Q4 2023 Amerant Bancorp Inc Earnings Call
Greetings and welcome to the Amarin Bancorp fourth quarter 2023 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
Now I'd like to turn the conference over to Laura Rossi head of Investor Relations. Mr. Sustainability. Thank you you may begin.
Darryl: Thank you Darryl.
Laura Rossi: Good morning, everyone and thank you for joining us to review, our Marin Bancorp's fourth quarter and full year 2023 result on todays call are Jerry flush, our chairman and Chief Executive Officer and showed them how to cut their own our executive Vice President and Chief Financial Officer as.
Jerry Flush: As we begin.
Mr. Sustainability: 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.
Jerry Flush: 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.
Jerry Flush: I will now turn it over to our chairman and CEO Jerry flush.
Jerry Flush: Thank you Laura good morning, everyone and thank you for joining today's call today, we will cover our performance for the fourth quarter and full year.
Jerry Flush: Before we do this I would like to acknowledge and thank all of my Amgen colleagues for their dedication and effort. This quarter as we completed our conversion to new core systems. This project, which required a significant amount of planning and effort was a huge undertaking and the team was up to the challenge.
Please know that work continues in a number of areas post conversion that's more enhancements are on the way.
Jerry Flush: So moving on to what we will cover on todays call. There are clearly a significant number of items to touch on including the commercial real estate sale in a number of additional actions. We took this quarter to best position our company for 2024, given the unexpected decline in interest rates for reference we filed a form 8-K covering these on January <unk>.
Jerry Flush: <unk> 2024, but it is important to give some additional context on today's call, which we will do.
Jerry Flush: While these actions created additional non routine gains or charges. This quarter. We expect this to be behind us for 2024, and as I mentioned best position us to execute on our growth strategy.
Jerry Flush: I also want to note here that we will cover credit in detail and we've added a number of new slides to the presentation with more detail on credit components, which sherri, we'll be covering shortly so.
Sherri: So we'll turn now to cover slide three and here, we've outlined a number of key items that took place in the fourth quarter.
Sherri: First deposits grew by 326 million reflective of our deposits first organic relationship based approach, while total loans grew $132 million as.
Sherri: As previously reported we made the decision to reclassify $401 million of Houston based multifamily loans as held for sale and we recorded a noncash charge of $30 million before taxes in the fourth quarter. This sale is expected to be completed sometime this month.
Sherri: At $370 million of these loans are variable rate and at an average yield of six 7%. This sale protects the company and a projected declining rate environment.
Sherri: So this strategic asset liability move together with our projected increase in earning assets is expected to create a net positive on margin. After the first quarter as we plan to use the proceeds of the transaction to reduce higher costing non relationship institutional deposits at an average cost of five 6% five.
Sherri: Lee This repositioning also reduces pre exposure it's important to note that this sale also right size, our operations in Houston, where loans prior to the sale exceeded deposits.
Mr. Sustainability: So we'll turn now to New York and here, we've reduced higher risk assets as we completed the sale of the highest New York City Creek exposure and we exited the nonperforming loan relationship in New York City, We discussed on our third quarter call and it's all part of our strategy to exit the remaining New York City loan portfolio speaking into the portfolio what remains.
Mr. Sustainability: Is performing and totals $217 million and consists of 21 properties in 12 relationships. We do have one small credit which is under $2 5 million that is being watched.
Laura Rossi: We repaid $585 million in federal home loan bank advances recording a $6 $5 million gain for the early repayment and the replacement funding provides for a lower cost of funds going forward.
We rationalized certain organizational components, such as acquiring the remaining ownership interest in amarin mortgage and rightsize staffing given the current rate environment and we approved a plan to the dissolution of the land Bank and trust. Our Cayman subsidiary, we wrote off goodwill for $1 million related to the mortgage company and 700000 in goodwill intangibles related.
Laura Rossi: To align with expected annualized savings of 300000 from closing a lot.
Laura Rossi: We also rationalized head count across multiple units, resulting in expected annual savings of $1 million after having recruited severance expenses of $1 million.
Laura Rossi: And as noted we completed the core system conversion and we're actively managing post conversion items, we recorded $1 6 million in final conversion costs related to SaaS and software expenses in the fourth quarter of 2003.
Laura Rossi: We also restructured bank owned life insurance to include more current team members in the plan and to provide for an enhanced yield going forward with an earn back period of approximately two years. This resulted in an income tax expenses and other charges totaling $4 6 million.
Laura Rossi: Ill now provide a brief overview of our financial position in the fourth quarter and year, and then turn it to Sherry to go over the details. So then turn it back to me for some comments regarding 2024 as part of my closing remarks, So let's turn to slide four now for financial highlights for the fourth quarter looking at the income statement diluted loss per share for the fourth quarter was.
Sherry: <unk> 51.
Sherry: Primarily due to the net impact of those non routine items, we recorded during the period that I just covered.
Jerry Flush: Net interest margin increased to 372% from 357% in the third quarter, which includes interest collected along with the loan principal recovery, which Jerry will go into further detail in a few minutes.
Jerry Flush: Exclusive exclusive of this recovery, we would have been relatively even with the third quarter, although we like others continue to experience the challenges of a sustained high interest rate environment.
Jerry Flush: Along with market competition.
Jerry Flush: And as a result of higher cost of funds. This quarter, we reached an inflection point in margin compression.
Laura Rossi: Credit quality events continue to be an area of focus and reserve levels are carefully monitored to provide sufficient coverage our provision for credit losses was $12 5 million up $4 5 million from the $8 million in the third quarter and again as I mentioned share will be covering the credit components in detail shortly.
Noninterest income was $19 6 million down from $21 9 million in the third quarter, while noninterest expense was $109 7 million up $45 3 million from the third quarter, both noninterest income and noninterest expense contain non routine items this quarter that I've already commented on <unk>.
Jerry Flush: Total assets reached a record high of $9 7 billion up from $9 3 billion as of the close of the third quarter total deposits also increased to $7 9 billion compared to $7 5 million in the third quarter, while total loans increased to $132 million gross loans held for investments actually decreased to $6 nine from the seven.
