Q2 2023 Amerant Bancorp Inc Earnings Call
Okay.
Good day and thank you for standing by what we'll do in Marin Bancorp's second quarter 2023 earnings Conference call. At this time, all participants are in a listen only mode.
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Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Laura Rossi head of Investor Relations and sustainability at a merit Bancorp. Please go ahead.
Thank you Gigi good morning, everyone and thank you for joining us to review Ameren Bancorp's second quarter 2023 results.
On today's call are Jerry flush, our chairman and Chief Executive Officer, and Sharon Malka, let alone.
Our executive Vice President and Chief Financial Officer.
As we begin please note that discussions on todays call contain forward looking statements within the meaning of the Securities Exchange Act. In addition references will also be made to non-GAAP financial measures.
Please refer to the company's earnings release for a statement regarding forward looking statements as well as for information and reconciliation of non-GAAP financial measures to GAAP measures.
I will now turn it over to our chairman and CEO Jerry Plush. Thank you Laura and good morning, everyone and thank you for joining Amarin second quarter 2023 earnings call.
I'd like to first welcome Sherry, who as our new Chief Financial Officer is on her first earnings call with US today and to also thank cargoes theatrically Ola Cruz tenure as our CFO .
As recently announced Carlos became our new Chief operating officer, and Jen I believe having both of them as part of our executive team makes us a much stronger organization.
Next I think it's important to address upfront that well this was an outstanding quarter in many ways. The results are clearly overshadowed by the provision expense reflected in the Q2 results.
Substantial increase from last quarter was driven by our legacy New York City commercial real estate loans originated in 2016 and from increased negative economic factors used in the seasonal calculation.
Her section Sherry will provide additional details of the provision recorded this quarter.
Outstanding deposit growth in Q2 and year to date that we will review in the presentation reflects our goal of being able to rely on ourselves for organic deposit growth and we believe this clearly sets us apart from the competition.
We've been talking about how essential it is to be at deposits first relationship based bank and it is showing in our Q2 and year to date performance. We provided more granular information on the sources and types of deposits in today's earnings presentation, and I won't go into it in detail shortly.
In addition, this quarter we are reporting on reflects the achievement of the highest core pre provision net revenue.
For any quarter in the history of our the history of the company as a public company, primarily driven from a higher average balance overall, coupled with a strong net interest margin. So as a result of higher NII and lower core expenses, we were right at 60% and core efficiency. So as we go through the slides today.
You will see that we have changed the presentation order and we've added some additional slides that we believe will be helpful and I'd further transparency.
So I'm going to cover key highlights and actions taken in two Q, along with deposits liquidity and capital and Im sure. He is going to cover other balance sheet items and our performance for the quarter in detail.
So now we'll turn to slide three and here, we provide a summary of our second quarter highlights.
Net income attributable to the company was $7 3 million compared to $20 2 million and <unk> 23. This decrease was primarily driven by the higher provision for credit losses in the period.
The net interest margin was 383% compared to the three 9% we reported last quarter, but in line with our previous guidance for the quarter of a 10 basis point margin reduction from <unk> levels.
Our assets increased 24 million compared to <unk> 23, total gross loans were 722 billion compared to 7.12 billion last quarter, an increase of 102 million and total deposits were $7 five 8 billion up $293 million compared to the $7 billion to $9 billion last quarter.
The company's capital levels continue to be strong and well in excess of minimum regulatory requirements to be considered well capitalized at June 32023.
Our tangible common equity ratio remains strong at 734% as of June 32023, as we classified the vast majority of our investment portfolio as available for sale the mark to market on the portfolio was deducted from TCE.
In an upcoming slide will also show TCE, if you deducted the market value adjustment related to the held to maturity portfolio, which would result in TCE of 716%.
Lastly, during the quarter. We also paid out the previously announced cash quarterly dividend of <unk> <unk> per share on May 31.
So now I will turn to slide four and here you can see the core P. P&I was $39 2 million compared to the $37 1 million reported in the previous quarter.
We recorded a total of $13 4 million in non routine noninterest expense.
Mostly offset by total non routine noninterest income of $12 4 million, which includes $13 4 million in gains on early extinguishment of federal home loan bank advances.
Non routine noninterest expense items recorded into our listed here in detail and substantially all of these were previously furnished in our form 8-K, we filed in mid June in conjunction with our virtual non deal roadshow.
The impact of these non routine items overall with a net negative of $1 million.
We'll turn now to slide five and cover key actions taken during the second quarter. So again loans, we reported growth year to date of 297 million or four 3% at $102 million or one 4% in Q.
Regarding deposits, we have had growth year to date of $535 million or seven, 6% and $293 million or 4% into Q. Our loan to deposit ratio is now 95, 2% compared to the 97, 6% for <unk> and 98, 2% for <unk> of 22.
As noted earlier, we're focused on our organic deposit growth and reducing reliance on other funding sources, except for asset liability needs. We're also working on improving the deposit mix to generate even more core deposits more on that shortly.
Next to our banking center rationalization continues we've listed here details regarding additions are key Biscayne, Florida location opened in June as plan and we already have over $16 million in deposits, our downtown Miami, Tampa and Fort Lauderdale locations are still in process to open by year end and new in <unk> 'twenty.
Great.
We're under LOI for a private banking location in the river of section of Houston, Texas and the agreement is in final stages approval that has already been received from the OCC.
On the consolidation side, we closed our ethane 1960 location in Houston, Texas and merged it into our champions Banking Center, and we intend to close our Edgewater location in Miami, Florida to coincide with the downtown Miami opening.
Turning now to the stock repurchase program, we have a 25 million class a common stock share repurchase program in place and in May and June we repurchased 95262 shares for $1 7 million. So at an average price of $17 42 per share alright, 0.8 price to book value.
We are prudently balancing between cash on hand capital levels and price levels availability remaining under this program was $22 million as of quarter end.
Next regarding people, we finalized all of the expected executive team moves and further optimize our org structure. We're delighted to have these changes behind us to welcome the new people on board and to be totally focused now on the business and I'm happy to say these changes are already having a significant impact on our results.
