Q4 2020 Alerus Financial Corp Earnings Call
Good morning, and welcome to the Atlas Financial Corporation Earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note. This event is being record.
Okay.
This call May include forward looking statements and the company's actual results may differ materially from those indicated in any forward looking statements important factors that could cause actual results to differ materially from those indicated in the forward looking statements are listed in the earnings release and the company's SEC filings.
I'd like to turn the conference over to your last Financial Corporation, Chairman, President and CEO Randy Babbitt. Please go ahead.
Thank you grant and good morning, everyone.
This is our sixth earnings call since our IPO in September 2019. This morning, we intend to discuss our fourth quarter 2020, and year end financial results and also to give a current impact of the COVID-19 pandemic today I'm joined by our Chief Financial Officer, Katie Lorenson our cheap.
Risk Officer, Carl Taylor, and our Chief revenue Officer, Brian Goldberg as always we appreciate your interest in our company and invite your questions at the end of our introductory remark.
Let me first begin by recognizing and thanking all of our almost 850 employees that alerts on.
Our significant achievements in 2020 were a result of their dedicated efforts and reflect their pride and passion that they have an alert.
Soliris is a purpose driven organization with very strong ethics principles values and performance standards all centered on a guiding principle to do the right thing always and to help our clients and customers achieve their financial goals. During the fourth quarter 2020, we continued to ensure that our employees are.
Safe and that we meet the needs of our clients. During this period of uncertainty our focus and efforts remain the same in the fourth quarter as they have throughout 2020, Kt and Karen will give more specifics in their reports I would like to focus on a brief summary of 2020, we like everyone else did not.
We anticipate COVID-19 and its impact as we began 2020. It did it has and it will continue to have an impact on us going forward that being said and despite this disruption and uncertainty Ah Laris achieved record financial results for 2020 continued to execute our.
And inorganic growth strategies by proactively meeting the needs of our employees and clients.
We successfully completed our 14th P income acquisition, and we continuously continue or continue to build upon our very strong financial foundation as we head into 'twenty 'twenty one.
I'm very pleased to announce that <unk> achieved this record financial performance in 2020 that consisted of a record net income totaling $44 million $675000.
Fully diluted earnings per share of $2.52 per share.
Return on equity of 14, 41% and return on tangible capital of $17, seven 4% respectfully and an ROA of 1.61% for the year.
Our stock price increased significantly throughout 2020 from $22.50 per share on January one 'twenty 'twenty to a low of $15.26 on April 1st 2020.
<unk> be concern that the industry had for credit quality in the pandemic and finished at year end debt $27 37, a share achievements in 2020 included record financial performance proactively protecting the safety of our employees in meeting the needs of our clients.
Being named to the Piper Sandler All Star list for 2020 for small cap financial institutions being named one of the 85 best banks to work for in 2020 by American banker.
And successfully closing on another fee income acquisition in the Rocky Mountain region on Colorado.
At this time I'll turn it over to Katie Lorenson and a follow up with some concluding remarks at the end of todays presentation Katie.
Thank you Randy good morning, everyone. Thank you for joining our call today.
What an incredible quarter on a year. Indeed, we are of course very proud of our financial results, but even more proud of how we got there and all of our amazing team members. So I'll briefly walk through some of the highlights for the quarter and then I'll hand, it off to Karen who will provide an update on credit related matters P. P P and provisioning.
The trends for the fourth quarter picked up steam right, where the third quarter left off and I'll go right into a mortgage which was again a highlight this time with origination blowing right past last quarter's record surpassing 600 million.
To end the year at nearly $1 8 billion of originations.
I've mentioned it before but I think it's worthy of noting again that this unprecedented volume would not have been possible without those long term investments we've made in technology and digital.
Although our originations are typically weighted towards the purchase side the mix shifted as expected in 2022, a 55% of total originations on the refi space.
Purchase volume did remain strong in 'twenty and 'twenty on our mortgage loan officers produced on average over 55 million in 2020.