Mr. Sustainability: $1 billion in <unk>, our total securities portfolio was $1 5 billion and that's up $183 million from the third quarter, while cash and cash equivalents increased $12 million to $321 million at the end of the fourth quarter the.
Mr. Sustainability: The additional securities purchase were fixed rate and they were all part of our a L. M actions given the unexpected decline in rates in 2024.
Mr. Sustainability: And moving on now to capital our total capital ratio as of <unk> ended at 12, 19%.
Mr. Sustainability: Percent compared to 12, 7% as of <unk> and our CET, one was 984% compared to 10, 3%.
Mr. Sustainability: Our tangible equity ratio was 733%, which includes $78 million in OCI, resulting from the after tax change in the valuation of our investment portfolio and which substantially improved in the fourth quarter from $97 million that we saw in the third quarter of 2003.
Mr. Sustainability: Lastly, as of fourth quarter, our tier one capital ratio was 10, 6% compared to 11.8% as of <unk>.
Mr. Sustainability: And it's also worthy to note that on January 17th our board of directors approved a dividend of <unk> <unk> per share payable on February 29 2024.
Mr. Sustainability: So we'll move now to slide five and I'll provide an overview regarding our deposit base.
Mr. Sustainability: As I mentioned earlier total deposits at the end of the fourth quarter was $7 9 billion up $326 million from the third quarter.
Mr. Sustainability: This increase was mainly driven by an increase in relationship deposits of $365 million, while institutional deposits declined by $40 million speaking of institutional deposits as I briefly mentioned earlier, we anticipate the balance of this higher cost non relationship source of funds to be run off by mid first quarter 2024 IRA.
Mr. Sustainability: Show of loans and deposits increased decreased this quarter to 92, 4% as we've referenced in prior calls our goal is to manage that to a target of 95% and not to exceed 100, we have a strong loan pipeline in the first quarter. So we expect to be back in this range soon.
Mr. Sustainability: We'll turn now to slide six and here, we show a well diversified deposit mix composed of domestic and international customers. Our domestic deposits account for 69% of total deposits totaling $5 4 billion as at the end of the fourth quarter, that's up $340 million or six 7% compared to the third quarter and international.
Mr. Sustainability: Deposits, which now account for 31% of total deposits totaled $2 5 billion down slightly <unk>, 6% compared to the third quarter domestic deposit accounts have an average balance of 110000, while international deposit accounts have an average balance of 43000 and that reflects the granularity of our deposit base and the stability of this.
Mr. Sustainability: Funding source as.
Mr. Sustainability: As I've shared on previous calls, we intend to take advantage of our infrastructure and capabilities and begin to further emphasize international deposit gathering going forward as a source of funds given the favorable pricing, while continuing to add diversification to our funding base our core deposits defined as total deposits, excluding all time total deposits.
Mr. Sustainability: Excluding all time deposits excuse me were $5 6 billion as at the end of the fourth quarter, an increase of $332 million or six 3% compared to the third quarter.
Mr. Sustainability: Included in core deposits are $1 4 billion in noninterest bearing demand up $35 million or two 5% versus third quarter $2 6 billion in interest bearing deposits up $144 million or 6% versus the third quarter and that's primarily the result of continued customer demand for higher rate products and one.
Sherry <unk>: $6 million in savings and money market deposits up $153 million or 10, 5% versus the third quarter. So at this point I'm going to turn things over to Sherry <unk> key metrics. Some other balance sheet items credit quality and the results in the third quarter in more detail.
Sherry <unk>: Thank you Jerry and good morning, everyone as part of today's presentation I will share more color on our financial position and performing so turning to slide seven I'll begin by discussing our key metrics for the quarter.
Sherry <unk>: Noninterest bearing deposits to total deposits decreased to 17, 8% from 18, 2%.
Sherry <unk>: Despite the challenges of customers seeking higher interest rates and the market competition. We continue to work hard on our deposits first focus and increasing demand deposit accounts by building relationships in our market.
Sherry <unk>: The ratio slightly decreased total noninterest bearing bonds in fact increase although not at the same speed as interest bearing deposits.
Laura Rossi: Net interest margin improved to $3, 72% compared to $3, 57% in the third quarter.
Laura Rossi: This includes 16 basis points in connection with the one time demand recovery.
Details of NIM changes quarter over quarter shortly.
Laura Rossi: Our efficiency ratio was 108, 3% compared to 64, 1% in the third quarter as a result of the $43 million in non routine noninterest expense items here just covered.
Laura Rossi: Or are we in early in the fourth quarter were a negative <unk>, 71% and negative 922%, respectively. As a result of the one time charges and higher provision for credit losses during the period.
Laura Rossi: For consistency and transparency, we showed the three core metrics of ROA ROE and operating efficiency, excluding non routine items. So you can better see our underlying performance for the fourth quarter.
Mr. Sustainability: As an example core efficiency for the fourth quarter was 69, 7% compared to 62, 1% in the third quarter, which excludes non routine charges.
Mr. Sustainability: As I mentioned last quarter. These results also include certain cost of new applications and services being used in parallel after the conversion with previous applications in place.
This parallel use of applications will occur until we complete the commissioning applications in the first quarter, a police report and therefore reduce these costs.
Mr. Sustainability: Moving on to slide eight I will discuss our investment portfolio.
Fourth quarter fixed income investment balance was $1 4 billion slightly up from both the third quarter in the same period from last year when compared to the prior quarter. The duration of the investment portfolio decreased to five years due to market rates decreasing during the quarter.
Added a new chart to show the expected repayments and maturity of our investment portfolio for 2024, which represents the liquidity available to support growth and higher interest earning assets.
Mr. Sustainability: Moving on to the rate competition of our portfolio you can see that the floating portion decreased to 13% compared to 15% in the third quarter.
Mr. Sustainability: This reflects our efforts to position the balance sheet for an increasing rate environment and achieve the right balance between yield and duration will maintain a high credit quality of the portfolio.
