cristinafzger
First National Bank Alaska (OTCQX:FBAK) earnings will likely remain flat this year. Below-average loan growth will likely offer some support to the bottom line. On the other hand, interest rate cuts and subsequent margin compression will likely restrain earnings. growth. Overall, I expect the company to post earnings of $18.88 per share by 2024, almost unchanged from last year's earnings. compared to me latest report As for the company, I haven't changed my earnings estimate much as my outlook is more or less the same. The year-end price target suggests a double-digit increase from the current market price. Furthermore, the stock offers an attractive dividend yield of over 6%, excluding the special dividend. Considering the expected total return, I maintain a Buy rating on First National Bank Alaska.
Loan growth expected to remain below historical average
First National Bank Alaska's loan portfolio declined 1.9% in the final quarter of 2023, leading to disappointing growth of 2.1% for the full year. Last year's growth is below the compound annual growth rates of 3.1% for the past five years and 4.9% for the past eight years.
I think loan growth will most likely remain below the historical average this year due to a difficult operating environment. Alaska's economy relies heavily on the price of crude oil, which has dropped in recent months.
Furthermore, the price of crude oil forward curve remains in backwardation, which is bad news for credit demand not only in the energy segment but also in other segments due to the dependence of Alaska's economy on crude oil.
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Additionally, Alaska's economy has worsened in recent months, as shown by the matching economic index.
The state's unemployment rate has also worsened lately, which bodes poorly for loan growth.
Taking these factors into account, I expect the loan portfolio to grow 2.0% in 2024. Additionally, I expect most other balance sheet items to grow in line with loans. The following table shows my balance sheet estimates.
| Financial situation | Fiscal year 2019 | Fiscal year 2020 | FY21 | FY22 | FY23 | Fiscal year 24E |
| Net Loans | 1992 | 2,190 | 2,104 | 2,208 | 2,256 | 2,301 |
| Net loan growth | 2.9% | 9.9% | (3.9)% | 4.9% | 2.1% | 2.0% |
| Other productive assets | 1,589 | 2,391 | 3,356 | 2,886 | 3,291 | 3,357 |
| Deposits | 2,388 | 3,113 | 4,217 | 4,225 | 3,780 | 3,856 |
| Full responsibility | 3,261 | 4,109 | 5,027 | 4,930 | 5,266 | 5,371 |
| Common equity | 548 | 587 | 555 | 408 | 465 | 474 |
| Book value per share ($) | 172.8 | 185.2 | 175.1 | 128.7 | 146.8 | 149.7 |
| Tangible BVPS ($) | 172.8 | 185.2 | 174.1 | 127.8 | 146.1 | 149.0 |
| Source: FDIC call reports, annual financial reports, author's estimates (in millions of dollars, unless otherwise specified) | ||||||
Room to reverse the trend due to rigid deposit costs
First National Bank Alaska's net interest margin grew 16 basis points at the end of 2023 from the end of 2022. Although the share of non-interest-bearing deposits in total deposits fell during the year, the share was still quite high at the end . of 2023 by around 51%. As a result, the cost of deposits remained fairly sticky last year, while average loan yields rose due to the rising interest rate environment.
I expect the federal funds rate to fall between 50 and 75 basis points this year. In a falling interest rate environment, sticky deposit costs will likely be detrimental to margin because they will not fall as fast as loan yields. As a result, unlike last year, the margin is likely to decline in 2024.
Overall, I expect net interest margin to fall by around twenty basis points by the end of 2024 from the end of 2023.
Flat Profits Likely
First National Bank Alaska's earnings are likely to change very little this year. The expected loan growth will likely offset the effect of a moderate margin contraction and normal growth in non-interest expenses. Overall, I expect the company to post earnings of $18.88 per share by 2024, a year-over-year decline of just 0.4%. The following table shows my income statement estimates.
| Statement of income | Fiscal year 2019 | Fiscal year 2020 | FY21 | FY22 | FY23 | Fiscal year 24E |
| Net Interest Income | 137 | 145 | 146 | 145 | 154 | 159 |
| Provision for credit losses | 0 | 2 | 2 | (1) | (1) | 0 |
| Non-financial income | 23 | 26 | 27 | 24 | 25 | 26 |
| Interest-free spending | 86 | 91 | 92 | 93 | 98 | 104 |
| Net income – common Sh. | 56 | 58 | 58 | 58 | 60 | 60 |
| EPS – Diluted ($) | 17.56 | 18.17 | 18.45 | 18.39 | 18.95 | 18.88 |
| Source: FDIC call reports, annual financial reports, author's estimates (in millions of dollars, unless otherwise specified) | ||||||
Compared to my last report on the company, I haven't changed my earnings estimate much because the outlook for this year hasn't changed much in the last three months.
