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Alpine Banks of Colorado: Focus on Loan Quality Pays Off

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Introduction

It has been almost two years since my last article on the Alpine Banks of Colorado (OTCQX:ALPIB) was published. This small-cap bank with a balance sheet total of approximately $6 billion operates in Colorado and has a strong history of low provisions for loan losses thanks to a focus on credit quality.

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After the last fundraising in July, the market capitalization is now approximately $505 million based on the current share price of just under $31 and the current number of shares of 16, 37 million equivalent shares. The exchange-traded shares are non-voting shares, while the bank also has just over 52,000 A-shares outstanding. These shares have voting rights and are entitled to 150 times the economic interest of the B shares. In this article, I will only talk about the B shares and I have multiplied the A shares by this same factor of 150.

The first half of the year went well, with loan quality remaining strong

Alpine’s performance in the second quarter was strong as the company reported an increase in net profit compared to the first quarter of the year.

During the second trimester, the Net interest income increased by almost $6 million and that’s the main reason why pre-tax profit increased by a similar amount, ultimately leading to net profit of $17.5 million on EPS of $1.14 per share.

income statement

ALPIB Investor Relations

As you can see in the image above, the bank did not have to record any additional provisions for loan losses, which again speaks to the excellent credit quality of the loan portfolio. Alpine Banks did not release a second quarter earnings presentation, but the first quarter presentation shows that Alpine Banks of Colorado has a long history of outperforming its peers when it comes to asset quality.

Loan quality

ALPIB Investor Relations

The recent capital increase will strengthen the balance sheet

In July, the bank announced that it had completed a $34 million common stock offering by issuing just under 1.2 million class B shares at $28.5/share. Alpine Banks mentioned that the use of the proceeds would go for general corporate purposes and to support organic growth while supporting regulatory capital ratios.

At the end of June, the bank’s capital ratios were quite decent, but the CET1 ratio fell below 10% and the Tangible Common Equity Ratio fell from 6.61% a year ago to just 5.99% end of June this year. This is not necessarily a problem as the regulatory minimum for the CET1 ratio was only 6.5% at the end of last year and I do not foresee any drastic or dramatic changes in this requirement, so Alpine Banks didn’t have a gun to his head to raise the money.

Capital ratios

ALPIB Investor Relations

The capital increase will achieve two important objectives. First, there should be a positive impact on the CET1 ratio. Although the bank did not disclose its total amount of risk-weighted assets used for the calculation, I assume that the CET1 ratio exceeds 10.5% again (excluding the impact of retained earnings and additional losses on the AFS portfolio during the third quarter) . A bond rating document shows the first quarter 2022 RWA at around $4 billion, which means the net proceeds of $32 million could increase the CET1 ratio by up to 80 basis points, so my target of 10.5% is probably conservative .

Second, while it might seem counterintuitive to increase book value by issuing new shares, it was actually a move that made a lot of sense from a balance sheet perspective. From the end of June, the book value per B share was $25.09 while the tangible value per share was $23.93 after deducting goodwill of $17.6M from the equation. This means that the recent increase was valued at a 19% premium to the most recent known tangible book value per share.

Holding all things equal and assuming a 6% total cost of issuing shares for total proceeds of $32 million (total finder’s fees were estimated at $1.655 million, but j ’round that up to $2 million as there will certainly be some as well as legal fees), the tangible book value per share will actually increase by about 20 cents to $24.13 (this again excludes the impact retained earnings and changes in the value of the securities portfolio). Thus, the capital increase made sense on several levels. That being said, Alpine Banks repurchased over 200,000 shares during the second quarter (as the number of shares fell from over 7.5 million shares to just over 7.3 million shares ) and the stock traded above $30/share throughout the quarter. it looks like Alpine raised funds at a lower level than it was buying back its own shares, and that’s not usually something I like to see.

Investment thesis

While underlying results are strong, Alpine’s capital ratios and book value have been impacted by the direct impact of higher interest rates on the value of the available-for-sale securities portfolio. . While I generally support a company’s capital raise because it’s certainly a sign of careful capital and balance sheet management, I’m a bit surprised that the bank issued new shares just weeks after buying out its own shares at a higher price.

Despite this I think Alpine Banks is well ahead and it is unfortunate to see the book value erode due to the declining value of the available-for-sale investment portfolio which has reduced the book value per B share of $3.48 in the second quarter after already recording a hit of $1.97 in the first quarter. The reported book the value fell just over $2/share in the first half thanks to the bank’s policy of keeping most earnings on the balance sheet and ALPIB retained about $1.6/share of earnings in the first half.