Earnings Call: Q2 2021

Jul 29, 2021

Good morning, and welcome to the Alaris Financial Corporation Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. 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 Alaris Financial Corporation, Chairman's President and CEO, Randy Newman. Please go ahead. Thank you. Good morning, everyone, and thank you for taking the time to join or listen to our call today. I'm very proud to report another quarter of incredible financial results and even more proud of our team members and how they continue to focus on serving our clients through holistic advice and unparalleled service. Our diversified business model built on decades of execution continues to set us apart in both performance and total shareholder returns. These key attributes of our company have also become the competitive advantage in attracting talent. During the quarter, we added one of the best SGA teams in the country to our talented employee base. With our strong commercial base of clients and the expertise and experience of this team, we believe this product will continue to help differentiate Alaris and the value we bring to our business clients. Strategically, we are laser focused on organic growth, led by our Chief Revenue Officer, Ryan Goldberg, who is joining us on the call today. The investments we have made in our sales force, both in training and technology, we believe will set us apart in bringing in new clients as well as expanding relationships with our significant client base of more than 18,000 business clients and over 500,000 consumer clients. During the Q2, production levels on all products were strong and we continue to see momentum building in our pipelines and preflights. Low line utilization, higher than historical prepayments and continued extraordinary levels of liquidity have been a sustained headwind. In addition to growth, we are also concentrating on expense management, process improvement and driving efficiencies in our organization. We are so impressed with our talented team members across the company who are reinventing how we do business throughout all areas of product lines, finding ways to replace manual processes with robotics, automation and soon artificial intelligence. These efforts will improve the profitability of our business units and just as important provide a better client experience that allows us to scale effectively as we continue to grow both organically and through acquisitions. Speaking to acquisitions, our Colorado transaction continues to go very well from a client and employee integration standpoint. Results are right in line with our model. The synergies we can extract in our business model are remarkable and affords us an opportunity to be a player in a very competitive M and A space. We continue to build on our acquisition pipeline on the fee income and banking side with proactive outreach to potential partners as well as exploring opportunities of companies which are currently looking for a sale or exit. In summary, another great quarter and strong shareholder returns. Our business model, our strategies and our strong foundation of capital and robust allowance levels have allowed Larus positioned for continued success. I will now turn it over to our Chief Revenue Officer, Ryan Goldberg. Thank you very much, Randy. 2nd quarter continued to build on the successes our business and financial advisors realized during the Q1. The team remained focused on proactive client interactions, understanding how Alaris can assist in building a better financial future for each business and consumer client and then recommending the most appropriate solutions on an individualized basis. Wealth management revenue increases can be attributed to sales of businesses, which are creating liquidity events for the owners, offering additional value added services to retirement plan participants such as 401 rollovers and remaining focused on having discussions with clients who are seeking more attractive returns in this low interest rate environment. Looking at Retirement Services, we have been very pleased with the progress we are making in our group with the acquisition of new plans and expanding the services that our clients are obtaining from Alaris in the areas of fiduciary, administrative and health and welfare solutions. Looking at lending performance, our new consumer and business loan originations are in line with our internal expectations, but the balance sheet benefit has been muted by lower than expected line of credit utilization and larger prepayments and balance reductions, which can be attributed to the excess liquidity that borrowers have access to currently. 2nd quarter loan volume was stronger than what we saw in the Q1 and continues to trend in a positive direction. The loan pipeline is building. It can be attributed to identifying client opportunities with multiple entry points into our expanding Alaris client base. We're very pleased with the SBA team that has recently joined Alaris during the Q2. We have integrated well into the company and the impact of their expertise is already being realized with new SBA loan volume being closed. SBA lending is an exceptional opportunity for us. Coming out of the PPP process, there is much more awareness of SBA programs and a willingness of borrowers to consider these options where the previous sentiment was not necessarily as favorable. In addition, for many businesses rebound, we have to get the worst of the COVID pandemic. This provides a set of solutions that can mitigate certain risk components of a lending application, allowing us to provide more options to make loans in our market. Through our focus on segmentation and talent identification strategies, we plan to add advisors in lending segments of focus that have expertise with C and I and CRE relationships in the communities we serve. We plan to continue our aggressive approach in adding revenue producing individuals in our market. We have recently seen high quality hires beyond just the SBA team, but also within our mortgage group, wealth management segment and retirement services group. At this point, I'm going to turn the call over to our CFO, Katie Lorentzon, for some additional financial commentary. Thank you, Ryan. Good morning, everyone. I'll spend just a few minutes this morning hitting on some highlights of another truly excellent quarter of results. 