Our new head of commercial banking and our new Houston market President were on boarded during the quarter, we merged retail and business banking into one unit to gain synergies between the two lines of business under one leader, resulting in significant go forward savings. We did the analysis to rationalize the organization as several other support areas, which will also result in a.
Future period efficiency and personnel expense savings. These changes also improved the ratio of customer facing to support positions to be close to 50 50, and we intend to further improve this ratio as we go ahead and.
And finally, we continue to selectively add key business development personnel and the three markets, we serve including as I mentioned, the hiring of a new private banking leader in Houston, who starts in early August and we've added three new key commercial.
Business development officers here in South, Florida, all of whom start next week.
So now we'll turn to slide six and I'll provide an overview regarding deposits as of June 30th.
This is one of the new slides I referenced earlier, so again total deposits at the end of the second quarter were $7 6 billion up $293 million from the prior quarter. You can see here. The increase was primarily in commercial retail and private banking as well as international.
Ganic growth was even higher for the quarter than the 293 $293 million, we just referenced as we've reduced institutional and broker deposits by $136 million or $52 million, respectively. We remain committed to maintaining our current ratio of loans to deposit with a target of 95% Chad and intent.
Not to exceed 100%.
So we'll turn now to slide seven and here you can see we continue to have a well diversified deposit mix composed of domestic and international customers. The growth. This quarter was primarily driven by increased transaction and time deposits domestic deposits now account for 67% of total deposits totaling $5 1 billion as of the end.
For the quarter, and that's up $222 million or four 5% compared to the previous quarter in international deposits, which account for 33% of total deposits totaled $2 5 billion and that was up $71 million or 3% compared to the prior quarter.
We intend to continue to emphasize international deposit gathering as a source of funds given the favorable pricing and to take advantage of our infrastructure and capabilities. We believe this is essential to do as it provides additional diversification to our funding base.
Domestic deposits include over 50000 accounts with an average size of $100000. While international deposits include approximately 58000 accounts with an average size of $45000 or core deposits defined as total deposits excluding all time.
Were $5 $5 billion, that's at the end of the second quarter, an increase of $141 million or two 6% compared to the previous quarter. The $5 5 billion in core deposits included $2 8 billion in interest bearing deposits up $284 million or 11, 4% versus previous quarter, $1 4 billion in savings and money market.
<unk>, which was down $76 million or 5% versus the prior quarter and $1 3 billion in noninterest bearing demand deposits down $67 million or four 9% versus the previous quarter.
We'll now move to slide eight and here. We've again included this table to provide additional data regarding deposit insurance coverage.
Even 1% of our deposits are FDIC insured and additionally, we carried $275 million in qualified public deposits in the state of Florida as of the second quarter, which are subject to collateral requirements.
By the state of Florida, reciprocal deposits, which are 100% insured by the FDIC through the <unk> network grew to $1 billion at over 200 accounts as of the end of Q2 'twenty three we are actively.
Actively marketing this to our customers and it's branded as amarin protect to existing as well as potential customers and we intend to continue to proactively promote this to protect our customers on an ongoing basis.
Additionally, our large fund providers defined as those with balances above $20 million or approximately 15% of total funding as of the end of the second quarter.
We'll move now to slide nine regarding liquidity risk management, we're going to provide some details not only on our practices on additional actions, we've taken to strengthen our funding and capital position. So our standard liquidity management practice that includes such things as regular testing of the lines of credit daily.
Monitoring of our Federal reserve account as well as large fund providers daily analysis of our lending and deposit gathering pipelines limits on liquidity ratios active collateral management and as shown here, 79% of the $1 $2 6 billion in the investment portfolio have direct or indirect U S government guarantees.
So in terms of credit availability totaled advances from the <unk> were $770 million as of June 30, 'twenty. Three we have an additional $2 1 billion of remaining credit availability from this source based on current collateral availability are open borrowing capacity with the <unk> is 134 billion.
Please note that no funds have been needed from emergency funding facilities or from the discount window from the Federal Reserve Bank.
Regarding additional actions taken to increase our liquidity position, we have a strong cash position of $381 million at the Federal Reserve Bank. As we just mentioned we are continuing to work with our large deposit clients to promote ameren protect to ensure all of their deposits are 100% FDIC insured we increased volumes under this product.
By $454 million and added 127 accounts the coverage in <unk>.
And we continue to include deposit covenants with minimum balance requirements for any new financing relationship. So.
So in terms of liquidity at the holding company, we carry $60 5 million in liquidity on hand, which covers approximately four times, our annual Opex and debt service ads of <unk> 23, the dividend just declared by our board will use only $3 $1 million of this cash on hand.
We'll turn now to slide 10 here, we provide an update on share repurchases and shares outstanding.
So after having elected to pause on repurchase in March given industry events, we began to prudently use our $25 million share repurchase program again during the quarter. We believe the current market price does not reflect the true valuation of our stock. So this presents an opportunity to repurchase in <unk> as I referenced before we'd.
Repurchased 95262 shares of common stock and I've said this before and I'll say it again today when done right and a measured prudent way, there's nothing better than buying back part of your own business. It shows you believe in what you're doing and the value you can and will create.
So we'll turn now to slide 11, and we will show our capital position relative to regulatory minimums. So at the end of <unk> 'twenty three our total capital ratio ended at 12, 41% and our CET one was 10.02% our tangible common equity ratio, which includes $87 million of OCI.
Resulting from the after tax change in valuation on the <unk> investment portfolio was 734%.
Regarding our tangible common equity ratio here, we show the impact of the $18 5 million in unrealized losses from our held to maturity investment portfolio and what that would have on our TCE, which results in an adjusted TCE ratio of seven 106% remember that this is not required but we show it that we show this here.
To emphasize the relatively small impact. This would have included at our tangible book value per share also adjusted for the held to maturity valuation stood at $20 11 as of quarter end.