Our capital markets on our operations team signed with continued strong margins and a nearly 90% pull through rate on mandatory delivery.
We ended the year with almost 6000 clients purchasing a refinancing their home without merit and we are grateful and proud of our team members within the division and across the company, who helped make these results possible.
As the mortgage application volume came down from its record levels. The valuation of the forward pipeline decreased $2 3 million in the quarter ending the year on a mark to market gain just over $8 8 million of the nearly 62 million of mortgage revenue reported.
We expect the first quarter volume for 'twenty 'twenty, one to be higher than usual for our first quarter, but down from the record levels on the fourth quarter volume.
Sticking with the fee income theme, which comprised over 64% of total revenue in 2020.
Retirement revenue finished in line with expectations.
Assets in the division jumped up to 34 billion driven by strong market conditions on the closing of the 24 hour flex our P. S transaction in mid December.
For the first conversations with the leaders of our P. S. We believe these companies had a strong cultural fit and we are seeing the teams integrating well and focusing on client retention and conversion wealth.
Wealth management finished the year strong with overall production exceeding our expectation.
Certainly impressive given the volatile environment of 2020.
On the balance sheets are which ballooned over the $3 billion Mark in total assets at the end of the year, we continued to build the investment portfolio, adding another 100 million in the quarter free cash with both short and long term purchases, but despite these ongoing efforts to cash levels remained in the $200 million range consistent with most of 2021.
Loans held for sale at historic highs and 122 of $122 million in P. P. P. Forgiveness, continuing it appears the liquidity levels will be higher and remain longer than we anticipated.
From a net interest margin standpoint, the increase on a linked quarter basis was due to the P. P piece on forgiveness on a core basis. The net interest margin dropped to three point or three.
From a Q3 core of three pad cost of funds decreased another nine basis points, while average deposits grew nearly 5% on a linked quarter basis.
Excess cash continues to weigh a heavy burden on the NIM. Despite these ongoing efforts to reduce the cost of deposits.
Last but not least expenses.
Expenses for the quarter did have a few outliers are first and foremost the compensation rose in conjunction with the increase in mortgage volume and an increase in accruals for total loans originated not just sold.
In addition, one time adjustments to your on accruals were made relating to the outstanding financial performance of the company.
During the quarter. We also made the decision to exit another for locations, bringing our total office closures for the year to fix.
Six of our or a quarter over 25% of our physical footprint the impact on to the financials for the Q4 was over $700000.
And the technology and business services line. If we included some one time expenses related to the permanent transmission that some of our employees to our home office. In addition, we accelerated a few projects into 2020 professional services included merger related expenses for the acquisition, we closed during the quarter and we expect the 'twenty 'twenty one expense run rate to normalize.
And the $40 million per quarter range.
As a final point, we are pleased to see our investments and our one alerts culture, our talent and technology translate into results. Our teams are working with urgency to identify additional opportunities to expand relationships and grow our client base as well as increased efficiencies and reduced expenses.
Although uncertainty remains for 'twenty 'twenty one it is clear the enterprise value of our company is strong and resilient to incredible challenges.
I will now turn it over to Carl Taylor, our Chief risk Officer.
Thank you Katie and good morning, everyone first a brief update on our banking market.
North Dakota, and Minnesota, both experienced a significant surge in cases through much of November and December North Dakota remained open for business, while Minnesota increased restrictions on businesses during that time.
For those restrictions were lifted earlier this month.
On a soda case numbers decrease.
Arizona esters came later and they continue to experience an elevated number of cases, we are serving clients in all markets virtually digitally and in person based on market needs and condition.
Loans increased by 258 million since December of 2019. This was attributable to an increase of $212 7 million in C&I loans, driven by P. P. P and an increase of $68 3 million in commercial real estate loans.
This growth was offset by a decrease in consumer loans of $41 million.
Commercial line utilization remained low at the end of the year at 21%. This compares to a utilization rate of 34% at year end 2019.