Mr. Sustainability: As we have done in previous quarters, I would like to reference the impact of the interest rate undervaluation of debt securities available for sale.
Mr. Sustainability: As of the end of the fourth quarter the market value of this portfolio had improved $35 million after tax compared to the decrease of 19 million in the third quarter.
Mr. Sustainability: The quarter over quarter improvement was primarily driven by market rate move and is consistent with our interest rate sensitivity analysis for a down 100 basis point shock.
We had increase we had an increase of $9 4 million after tax for the full year of 2023.
Mr. Sustainability: It is also important to comment that our tangible common equity ratio ended at a solid 73% after considering the impact of changes in valuation of our assets portfolio.
Mr. Sustainability: No that 82% of the total portfolio had a government guarantee while the remainder is rated investment grade.
Mr. Sustainability: Continuing on to slide nine, let's talk about our loan portfolio.
At the end of the fourth quarter total gross loans were seven 3 billion up one 9% compared to the end of the third quarter.
Mr. Sustainability: The increases were primarily driven by increases in single family residential loan loss development commercial loans as well as construction loan.
Mr. Sustainability: F&B and FERC 23 were 403 million, a decrease of $36 million or eight 2% quarter over quarter.
Mr. Sustainability: This includes $211 million in higher yielding indirect consumer loans compared to 255 million in the third quarter, which were a tactical move for us increasing yields and prior period.
Mr. Sustainability: As we mentioned last quarter, we are focusing on organic growth and have not been purchasing any new production since the end of 2022.
Mr. Sustainability: We estimate that at current prepayments speeds. This portfolio will run off by the first quarter of 2026.
Mr. Sustainability: As Jerry mentioned during the fourth quarter, we completed the sale of the Hyatt theory exposure and exited the non performing loan relationship both in New York as part of the company's strategy to exit its remaining New York City loan portfolio.
Mr. Sustainability: The theory loan sale reopened and the loss on sale of approximately $2 million and for Q3, three and the nonperforming loan with modified and paid off.
Jerry Flush: Portfolio had a yield of seven 9% in 2023. This includes some recovery recorded during the period to provide a more comparable figure figure the yield of the loan portfolio. Excluding this recovery was $6 93%.
Moving onto slide 10 here, we show our theory portfolio in further detail, we have a conservative weighted average loan to value of 58% and debt service cover ratio of one three times as well as strong sponsorship tiered profile based on AUM network and years of experience free sponsored.
Laura Rossi: The end of <unk> to 'twenty, three we had 31% of our CRE portfolio and top tier borrowers.
Laura Rossi: We have no significant tenant concentration in our CRE retail loan portfolio at the top 50 tenants represent 22% of the total.
Laura Rossi: Major tenants include recognize national and regional grocery stores pharmacy, food, including retailers and banks.
Laura Rossi: Our underwriting methodology for theory include sensitivity analysis from multiple risk factors like interest rates and their impact over a debt service coverage ratio vacancy antenna retention.
Laura Rossi: As Gary mentioned during the first quarter, we classified $401 million of our multifamily loans in Houston as held for sale. The transaction is expected to close later this month and had an impact the tangible common equity of a reduction of approximately 23 basis points from day, one and two common equity tier one of an improvement by approximately 12 basis points.
Laura Rossi: With the proceeds of the sale, we expect to reduce.
Laura Rossi: 1024, higher cost non relationship institutional funding of $260 million at an average rate of five 6% and invest the remaining proceeds and fixed rate fixed rate, earning asset.
Laura Rossi: Now turning to slide 11, let's take a closer look at credit quality overall credit quality remains sound and reserve coverage is strong despite charges recorded during the quarter.
Laura Rossi: Nonperforming assets totaled $54 6 million at the end of the fourth quarter of 2023, an increase of $1 2 million compared to the third quarter and an increase of $17 million compared to the fourth quarter of 2022.
Laura Rossi: The increase in the fourth quarter was primarily due to a downgrade to non accrual of two commercial Texas long known totaling $12 3 million with $4 1 million, an allocated reserve and one commercial Florida alone totaling $7 million with three 9 million and allocated reserves often by the exit of the theory years loan totaling $23 $3 million with an associated charge off.
Laura Rossi: $10 3 million of which $8 5 million wasn't specific reserves in previous quarter.
Laura Rossi: The ratio of nonperforming assets to total assets was 56 basis points down one basis point from the third quarter of 2023, and up 15 basis points from the fourth quarter of 2022.
Laura Rossi: Our nonperforming loans to total loans are 47 basis points compared to 46 basis points in the third quarter.
Laura Rossi: In the fourth quarter of 2023, the coverage ratio of loan loss reserve to nonperforming loans closed at three times consistent with three times at the end of the third quarter, an increase from two times at the close of the fourth quarter of 2020.
Laura Rossi: Now moving on to Slide 12, which is a new slide we added this quarter to better show the drivers of the allowance for credit losses.
Laura Rossi: At the end of the fourth quarter. The allowance was $95 5 million a decrease of $3 3 million or three 3% compared to $98 8 million at the close of the third quarter.
Laura Rossi: The drivers of the allowance movement. This quarter were $20 6 million in charge offs out of which $12 $1 million or incremental charges in the quarter and are primarily related to the indirect consumer portfolio. The exit of the New York City nonperforming loan and some smaller balance business loans and $4 5 million release due to the transfer of the Houston multifamily loans to held for sale.
Laura Rossi: These are often by $2 6 million related to credit quality and macroeconomic factor update one 8 million due to net loan growth and $5 3 million in recoveries primarily related to a commercial loan that was charged off back in 2017.
Laura Rossi: We recorded a provision for credit losses of $12 5 million in the fourth quarter compared to <unk> 8 million provision in the third quarter.
Laura Rossi: This included <unk> 5 million for reserves for contingency.
Mr. Sustainability: <unk> is also new and provides a closer look on this topic to illustrate what the incremental charges in the quarter were excluding previously reserved items.