Location and unrealized losses pose risks
Due to the geographic concentration of its operations, the volatility of oil and gas prices is a significant source of risk for First National Bank Alaska. Additionally, the high level of unrealized losses at market value in the portfolio of available-for-sale securities poses risks to earnings, as management could sell these securities and convert unrealized losses into realized losses. As of the end of December 2023, these unrealized losses amounted to $98.4 million, representing around 21% of the total closing equity balance, according to details provided in the earnings release.
FBAK offers an attractive dividend yield of over 6%
First National Bank Alaska currently pays a quarterly dividend of $3.2 per share. It also pays an annual special dividend of $3.2 per share. Excluding the special dividend, the company's current dividend level suggests an impressive dividend yield of 6.4%. After the inclusion of the special dividend, the dividend yield jumps to a hefty 8.0%!
The dividend payment appears certain, as discussed below.
- Total dividend and earnings estimates for 2024 imply a payout ratio of 84.7%, very close to the five-year average of 85.6%. Therefore, my earnings projections show that FBAK should have no problems paying its common and special dividends this year.
- FBAK remains very well capitalized; Therefore, the company will not face pressure from regulatory requirements to reduce its dividend. The company reported a Tier 1 leverage ratio of 9.85% as of the end of December 2023, compared to the minimum regulatory requirement of 5.0%, according to the earnings release.
Maintain a buy rating
I am using historical price-to-earnings (“P/TB”) and price-to-earnings (“P/E”) multiples to value First National Bank Alaska. The stock has traded at an average P/TB ratio of 1.43x in the past, as shown below.
| Fiscal year 2019 | Fiscal year 2020 | FY21 | FY22 | FY23 | Average | |
| T. Book value per share ($) | 172.8 | 185.2 | 174.1 | 127.8 | 146.1 | |
| Average market price ($) | 248.2 | 202.4 | 227.9 | 248.2 | 201.9 | |
| Historical P/TB | 1.44x | 1.09x | 1.31x | 1.94x | 1.38x | 1.43x |
| Source: Company Finance, Yahoo Finance, Author Estimates | ||||||
Multiplying the average P/TB multiple by the expected tangible book value per share of $149.0 gives a price target of $213.4 by the end of 2024. This price target implies a 7.1% upside from the stock price. Closing on March 13. The following table shows the sensitivity of the target price to the P/TB ratio.
| P/TB Multiple | 1.23x | 1.33x | 1.43x | 1.53x | 1.63x |
| TBVPS – Dec. 2024 ($) | 149.0 | 149.0 | 149.0 | 149.0 | 149.0 |
| Target price ($) | 183.6 | 198.5 | 213.4 | 228.3 | 243.2 |
| Market price ($) | 199.2 | 199.2 | 199.2 | 199.2 | 199.2 |
| Up/(Down) | (7.8)% | (0.4)% | 7.1% | 14.6% | 22.1% |
| Source: Author's estimates |
The stock has traded at an average P/E ratio of around 12.36 times in the past, as shown below.
| Fiscal year 2019 | Fiscal year 2020 | FY21 | FY22 | FY23 | Average | |
| Earnings per share ($) | 17.6 | 18.2 | 18.5 | 18.4 | 19.0 | |
| Average market price ($) | 248.2 | 202.4 | 227.9 | 248.2 | 201.9 | |
| Historical P/E | 14.13x | 11.14x | 12.35x | 13.50x | 10.66x | 12.36x |
| Source: Company Finance, Yahoo Finance, Author Estimates | ||||||
Multiplying the average P/E multiple by the expected earnings per share of $18.9 gives a price target of $233.3 by the end of 2024. This price target implies a 17.1% upside from the closing price of the March 13. The following table shows the sensitivity of the target price to the P/E ratio.
| P/E Multiple | 10.36x | 11.36x | 12.36x | 13.36x | 14.36x |
| EPS 2024 ($) | 18.9 | 18.9 | 18.9 | 18.9 | 18.9 |
| Target price ($) | 195.5 | 214.4 | 233.3 | 252.2 | 271.0 |
| Market price ($) | 199.2 | 199.2 | 199.2 | 199.2 | 199.2 |
| Up/(Down) | (1.9)% | 7.6% | 17.1% | 26.6% | 36.0% |
| Source: Author's estimates |
Equally weighting the target prices of the two valuation methods provides an $223.3 price target, which implies an increase of 12.1% compared to the current market price. Adding the forward dividend yield gives an expected total return of 20.1%. Therefore, I maintain a buy rating on First National Bank Alaska.
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