So with all that said I will turn things over to Sherry now she'll go over key metrics other balance sheet items and the results for the quarter in more detail Sherri. Thank you Gerry and good morning, everyone happy to be here to share more color on our financial position and performance. So turning to slide 12, I'll begin by discussing our key performance metrics under changes compared to last.
Quarter noninterest.
Noninterest bearing deposits to total deposits decreased to 17, 1% in Q2 compared to 18, 7% in the previous quarter. This comes as no surprise as interest for DDA is reduced and customers continue to seek higher interest rates on their deposits given market competition, we continue to be keenly focused on increasing this race.
Through the different initiatives Gary mentioned.
Our efficiency ratio was 65, 6% compared to 63, 7% last quarter and ROA and ROE were lower this quarter at 31% and $3, 92%, respectively. As a result of the higher provision and non routine charges we discussed.
For consistency and transparency, we show the three core metrics of ROE.
ROE and operating efficiency, excluding onetime non routine item. So you can more easily see underlying performance for the quarter as.
As an example core efficiency of 63% versus the 65 six.
6%, which includes non routine charges.
Lastly, the coverage of the allowance for credit losses to total loans increased to 148% compared to one 2% as a result of increased provision associated with the New York City legacy loan and consumer loan charge offs as well as updates to the economic outlook.
Continuing to slide 13, I'll discuss our investment portfolio.
Second quarter investment Securities balance was $1 3 billion, which remains unchanged compared to the previous quarter when compared to the prior quarter. The duration of the investment portfolio has extended to five one years as the model anticipates longer duration due to recent higher mortgage rates and therefore, it's an art repayment.
We did last quarter I would like to take a minute to discuss the impact of interest rate increases on the evaluation of debt securities available for sale.
And so at the end of June the market value of this portfolio decreased $13 5 million after tax compared to an increase of $3 9 million in the first quarter the.
The change quarter over quarter was driven by rising rates during the second quarter.
Available for sale portfolio represents 78% of the total investment portfolio well held to maturity securities representing 18% and the remaining balance is federal reserve an official destock.
Continuing on to slide 14, let's talk about the loan portfolio.
At the end of the second quarter total growth loans were $7 2 million billion up slightly <unk>, 4% compared to 712 billion at the end of the first quarter.
This growth was driven by loan origination efforts, primarily in specialty finance and single family residential mortgage.
Partially offsetting this increase were prepayments of approximately $183 million, primarily in commercial and consumer loans.
Specialty finance loans increased to $625 million compared to $557 million in <unk>.
The single family residential portfolio was 133 billion, an increase of $93 million compared to 1.16 billion and $1 23.
This amount includes $113 million in notes originated and purchased the RMR mortgage during the quarter, primarily done with private banking customers and other strategic relationships.
<unk> loans as of Q3 were $503 million, a decrease of $47 million or eight 5% quarter over quarter.
This includes approximately $312 million in higher yielding indirect loan which had represented a tactical move for us to increase yields as we mentioned last quarter. We are focusing on organic growth and are no longer buying any new production since the end of 2022.
We estimate that our current prepayments speeds these will pay off over the next two years.
Also we continue to run our strategy of the New York City CRE portfolio. The balance remaining is 292 million consisting of 24 properties.
Loans held for sale, which are all in connection with Ameren mortgage total $50 million as of <unk> 23, compared to $65 million as of the previous quarter.
Inline with our business focus in Tampa, We will continue to include this market to show our progress as a percentage of the total portfolio, which was almost 4% as at the end of the quarter.
Tampa represents a significant source of growth opportunity for us for full banking relationships.
Of note this quarter, we successfully completed our transition from labor to fill for <unk>.
Your existing contracts have a robust fallback language that includes a clearly defined alternative reference rate, we converted approximately 390 loans with a total loan balance of approximately $1 1 billion.
Turning to slide 15, let's take a closer look at credit quality, our credit quality remains sound and research coverage is strong the allowance for credit losses at the end of the second quarter was $106 million, an increase of 25, 6% from $84 4 million at the close of the previous quarter.
Recorded a provision for credit losses of $29 1 million in the second quarter, which includes $15 7 million in additional reserve requirements for credit quality and charge off $1 4 million to account for loan growth in the quarter and 12 million to reflect updated economic factors.
It is important to mention that the quarterly 2022 provision for credit losses, and that reflects the disaggregated impact of Cecil implementation for those specific period.
During the second quarter of 2023, there were net charge offs of $7 5 million and was $7 6 million related to indirect consumer loans, and one 5 million related to multiple commercial loans. This was offset by $1 6 million in recovery.
Nonperforming loans to total loans are up to 65 basis points compared to 31 basis points last quarter. This is primarily due to the further downgrade from a special mention of our New York City CRE loan for 24, 3 million and a commercial loan for $1 5 million.
Nonperforming assets totaled $67 4 million at the end of the second quarter, an increase of $18 7 million compared to <unk> 23.
This includes the increase in Npls and $6 4 million decrease in other repossessed assets related to the sale of transportation equipment, reprocessed and disclosed last quarter.
The ratio of nonperforming assets to total assets was 71 basis points up 20 basis points from the first quarter of 2023.
In the second quarter of 2023, the coverage ratio of loan loss reserve to nonperforming loans closed at two two times down from three eight times at the end of the last quarter and from two eight times at the close of the second quarter of last year.
Now on slide 16, we discuss our CRE portfolio in further detail.
We have a conservative weighted average loan to value of 59% and debt service coverage of one four times as well as strong sponsorship tiered profile based on AUM net worth and years of experience for a sponsor.
The end of Q3, we had 31% over theory portfolio and top tier borrowers.
We have no significant tenant concentration in our CRE retail loan portfolio as the top 15 tenants represent 22% of the total.
The major tenants include recognized national and regional grocery stores food and clothing among others.
Our underwriting methodologies for CRE include sensitivity analysis for a variety of key risk factors like interest rates and their impact over debt service coverage ratio vacancy and tenant retention.
Please note that over 45% of our CRE portfolio had been hedged by the borrowers interest rate caps or swap, which in turn protects them against rising rate environment.