1st and foremost, Alaris' pretax pre provision results continue to outperform our peers. The key differentiator in our performance ratio is notably driven by Alaris' non margin dependent annuitized earnings, which have no credit risk and significantly less capital allocation. As PPP forgiveness accelerated during the quarter and liquidity levels remained relatively high, our NIM contracted further than expected. However, the Alaris business model diversified earnings continues to deliver exceptional returns to our shareholders. On the fee income side, I'll start with the Alaris mortgage division, which continues to execute at an exceptional level. Originations pull through gain on sale margins had another strong quarter. Revenue results were weighed down by the decline in fair value of the hedge, which is what we expected and have guided to over the last several quarters. We are seeing our business return to the purchase line. Historically, refides may have only about 20% to 25% of our origination volume. The 2nd quarter for Alaris was our highest quarter ever of purchase volume and application trends are reflecting the return to that purchase line. We expect the 3rd quarter volume to remain strong, the trend down from 2nd quarter levels and the 4th quarter volume returning to a more typical Q4 option level. On the Retirement, Health and Welfare Benefits revenue side, it continues to be strong with earnings accretion from our recently completed acquisition. We expect the run rate to settle in around $17,500,000 for the rest of the year assuming that market conditions hold steady. Our Wealth Management revenue was up 24% on a year over year basis. As Ryan mentioned, these investments are well positioned by weaker levels of new business and traction as we have invested in numerous financial advisers over the past 4 years. We are pleased with our continued success of adding talent to grow and expand solutions in our massive consumer client base. Last but not least, expense management. From an expense standpoint, our execution and controlling cost continues and we delivered another solid quarter of managed expenses. We continue to extract efficiencies and processes, operations and facility closures while growing our client base and engaging our clients in our robust technology investments. All of this, while employee satisfaction scores and recognitions continue to distinguish Alaris as an employer of choice. With that, I will turn it over to Karen Taylor, our Chief Executive Officer. Hi, Katie, and good morning, everyone. The 2nd quarter marked progress in moving toward our new normal. We have adopted a flexible approach to our work environment allowing many of our employees to work from home long term. The vaccines became more widely available in the spring. We implemented our Phase to Turn to Office plan, reopening our offices and returning those employees who will work from Miller's office. We expect the Phase to the plan to be complete in September. As of July 23, dollars 155,000,000 in GPT loans remained on the books, comprised of $51,000,000 in 1st round loans and $104,000,000 in 2nd round loans. Dollars 319,000,000 has been forgiven through the date. Remaining payments deferrals totaled just under $6,000,000 or 0.3 percent of outstanding unguaranteed balances, even almost entirely in our 1 to 4 families continuing portfolio. Asset quality metrics remained strong during the Q2. Nonperforming assets increased during the quarter due to 2 loans of income to non accrual, 1 commercial loan and 1 commercial real estate loan. In addition, our real estate owned increase was the 2 possession of Claro securing a long term breakout loan. I would characterize this as normalization in the portfolio not specifically attributable to the impact of the pandemic. We recorded a net recovery of $6,000 for the quarter. No provision was reported during the quarter due to strong credit metrics and is decrease in loan balances. The level of the reserve continues to be driven by qualitative adjustments due to economic uncertainty. The ratio of the allowance to total loans excluding 2QT loan balances was 2 point 0 2% at the end of the quarter and the allowance to non performing loans was 4 85%. As Ryan noted, low line utilization and prepayments to the high levels of Klaviyi continue to be headwinds to loan growth. As of June 30, utilization on our C and I lines was under 20% compared to 23% at March 31st and historical seasonal utilization rate normally in the mid to high 30% range. That concludes our prepared comments. We'll open it up for discussion and questions with closing comments from Randy to follow. We will now begin the question and answer session. The first question comes from Jeff Rulis of C. A. Davidson. Please go ahead. Good morning. Question on the low growth side. One of the couple of things, I wanted to check-in on the indirect portfolio, how much the size of that and what's left to off? Sure, Jeff. This is Karen. We've got about $37,000,000 left in that portfolio, and we've been seeing about $6,000,000 to $7,000,000 a quarter and half on that. Got it. Okay. And maybe Karen or Ryan, you talked about the SBA team. I guess, what's sort of the inflection point if you continue to see that indirect modest drag on the portfolio? Just want to check-in on inflection, you've got some SBA, a theme there and you're thinking about kind of the balance of the year, what net growth could look like absent PPP? Rami, do you want to take that? Sure. Thank you, Jeff. So what I would tell you at the start is we have some expectations as we go forward with our SBA team. They are off to a, I would say, a faster start than we expected. I think this is attributed to the quality of the group that we have brought in. They're working hard to establish the foundation within Alaris for this particular program. We're seeing really a broad based set of loan opportunities that have come into our team for evaluation. They're already starting to close business. We're optimistic about what the rest of the year would look like and believe that this will be a catalyst as we move into the next couple of years. And so the overall portfolio, I know that you said payoff activity is tough to peg. But in terms of the net balance of loans, kind of you look at a net growth position in the second half given things like that? We do. There's a variety of different things that we have options to pull in terms of levers for us to achieve some of the growth, but our expectation is in the low single digits for growth when you look at all of our lending asset classes on an aggregate basis. We're not exactly sure where each of the line items will play out at this point in time. Some of that's going to be opportunistic. Some of it's going to be environmentally driven. That's what our expectation is at this point is in that low single digits for the rest of the year and that's what we're aspiring to based on the different initiatives