First National Bank Alaska Stock: High-Yield Bank Stock (OTCMKTS:FBAK)

For the last month we have been encouraging our members to buy financials on pullbacks, as rising interest rates in our opinion are more of a benefit medium-term to banks’ possible earnings compared to the possible reduction in near-term loan demand. The Federal Reserve is continuing to raise rates to combat inflation, and the job is not done yet. These rate hikes have hammered markets this year. But as banks continue to report Q3 earnings, they have largely been much better than expected and are showing the positive impacts of higher rates, particularly as net interest income is concerned. Regional banks in particular are some of our favorites. One high-yield bank that we like here is First National Bank Alaska (OTCQX:FBAK).

We really like the setup here as tourism has returned to Alaska. It is a unique region, and this bank will pay you 5.2% on your money to wait for operational improvement, or an overall stock market rebound. We like buying it here down to $200 for a long-term investment. The major concern right now is that all of the Fed pressure will lead to a recession and that will hurt banks. We are seeing loan loss provisions building in the sector, given the economic woes, but we like a buy in the stock based on the performance, and of course that dividend for income. Let us discuss.

First National Bank Alaska revenue growth

Like many other names we have covered, the bank’s operational results shared similarities in the trends we have seen with other banks. EPS gained on the back of continued loan growth and deposit strength, but notably the bank saw revenues continue to improve. With Q3 2022 revenues of $43.3 million, the bank put up a nice 5.7% increase in this metric year-over-year. This growth was welcomed, and margins are strong as well. We saw a respectable performance on earnings. This comes despite oil production in the area which has declined over the years, especially under a democratic administration.

Earnings power in Q3

We loved to see revenues grow which helped fuel earnings power. Net income for Q3 2022 was $15.7 million, or $4.94 per share. This compares to net income of $14.4 million, or $4.55 per share last year. That is pretty stellar performance. What about so far in 2022? Well performance is higher than 2021 in the first nine months so that is good too. Year-to-date net income was $43.9 million, or $13.85 per share, compared to net income of $42.1 million, or $13.28 per share for the first nine months of 2021. We think 2022 will be even better based on the trends we are seeing for banks, particularly the higher rates leading to more income on loans made.

First National Bank Alaska Q3 book value has fallen hard

One trend we have seen in a lot of regional banks is the decline in book value. Book value is down huge here due to securities held for sale, and their value has been hammered with rising rates. We would really like the stock if it pulls back toward the $200 level, as we expect book value starts to rebound in 2023 as rates stabilize. While a stock pull back to $200 is highly unlikely, we would be strong buyers at that level as the stock’s value proposition would be extremely attractive.

The bank’s stock is nearly 2X book now as book value fell to $126 and shares are at $246. That said, other key indicators we watch have shown improvement.

Loans and deposits grow for First National Bank Alaska in Q3

We are 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. You take in deposits at a low interest rate, and lend at a higher one. We have said it before and will say it again. This model has been working for centuries and will continue to do so well into the future, and the best banks are seeing widening margins.

Total loans were $2.2 billion rising $42 million from a year ago. Bucking national trends, the banks saw strong real estate loan growth. Further, deposits grew in the last year. Deposits and repurchase agreements increased $82 million this year to $5.1 billion. These results should be considered a strength. However, we were disappointed that margins narrowed when most banks are seeing widening margins. While the yield on loans is up, the cost of funds is up too. Net interest margins of 2.63% is down from 2.88% to start the year. Ouch.

Asset quality trends improve in Q3

So results have been mixed so far. Loan growth is a strength, but only if they are quality loans. Asset quality metrics are also mixed here. The return on assets was 1.05% down from 1.11% through the year. That was a negative, as was the bump in delinquent loans. Delinquent loans from 30 to 89 days were $0.7 million, 0.03% of outstanding loans, an increase of $0.6 million from the start of 2022. While this increased, nonperforming loans were $5.8 million, 0.27% of outstanding loans, a decrease of $11.8 million from the start of the year The allowance for loan losses at September 30, 2022 was $19.0 million, or 0.88% of total loans, down tremendously from 1.08% to start the year. Finally, the efficiency ratio improved from Q2 to a solid 53.76% from 53.91%. So, the measures are mixed, some good, some bad.

These results are about in line with many other banks we follow. We like what we see here from First National Bank Alaska overall, but think shares need to pull back some.

Bottom line

This was a mixed quarter for First National Bank Alaska. When we look at loans, deposits, and asset quality, the patterns followed the trends of some similar banks that are improving, though asset quality was mixed. With a dividend yield of nearly 5.2%, it is interesting, but let it pull back first.