Next I'll discuss net interest income and net interest margin on slide 17.
Net interest income for the second quarter was $83 9 million up $1 5 million or one 9% compared to the previous quarter, our asset sensitive position enabled us to often be a repricing the incremental cost of deposits. We recorded during <unk> due to higher market rates and balances as well as the cost of borrowings which also increased.
Rates, despite lower balances.
The increase was primarily driven by higher rates on total interest, earning assets, primarily loans and interest earning deposits with banks in line with the 25 basis point increase in the benchmark rate into Q increase.
Increased loan balances, primarily commercial and single family residential and to a lesser extent CRE and owner occupied loan and decreased balances unofficially be advances savings and money market deposits.
As rates continue to increase during the quarter, we experienced higher beta via the combined effect of rate increases in money market profit as well as repricing of time deposits that had not repriced at current market rates.
As you can see in the graph, we observed a beta of approximately 40 basis points on accumulative basis since the beginning of the interest rate cycle, but over 90 basis points quarter over quarter as.
As we indicated last quarter, a large portion of our time deposits have repriced at current market rates and a reduced balance of luxury price limiting the impact on our interest expense in coming quarters.
Moving on to the net interest margin I think Gerry mentioned NIM for the second quarter with $3, 83% down by seven basis points quarter over quarter as I said, our ability to offset funding costs and contain further a further decrease in NIM is a reflection of our asset sensitive position. However, we expect the margin to continue to be pressured given substantial market competition for domestic departure.
And demand for hiring I'll provide some additional color on NIM forecast in my final remarks.
Moving on to interest rate sensitivity on slide 18, you can see the asset sensitivity of our balance sheet with 51% of our loans, having floating rate structures and 54% of repricing within a year.
As we have said in previous calls we continue to position our portfolio for a changing recycle by incorporating grateful when originating adjustable rooms.
We currently have over 50% of our adjustable loan portfolio with Fleury. Additionally, you can see here the transition to sofa rates with 30% of our portfolio now indexed to this right.
Our NIM sensitivity profile remains stable compared to the previous quarter. We include the sensitivity of our available for sale portfolio to showcase our ability to withstand additional negative valuation changes I would like to remark the organic improvement in OCI by $12 million due to the expected maturities of the investment portfolio and expectations of rate reductions during 2024.
We will continue to actively manage our balance sheet to best position our bank for the remainder of 2023.
Continuing to slide 19, noninterest income in the second quarter was $26 6 million up by $73 million or 37, 6% from $19 3 million in the first quarter of 2023.
As referenced earlier $13 4 million of noninterest income were non routine items.
The increase was primarily driven by lower losses on the sale of available for sale securities compared to the previous quarter.
This increase in noninterest income was partially offset by lower fee income from customer derivatives and by lower mortgage banking income.
<unk> assets under management totaled $2 1 billion as of the end of the second quarter up $40 million or one 9% from the first quarter. This increase was sprint was driven by approximately 11 million in net new assets as we continue to execute on our relationship focused strategy as well as approximately $60 million from increased market valuation.
Turning now to slide 22nd quarter noninterest expenses were $72 5 million up $7 8 million or 12% from the first quarter as Gary covered earlier, we considered $13 4 million of our expenses this quarter as non routine expense items exclude.
Excluding these items core non interest expenses were $59 1 million in the second quarter of 2023.
The quarter over quarter increase was primarily driven by $2 6 million loss on the sale of repossessed assets in connection with our equipment financing activities $2 million of impairment charges related to an investment carried at cost in connection with a specific fintech investment given current investment round two.
$2 million and higher severance expenses in connection with the organizational rationalization mentioned by Gary which provided for an improved ratio of customer facing versus support function.
One 7 million in additional advertising expenses in connection with our partnership with professional sports teams given both teams advanced This championship brown.
One 6 million in additional expenses in connection with the termination of contracts with third party vendor, resulting from our upcoming engagement with Fas.
One 4 million in additional telecommunications and data processing expenses due to the write off of an in development software and $1 1 million of additional branch closure expenses and related charges as a result of our decision to close the edgewater location in Miami, Florida.
The increase in noninterest expenses was partially offset primarily by lower loan level derivative expenses due to the absence of additional expenses in <unk> related to the transition of interest rate swap and cap contract with clients from labor to any replacement index.
Lower salaries and lower professional fees.
In terms of our team we ended the quarter with 710 Ftes slightly lower from 722, we had in <unk>.
Out of the 710 team members 617 are employed by the bank and 93 by Ameren mortgage.
On that note, let's turn to slide 21, which focuses on ameren mortgage on a standalone basis Ameren mortgage had a negative of <unk> of $1 million and <unk> 23, which was consistent with 123 results our efficiency ratio excluding the activities for memory mortgage improved from 65, 6% to $63 seven.
Percent.
During the second quarter, the company originated and purchased approximately $113 million in loans to Ameren mortgage and as noted on the slide related to bank customers.
Current pipeline shows 95 million in profit or 294 and applications as of July 17, 2023, with a $121 million in rates locked.
Now before I turn it back to Jerry I would like to provide you with some color on our expectations for next quarter.
Regarding growth, we expect stronger loan broke in the third quarter given the current pipeline in line with a 10% annualized growth communicated earlier.
Deposit growth continues to be strong, but note that any excess over loan growth will be used to further reduce high cost institutional deposits.
Given the rate environment, we expect margin to reflect rising deposit costs due to competitive pricing.
Our expectation is the reduction in NIM in the next quarters of 18 to 20 basis points.
For noninterest income, we expect a range of 15 to 16 million next quarter.
Regarding operating expenses, we estimate core noninterest expense to remain in the $60 million range, and we expect provision for credit losses to normalize and be in or around 10 million next quarter.
It over to Gerry for his closing remarks.
Thanks, Sherri, let me cover a few items in closing.
Our Fas.
And it has been delayed from this quarter to early November we.
We want to have everything right as to the folks at Fas and we agreed after three rounds of readiness testing to push the timing back to ensure everything is just right no workarounds.