and activities that I mentioned in my earlier comments. Thanks, Ryan. And Katy, I just wanted to touch back into the mortgage banking update. I'm surprised gain on sale is increasing and volumes remain pretty strong. That's pretty significant. I know you've indicated some of the MSR adjustments, but the net line, could you remind me what kind of where you've guided to on that? I heard your comments about Q3, Q4 kind of volumes coming in, but the net number, any guide there? I kind of maybe lost track versus the previous quarters. Yes. That's no problem. Thanks for the question. So from an origination standpoint, I think we'll go under $400,000,000 for the Q3, but probably in the upper $300,000,000 We do expect the gain on sale margins to drop. That's probably a high level watermark for us. And then we do have probably around $2,000,000 to $3,000,000 of heads to unwind for the rest of the year. And so I would consider that in the headwind also. Is that per quarter or just for maybe In total. In total. Okay. So that's significant. I mean, relative to the kick you took this quarter, that's going to minimize quite a bit at and or so the net figure may be you can hold that up pretty well, if I'm reading it correctly. Yes. We I mean, in regards to we'll see we obviously took had a significant headwind in the revenue this quarter, but with the drop in originations plus the continued headwinds, we'll see the mortgage revenue drop probably around $8,000,000 or so will settle in there, we think. Okay. The next question comes from Nathan Race of Piper Sandler. Please go ahead. Hi, everyone. Good morning. Good morning. Good morning, Nate. Maybe hoping to get some color on the outlook for RBMS revenue going forward. I imagine some of the market strength that we saw in the Q2 contributed to solid sequential growth in that line 2Q. So just curious if you can kind of parse out how much of that growth was related to that appreciation in the market versus just kind of ongoing organic growth in that line because of the outlook for organic growth within RBMS in the back half of 2021? Yes. Good question, Nate. We think revenue there probably fills in around $17,500,000 from a run rate basis based on what we see today and where the market is today. And then on a go forward basis, we look to grow that revenue in the low single digits. Okay, perfect. Very helpful. And along the lines, when you think about RGS going forward, I believe we saw some announcements during the last few months around some other acquisitions, other entities that come in that space. So we'd love to hear your kind of updated thoughts on what you guys are seeing as it relates to future deals within that segment going forward and so forth? Yes, absolutely. I'll take that one. And I mentioned in my opening comments, the competition for fee income acquisitions continues to be elevated. But our with Alaris and our organization and the synergies that we're able to extract, we believe and we know that we can be very competitive in the M and A space. And so we continue to see more opportunities from a reactive basis as just awareness of the company and our capital that's available to deploy becomes more widespread as well as proactive outreach efforts continue to intensify with urgency around our team because of the competitive nature and the number of players that are attempting to enter this fleet or build scale. Got it. Understood. Makes sense. Just a couple of housekeeping questions about the overall balance sheet size going forward, the deposit inflows in Q2 in the quarter. And I imagine that's a function of just the macro factors outside of these data and as you guys continue to execute on some Monelaris synergy deposit growth. So just expectations for just the overall balance sheet size and if we should expect some continued growth with those strategies continue to play out and even as the PPP forgiveness process ensues and perhaps as some clients' liquidity levels come down? Right. From a balance sheet perspective, I mean, I think we're continuously surprised at the level of liquidity that maintains. I we'll continue to put more into the investment portfolio and move that up to $1,000,000 From a deposit balance side, we are seeing some outflows, as we did last quarter with our retirement money markets. But we are also at a low watermark for some of our public funds, which we don't have very much of. So I don't believe we'll see any liquidity or we're not expecting any liquidity out flow at this time. Okay. Got it. And then just one last one, I apologize if you guys already touched on this. But the other expense line was lower by about half quarter over quarter. Do you think this is fair and just thoughts on just the overall operating expense run rate in the back half of twenty twenty one? Yes. I think that there's been some noise in that number in both quarters. So I think that's more of an $800,000 to $800,000 run rate going forward in a typical quarter. And from an expense standpoint, with mortgage origination volume declining, I think we would expect to drop another $1,000,000 of expense down in the Q3 and then potentially another $1,000,000 in the 4th quarter from that. Okay. That's very helpful. I appreciate all the color. Thanks, everyone. This concludes the question and answer session. I would like to turn the conference back over to Randy Newman for closing remarks. Thank you. And thanks to everyone for joining our call this morning. Thank you for listening and asking questions. Our financial performance in 2020 was record setting. The first and second quarters of 2021 have continued this pace. Although the industry is facing headwinds, our company, which has historically outperformed our peers, remains well positioned for future success because of our diversified business model. We continue to see momentum building in our pipelines for new business and client expansion across all products and a high level of engagement within our team. We have a constancy of purpose that is embraced and magnified by our leadership team, and we remain focused on working together to grow the company. This steady and strong foundation is allowing us to retain and recruit top talent, serve in the best interest of our clients and deliver long term value for our shareholders. We are very pleased with our performance year to date and thank all of our shareholders for their investment and our team members who work daily to positively impact our clients' financial potential. We thank you for your continued support and interest in our company. And again, thank you for joining or listening to today's call. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.