2023-08-01 15:41:06 ET
Summary
- Upgrading First National Bank Alaska from hold to buy.
- Yield now 6.6%.
- Regional banking has been a tough space.
- Deposit outflows have slowed, loans are growing.
- Asset quality remains healthy.
We continue our regional banking coverage today, looking for signs of contagion stemming from the Federal Reserve's rate hiking campaign and the negative impacts to smaller banks. One high-yield bank that we previously had a neutral rating on was First National Bank Alaska ( FBAK ). We now see it as a buy on valuation and for income following the decline in shares to about $190 here.
The company pays a $3.20 quarterly dividend, which is 6.6% annualized. There is opportunity for share appreciation as well from these levels longer-term as the rate hiking campaign from the Fed draws to a close and things stabilize. Tourism has returned to Alaska, and many parts of the world. We think you get paid to wait, and the bank's metrics largely remain healthy in the just-reported second quarter . Let us discuss.
First National Bank Alaska Q2 revenue growth
First National Bank Alaska's operational results were similar once again to the overall trends we have seen with other regional banks. EPS gained on the back of continued loan growth, but notably, the bank saw revenues continue to improve. With Q2 2023 revenues of $43.7 million, the bank put up a nice 3.4% increase in this key metric year-over-year. This growth was welcomed, and margins, while hit by a rising cost of funds, remain strong.
Earnings power in Q2
Revenue growth helped fuel earnings power. Net income for Q2 2023 was $14.5 million, or $4.57 per share. This compares to net income of $14.5 million, or $4.54 per share last year. While this is down from the highs seen in recent quarters, this is still 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. Year-to-date net income was $27.9 million, or $8.81 per share, compared to net income of $28.2 million, or $8.91 per share in the comparable periods. While higher rates are leading to more income on loans made, the cost of deposits has weighed on margins a bit. However, margins were up versus a year ago to 2.77% from 2.62% last year, although margin is down from 2.84%.
First National Bank Alaska Q2 book value
Book value got slammed in 2022 with rising rates, but book has started to come back in 2023. Book value per share as of June 30, 2023 was $133.97, compared to $128.69 at the start of the year. We previously wanted to see this stock pull back to $200 or lower, which we viewed as unlikely, but we are here now, and see the stock as a buy, particularly with the 6.6% yield as you are paid to wait
Loans and deposits in Q2
We were once again pleased with the progress on loans and deposits we are seeing here. Let us be clear, growth in loans and deposits is key for any bank, small or large. The problem was that many regional banks have experienced deposit outflows. The outflow of deposits slowed in Q2, a very positive sign. Further, loans grew.
Total loans were $2.29 billion, rising $123 million from a year ago. The bank continued to see real estate loan growth, despite the economic uncertainty. Further, deposits grew in the last year. Second quarter net deposit outflow of $144.3 million was lower than the first quarter. Year-to-date net outflow totaled $378.7 million, and total deposits are still a healthy $4.5 billion. The margin strength was impressive, as many banks have seen significant reductions in margins, First National Bank Alaska's 2.77% is strong, only dipping 7 basis points. While the yield on loans is up, the cost of funds is up, too, but the bank has not seen a huge deterioration, and as such, asset quality remains strong.
Asset quality in Q2
Loan growth is a strength, but only if they are quality loans, as we say. Asset quality metrics were mixed but overall healthy. The return on assets was 1.01% down from 1.03% last year. The return on equity improved to its highest level in a year at 13.29%, in part due to valuation, but was up from 11.49% a year ago. However, there was an improvement in less delinquent loans. Delinquent loans from 30 to 89 days were $3.9 million, 0.17% of outstanding loans, a decrease of $0.9 million a year ago, or 0.23% of all loans. Nonperforming loans were $4.8 million, 0.21% of outstanding loans, a decrease of $1.6 million from last year. The allowance for credit losses on June 30, 2023, was $18.9 million, 0.82% of total loans. Finally, the efficiency ratio is a healthy 55.45%.
Take home
Overall, this was a mixed quarter for First National Bank Alaska, but largely better than expected. While the outlook and economic picture is not clear, this bank has managed through many economies. We like buying this stock for income here. When we look at loans, deposits, and asset quality, we think now is the time to start building a position here.
For further details see:
First National Bank Alaska: Time To Buy For Income (Rating Upgrade)