While we are certainly planning we were certainly planning on being converted by now it is absolutely the right thing to do to make sure everything works as it showed systemically to ensure a great experience for our customers and our people.
Next in light of the inevitable further margin compression as Sherry just referenced we're evaluating everything so from expenses margin enhancement strategies growth strategies among others.
I think in light of the pressure on earnings that is coming from higher funding costs, we must look at absolutely everything and we have already begun to do this and we'll continue to do so.
And finally, we expect and intend to continue to grow organically.
Are open for business there are ample opportunities in the markets, we serve and we welcome existing and new customers willing to have full banking relationships to grow with us so with that I'll stop Sherry and I will look to answer any questions. You have so <unk>. If you would please open the lines for Q&A.
Thank you as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again.
These standby, while we compile the Q&A roster.
Our first question comes from the line of Michael Rose from Raymond James.
Hey, good morning, everyone. Thanks for taking my questions.
Hey, maybe we can just hey, how are you Jerry maybe we can just start on deposits understanding that the niv mix dropped like everybody else.
You guys are at 17% I know you have a lot of initiatives in place you have a very sticky.
Lower cost foreign deposit element, which is clearly very unique and I think a very positive thing in this type of environment here you on the margin guide just trying to get a sense for are we kind of nearing after this quarter's kind of expected compression are we nearing a bottom just given some of the efforts that you have.
Undertaken any deposit growth, obviously paying down some of the higher cost stuff just trying to get a sense for are we at or near a bottom for NIM. After this quarter. Thanks.
Yeah, Hey, Michael Great question.
And certainly one we want to see happen as well the answer which is look we feel theres clearly going to be a drop.
Competitive pressures, whether youre raising money in money market <unk>.
The different maturities that are out there are terms on Cds right and let's let's just clarify customers have clearly expressed strong preference to be actively managing their money and so youre seeing that in terms of what's getting.
The real growth is really coming well again in core youre seeing equal if not bigger growth happening in time deposit so.
In our case, we actually grew noninterest bearing but to your point as a percentage it's declined.
Because again, it's been overshadowed by the greater growth in the other categories. Our view is that.
I think it's probably a little too early to tell but we certainly believe that our goal is to not have consistent quarters of margin compression going forward, we'd like to think that we can proactively manage this.
And again, depending on the rate increases we would obviously see.
An increase in yields out of the loan portfolio, given the higher percentage of variable to fixed that we've got there.
So I think where we are right now is we do believe that it's going to come in that solid 18 to 20 lower.
We are going to grow I mean, the view is we've got great pipelines on both sides of the balance sheet.
But it is important to recognize that the key for us to keep our cost down is clearly to focus on noninterest bearing so getting more relationship core operating accounts and it's also to continue the growth and it really ramp up the growth in the international side, because we see obviously the advantage there.
As we are we can attract a lower cost and a very sticky deposits.
Very helpful and that kind of leads into a follow up question you kind of mentioned pipelines being solid I think growth. This loan growth. This quarter was like 7% annualized just talked about it being stronger in the third quarter just wanted to get a sense how much of that is from maybe some of the newer markets like Tampa.
Some of the hiring efforts in Houston or is it really just that.
Other markets in South, Florida, So, it's really that strong and theres a lot of demand out there or is it more kind of just.
Growth in some of these new markets and market share gain versus maybe some competitors trying to.
Get a better sense for where the growth's coming from thanks.
Yes.
We actually see growth potential in all three markets. So if you consider it.
South, Florida, Great get up right. The three counties across the three counties. In addition to the greater Tampa Bay area as well as in Houston.
We are definitely seeing solid demand in all three.
Think it's overweight in one versus the other Tampa. The team has been building Jason has been there now a little over a year, whereas a team of 20, plus when you count and some of the mortgage personnel to work out of that office.
And it's really beginning to show in the momentum that they've got in their pipeline.
<unk> joined Us obviously.
In the past quarter, and they've shown a very nice job of getting your hands around.
Things, there and proactively out and meeting with customers and meeting new customers.
So as I said, we're open for business. The thing that we are requiring with any new customer and certainly any customer that wishes to renew expand relationships.
We want a fuller relationship with all our customers and Thats, where a fair bit of this deposit growth is coming from we are mining so to speak.
Our own customer base. In addition to requiring as we said we've put deposit covenants in place and Theres got to be very very.
Good reasons, if there isn't to meet a certain standard is that there are other opportunities with that customer to eventually get there. So we're excited and I think it's important Michael I'll, just real quick we not only hold.
I'll call. It the classic Credit Committee review the pipelines talk about that on the loan side.
Every week, we hold a weekly roundtable on deposit pipeline and so every business leader in the organization every region in the organization's represented and we go over deposit opportunity. So.
I think again, that's shown in our numbers and we fully intend to just continue to press our efforts in both sides.
Jerry to complement that too when we're thinking about our overall growth strategy and ensure for market. I think it's also important to mention our focus or are we are looking into our international deposits with the lower cost that they come through so I think it's built within our strategy for for Houston Tampa, Florida.
I appreciate the color and maybe just finally for me Jerry you mentioned.
Everything is kind of on the table on the expense side, just given the revenue challenges that are out there you guys have chopped a lot of woods since the IPO in that regard from here. It seems like it's probably gets a little bit more difficult just trying to size up where the opportunities could be to to kind of cut around the edges just assume.
The homeruns are gone and you are going to be looking for more singles and doubles types of.
Expense reduction efforts. Thanks.
Yes, Michael I'll give you a good example of something as simple as total square footage in the organization.
We are reassessing means we're certainly looking at you know what I've told a lot of folks in the organization already.
Even the potential with a number of folks that we have sort of been the at a hybrid work situation, whether we could eventually go to more of a hotel in scenario. So when I say everything's on the table. We're basically looking at every single expense line item that you see in art.
At the consolidated level I'll call. It an hour summary level in the P&L and breaking down every single GL that feeds those and reassessing everything that's there so.