Increased borrower liquidity due to various relief programs, including the P. P. P is contributing to that lower utilization rate.
As you know we successfully executed on the first round of the P. P. P. Securing over 1600 long score for our clients totaling 364 million.
As of January 25th we had submitted 763 for goodness applications for the SBA totaling a practice totaling approximately $205 million.
We had received approval from the SBA for 671 on both applications totaling $115 million.
We are accepting applications for round two of the P. P. P and through January 22, we had received 200 called applications for 26 million.
With respect to deferrals, we have granted some type of deferral on about $154 million in balances or 9% of the portfolio.
Requests for payment relief remained low during the fourth quarter most for one month deferral requests on consumer loans.
Requests on commercial loans were extremely limited as of year end about $12 million in loan balances remained under her or about 0.7% of outstanding on guaranteed loan balances.
$3 7 million of those loans are an initiative or in an initial deferral period, and $8 4 million or in a second deferral period balance.
Balances on second to her over almost entirely in our one to four family residential portfolio.
Our credit metrics remained strong during the quarter nonperforming assets to total assets remained at 17 basis points unchanged from the third quarter.
Loans downgraded or moved to non accrual during the quarter remained at very manageable levels and included loans to borrowers and industries, most impacted by the pandemic, including restaurants on hotels.
We recorded net recoveries of $1 5 million for the fourth quarter. This was primarily the result of a $2 $6 million recovery on a commercial loan that was charged off during the second quarter of 2019.
The recovery was partially offset by a further write down on problem on a problem credit on a charge off of a small business loan both of these loans had weaknesses prior to the pandemic.
Our fourth quarter provision expense decreased to $1 4 million on three 5 million in the third quarter, primarily a result of the recovery I mentioned.
We did increase allocations to all on segments for current economic conditions, as well as to potentially higher risk portions of the portfolio.
Our ratio of the allowance to total on guaranteed loan balances increased 2% compared to 1.83% at the end of the third quarter on.
Our allowance to nonperforming loans also increased to 678%.
Our credit is performing better than we had anticipated in the spring of 'twenty 'twenty. However, high degree of uncertainty remains as to whether the additional stimulus will be enough to actually bridge the gap for some businesses.
We expect non losses to emerge in 2021 and be higher than what we experienced during 2020, we believe our strong credit culture diverse loan portfolio and geographic footprint will continue to help us with standard.
The economic impact of COVID-19 relatively well.
We expect loan growth will be challenged in 'twenty and 'twenty one at least through the first half of the year due to continued high levels of liquidity and hesitancy on the part of some borrowers to make investments while there is still so much uncertainty on.
Business advisers continue to build their pipelines and we're finding opportunities in extending credit to meet the standard.
That concludes our prepared comments, we will now open it up for questions.
We will now begin the question answer session to ask for your question you May Press Star then one other touched on so youre using a speakerphone. Please pick up your answer before customer keys to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question will come from Jeff rules.
With D a davidson.
Please go ahead.
Thank you.
Good morning.
Good morning, Jeff.
Appreciate the comments on expenses kind of tracking back towards.
The low $40 million range simple agility in the fee income side.
A big piece of that as debt.
The mortgage unit.
Any thoughts on the outlook for the.
You mentioned expectations for production in the first quarter, but.
On a net revenues there on <unk> just add.
Absolute fee income.
I imagine, it's a tough quarter or tough year to replicate but any thoughts on the fee income side.
Sure morning, Jeff. Thank you for the question. So on the mortgage side as I mentioned, we do expect the first quarter to be relatively high compared to prior year, certainly and likely that the peak quarter for the year and so we are estimating an overall decline.
Net originations around 30%, which is consistent with the industry and the other component of that is related to a course that pipeline valuation, which which ended the year at at a positive almost $9 million, which we also expect to unwind during the year.
So that should give you a little color on mortgage in regards to to the revenue there on the other components Pete I'll, maybe speak specifically to the retirement side.
