2023-10-31 16:22:44 ET
Summary
- First National Bank Alaska Q3 results showed strong sequential increase in net income and improvement from Q2.
- Book value per share continues to show strength and has been recovering in 2023.
- Deposits and loans both grew in Q3, with deposit inflows for the first time in several quarters and real estate loan growth.
- The stock is flat from our call, whereas many in the sector are down significantly in the same time frame.
- First National Bank Alaska has impressive asset quality.
In today's column, we continue our regional banking Q3 earnings coverage. One high-yield bank that we got behind recently was First National Bank Alaska ( FBAK ). Shares are pretty much at the same levels from our buy call, which is just fine by us considering we saw it as a buy on its valuation and for income. To remind you, the bank pays a hefty $3.20 quarterly dividend, which is over 6.6% annualized at these levels.
Despite the pressure banks are seeing on their margins, given the spike in yields causing them to see a surge on their costs of funds, we believe there is opportunity for share appreciation as the rate hiking campaign from the Fed ends. Moreover, banks and consumers, as well as businesses will adjust to a new rate environment, but what really pressures banks is rapidly changing rates. It is hard to contend with, so stabilization around a new normal should help the banks in 2024, so long as we do not slip into a prolonged or severe recession.
We see a mild recession as likely, though there are a lot of coming data reads in the next two months which could adjust this outlook. In terms of this specific regional bank, it still seems that tourism has returned to Alaska and remains robust, while the local economies in the region hum along. We still like the name for income. We are not backing away. In this column, we review the bank's metrics which we believe are robust in the just-reported third quarter . Let us discuss.
Earnings power in Q3 and improvement from Q2
Net income for Q3 2023 was $15.5 million, or $4.90 per share. Folks, this was a strong sequential increase from the $14.5 million, or $4.57 per share in Q2. We like that. However, it is down ever so slightly from the $15.7 million, or $4.94 per share last year. This is a strong performance. What about so far in 2023? Well, performance is a touch lower than 2022 in the first six months due to Q1 weakness. Well year-to-date net income is almost flat from a year ago and has come in at $43.4 million, or $13.71 per share, down from $43.9 million or $13.85 a year ago. While higher rates are leading to more income on loans made, the cost of deposits has weighed on margins a bit, but they expanded from Q2, and this is a critical finding. The stronger banks are already seeing margin stabilization and we count this bank among them. Margins were 2.78%, ticking up one basis point, but enough to argue we have seen stabilization from 2.77% in Q2. And believe it or not, it is an improvement from a year ago when margins were 2.63%. That is a strong result.
First National Bank Alaska Q3 book value
Book value got nailed in 2022 with rising rates, and although they are higher in 2023 as well, book value continues to show strength. Book value has been recovering in 2023. Book value per share at the end of September was $133.68, compared to $128.69 at the start of the year, and down a few cents from Q2. Still a strong result.
Loans and deposits both grew in Q3
We had seen a large outflow of deposits in H1 202az3, but in Q3 we saw deposit inflows for the first time in several quarters, very positive. Total deposits were up $20.1 million and now sit at $4.5 billion. It is positive to see this stabilization as well. Further, total loans grew. Total loans were $2.32 billion, rising $148 million from a year ago. The bank continued to see real estate loan growth, despite the economic uncertainty. Now, it is also key to point out this this was also loan growth from the sequential Q3 of $24 million. The yield on loans increased to 6.08% up from 5.95% in Q2, while the cost of deposits were 0.92%, up from 0.80% in Q2. As such we saw a one basis point expansion in margin. We will closely watch the cost of interest bearing deposits, but do expect that yields on loans continue to increase as more loans are made at higher rates.
Asset quality improves in Q3
We liked what we saw on deposits, on loan growth, and on margin improvement that led to net income growth. What about asset quality? Well, asset quality metrics improved from Q2 as well. The return on assets was 1.04%, up from 1.01% in Q2, but down 1 basis point from a year ago. Still, in this environment, that is strong. The return on equity improved to its highest level in over a now year at 13.76%, up from 13.29% in Q2, and up from 12.56% a year ago.
Compared to Q2 we saw improvement on delinquent loans from 30 to 89 days of $2.2 million, 0.10% of outstanding loans versus 0.17% of all loans. Nonperforming loans were $5.1 million, 0.22% of outstanding loans, and that did tick up from 0.21% of all loans, one blemish on an otherwise strong quarter. But the allowance for credit losses was $18.5 million, 0.80% of total loans and this was down from $18.9 million or 0.82% of all loans. It is also worth noting that we saw another improvement in the efficiency ratio, and this came in at 55.16%, improving 29 basis points from Q2, and the best readout since Q4 2022.
Take home
We are not backing away from this income name. Whereas many regional bank stocks have been crushed since the beginning of August when we got behind First National Bank Alaska stock, this stock is essentially flat, and that is just fine by us as we collect a 6.6% yield to wait. This was a strong quarter for First National Bank Alaska, and largely better than expected. We saw almost universal improvement across the board on the key metrics we follow. Buy it and tuck the stock away. You will be glad you did years down the road.
For further details see:
First National Bank Alaska Q3 Earnings: We're Not Backing Away