I'm excited because I think we have come up with a few things I think the really important thing to share with you Sharon I have.
Lots of opportunities just given the number of investor conferences that are coming up here in the third quarter.
To bring updates on all our progress on all of that.
So in August and in September So the way I look at it is we've got three 8-K filings with.
The documents to give you updates as we you know.
Fully uncovers things and move things forward, so nothing today to share.
Obviously, we would have done that but my view is lots and lots of work in process and.
And we do think that there are opportunities.
Thanks, Jerry Sherri I appreciate the color I'll step back.
Thanks, Michael.
Thank you one moment our next question.
Our next question comes from the line of Graham <expletive> from P. F C.
Hey, guys good morning.
Hey, Graham.
So I just wanted to.
To start on the buyback. So you guys used a little bit of it this quarter.
Just wanted to get your sense for your appetite on that going forward.
I know you said the shares are attractive here and there's no better investment than your own stock.
The bank seems pretty well capitalized with common equity tier one over 10%. So just trying to get a sense for what you guys might do on that front and how active you might be it seems like there's a lot left in the authorization relative to what you guys have used so far.
Yeah, Greg good question.
We've been slow and steady with it I think we've been very consistent that represents we're not going out at any given day in and doing a big slug, we are consistently evaluating opportunities.
And I think that that's the way we will continue.
Sheri and I know, we've chatted, obviously very openly with our board of directors about this you have to be incredibly prudent when you look at this right because it's a balancing act we've got to grow our capital to grow our balance sheet.
We want to continue to pay dividends. So we're looking at all of the different moving pieces and but we think it's incredibly important to make sure people know we have an active program. We intend to continue to pursue where there are opportunities.
And whether we take up a lot of that rest of that between now and next quarter or so.
We have.
New expectations of price that put us in a place where we feel comfortable that we don't necessarily have to we're going to be opportunistic.
So I would just kind of sum it up that we have it in place it's something that we balance we look at our cash needs at the Holdco, we look at.
Capital levels, but we also obviously have a clear eye towards you know this is a really important tool in terms of the way we manage the company to have a program out there and to be actively using it.
Okay understood.
And then I just wanted to flip to credit quickly and just kind of.
Drill down a little bit I guess more on the New York portfolio.
And I guess the office broke in the multifamily book in particular, but just on the office book I know, it's relatively small at only $38 million, but wanted to get your sense for how that book.
Book is performing and how you might think it plays out over the next couple of years.
I'm sorry, the debt service coverage ratios of one one times or whatever are you seeing any any trends on that front in terms of your borrowers being able to generate.
Rent growth.
Or or otherwise.
Yes look I think at this time, we don't have.
Certainly any immediate issues on anything within office its two loans.
I will tell you that our new head of commercial banking wanting us to reap has been.
Very very active in being out meeting with customers has been to New York has done the full <unk> visited all of the properties with other team members from the organization.
The one unfortunately that we've circled this quarter really seems to be the singular problematic. One they are really at this point based on those reviews I don't really see that there is anything else material like that on the horizon right.
Just to add a little bit color on the office space in Europe , we have loan to values and our ratio of 70% and the debt service of one bring to them.
Okay. That's helpful.
Then lastly, I just wanted to hit on the NIM quickly.
B.
Yes, your NIM guide of down 18% to 20 basis points.
Sort of how do you guys have any update on where you guys think the total deposit beta might shake out maybe by the end of the year, if we get a fed pause.
When we look into how Davita has.
In Q1, and Q2 I think it's fair to say that at least for Q3, we expect that data to be somewhere in between the results for both quarters.
We even considering a stable rate from deferred right. So.
Image any shifts with somehow a decrease going forward I think we've captured some of that already in our historical report. These past two quarters, but I think it would be a good estimate to say between Q1 and Q2 results.
Yes, I do want to also comment.
The NIM compression one of the first things and I think one of the big accomplishments. This quarter was the pay down of institutional and one of the reasons that we wanted to break that out and it's really not to.
Other than to highlight that that tends to be the highest costing funding that we have on the liability side and so that's an area of focus for us. So when we can exceed deposit growth and be able to continue to maintain our loan to deposit ratio, where we where our intent is to drive costs down so back to.
The NIM itself. If we believe we can generate more international obviously, that's a very favorable data.
We can as one of the earlier questions was continue to ramp up on noninterest bearing and I will tell everyone.
We believe we have a lot of opportunity. Once this conversion is complete because we really like the platform capabilities that we will have we have already moved all of our customers over two and remote deposit capture.
We will.
Obviously be introducing them to a very comprehensive platform that we just think will really give us a competitive advantage going out in that.
That opportunity for us to get more lower cost better data.
Deposits in the organization so just for what it's worth.
I recognize that the drive up and data is clearly directly linked into what we're seeing as it relates to the.
The higher costing deposits, we've been putting up right and when we think about the repricing thats upcoming.
We do see that there are we do have part of our portfolio up for repricing, but when we look at the gap of the rate we're expecting than most of our deposits already captured that increase right. So we do have some coming up and repricing, but that already is capturing the higher rates. So that's how it offsetting beyond are getting us to a slightly decrease there.
Okay very helpful. Thank you guys.
Absolutely.
Thank you our next one moment for our next question.
Our next question comes from the line of Brady Gailey from K B W.
Hey, Thanks, good morning, guys.
Brady.
So I just wanted a little more color on what is happening with this $24 million multifamily loan in New York that I think was the one moved into non performers. This quarter can you just give us a little more color on what happened there.
Sure I mean as I've emphasized it's a legacy credit it was originated in 2016.
It's a multifamily property that's a conversion.
Our belief, we're working with the borrower proactively and we believed that since the loan matured during the quarter and clearly did not pay off we needed to classify it as a sub standard loan and put up the reserve that we did I don't think.
Just given the ongoing negotiations that I can go much further than that Brady, but.
Clearly this is one that's being very very proactively managed.
And I think then also Jerry to complement that being this within the multifamily space I think it speaks to being a specific item thats something pervasive.
William.
