Colorado's Alpine Bank Is A Compounder At A Reasonable Price
If you’ve skied in Colorado, odds are you’ve seen one of Alpine Bank’s (OTCQX:ALPIB) 40 branches. They have the 9th largest deposit share in Colorado (2.3%) and the largest deposit share on Colorado’s western slope (23.6%).
Source: 2019 Q4 Presentation
Colorado has boomed and so has Alpine Bank. It sports a 1.6% ROA and 17% ROTE. The company listed its class B shares (no voting power) last year in the OTC market, but they have not been immune to the current crisis. Today shares trade for 5.2x 2019’s pre-tax earnings and 6.3x 2019’s net income. This is a remarkably low price for what appears to be a well-run bank in an attractive and growing geography, so I decided to take a deeper look.
Liabilities
Alpine Bank has a remarkably low cost of funding. Interest-bearing deposits cost just 0.15%, a fraction of its competitors. Alpine’s 2019 cost of all liabilities was 0.27%. It’s not rocket science to make money when people give you $3.5 billion for 0.27%.
Source: 2019 Q4 Presentation
This low cost of funding has kept Alpine’s net interest margin absolutely and relatively high at 4.59%. Undoubtedly, this has compressed since year-end.
Source: 2019 Q4 Presentation
However, there is one quirk on the liability side of Alpine’s balance sheet. The bank’s ParentCo (Alpine Banks of Colorado) carries $69 million of subordinated debentures with a weighted-average interest rate of 4.79%. $10.4 million carry a punitive 9.5% rate and don’t mature for another nine years.
Source: Author, Data from 2019 Annual Report
This high-rate funding contrasts with the bank’s plentiful low-cost liabilities and strikes me as a scar from past troubles. I’ll circle back to explore this later.
Assets
On the asset side, Alpine has loaned out 78% of its deposits. Loans are primarily concentrated into three categories:
1-4 Family (42%)
Commercial Real Estate (31%)
Construction & Land Development (14%)
Source: 2019 Q4 Presentation
Commercial and Industrial loans only make-up 5% of Alpine’s portfolio, but they’re making a push to expand these.
Alpine’s loan book isn’t the most conservative I’ve seen. Construction is booming in Colorado, so it’s not surprising that they have a lot of exposure to it. Construction loans are on the riskier side of things, no matter where the construction is. Of course, riskier loans carry higher rates, which help explain Alpine’s high NIM. But how much pain will they take in the current downturn?
Credit Quality
Alpine’s credit has been pristine lately. 2019’s net charge-offs were just 0.09%. However, Alpine’s 9.5% subordinated debentures suggest this hasn’t always been the case. Alpine’s FDIC Call Reports go back to 2000 and show the long-term trend in charge-offs:
Source: Author, Data from FDIC Call Reports
Charge-offs were almost non-existent until 2009. They erupted between 2009 and 2012, and then nearly disappeared from 2013 onwards. But, 2009 to 2012 was ugly: net charge-offs averaged 2.54% of loans and peaked at 5.66%.
The Call Reports show that Alpine received equity injections from its ParentCo in 2006, 2008, and 2009 totaling $90 million. The capital in 2006 was probably for growth, not to cover losses. $50 came in 2009, which was probably to shore up the balance sheet. I’d guess some of this money was funded by the 9.5% debentures.
Normalized Earnings Power
Many of the mountain towns on Colorado's western slope started as boom and bust mining towns. Mining isn't a major economic driver anymore, but Alpine's credit trends suggest that it still sees severe boom and bust cycles.
To value Alpine I’d want to know two things. First, what is its normalized, through-cycle, earnings power? Second, can it survive a 2008/09-like scenario today?
To normalize earnings power, I increase Alpine’s provision for credit losses to its long-term average net charge-off rate. This is 0.73% which I rounded to 0.75%. This average excludes years where net charge-offs were less than zero, to be more conservative. Without this adjustment, the average is 0.56%.
This puts normalized pre-tax earnings at $50.3 million or $480 per share and normalized after-tax earnings at $400 per share. Alpine did not provision for loan losses in 2019, so normalization reduces trailing EBT by $20 million. Alpine trades at 7.3x normalized EBT and 8.9x normalized net income. This is an attractive valuation for a bank growing at a low-teens rate.