Laura Rossi: That line the $20 6 million in charge offs include a $10 3 million from the theory, New York nonperforming loans that we exited in for Q4, which we had recorded specific reserves of $8 5 million in <unk>. Therefore, the impact for this quarter was only $1 8 million an additional provision expense related to this loan.
Laura Rossi: Additionally, we charged off 7 million related to the indirect purchase consumer loan and $3 3 million due to multiple smaller balance banking on the.
Mr. Sustainability: The impact to provision due to these incremental charge offs was $12 1 million this quarter.
Mr. Sustainability: We introduced like breaking this quarter to provide more color regarding criticized loan special mentioned loans increased by $16 4 million or 55, 8%. The increase is primarily due to five commercial loans totaling $34 8 million downgraded to special mention during the quarter.
Speaker Change: <unk> of one commercial Florida.
Speaker Change: Oh loan totaling $18 7 million three owner occupied loans totaling $13 million and one commercial Texas unsecured loans totaling $3 1 million. The increases were offset by two commercial loans totaling $17 million that were further downgraded to nonaccrual during the quarter as mentioned in the previous NPL discussion.
Speaker Change: Next I'll discuss net interest income and net interest margin on slide 15.
Speaker Change: Net interest income for the fourth quarter was $81 7 million up 4% quarter over quarter and down 6% year over year.
Speaker Change: Quarter over quarter increase was primarily attributed to high.
Speaker Change: Higher average rates on total interest, earning assets, primarily loan increased average loan balances and lower average balance and official be advances the increase in net interest income was partially offset by higher average balances embracing money market deposits in customer Cds as well as lower average balances in deposit with banks.
Speaker Change: There were no market rate increases during the quarter. There is no beta population for this period. However, we observed a beta of approximately 47 basis points in accumulative basis since the beginning of the interest rate of plentiful as a result of the combined effect of rate increases and transactional deposit repricing of time deposits that had not reprice at higher rates.
Speaker Change: As well as higher balances and time deposits at higher market rates.
Speaker Change: Moving on to the net interest margin. We added slide 16, this quarter to show the contribution to NIM from each of its component and Gary mentioned NIM for the fourth quarter was 372% by 15 basis points quarter over quarter. The change in the NIM was primarily driven by the increase in the yield of our loan portfolio, which is now at seven.
Speaker Change: Now, 9%, an increase of 32 basis points compared to the third quarter.
Speaker Change: Interest income for Q 'twenty three includes $3 6 million in connection with a long recovery previously charged off as I mentioned earlier.
Excluding the positive impact of this loan then it would be at $3 66, which is stable when compared with the three Q 'twenty three named NIM at $3 57.
Speaker Change: The name reflects a higher yield of our earning assets offset by the higher cost of funds.
Speaker Change: We expect the margins to be stable through the second quarter more on NIM in my closing remarks.
Speaker Change: Moving on to interest rate sensitivity on slide 17, you can see the asset sensitivity of our balance sheet with 52% of our loans, having floating rate structures and 56% repricing within a year.
Speaker Change: We also continue to execute alien strategies, including hedging interest rate risk as we expect the downward trend in interest rates starting in 2024.
Speaker Change: As we have said in previous calls we continue to position our portfolio for a change in rate cycle by incorporating rig floors when originating adjustable loan.
Speaker Change: We currently have 49% of our adjustable loan portfolio with floor rates. Additionally, you can see here then within the variable rate loans, 36% are indexed to Sofia <unk>.
Speaker Change: Our net interest income sensitivity profile remains stable compared to the third quarter. We also include the sensitivity of our asset portfolio to showcase our positioning to benefit from a rates down scenario as I've done in the past calls during this interest rate cycle I would like to mention the change in this case the improvement in <unk> all of your expectations for easing monetary policy in 2000.
Speaker Change: Four.
Speaker Change: We will continue to actively manage our balance sheet to best position our bank for success in 2024 and beyond.
Speaker Change: Continuing to slide 18, noninterest income in the fourth quarter with $19 6 million a decrease of $2 3 million from the third quarter, primarily due to lower mortgage banking income.
Speaker Change: Reduction adjustment of $1 7 million in connection with enhancement of <unk> during the quarter lower fees and customer deposits in the fourth quarter in connection with the SaaS conversion lower gains on the early termination effect that you'll be invented and lower loan level derivative income due to less new swap contract during the quarter.
Setting the decrease in noninterest income were higher cards and trade financing trade finance servicing fees.
Speaker Change: We consider $5 $7 million of our noninterest income as nonrecurring items.
Speaker Change: The decrease compared to $6 9 million in the third quarter.
Speaker Change: Core non interest income was 14 million in the fourth quarter compared to 15 million in the third quarter.
Speaker Change: Ameren assets under management and custody totaled $2 3 billion as of the end of the fourth quarter up $197 million or nine 4% from the end of the third quarter. This increase was primarily driven by increased market valuations. Following the market rally we saw in the fourth quarter.
Speaker Change: Turning to slide 19 fourth quarter noninterest expense was $109 7 million up $45 million or 70% from the third quarter and up $47 million year over year, we consider $43 million of our expenses this quarter as non routine expense items as previously mentioned.
Speaker Change: Quarter over quarter increase was primarily due to the following previously discussed charge in connection to the transfer of the Houston CRE loan portfolio from loans held for investment to loans held for sale.
Speaker Change: Higher professional fees at fourth quarter expenses included the recurrent expenses breath I guess for the full quarter, whereas three excuse me three only included expenses for a portion of September.
Speaker Change: Higher salaries and severance expenses, driven by restructuring of business lines and other restructuring activity.
Laura Rossi: Goodwill impairment due to the consolidation of Ameren mortgage and dissolution plan of the land bank interesting kaman as well as other expenses in connection with the bully restructure.
Laura Rossi: The increase in noninterest expense was partially offset by lower occupancy and equipment expenses as there were no expenses associated with branch closures during the quarter.
Laura Rossi: In terms of our team we ended the quarter with 682 Ftes out of which 65 are in Ameren mortgage lower from the 700, we head into third quarter following strategic reductions in head count across multiple units.