Is it a rig control property.
Yes.
Okay.
Alright.
There are no further detail Brady thank you.
Okay.
And then the purchase indirect consumer loans that drove that I think it was like $7 5 million of net charge offs.
Can you give a little more color on what those word do you expect.
Any sort of forward noise from that.
Yes.
This is a shrinking portfolio our view is in particular the hotspot.
We've talked about.
The two parties we bought this from.
My we terminated the program at the end of last year. It appears that 'twenty. One vintage is the one that's running the hottest four.
Credit loss and we've now had two consecutive quarters at these levels.
Sherri reference we believe this is a portfolio that.
The current payment speeds will be gone in under two years.
Our view on the loss side as you know and she gave loss guidance is that we've got a view on the loss content projected forward.
Believe we've captured that and so you won't see the replenishment into the portfolio I mean, there could be a couple of million here or there, but it's not at the level that you know the.
The replacements that they've been in the last two quarters right into 2021 vintage that jewelry was mentioning.
When we think about the life of the term. We believe we are in the peak of the loss and that any expected losses are already covered through our.
Yes.
Okay.
Who are the two parties can you just remind us are these like student loans are home improvement loans.
Is that consolidation loans nationally generated.
No.
Put this is over the I'll call. It the 48 contiguous so.
That was intended to be sort of the.
Geographic protection that you would have.
We know it's safe to say the first one was so Phi right was the biggest part of the portfolio.
In terms of of states the highest concentrations are around 10% in any one state so inclusive of California.
Okay.
So.
NPA is you have the $24 million.
New York Multifamily then I think you have another $20 million.
New York based commercial real estate loans, as well and that rate.
Yeah. Thank you we have one additional relationship within that.
And Oreo property actually the NPA.
Can you give us a little more color on that property and what happened there.
For the further commercial property in Europe of the Oreo.
Yes, the other $20 million property.
Yes, we feel we're in a good position on that one Brady.
Frankly.
I don't see additional concern there at all.
Actually improving.
We've got new leases signed.
I think we are the best way to describe that is it's in process on its way to our belief is it will be very marketable.
A very good location densely populated.
High demand in the area and I think that one is going to be a positive but again.
We need to we need to continue to make sure we get it fully leased up and then we'll be in good shape, but we really like the partners that we're working with we think the folks have done an excellent job.
And helping us so I think the outlook on that one is nothing at all like the issues. We just reported obviously on the repossessed equipment.
And sorry, if I missed it but the one that's in Oreo what type of CRE is that.
It's retail.
It's a retail okay alright.
And maybe just a bigger picture question I know the Ora way has come under pressure here just with the higher provision.
You did on a core basis, you did almost a one ROA last year. So how do you think about.
City, and getting back up to that one ROA level.
Yeah look I think it's clearly more challenging with the NIM.
Considering you're going to have some NIM compression and obviously the last two quarters, we've booked some healthy provision expense. If you get the provision expense to go back to the 10 and under range then.
That coupled with the higher ability I believe to generate on both sides of the balance sheet I think we'd be in a really good spot we put grady.
Brady I think everyone that followed our story as we've been building our organization.
Sort of for the long term this is not a we're trying to.
Just make.
To make a few changes and improved results, we're trying to come up with something that can be very consistent on a go forward basis. Obviously, we've had some challenges based on some legacy things that have popped up here, but I think we have the right team the right infrastructure. Once we get this conversion past us I think it will be highly.
Efficient on the back office side as well as on the customer.
He's a customer to use.
Systems, we have I think it's been a growth strategy and our belief is we're in good markets that we can continue to grow they are not in some of the spots in the rest of the country that are having the stress levels.
And our sense is that we are in three of the best markets in the country to be doing business and all three.
From the visits that I'm, making in all three are very vibrant so we feel that.
It's for US it's going to continue to and we've talked about this openly we're not shy about going through $10 billion. We know there are implications development through $10 billion, but you can't see at adjust to in and around the $10 billion and avoid growing otherwise you know then it's going to be a cost cutting exercise and thats not what we wanted to do.
We've put some real muscle on the infrastructure here and now we've got to grow the organization. So our belief is there is good business to be had that's why I made the comments in closing that we think that theres a real opportunity for us. We're open for business with just one customers that want to use us as a we're a full service bank and that's what we.
And our customer relationships.
Okay, great. Thanks for all that I believe we can get there on growth.
Okay.
Got it thanks for the color guys.
Sure.
Thank you one moment for our next question.
Our next question comes from the line of Freddie strict Glenn from Janney Montgomery, Scott Research Division.
Hey, good morning, everybody.
Hey, good morning.
Just clarification on that NIM guide was that 18 to 20 basis points in the third quarter or is that over the course of the next two quarters.
In the third quarter.
Third quarter, Okay, and then along that same line of reasoning and Jerry I think you touched on this a little bit earlier, but.
If we see the fed stop hiking in 2023 could we potentially see the margin come back up some in 2024 as earning asset re pricing starts to overtake.
Some of the funding cost.
Yes, because I think youre going to see pressure on that's happening.
First of all stepping back.
Super competitive environment for <unk>.
And the CD marketplace and in some of the money market campaigns and we're seeing it from the largest banks in the country not just locally from.
Competition, that's headquartered here and so.
We need to with that in mind, that's why the international that's why the push on more core with our corporate customers as well as.
With our private banking and other lines of business is really essential for us. So yeah. I mean, we think it can normalize out.
And that's where the question that was just asked earlier, if youre, adding profitable growth.
What's going to drive year PNR on a go forward basis.
Understood that makes sense.
And then just on the international deposits I mean, it sounds like you feel like you can continue to grow those.
Can you remind us what the average rate is on those just curious I know there are usually lower cost.
It's around 70 basis points and an average for the portfolio.
Yes, and I think fed <unk> to give some color.
The growth that were.
This is not focused backlog.
Our history. This is a broader look at Latin America, and the opportunities that we're seeing in several countries and there'll be more to come on that over the next couple of quarters as we'll start to talk more and more about where all the growth is coming from.
