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Alerus Financial Corp. (ALRS) Q4 2020 Earnings Call Transcript

By Motley Fool Transcribing - Jan 28, 2021 at 8:01PM

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ALRS earnings call for the period ending December 31, 2020.

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Alerus Financial Corp. (ALRS 0.35%)
Q4 2020 Earnings Call
Jan 28, 2021, 10:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good morning and welcome to the Alerus Financial Corporation earnings conference call. [Operator instructions] Please note, this event is being recorded. 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 would now like to turn the conference over to Alerus Financial Corporation chairman, president and CEO, Randy Newman. Please go ahead.

Randy Newman -- Chairman, President, and Chief Executive Officer

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 chief risk officer, Karin Taylor; and our chief revenue officer, Ryan Goldberg.

As always, we appreciate your interest in our company and invite your questions at the end of our introductory remarks. Let me first begin by recognizing and thanking all of our almost 850 employees at Alerus. Our significant achievements in 2020 were a result of their dedicated efforts and reflect their pride and passion that they have in Alerus. Alerus 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. Katie and Karin will give more specifics in their reports. I would like to focus on a brief summary of 2020.

We, like everyone else, did not anticipate COVID 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, Alerus achieved record financial results for 2020, continued to execute our organic and inorganic growth strategies by proactively meeting the needs of our employees and clients. We successfully completed our 14th fee income acquisition and we continuously -- or continue to build upon our very strong financial foundation as we head into 2021.

I'm very pleased to announce that Alerus achieved this record financial performance in 2020 that consisted of record net income totaling $44,675,000, fully diluted earnings per share of $2.52 per share, return on equity of 14.41%, and return on tangible capital of 17.74%, respectfully, and an ROA of 1.61% for the year. Our stock price increased significantly throughout 2020 from $22.50 per share on January 1, 2020 to a low of $15.26 on April 1, 2020, reflecting the concern that the industry had for credit quality in the pandemic, and finished at year-end at $27.37 a share. Achievements in 2020 included record financial performance, proactively protecting the safety of our employees and 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 of Colorado. At this time, I'll turn it over to Katie Lorenson and follow up with some concluding remarks at the end of today's presentation.


Katie Lorenson -- Chief Financial Officer

Thank you, Randy. Good morning, everyone. Thank you for joining our call today. What an incredible quarter and 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 Alerus team members. So I'll briefly walk through some of the highlights of the quarter, and then I'll hand it off to Karin, who will provide an update on credit-related matters, PPP and provisioning. The trends for the fourth quarter picked up steam right where the third quarter left off, and I'll go right into mortgage, which was again a highlight this time, with originations flowing 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 toward the purchase side, the mix shifted as expected in 2020 to a 55% of total originations in the refi space. Purchase volume did remain strong in 2020, and our mortgage loan officers produced, on average, over 55 million in 2020. Our capital markets and our operations teams shined with continued strong margins and a nearly 90% pull-through rate on mandatory delivery. We ended the year with almost 6,000 clients purchasing or refinancing their home with Alerus.

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 at 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 2021 to be higher than usual for a first quarter but down from the record levels of 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 and the closing of the 24HourFlex-RPS transaction in mid-December. From the first conversations with the leaders of RPS, we believe these companies had a strong culture fit, and we are seeing the teams integrating well and focusing on client retention and conversion. Wealth management finished the year strong, with overall production exceeding our expectations, certainly impressive given the volatile environment of 2020.

On the balance sheet, 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 from cash with both short- and long-term purchases. But despite these ongoing efforts, the cash levels remained in the $200 million range, consistent with most of 2020. With loans held for sale at historic highs and 122 -- of 122 million in PPP 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 PPP loan forgiveness.

On a core basis, the net interest margin dropped to 3.03% from a Q3 core of 3.10%. Cost of funds decreased another 9 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. 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, onetime adjustments to year-end accruals were made relating to the outstanding financial performance of the company. During the quarter, we also made the decision to exit another four locations, bringing our total office closures for the year to six.

Six of our -- or a quarter -- over 25% of our physical footprint. The impact to the financials for the Q4 was over 700,000. In the technology and business services line, we included some onetime expenses related to the permanent transition of some of our employees to a 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 2021 expense run rate to normalize in the 40 million per quarter range. As a final point, we are pleased to see our investments in our One Alerus 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 increase efficiencies and reduce expenses.

Although uncertainty remains for 2021, it is clear the enterprise value of our company is strong and resilient to incredible challenges. I will now turn it over to Karin Taylor, our chief risk officer.

Karin Taylor -- 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.

Those restrictions were lifted earlier this month when Minnesota case numbers decreased. Arizona surge 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 conditions. Loans increased by 258 million since December of 2019.

This is attributable to an increase of 212.7 million in C&I loans, driven by PPP, 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 PPP, is contributing to that lower utilization rate. As you know, we successfully executed on the first round of the PPP, securing over 1,600 loans for our clients totaling $364 million. As of January 25, we had submitted 763 forgiveness applications to the SBA, totaling approximately $205 million. We had received approval from the SBA for 671 of those applications, totaling 115 million.