Laura Rossi: Moving on to slide nine we reported fourth quarter diluted loss per share of negative <unk> 51 on net loss of $17 1 million, we recorded an income tax benefit of which impacted our diluted EPS favorably as.
Laura Rossi: As we have mentioned earlier noninterest expense was higher during the first quarter, which resulted in a significant net impact of non routine items on EPS.
I will now give some color overall outlook for the first quarter of 2024 and 2024 overall.
Mr. Sustainability: So in summary on the next slide we would say the following regarding financial expectations.
Mr. Sustainability: We expect annual loan growth of approximately 15%.
Mr. Sustainability: Our projected annual deposit growth will match loan growth, we intend to focus on improving the ratio of noninterest bearing to total deposit heavier.
Having a new Treasury management platform and <unk> digital account opening tool should help in this regard.
Mr. Sustainability: Our loan can be pocket target will remain at 95%.
Mr. Sustainability: The net interest margin is expected to be stable compared to the normalized 40, 23, salt and the $3 50 to $3 60 level in the first half of 2024 and improve over the second half of the year.
Laura Rossi: We expect higher expenses in the first half of 2024, given investment and continued expansion predicting to achieve 60% efficiency in the second half of 2024 as we grow.
Laura Rossi: We intend to continue executing on prudent capital management balanced balancing between retaining capital for growth and buybacks and dividends to enhance returns.
Jerry: And with that I'll pass it back to Jerry for 2024 overview and closing remarks.
Jerry Flush: Thanks Sherry.
Jerry Flush: So on our last slide today, I'm going to give some comments on how we see 2024.
Jerry: So starting off we view this year is very significant as we transition from what has been a multiyear transformation phase over to execution and profitable growth.
Jerry: With the SaaS conversion and much of the physical infrastructure changes nearly complete along with the executive leadership team now in place. This allows for a primary focus to be all about execution.
Jerry: The first two quarters of 2024 will reflect increased investment in business development personnel to drive incremental growth in both the commercial and consumer banks. There are considerable opportunities for solid relationship growth in the markets. We serve and we're seeing a lot of interest from quality people wanting to join our team.
Jerry: The first half of 2024. It will also reflect the incremental expense post conversion as we decommission from previous systems.
Mr. Sustainability: And now the emphasis shifts from the conversion to accelerating our digital transformation efforts, we have a great team onboard are driving our efforts and the utilization of AI as part of this will be something we'll update everyone on throughout the year.
Mr. Sustainability: We are focused on improved sale efficiencies as well as front and back office efficiencies as our top priorities and.
Mr. Sustainability: And as far as an update on physical distribution. We're finally opening our new locations in downtown Miami Fort Lauderdale, and Tampa in the first quarter of 2024, and also our new regional offices in Tampa and plantation.
Mr. Sustainability: So now we'll shift and talk a little bit about the second half of 2024, we expect to show the growth and profitability that results from the execution of our plan and in closing we are reaffirming our commitment to be the bank of choice in the markets. We serve we have been retooling and building for some time to have something very special here and we believe this is our year to show how.
Mr. Sustainability: It all comes together, so with that I'll stop and sharing I will look to answer any questions. You have Gerald please open the line for Q&A.
Mr. Sustainability: Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Gerald Smith: A confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from Mchugh.
Gerald Smith: Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Gerald Smith: Please while we poll for your questions.
Gerald Smith: Our first questions come from the line of Michael Rose with Raymond James. Please proceed with your questions.
Michael Rose: Hey, good morning, everyone. Thanks for taking my questions.
Jerry: Good morning, Jerry.
Jerry: Good morning, maybe we could just start with the loan sale in Houston I think when it was announced it was a pretty large percentage of what.
Jerry: Was there and just given what we've seen you do in New York in terms of.
Jerry: Kind of pulling out of that market I, just wanted to get a sense for what the what the strategy.
Jerry: For taxes is this a market that youre going to look to continue.
Jerry: Continue to be in or is the focus going to be to just focus on core South Florida operations. At this point would just love some overarching thoughts thanks.
Jerry: Yeah. So Michael we emphasize that this portfolio of loans, we're really sort of we'll call it non core.
Michael: They were not broad relationship base, we don't have full relationships with the sponsors.
Michael: Meaning portfolio that we do have.
Michael: Associated with Houston is.
Michael: And we believe that there is.
It's solid and it makes sense for us in terms of the operations. There I would also make the remark that I covered earlier again that we felt that chooses to Houston was.
Michael: Terms of loans versus deposits not really self funding and we think this gets us much closer to right sizing the operations there.
Michael: We have great opportunities, we think in all of the markets we serve.
Michael: Clearly, we get far more brand recognition right now because of all the steps we've taken in South Florida.
Michael: But that doesn't mean that we're not looking at opportunities across the entire footprint.
Michael: That's helpful. And then maybe for Sherry just kind of a modeling question is certainly a lot of moving parts on the expense side and I. Appreciate the color in the slides to get down to closer to a 60% efficiency ratio by year end, but can you just help us from a run rate perspective.
Sherry: In the first quarter, just given that there was so many moving parts, what we should be kind of be using as a base and just given that you guys have some additional investments it looks like in the first half of the year, how should we think about at least expenses over the next quarter or two.
Sherry: Sure sure. So what we're seeing in terms of forecast for 2024 is that we should be let's say either stable or even slightly higher closer to the 68 in the first.
Sherry: A few quarters of the year.
Sherry: And this is driven youre going to see some drop off some technology cost or a re competition of the expenses and higher investments on the people side as we work towards growth later on in the year. So I think using a 67% 69 should be a good range for expectations in the first half of the year.
Okay very helpful. And then maybe just finally for me just.
Jerry Flush: Jerry stepping back I mean.
Jerry Flush: You guys have done a lot over the past couple of years really since you kind of took the range.
Jerry Flush: Are we done with the majority of the large moves in hey could we start to see.
Jerry: See some some cleaner results once we get past the first couple of quarters of the year and I think when I put the pieces together just given what is shaping up to be or your expectations are for pretty strong balance sheet growth this year, both loans and deposits.
