Alaska is an enormous state filled with plenty of wildlife, mountains, oil, cold weather and hardy individuals. The state is more than double the size of Texas. If the state were a country it would be 33rd in terms of total size, or roughly double the size of Sweden. The state is disconnected from the rest of the continental US. An American needs to drive through Canada to access Alaska by land.
The exposure most Americans have to Alaska is a series of shows in the Discovery channel featuring "crazy" individuals who live off the land, drive trucks on ice, or mine for gold. Alaska in many ways is still considered the frontier and isn't generally thought of as a business destination unless you're working in oil & gas, mining or something related to wildlife.
Even though Alaska isn't a hot bed of business there are still people who live and work there who need loans and have money to deposit. In general the state is overlooked, and I imagined their banks would be even more overlooked. It turns out I was right.
The state has five bank headquartered there and three are publicly traded. The banks headquartered in Alaska are shown below:
Outside of the five banks headquartered in the state Wells Fargo and KeyBank also branches in the state. Statewide there are only 130 total bank branches with Wells Fargo claiming the most at 50. Runner up in the branch count is First National Bank Alaska with 30 braches. The other six alaskian banks all have 16 or less branches.
The easiest way to look at all of the banks in Alaska is to divide them up between the non-traded and traded banks and look at each.
Traded Banks
Here is a simple comparison showing the historical returns on equity for all three traded Alaskan banks from CompleteBankData.com (Bloomberg Terminal: APPS BANKS <GO>):
Alaska is set apart from the US and their banks appear to be as well. All three are very healthy and avoided problems during the financial crisis. Both Northrim and Denali Bancorporation are earning returns on equity above the national average. All three banks are profitable as well. And lastly all three have more than 10% equity to assets with low to non-existent non-performing assets.
These are safe and profitable banks. Is it any surprise that once an investor leaves the mainstream opportunities suddenly present themselves?
Northrim Bancorp (NRIM)
Northrim is a $1.4b bank headquartered in Anchorage, AK founded in 1990. The bank recently purchase and integrated Alaska Pacific Bankshares (formerly AKPB).
The bank has $966m in loans with the majority of them lent to residential borrowers. The bank has been profitable since 2003 and sailed through the financial crisis without any issues. Their Tier 1 capital has remained above 10% since 2004 and non-current loans to loans peaked at 3.66% in 2008.
The bank trades for 1.11x TBV and 12.25 times earnings with a $167m market cap. Shares are fairly liquid with about 15,000 trading daily.
Our CompleteBankData valuation model (available on the Bloomberg Terminal version) has the bank's estimated intrinsic value at $30.81 compared to the most recent close of $24.44. The valuation model is shown below:
If Northrim were to be acquired, or to trade in line with the bank index multiples shares should trade higher. Even without multiple expansion the bank looks attractive. They are conservative but have been growing steadily over the past decade. The bank's equity has more than doubled in a decade.
First National Bank Alaska (FBAK)
There is a stigma attached to companies whose stock price is over $100 a share. An even greater stigma exists for companies with share prices higher than $1,000 per share. First National Bank Alaska takes it a notch further with their $1,550 share price.
The company is publicly traded, but is closely held. The bank is the largest of the Alaska banks with $3.3b in assets. They trade for slightly more than book value and 15x earnings. The bank has experienced loan and deposit growth in the past three years as shown below (deposits in red, loans in blue):
According to our model the bank is considered fairly valued to slightly overvalued for both our acquisition valuation model and the dividend discount model. If the bank is valued relative to banking index multiples they are undervalued by 13%.
The advantage that First National Bank Alaska has is that they are the largest bank in the state and they're growing. Scale in banking matters a lot and First National Bank Alaska has built scale and a brand in their region. They are consistently growing and pay a nice dividend. If one wished to have some exposure to Alaska in general a single share of First National Bank Alaska might fit the bill.
Denali Bancorporation (DENI)
Denali Bancorporation is much smaller than the other two, but equally attractive. The bank trades for slightly more than TBV and 13x earnings.
The bank has $266m in assets and $133m in net loans. They earned $1.86m this past year, or about $.68 per share. They have an above average net interest margin and a 16% Tier 1 ratio.
The bank's assets appear to be in check outside of a curious line item in their last two financials. The bank recorded 44% of 2014 Q3 and 68% of 2014 Q4 US Government guaranteed loans as non-current. The bank doesn't have any government loans on their books. This would indicate that the non-current government loans are most likely government backed bonds that have stopped paying interest.
Besides the small size of Denali Bancorporation and their inefficient operations (85% efficiency ratio) there isn't much to not like. As you can see below they have never earned less than $1.2m in the past 11 years.
The bank has grown strongly over the past decade much like Northrim has. The bank's size makes it an attractive acquisition target for a larger Alaska bank, or a bank that would like to enter the Alaska market. Absent an acquisition investors own a nicely growing bank with an attractive dividend yield at 3.45%
Non-traded Banks
The state has two non-traded banks, First Bank, and Mt. McKinley Bank. Both of these banks are less profitable compared to their public peers. The reason for the lower profitability is both of these banks are overcapitalized with Mt. McKinley Bank coming in on top with a 39% Tier 1 ratio.
There isn't much to say about either of these banks. Both are solid performers currently and have been historically. Neither of these banks lost money during the financial crisis.
Mt McKinley Bank
The bank has $344m in assets and earned a 5.37% return on equity in the last year. They've remained profitable since their start. While they've been profitable they haven't experienced much growth. Their equity has grown from $43m in 2006 to $73m today. Total loans have fallen from $151m to $130m. As loans have decreased security holdings have increased. The bank owned $80m in securities in 2006 and owned $179m in securities at the end of 2014.
First Bank (First Bancorp)
The bank was founded in 1924 and prides itself on being locally owned and operated. Their branches are located in Ketchikan and around Juneau.
They have $486m in assets and $215m in loans. First Bank earned 7.34% on their equity. The difference between Mt. McKinley's ROE and First Bank's ROE is that First Bank only has a 16% Tier 1 ratio compared to the monster 39% Tier 1 ratio that Mt. McKinley Bank has.
The bank could improve their operations some, their efficiency ratio stands at 82%. Non-current loans to loans are under control at 1.24%.
Summary
A dive into Alaskan banks didn't turn up any banks trading for 25% of book value, which is unfortunate. But what this exercise did turn up was a set of conservative and growing banks that avoided the housing crisis. Investors might worry about the energy production drop harming Alaskan banks, or maybe a mining drop. These are valid concerns, and there will always be dark clouds lurking on any investment horizon. Alaska is physically separated from the rest of the US and their banks appear to be separated as well. On a relative basis all are undervalued and all have experienced growth in a flat no growth environment. Alaskan bank shares might be the perfect investment to make and tuck away in a drawer for a few years.
Want to find more information on how to find and research bank equities on your Bloomberg Terminal with APPS BANKS <GO>? We recently put together a short video with a walk through and posted it to YouTube here.
Disclosure: Long DENI
Nate,
ReplyDeleteDid you buy this via a broker or did you call Priscilla at Denali IR and buy the shares straight from her? The reason I'm wondering is as far as liquidity goes this one is tough. Thanks.