We are accepting applications for round two of the PPP and through January 25, we had received 212 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. Request for payment relief remained low during the fourth quarter. Most were 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 on deferral or about 0.7% of outstanding and guaranteed loan balances. 3.7 million of those loans are in an initial deferral period and 8.4 million are in a second deferral period. Balances on second deferral were 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 nonaccrual during the quarter remained at very manageable levels and included loans to borrowers in industries most impacted by the pandemic, including restaurants and 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 writedown on a problem credit and 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 from 3.5 million in the third quarter primarily a result of the recovery I mentioned.

We did increase allocations to all loan segments for current economic conditions, as well as to potentially higher risk portions of the portfolio. Our ratio of the allowance to total unguaranteed loan balances increased to 2% compared to 1.83% at the end of the third quarter. Our allowance to nonperforming loans also increased to 678%. Our credit is performing better than we had anticipated in the spring of 2020.

However, a high degree of uncertainty remains as to whether the additional stimulus will be enough to actually bridge the gap for some businesses. While we expect loan 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 withstand the economic impact of COVID-19 relatively well. We expect loan growth will be challenged in 2021, 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. Our business advisors continue to build their pipelines, and we are finding opportunities and extending credits that meet our lending standards.

That concludes our prepared comments. We will now open it up for questions.

Questions & Answers:


[Operator instructions] Our first question will come from Jeff Rulis with D.A. Davidson. Please go ahead.

Jeff Rulis -- D.A. Davidson -- Analyst

Thank you. Good morning

Katie Lorenson -- Chief Financial Officer

Good morning, Jeff

Jeff Rulis -- D.A. Davidson -- Analyst

I appreciate the comments on expenses kind of tracking back toward the low 40 million range. Some volatility in the fee income side, a big piece of that is the mortgage unit. Any thoughts on the outlook for the -- I mean, you mentioned expectations for production in the first quarter, but kind of net revenues there and/or just absolute fee income? I imagine it's a tough quarter or a tough year to replicate, but any thoughts on the fee income side?

Katie Lorenson -- Chief Financial Officer

Sure. 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, the peak quarter for the year. And so, we are estimating an overall decline in originations of around 30%, which is consistent with the industry.

The other component of that is related to, of course, that pipeline valuation, which ended the year 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 the revenue there. The other components maybe speaks specifically to the retirement side. There, we expect, from a legacy business standpoint, probably fairly flat, maybe incremental core growth in the lower one to two percentage.

Then of course, with the addition of the acquisition in the RPS-24HourFlex team, overall, we should see -- they should add about 8% or so to total revenues in the retirement division, bringing us up to a run rate that's probably closer to the $17 million -- 17, 17.5 for the year.

Jeff Rulis -- D.A. Davidson -- Analyst

Great. And it's pretty steady on wealth management, as we kind of back into that. That's good color. Maybe one for Randy, just kind of checking in on the capital plan and your priorities of, I imagine, funding kind of organic activities, number one.

But you did close on RPS and this pipeline of other opportunities and/or kind of what you can do now that you look at dividend or other on the capital side.

Randy Newman -- Chairman, President, and Chief Executive Officer

All of what you mentioned there. 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 Alerus.

Where the board really turns its attention to now is really to -- having gone through the IPO and everything and with the -- both the earnings and the buildup of capital management is something that we continue to discuss on a quarterly basis with our corporate board. And all of the things you mentioned, just to review, the dividend strategy, which I'll make a remark, and I'll save my remarks to the end of the meeting and also, as well as just putting things in place from a good governance manner to discuss and make sure that we're managing that capital properly going forward.

Jeff Rulis -- D.A. Davidson -- Analyst

OK. Thanks. I'll step back.


Our next question will come from Nathan Race with Piper Sandler. Please go ahead.

Nathan Race -- Piper Sandler -- Analyst

Yeah. Hi, everyone.

Katie Lorenson -- Chief Financial Officer

Good morning, Nate.

Nathan Race -- Piper Sandler -- Analyst

Perhaps just continuing on that capital deployment discussion. I'd be curious just to get an update just in terms of how discussions are going with additional potential -- being as partners. Are you guys seeing an influx of opportunities post RPS, or is it pretty much a similar state of affairs from what we discussed last quarter?

Randy Newman -- Chairman, President, and Chief Executive Officer

Katie, do you want to answer that?

Katie Lorenson -- Chief Financial Officer

Yeah, absolutely. I would say it's fairly consistent with what we've been seeing in the pipeline since last quarter.

Nathan Race -- Piper Sandler -- Analyst

OK. Got it. And then, just on the core margin outlook, ex PPP, any thoughts, Katie, and just how that kind of contracts from here. I believe you just kind of said it was around 3.03% for the quarter.

I know a lot of that will depend on kind of excess liquidity levels and how that trends over the course of this year. But just any thoughts just with kind of a flattish loan growth outlook for the first part of this year, as Karin alluded to, how we can kind of think about the core NIM ex PPP?