Gerald Smith: It looks like Youre going to have a fair amount of positive operating leverage beginning as we get into the back half.
Gerald Smith: Of this year and really into 2025. So just wanted to comment where you think you are with those efforts and then.
Gerald Smith: Looks like you should be able to get the efficiency ratio kind of sub 60% driving ROA above 1% drive pretty good kind.
Gerald Smith: Kind of returns that not asking for explicit guidance, but it does seem like the path forward here, especially once we get into 2025 years, it's pretty powerful from an earnings perspective, and just wanted to get some some color and thoughts from you. Thanks.
Michael Rose: Yes, Thank you Michael.
Michael Rose: I would respond by saying again, we have the right executive leadership in place we've got the physical distribution.
Michael Rose: Yes majority, yes, we will do some additions here and there, but it won't be anywhere near as significant in terms of the amount of.
Michael Rose: Different.
Michael Rose: Retail facilities into regional hubs I just went over also having the conversion behind us.
Michael Rose: It's safe to say that in terms of China Shake out is there anything else.
Michael Rose: Non routine side, we certainly believe that our best days are ahead, it's going to be all about executing our plan.
Michael Rose: We think we've got the right people, we think we are adding even more quality people.
Michael Rose: Thats, all going to drive incremental growth and profitability. So we're excited I think that.
Michael Rose: It's been quite a journey here.
Michael Rose: I do think it's important to say that we really do believe added this transformation phase.
Michael Rose: We've got to go full steam ahead on our growth and just execute.
Michael Rose: Alright, thanks for all the color I'll step back.
Michael: Thank you thank you Michael.
Michael: Thank you our next questions come from the line of Freddie Strickland with Janney Montgomery Scott. Please proceed with your questions.
Michael: Hey, good morning, everybody.
Michael: Good morning.
Michael: Just wanted to step back to the expense discussion again real quick just trying to understand in the second half of the year as we get to that 60% efficiency as part of that.
Freddie Strickland: I guess our expenses.
Freddie Strickland: Flat from the second quarter or did they come back down just.
Freddie Strickland: Just as some of these.
Freddie Strickland: The dual system turning to single cell subs.
Freddie Strickland: I guess my question is does it go back towards like a $60 million level or do they just stay relatively flat in the back half of the year.
Freddie Strickland: Yeah.
Freddie Strickland: We do expect that in the second half of the year expenses will stay pretty flat to what we've seen earlier in the year I think what youre going to see in terms of the improvement on the efficiency ratio will be driven by the growth the growth component.
Freddie Strickland: Got it so it'll be on the revenue side that makes sense.
Freddie Strickland: And then moving over to the charge off piece.
Freddie Strickland: I heard you say that most of that this quarter was driven by.
Freddie Strickland: The movement in the New York portfolio getting that one NPL out of there.
Does that mean, we should expect charge offs to kind of step down a bit from here would primarily be driven by that consumer portfolio.
Freddie Strickland: Any other one off items that might come up the next couple of quarters.
Freddie Strickland: Yes from a charge off perspective, youre right. The drivers of the charge offs. This quarter were in the New York Nonperforming loan and we also had some charge offs related to the indirect consumer portfolio. We are not expecting a similar level of charge offs coming from the New York portfolio in the next quarters.
Freddie Strickland: Again today to add to that that's why I gave those comments around the $217 million that's left.
Freddie Strickland: Portfolio is 21 properties 12 sponsors.
Freddie Strickland: All performing we've got a small credit that we've got on our watch list.
Freddie Strickland: Based on payment history, but I would tell you that you know in terms of of the size issue. Some of the issues that we've had we've got it already either in NPA right because that's the one big area that we still have which by the way just making a comment we're making a lot of progress there.
We did get the permits to be able to open the acceptability to on that one is I just think were.
Freddie Strickland: And a little better place as it relates to what's going to happen, there and being able to get that thing moves hopefully here in 2024.
Freddie Strickland: Okay.
Freddie Strickland: That's helpful.
Freddie Strickland: Last thing just wanted to make sure I heard the NIM guide correct.
Freddie Strickland: No. It is flat in the first half of the year and the 'twenty 'twenty four outlook, but I think I heard you say that that was going to step out setback down actually the $3 50 to $3 60 range because of that.
Freddie Strickland: Loan recovery piece did I write that down correctly.
Freddie Strickland: Yes, we are.
Freddie Strickland: Speaking to stay within the $3 $53 60 range in the first half of the year.
Freddie Strickland: Yes.
Freddie Strickland: I think we hit the inflection point right I think if you now look at which originally we were thinking it wouldn't come until 2024.
Freddie Strickland: We we obviously with a bunch of different moves that we've made.
Freddie Strickland: Got there quicker.
Freddie Strickland: And that's actually one of the real positives out of the fourth quarter.
Freddie Strickland: Okay.
Freddie Strickland: Got it that makes sense I'll Echo what Michael said that it sounds like definitely have some profitability growth and future growth.
Freddie Strickland: Thanks for taking my questions. Thank.
Jay: Thanks Jay.
Jay: Thank you our next questions come from the line of Russell Gunther with Stephens. Please proceed with your questions.
Hey, good morning, guys.
Russell Gunther: Hey, Russell.
Russell Gunther: Just a quick follow up on the margin discussion can you guys share what your interest rate assumptions are.
Russell Gunther: That are underlying that guide.
Russell Gunther: So from from a NIM perspective, what we're expecting at least in the first and the first half of the year is for the loan portfolio to stay pretty flat or loan production, that's coming on to the portfolio to be into higher end and from the expense standpoint, we're seeing that.
Russell Gunther: The overall, we got to get to the point, where pretty much everything has reset to the current rate level. So were expecting cost of funds to stay pretty flat.
Russell Gunther: When youre going to see Russell is that in the first the first quarter, we have a timing component.
Russell Gunther: We have a timing component related to the reallocation of the funds that come from the multifamily portfolio. So some of those will be placed in liquid assets and we're able to redeploy them into the loan portfolio, which will be able to take us to the higher end of the range that we provided guidance on by the end of the second quarter.