Source: 2019 Q4 Presentation
Alpine’s capital ratios suggest it is in decent shape to weather a severe downturn. To estimate a worst-case scenario, I assume that Alpine charges off 5.66% of loans in 2020. That would match the worst of the ’08-’09 crisis.
This would produce a $150 million write-off, equal to three years of normalized pre-tax earnings. CET1 could fall from 10.94% to 5.9% in this scenario. This would push it below the regulatory minimum of 6.5% and force Alpine to raise capital. Alpine could handle up to a 5.0% charge-off and remain well-capitalized. This is a severe scenario that I would call possible but not probable. That said, 2019 will probably mark this cycle’s high in credit quality, and the next year or two may be worse than average.
Estimating Forward Returns
I estimated that Alpine can earn a normalized $400 per share, after-tax. This works out to a 12% return on tangible equity, five points below Alpine’s trailing 17% ROTE.
Alpine currently pays a $31 per share dividend, which is an 8% payout ratio on normalized earnings. That implies Alpine is re-investing 92% of net income at a 12% return.
Since 2000, Alpine has compounded tangible equity at about 10% annually, as shown by the chart below.
Source: Author, Data from FDIC Call Reports
More recent results have been better than average.
Source: 2019 Q4 Presentation
At $3,500 per share, Alpine yields 0.9%. If 92% of earnings are re-deployed at 12%, Alpine will grow 11% annually (92% reinvestment rate x 12% ROTE). In total, the business should return about 12% (0.9% yield plus 11% growth). If Alpine’s multiple re-rates from 7.3x normalized pre-tax earnings to 10x over five years, that will add an additional 6.5% return per year (for five years), bringing the stock's total return to 18.5%.
These are big numbers. Colorado’s growing population will be a tailwind to Alpine’s growth ambitions, but are already baked into these numbers. Alpine is now expanding into the front range - Denver and Boulder. These are more competitive markets, and Alpine’s easiest growth may be behind it.
On the other hand, small businesses across the country are scrambling now. Many are having trouble getting the attention of the large money center banks. These small businesses could turn to their local community banks. This may be a wonderful time for Alpine to develop new relationships and onboard new clients. This might look ugly the next year or two as provisions and charge-offs rise (lending in a recession is always riskier) but the full-cycle relationships may be quite profitable.
Risks
The primary risk Alpine faces is credit quality. 2020 will almost certainly not be a repeat of 2019. My valuation anticipates average charge-offs of 0.75%, which is significantly higher than 2019's 0.09%. But 2020 could be materially worse. If charge-offs hit 5.66% like they did in 2009, Alpine could be forced to raise capital. This could dilute existing shareholders. I'd say this scenario is possible, but not likely. Alpine's balance sheet looks like it can sustain up to 5.0% charge-offs, which is ample capacity for most scenarios.
Beyond the current crisis, Alpine faces the risk that growth in the front range doesn't come as easy as it did on the western slope. Alpine's initial data out of its Boulder and Denver branches look good. But it is too early to say decisively.
Summary
In summary, Alpine has a leading position in Colorado’s growing western slope. They have a wonderful deposit franchise and somewhat risky loan book. The bank looks cheap on a trailing basis and a bit more expensive when normalized for through-cycle credit costs. Alpine is well-capitalized and can withstand a substantial shock, but sudden losses greater than about 5.0% would likely require them to raise more capital.
Alpine has grown tangible book value at about 10% annually since 2000 (according to FDIC Call Reports), which is a superb record. If the future looks like the past, Alpine could compound at an 11-12%-ish rate. The stock’s valuation provides a margin of safety on this and the stock could outperform the business for a few years.
At $3,500 per share, Alpine trades for 1.1x tangible book value and 7.3x normalized pre-tax earnings. I generally think a bank earning a 1.0%+ ROA and 15%+ ROTE should be worth about 10x pre-tax earnings or 1.5x tangible book. These peg Alpine’s intrinsic value between $4,800 and $4,900 per share, about 40% higher. Shares are illiquid, so investors should take care placing their orders and only invest if they’re willing to hold for many years.
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