the loan book at the end of Q1, the total amount of assets on the balance sheet decreased as the higher loan book was compensated by a lower cash position and a $37M reduction in the size of the securities portfolio.

Looking at the liabilities side of the balance sheet, the total equity value was $435.5M which is lower than the $436.2M one quarter earlier. The decrease is rather easy to explain, despite the in excess of $10M in retained earnings generated during Q2. The image below shows the total share count has decreased from 8.51M shares to 8.33M shares during the second quarter, which means the bank repurchased almost 170,000 shares. I'm not thrilled with that approach as less than one year before Alpine Banks issued almost 1.2M new shares at $28.50 during a capital raise.

While it theoretically is a good move to buy back stock at a discount to the issue price less than one year before it also signals the capital raise (or at least the size of the capital raise) last year perhaps wasn’t necessary.

Dividing the $435.5M in equity over the 16.36M shares outstanding results in a book value of $26.6 per share. After deducting the $17.6M in goodwill, the tangible book value per share came in at roughly $25.5 at the end of the second quarter.

Investment thesis

There are plenty of regional banks that are trading at attractive multiples and Alpine Banks of Colorado definitely is one of them. I will keep an eye on the net interest income performance in the next few quarters as the NII and NIM in the second quarter was a bit weaker than I had expected. It also is a pity we have to wait for the annual report to be published to get a better look under the hood when it comes to the loan book as I would like to see if there has been a sharp increase in the total amount of loans past due and/or non-accruing loans.

I'm watching the stock with interest as the earnings multiple (8) and the price to Tangible Book Value (1.05) is pretty attractive. The dividend yield is low at just around 3%, but the payout ratio based on the Q2 results was less than 25% and the remainder of the earnings are retained on the balance sheet (and/or used to buy back stock).

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