There, we expect from our legacy business standpoint, probably fairly flat, maybe maybe incremental incremental core growth in the lower one to two percentage then.
And then of course with the addition of the acquisition and the Rps 24 hour flex team.
Overall, we should see them they should add about.
8% or so up to total revenues in the retirement division, bringing us up to a run rate, that's probably closer to the $17 million mm.
17, 17 and a half.
For the year.
Okay.
Great.
It's pretty steady on the wealth management.
I can do that that's.
Good color. Thanks.
For.
For Randy just checking in on the capital plan and in your priorities.
Funding kind of organic activities number one but.
You did close on Rps in.
This pipeline of other opportunities and or kind of what you could do you know do you.
Do you look at <unk>.
Dividend or other Oh on the capital side.
Oh all of what you mentioned there you know first of all we're very very pleased with the acquisition that we were successfully able to close on.
It was a very very good fit both from a business perspective, as well as cultural fit to our company.
It will really come down as a very good acquisition for <unk>.
The board really turns its attention to now is really too.
Having gone through the IPO and everything with the both the earnings and the buildup of capital is capital management is something that we continue to discuss on a quarterly basis with our corporate board and all other things you mentioned just to review the.
The dividend strategy, which.
Make a remark on I'll save my remarks to the end of the meeting and also as well as you know, we're just putting things in place for a good governance matters to discuss and make sure that we're managing.
Managing that capital properly going forward.
Okay.
Thanks, I'll step back.
Our next question will come from Nathan race with Piper Sandler. Please go ahead.
Yes, hi, everyone. Good morning.
Good morning Nate.
Perhaps just continuing on the capital deployment discussion I'd be curious just to get an update just in terms of how discussions are going with.
But additional potential or.
BNS partners, but you guys seem to close about two days post rps or is it pretty much a similar state of affairs from what we discussed last quarter.
Okay.
Katie.
Yes, absolutely.
I would say, it's fairly consistent with what with what we've been seeing them.
In the in the pipeline since last quarter.
Right.
Okay.
Got it and then just on the core.
Margin outlook.
Okay, Let me thoughts Gideon just how that kind of.
From here I believe you've kind of said it was around 303 for the quarter.
I know a lot of it will depend on kind of excess liquidity levels and how that trends over the course of this year, but just any any thoughts just with kind of a flattish loan growth outlook for the first part of this year as Karen alluded to how would you draw on the thing about the core NIM.
Triple T.
Yeah, I think you know my the guidance I've been giving was debt scraping for three and where Theyre and [laughter]. It.
It seems like our liquidity position actually continues to increase so I think X P. P. P. You.
You know, there's there's a good possibility with all its loan growth or without seeing that more noodles. They should pick up that we will drop below free.
And today as you know to 90 potentially as low as two eight is it if it if it really takes a long time this year to see any demand on the loan side. So I do think a sub three is going to be a reality before.
Before we know what unfortunately.
Yeah.
Okay got it if I could just ask one last one.
Mortgage banking revenue I think you had talked about it being down 30% or so or at least expectations for if he's on 30% or so on 'twenty 'twenty, one which is you know kind of in line with the industry expectations does that include the the drop off that we may see in the.
Unrealized or the.
There was in 2020.
Hum.
Oh, it does not so the the kind of core revenue and we would expect a decline that much and then in addition, we would expect to see the the headwinds of the hedge on top of that decline.
Okay got it I appreciate all the color.
Thanks, everyone.
Our next question will come from William Wallace with Raymond James.
Please go ahead.
Thank you good morning.
Just just following on that last question.
What are your thoughts on the mortgage gain on sale for the year.
Yeah. Good question, we are anticipating at this point that the margins will return back to the debt.
Kind of pre COVID-19 levels, so the 2727 level.
Yeah.
Okay. Thank you.