Russell Gunther: Okay. Thank you Sherri and then I guess.
Russell Gunther: In terms of your expectations for.
Russell Gunther: Bed rate cuts or staying stable.
Russell Gunther: Just what is baked into the to the margin guide for 'twenty four.
Sherri: For the first half of the year, we have raised pretty stable. We are incorporating some rate cuts in the second half of the year, we have modeled from light haircuts Autistics haircut.
Freddie Strickland: <unk> cut some rate sorry.
Sherri: Through the end of the fourth quarter.
Sherri: So okay.
Sherri: Margin guide includes six fed rate cut.
Sherri: No.
Sherri: What share is given you Russell is we've looked at a sensitivity as to up to that Manny.
Gerald Smith: Our projection is that there'll be several in the second half of the year.
Gerald Smith: The guidance that was shared with through the end of the second quarter for which our assumption is no cuts right. Yes. Okay understood. Thank you guys for clarifying that.
Russell Gunther: I guess I would ask then on the.
Russell Gunther: Beta assumption, so cumulative 47% on the way up.
Russell Gunther: How do you expect that to trend on the way down that you guys are thinking about those three cuts in the back half of the year.
Russell Gunther: Right. So so if we think about our current portfolio and we think about let's say our average maturities on customer deposits and we think about our interest bearing products resetting faster, we should be thinking with a rate cut of 25 basis points, we were thinking of a beta closer to 40%.
Jerry: That's great Jerry Thank you.
Jerry: Just switching gears a final question for me you guys.
Jerry: So really strong expectations, just any any color you could share.
Jerry: In terms of loan mix drivers and then I think sharing on your expense comments you mentioned.
Jerry: Additional cost around hiring folks.
Jerry: That is related to any loan growth expectations as well.
Jerry: Yeah look I think.
Jerry: Both sides of as I've said I've referred to it as consumer and corporate and in our consumer it's predominantly additions will continue to make in private banking.
Michael Rose: We have an already strong team that's done a great job and we believe as I mentioned, we have a lot of people that have a strong interest in and working with US I think you know the reputation of building through even with the some of the ups and downs that we've had in the financial results the underlying performance of the company to growth.
Michael Rose: <unk> people all the branding we've been doing seeing us in the community. We had a lot of people that have a strong interest in being part of our team same thing's true on the corporate side. We've added some great folks to an already good team I've been a very solid team for sure and we are getting strong interest.
Michael Rose: There. So it's a combination of remember last year, we built throughout the year and now youre going to layer. It in more personnel in and in and basically to put more folks in markets, where we think there's great opportunities, where we've got strong presence already throughout Miami Dade, We know that we can add.
Laura Rossi: Italy to a great team, we've got in Broward and to build even further.
Laura Rossi: And.
Laura Rossi: Palm Beach right. So just here alone in South, Florida and as we've.
Laura Rossi: About we put a new regional headquarters that'll be opening we also have the new Tampa.
Laura Rossi: Our first facility branch facility going in there theres going to be additions there as well so we just see that.
Laura Rossi: We're taking advantage of of a lot of market recognition and a lot of people talking about us to add quality folk.
Laura Rossi: And both sides.
Laura Rossi: That's great. Thank you Jerry and thank you both for taking my question.
Joseph: Yes. Thank you thanks Joseph.
Thank you. Our next question is come from the line of will Jones with <unk>. Please proceed with your questions.
Joseph: Hey, great good morning, guys.
Brian: Good morning, Brian.
Jared: So I just wanted to stick on the growth discussion for a second Jared.
Jared: The outlook it really is a strong particularly on the deposit side to know a lot of your peers.
Jared Kushner: We really cherish being able to grow deposits at that pace, but what do you have the pay on new deposits to attract that kind of growth.
Jared: Upcoming here.
Jared: Yes.
Jared: I don't know that its as much to pay on the deposits. It's asking for the business. I think this is a shift a cultural shift in our company, where we really emphasize I've been talking about it.
Jared: The previous quarters about deposits first is job one and I just think asking for the business right. We had been very siloed in our approach.
Jared: Years ago, and you know the change culturally in the company, it's coming through in the numbers I actually think Sheri made a great observation in her comments that we have all lost.
Jared: Got it.
Jared: Incredible opportunity not almost we have an incredible opportunity because of the new Treasury management platform, coupled with a much smoother account opening process on the consumer and private bank side, where it's only a couple of steps I'm really excited to see the change I think we can make in noninterest.
Jared: <unk> growth, where as opposed to it having to be hey, we're growing because you know were out issuing time deposits or high rate money market.
Yeah.
Jared: Yes, no that makes total sense and then are you seeing any green shoots in the international deposit base. I know you guys have been really excited about maybe trying to see and flex Clinton and <unk>.
Jared: And the growth in deposits there is any of the guidance factoring growth in our international deposit base.
Jared: You know, it's an area, where we're with that.
Jared: I'll call it the strategy is evolving.
Jared: We think we've got the right marketing the right Intel that we're developing.
Jared: And we're going to give you guys as we come into I'll call. It conference season, probably more and more from the investor presentations more details on how that's evolving so I would tell you. It's an area where the team is working hard they are definitely getting new business.
Mr. Sustainability: We have some areas, where we want to sort of I'll call. It fine tune in to focus on and so that's one where I would say maybe by the mid February.
Mr. Sustainability: Later first quarter, we'll be able to give even more color about how that's going to play out for 2024.
Mr. Sustainability: Okay. That's great and then last one for me. This is maybe more technical thing I'm honest answer in the slides but.
Mr. Sustainability: With that with the multifamily loans, so within that $30 million charge you guys took a I'm assuming that that was mostly if not all rate related what was there a credit related piece.
Mr. Sustainability: Due to the.
Mr. Sustainability: You may have charged off with the loan sale or or or.
Mr. Sustainability: Could you just kind of give us a break Denver, yes, no well they were all performing they were all high quality theirs.
Mr. Sustainability: Low loan to values on those no no issues on those properties.