Katie Lorenson -- Chief Financial Officer

Yeah. I think my -- the guidance I've been giving was the -- scraping for 3%, and we're there. And it seems like our liquidity position actually continues to increase. So I think ex PPP, there's a good possibility without loan growth or without seeing that loan utilization pick up that we will drop below 3% into the 2.90%, potentially as low as 2.80s 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 we know it, unfortunately.

Nathan Race -- Piper Sandler -- Analyst

OK. Got it. If I could just ask one last one. Mortgage bank revenue, I think you talked about it being down 30% or so or at least expectations were to be down 30% or so in 2021, which is kind of in line with the industry expectations.

Does that include the dropout that we may see in unrealized -- or the gain that was in 2020?

Katie Lorenson -- Chief Financial Officer

It does not. So the kind of core revenue we would expect to decline that much and then in addition, we would expect to see the headwinds of the hedge on top of that decline.

Nathan Race -- Piper Sandler -- Analyst

OK. Got it. I appreciate all the color. Thanks, everyone.

Katie Lorenson -- Chief Financial Officer

Thank you.


Our next question will come from William Wallace with Raymond James. Please go ahead.

William Wallace -- Raymond James -- Analyst

Thank you. Good morning. Just following on to that last question. What are your thoughts on the mortgage, the gain on sale for the year?

Katie Lorenson -- Chief Financial Officer

Yeah. Good question. We are anticipating at this point that the margins will return back to the kind of pre-COVID levels. So the two-seven level.

William Wallace -- Raymond James -- Analyst

OK. Thank you. And then, on the net interest margin, just following up on that line of questioning. So we can understand that with all the liquidity that continues to come into the bank balance sheet, that's going to add NIM pressures.

But maybe helping us think about NII dollar growth, exclusive of PPP fees, any thoughts on how NII dollars might grow? In other words, are you -- or are you planning on deploying liquidity into the bond portfolio to kind of supplement flattish loan growth, etc., to help drive NII growth?

Katie Lorenson -- Chief Financial Officer

Yeah. We certainly are. I think the headwinds will probably continue to still be too strong from that standpoint. But that's the goal, is to at least maintain levels of NII where we were last year, ex the PPP.

Of course, we made a lot of ground -- 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 our objective, that's our goal, is to focus on at least maintaining that level or growing at whichever levers we can.

William Wallace -- Raymond James -- Analyst

OK. And if we were to assume that liquidity were not to continue to build, would that prior guidance around the 3% core NIM hold today?

Katie Lorenson -- Chief Financial Officer

That assumes that the liquidity we're seeing, the liquidity we've got, yes, sticks around. And so, a continued build would probably further deteriorate that, though I don't anticipate that happening at this point.

William Wallace -- Raymond James -- Analyst

OK. Perfect. 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 ultimate level of participation in round two or three, whatever you want to call it, might shake out.

Karin Taylor -- Chief Risk Officer

Yeah. Sure, Wally. This is Karin. It's really early for us to tell where it will shake out.

We think that most of the applications we've received so far were for second try applications. We've not seen significant new applications for first draws.

William Wallace -- Raymond James -- Analyst

OK. And has the pace of applications already started to slow, or does it remain kind of obviously below the first round but steady?

Karin Taylor -- Chief Risk Officer

Yeah. I mean, it's been steady, and we'll get another update here as we get to the end of the week. But we've had -- we've certainly had strong applications right at the start.

William Wallace -- Raymond James -- Analyst

That 26 million, where was that up through? What day?

Karin Taylor -- Chief Risk Officer

That was through Monday of this week. And I should clarify, too, those are applications received. So they're not necessarily approved by SBA. They're at different stages of approval.

William Wallace -- Raymond James -- Analyst

Yeah. OK. OK. That's all I had.

I will step out and let somebody else ask a question. Thank you for your time.


[Operator instructions] There being no further questions at this time, this will conclude our question-and-answer session. I would like to turn the conference back over to Randy Newman for any closing remarks.

Randy Newman -- Chairman, President, and Chief Executive Officer

All right. Thank you. Yes, let me first extend our appreciation to everyone who joined our call this morning. Thank you for listening.

And Jeff, Nate and Wally, thank you for your questions. Alerus 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. I'd like to mention two long-term highlights of our very strong operating performance.

My records go back to the late 1960s and show that Alerus has always paid a cash dividend. But since 1987, we have increased our cash dividend every year for the last 34 years at an average of 10% per year. At the end of 2020, over the past 10 years, Alerus 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 Bank Index and to the 150% total shareholder return from the SNL 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 company has accomplished so much despite COVID-19, which is a testament to our team, our leaders at all levels and 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 Alerus.

Thanks to all of you for joining today's call.


[Operator signoff]

Duration: 30 minutes

Call participants:

Randy Newman -- Chairman, President, and Chief Executive Officer

Katie Lorenson -- Chief Financial Officer

Karin Taylor -- Chief Risk Officer

Jeff Rulis -- D.A. Davidson -- Analyst

Nathan Race -- Piper Sandler -- Analyst

William Wallace -- Raymond James -- Analyst

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