And then on the net interest margin just follow up on that line of questioning. So we can understand that debt with the total liquidity that continues to come in into the bank balance sheets, that's gonna add NIM pressures, but but maybe helping us think about NII.
Dollar growth exclusive of <unk>.
P P P fees and any thoughts on.
How NII dollars might grow.
Okay.
In other words, our yeah.
On deploying liquidity.
Into the bond portfolio to kind of.
Supplement flattish loan growth et cetera to help drive NII for us.
Yeah, we certainly we certainly are.
You know I think I think the headwinds all will probably continue to still be two strong from that standpoint, but that's that's the goal is to at least maintain levels of NII, where we were last year ex the P. P. P.
Of course, we've made a lot of.
Lot of ground has made up a lot of ground on the expense side of things last year, which will be more difficult to do this year in regards to our ability to continue to lower our cost of funds.
But yes, that's that's our that's our objective that's our goal is to focus on at least maintaining that level or growing edge, which whichever levers we can.
Okay, and if we were to assume debt liquidity were not to continue to build what would that prior guidance to around the 3% core NIM holds today.
That assumes that the debt liquidity liquidity, we're seeing the liquidity, we've got yes sticks around.
And so on a continued build wood, but would probably further deteriorate that though I don't anticipate that happening at this point.
Okay. Okay. Thanks, and then in prepared remarks, I believe it was stated that the applications. So far for round two of PPP were $26 million received I'm. Just curious if you could give us thoughts on where you think your your ultimate.
Level of participation in round, two or three or whatever you want to call it might shake out.
Yeah sure Wally. This is this is carlin.
It's really early for us to tell them, you know where where it will shake out we think that most of the applications. We've received so far or for a second drive applications.
We've not seen significant new applications for first draws.
Yeah.
Okay and has the pace of applications already started slow or has it remained kind of obviously below the first round, but but steady.
Yeah, I mean, it's it's been steady and you know I will get another update here as we get to the end of the week, but you know we had we certainly had a strong applications right at the start.
That $26 million where was that.
Through what day.
That was through Monday.
This week.
And you know I I should clarify two those are applications received so they're they're not necessarily approved by SBA there are different stages of approval.
Yes, okay.
Okay. That's all I had I'll step out and let somebody else ask a question. Thank you for your time.
Thanks Ali.
Okay on that if you'd like to ask your question for the Star then one Star then one to ask a question.
There being no further questions at this time the sport conclude our question and answer session.
I'd like to turn the conference back over to Randy Newman for any closing remarks.
Alright, thank you.
Yeah, Let me first extend our appreciation to everyone who joined our call. This morning.
Thank you for listening and Geoff Nathan Wally Thank you for your questions.
Lewis has a long history of consistently outperforming our peers and we believe providing extraordinary value to our shareholders. This is driven by our high value professional services business model, our diversified balance sheet and loan portfolio and our non margin dependent revenue lines of business that we.
Believe deliver greater risk adjusted returns than our peers.
Like to mention two long term highlights of our very strong operating performance. My records go back to the late 19 sixties and showed that <unk> has always paid a cash dividend, but since 1987, we have increased our cash dividend every year for the last 34 years had on.
Average of 10% per year.
At the end of 2020.
Over the past 10 years Polaris has achieved a 337% total shareholder return, which is just shy of a 16% annual return for our shareholders.
This compares for example to 165% total shareholder return for the SNL All Bad Bank index into the 150% total shareholder return from the yesterday on small cap Bank index.
We remain confident in our ability to continue to navigate the uncertainties of this downturn, while also continuing to drive value for all of our stakeholders as we navigate through the remainder of 2021 I am very proud of how our organization has responded to this uncertain and challenging environment our come.
<unk> has accomplished so much <unk>.
Fight COVID-19, which is a testament to our team our leaders at all levels in our business model I'd like to again, thank all of our employees for their extraordinary efforts. During these unprecedented times and for all of your continued support and interest in waters.
Thanks to all of you for joining today's call.
Okay.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.