Got it.
And just one last one for me you mentioned that 15% to $16 million guide on noninterest income for the third quarter.
Yes, it seems like a pretty solid linked quarter jump can you talk through some of the drivers there what's what's driving on interest income higher.
Sure. So so we are as you can see we have an increase in AUR because we have an increase in valuation of goes with the least that's part of it.
Also we are looking into our fee income and also some of the mortgage activity, we believe will get us to that range.
That makes sense, thanks for taking my questions.
Have a good one.
Thank you one moment for our next question.
Our next question comes from the line of Matt Olney from Stephens.
Thanks, Good morning.
Just looking for a few clarifications on the on the credit front.
That provision expense the $29 million I think.
The slide says 16 million comes from additional reserve requirements from credit quality.
Mark you took on that the non accrual downgrade or or any more color on kind of what that $16 million of.
Yeah look I think if you dissect the provision there.
There's there's obviously the two largest pieces I think that were referenced related to the specific credit in New York right and there was also a replenishment on charge offs, but the other piece that's sort of I'll call. The biggest of the mall was related to.
Two what we refer to as the macroeconomic factors, we put into the C. So model I think we basically evaluated and felt that we took.
I won't call it either aggressive or conservative I think an appropriate look and said we're going to reflect those in the.
And again, that's based on a.
The spread of the business that we have right and so you get that from the third parties highly reputable evaluated and you put that into your models. Our view is we.
We don't expect that level to continue in future quarters, and I think when you look at the overall reserve we're nearly at a one 5%.
Allowance and so we think at this stage given the portfolio, particularly the secured positions that we've got.
Did that kind of more that's adequately covering what we think is the risk there.
I think the charge offs number Matt was.
The replenishment a big part of that was the replenishment from those indirect consumer and as I referenced in an earlier point. There is we believe we've got that loss content that could be give or take in future quarters, a $1 million or two here or there, but we.
We think we've got that recognized.
Okay I appreciate that and follow up on your last point Jerry on the consumer indirect piece I think you disclosed that the.
2021 vintage is kind of the hottest in terms of charge offs I guess based off this technical data.
How long do those losses need.
Are they peak out and starts to decline.
Yes, I think we are in decline on that now Matt I think that's why given the prepay speeds.
I think when I remember when we did.
<unk>.
The update you sort of look at this portfolio is probably on a run rate of being able to pay off.
Around $80 million to $100 million every six months and that's the run rate that it's on.
So a combination of I'll call it pay offs and write offs right get you that number.
And that's why we said we believe we will have we'll have this behind us.
Two year horizon.
Completely behind us.
Okay. That's helpful. Jerry and then.
I guess switching a little bit over to the loan growth front I think you said one of the loan categories driving the growth at least in <unk> was a specialty lending portfolio.
Find me kind of what this is again does it come with any kind of dip.
Deposit or funding relationships.
Yes so.
We have a group.
So if you think of our typical commercial.
It fits in that is I'll call. It your classic corporate middle market.
Asset based lending.
Under that anything else, we put in what we'll call the specialty category, that's where we have our equipment finance activity as an example.
We will call it sort of typical the non traditional bank is what we will call specialty, but when we a year almost I guess about a year and a half ago launched into in a bigger way in the equipment finance that was really a big part of that division.
I guess just strategically I appreciate kind of the growing that portfolio at this point given some of the funding headwinds, presumably that portfolio doesn't come with much in the way of.
Funding by itself.
Yes, actually I have to tell you. That's that's one of the unique things is that we're putting the same if you want to bank with us She got a deposit with us.
Not necessarily in all those patients are we getting to a core deposit.
That were the primary bank.
But we certainly are pushing for our share or we're not interested in doing it so.
I think.
Good way to think about us because I agree with you that's not a traditional way typically.
Equipment Finance as an example, right even in some respects.
Other corporate activities it tends to be like obviously commercial real estate they tend to be funding to users not fund providers in our case.
We're emphasizing that every relationship needs to come with some level of deposits.
And we also look at it Matt more broadly because we're going after the principles and these relationships on the private banking side. So we're very very transparent I can tell you that anyone that comes to visit anyone I go see.
They automatically know that when they asked me a question is there is anything they can do for us and I immediately respond more deposits.
Where that laser focused on ensuring that you are not coming to amarin to just do financing activity youre coming to amarin and we're looking for you to think of us as a bank.
So that's beginning to really take hold in shape.
I have said this in prior calls I'm really proud of our commercial real estate team.
For the energy and effort they've put into deposit gathering because I've not seen that in my career and other organizations. The way our teams have been able to do it but we're pushing at similarly on <unk>.
Okay.
Any any more color on the loan yields that youre seeing today on the incremental loan growth I think it's especially finance tickets and then the single family.
Residential loans any color on just kind of what the yields are on some of those products.
Yes, I think you're.
No there is the occasional in this evidence these days.
But I think youre seeing a plus.
On the vast majority of the production that we're booking.
Which obviously.
And of course.
We're being and I do think Theres, a real opportunity for us in this production going forward that we've got an opportunity to put more swap income on our books in <unk> <unk> because the customers that are coming in right that are pegged to an index are clearly wanting to swap to floating for fixed.
Uh-huh.
Okay.
And then.
The overhang still there Matt by the way I mean, all the uncertainty in rates, which way things are going to go now is the fed going to continue to move or not I mean, I know, there's lots of speculation because we got a better inflation number but I do think that there's still a lot of people want certainty right now I think it's one of the reasons why you see the <unk>.
Success rate that we're certainly have and I'm not going to comment on others.
People want uncertainty of term and Thats why you clearly see the the inflow that's happening on time deposits right. So they wanted it on both sides.
Uh huh.
Okay.
Okay. That's all from me guys. Thanks for taking my questions.
Absolutely.
Thank you I would now like to turn the conference back to Mr. Bosch for closing remarks.
Okay I want to thank everyone for joining our second quarter earnings call. We genuinely appreciate your interest in our company and thank you for all your continued support have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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