Mr. Sustainability: Yeah, Okay any other larger chunkier pieces of the portfolio that you may look to do.
Mr. Sustainability: Similar strategy with or was this really just kind of a onetime optimistic.
Mr. Sustainability: Yes. This is definitely a one time opportunistic evaluating again I think we've we've kind of hammer around this a lot hammer. This home that we want to be a relationship based organization.
Mr. Sustainability: And while there's others that may not take that same approach as us. That's one of the biggest drivers of why we identified that portfolio in particular.
Mr. Sustainability: As one that made sense for us to exit and to basically replace it with.
Mr. Sustainability: Knowing the sponsors and having a much broader relationship with those sponsors.
Mr. Sustainability: Okay.
Mr. Sustainability: Great well, thanks, and thanks for the color.
Mr. Sustainability: Sure. Thank you.
Mr. Sustainability: Thank you. Our next question is coming from the line of Stephen Scouten with Piper Sandler. Please proceed with your questions.
Hey, good morning, everyone.
Mr. Sustainability: Firstly I was curious if you had an update on the consumer balances I don't think I saw that in the slide deck anymore of the indirect consumer just kind of curious where that falls in with the pace of runoff do you think is from here.
Mr. Sustainability: Yeah around the indirect consumer.
Mr. Sustainability: Yeah.
Mr. Sustainability: Right.
David: David just to clarify you're talking about.
David: Yes.
David: Previously it was maybe $250 million of it yes.
Sherry: $220 million and I think as Sherry commented the expectation is based on current payment rates. It will be off the books over to after the first actions I guess, the best way to say it is a.
Sherry: By the end of 'twenty, five maybe a little bit residual into the first quarter of 'twenty six.
Sherry: Okay and.
Gerald Smith: And I know there was kind of a question around that book with charge offs in a sense, but absolutely no charge offs have been elevated kind of the last couple of years, what do you think a normalized level of net charge offs.
As for you guys in this kind of environment with the book you have today after kind of clearing the decks a bit from here.
Gerald Smith: Yeah, if if if we remove these charge offs from the indirect consumer and we look at a more normalized charge off level, where we're seeing a closer to 30 basis.
Gerald Smith: Okay.
Gerald Smith: Okay, 30, 30 bps ex the indirect consumer and then that'll just kind of be piecemeal over that two years as that book runs off.
Gerald Smith: Right yes.
Gerald Smith: I think what's happening Stephen and that portfolio is.
Gerald Smith: You remember these are consult debt consolidation loans.
Gerald Smith: No.
Gerald Smith: It's a pretty granular portfolio its not concentrated in any one state, but I do think it reflects the consumer debt load and the pressure that's on the consumer and so we're seeing that.
Gerald Smith: Thank the.
Gerald Smith: One portfolio because of the different vintages has actually started to show signs of of the charge off levels improving.
Gerald Smith: I guess I should say declining so.
Gerald Smith: We're hopeful that we'll continue to see that.
Gerald Smith: Yes, Okay, and then just kind of last question around the NIM.
Gerald Smith: So it sounds like so we're not taking a $3 72, I guess, if we take the $3 72 minus the loan recoveries, so kind of starting from $3 56, and then kind of flattish from there.
Gerald Smith:
Gerald Smith: And then even with if you could just repeat what you have in there from a fed cut perspective, but how do we think about the ability to expand NIM with the asset sensitivity there I would've expected.
Gerald Smith: The down 100 basis points I think you've show down three 1% so kind of wondering how that plays out in a down rate environment that we think we might be moving forward.
Gerald Smith: So going back to the first part of the question when we think about the NIM for the first quarter.
Gerald Smith: Quarter of 2024, we are expecting to see a slight reduction on average balance sheet size, because we're going to use a portion of the proceeds to pay off institutional funds.
Gerald Smith: That should pick up once we continue with a loan pipeline materializing right. So that's what's going to make US go from the lower to the higher end of the range of the guidance. We provided through the end of the second quarter as we think about the NIM more prospectively and how we're managing the re or protecting the balance sheet from a downward trend.
Gerald Smith: We can there are a couple of things we were thinking about the the first one is from the investment portfolio purchases. We have made and that we're looking forward from an expectation or in fixed rate securities. But also looking at the quality of those securities and characteristics that slowed down the level of prepayments in a typical prepayment speed.
Laura Rossi: Environment than we would have on a downward trend. The second piece is on the loan side and I think I mentioned something of this in my in my comments.
Gerald Smith: It's the floor that we arent using for variable rate loan production and also looking into fixed rate loan production as well.
Gerald Smith: That together with the reset of our liability side <unk> seen an increase in interest bearing products versus Cds are.
Mr. Sustainability: Our positioning our balance sheet in a better spot for a downward trend.
Mr. Sustainability: Okay. That's extremely helpful and just last thing I guess is the core spread you're seeing today, what are you seeing kind of on new loan production versus where.
Mr. Sustainability: New deposits are coming on I guess as we think about this maybe 15% loan and deposit growth next year kind of what that core spread looks like.
Mr. Sustainability: I think the spread is pretty similar to what we're seeing in the fourth quarter production I think we got to a point where the.
Mr. Sustainability: Deposit side already Max the rate level in the loan production is already at the at the high level as well. So I think if we were going to think about projections for the first half I would see a pretty stable level versus the fourth quarter 2023.
Mr. Sustainability: Okay. Thanks for the time guys.
Thank you.
Mr. Sustainability: Thank you we have reached the end of our question and answer session I would now like to turn the floor back over to Mr. Jerry <unk> for any closing remarks.
Mr. Sustainability: Yes. Thank you everyone for joining our fourth quarter and full year earnings call. We're excited about the foundational progress we made throughout 2023 toward becoming a stronger higher performing bank and as I noted earlier, we are now focused on executing on our strategy to show how it all comes together.
Mr. Sustainability: You again for your continued support and interest in Ameren and have a great day.
Mr. Sustainability: Thank you. This does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time enjoy the rest of your day.
Mr. Sustainability: [music].