This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk04: Good day and thank you for standing by. Welcome to the Amerint Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1-1 on your telephone. Please be advised, today's conference is being recorded. I would now like to hand the conference over to your host today, Laura Rossi, Head of Investor Relations at Amerint. Please go ahead.
spk01: Thank you, Michelle. Good morning, everyone, and thank you for joining us to review Ameren Bancorp's fourth quarter and full year 2022 results. On today's call are Jerry Plush, our Chairman and Chief Executive Officer, and Carlos Yafiliola, our Senior Executive Vice President and Chief Financial Officer. As we begin, please note that discussions on today's call contain forward-looking statements within the meaning of the Securities Exchange Act. In addition, reference 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.
spk08: Thank you, Laura. Good morning, everyone, and thank you for joining today. I am pleased to be here to report on our performance for the quarter and full year. But before we get into that, I would like to first acknowledge and thank all of my colleagues here at Emory for their dedication and effort again this quarter. We have a great team and we're excited about the strong additions to the family this quarter and throughout the year. They will play an essential role in our growth in 2023 and beyond. So moving on to the remarks for the quarter, I'm pleased to share that on January 18th of 2023, our Board of Directors approved a dividend of $0.09 per share payable on February 28th of 2023. The ability to pay dividends, along with the ability to repurchase stock, are essential parts of effective capital management and value creation for our shareholders. More on this in a few minutes. So I'll now provide a brief overview of our performance for the fourth quarter and year, and then Carlos will go over the details. He will then turn it back to me for some observations regarding 2023 as part of my concluding remarks. So let's turn to slide three for a summary of our fourth quarter highlights. Net income attributable to the company was $18.8 million, down 10.3% quarter over quarter, driven by the recording of a provision of credit losses of $20.9 million, which includes a one-time $11.1 million provision expense in connection with the adoption of CECL. as well as some other items which Carlos will cover in further detail in the coming slides. Please know we will provide disaggregated CECL impacts for each quarter of 2022 in our upcoming 10K report. Our net interest margin expanded to 3.96% and increased to 35 basis points quarter over quarter. Our balance sheet continued to grow, reaching a record high of $9.1 billion in total assets compared to $8.7 billion as of the close of 3Q22. Total gross loans were $6.9 billion, up $416 million from the $6.5 billion last quarter. The total deposits were $7 billion, up $456 million from the $6.6 billion last quarter. Core deposits also increased by $114 million this quarter compared to 3-2-22. The company's capital continued to be strong in excess of the minimum regulatory requirements to be considered well-capitalized as of December 31st, 2022. And during the quarter, we paid out the previously announced cash dividend of $0.09 per share on November 30th, 2022. So regarding effective capital management, as I referenced earlier, on December 19th, we announced that our board authorized a new $25 million share repurchase program, which became effective on 1-1-2023, and this will remain active for the calendar year of 2023. At the time of this announcement, we stated we did not intend to use this new authorization before reporting the results today, and we did not use it. We do now intend to be opportunistic throughout the year to utilize this authorization where appropriate. So let's look at core PPNR on slide four. Core PPNR increased to 37.8 million, up 24.8% compared to the 30.3 million reported in the previous quarter. As we've consistently stated, we believe it's essential to show the net revenue growth of the company, excluding provisions and non-routine items, to show Amerit's core earnings power. Turning now to slide five, here is a list of several key actions taken during the fourth quarter. We continue to focus on actions that will drive profitability and improve our efficiency ratio. We also intend to continue investing in future growth, as you will see. We referenced last quarter a commercial property that moved into REO This was disposed of in October at no additional loss. Regarding an update related to our banking centers, as we previously announced, we did close the Pembroke Pines, Florida location on 10-17-22, and we consolidated the existing customers into our newer Davie Branch location. We opened in University Place in Houston at the end of October and closed the South Shepherd Banking Center This is a far superior location for us, as the Texas Medical Center, Rice University, Rice Village, and the NRG Center complex are all within a one-mile radius. The downtown Miami location is now expected for 3-2 of 23. This will be a flagship location for us in the heart of the city, with private banking, wealth management, and commercial banking all having business development officers located there. We received OCC approval to open new full-service banking center in Key Biscayne, Florida. Permits are expected sometime this quarter, and opening is expected for the second quarter. We're excited to be opening there, and we've already attracted a well-respected team to drive growth. And we also received OCC approval for a new location on Las Olas Boulevard in Fort Lauderdale, Florida. This office is expected to open in 3Q23 and will bolster our consumer bank growth, especially in private banking there. We continue to add key business development personnel in domestic retail, private and commercial banking, as well as wealth management. Our board appointed Ms. Erin Dolan Knight as a member of the board of directors effective on December 15 of 2022. Erin is well known and respected here in the Miami marketplace, and her knowledge and banking experience make her an excellent addition to our board. And as previously referenced, the board authorized a new share repurchase program for up to 25 million of Ameren shares of Class A common stock. On the partnership front, we announced an expanded multi-year partnership with the Florida Panthers, making Ameren the official bank of the Florida Panthers and FLA Live Arena. We're excited to not only be able to say we're the official bank of the Panthers, but to also have them as one of our newest customers. And the same goes for our partnership with the Miami Heat. Banking with us is an essential part of these partnerships. We'll talk more about this in our concluding remarks. And then finishing up this slide, we became a large accelerated filer and adopted the current expected credit loss accounting standard, which Carlos will go into detail shortly. So now we'll turn to slide six. Here are select key performance metrics and their change compared to last quarter. Our net interest margin improved to 3.96% compared to the 3.61% in the previous quarter, and our efficiency ratio improved to 58.4% compared to 65.4% last quarter. Please note that the core efficiency ratio for 4-2-22 was 61.3%. So for consistency and transparency, we included the three core metrics of ROA, ROE, and efficiency excluding any one-time or non-routine items in the footnotes in this slide, so you can easily see the underlying performance for the quarter. We'll turn now to slide seven, which focuses on Amerit Mortgage. On a standalone basis, Amerit Mortgage had net income of $0.9 million, an increase of $100,000, or 13.9%, compared to Q3, primarily the result of mortgage banking income from transactions with the bank. On a consolidated basis, we recorded a net loss of $1.5 million for the fourth quarter in connection with the operations of Amerit Mortgage. Year-to-date 2022, the company has purchased approximately $413 million in loans through Amerit Mortgage, which includes loans originated and purchased from different channels. The current pipeline shows $64 million in process or 88 applications as of January 12th of 2023. So with that said, I'll now turn things over to Carlos, who will walk through our results for the quarter in more detail.
spk06: Thank you, Jerry, and good morning, everyone. So, turning to slide eight, I'll begin the discussion with our investment portfolio. Our four-quarter investment securities closed at $1.3 billion. We also had a strong cash position of $290 million for the end of the quarter. When compared to the prior year, the duration of the investment portfolio extended to 4.9 due to higher market rates and lower prepayment speeds recorded in our mortgage-backed securities. As I shared last quarter, our investment strategy has focused on achieving right balance between yield and duration while maintaining a high credit quality in the portfolio. The floating portion of our investment portfolio increased to 13% compared to 11% in the previous year. As I had done in the previous quarters, I would like to reference the impact of the interest rate increases on the valuation of the debt securities available for sale. As of the end of the fourth quarter, the market value of this portfolio had increased by $3.9 million after tax compared to the decrease of $35 million in the third quarter. The quarter-over-quarter increase was driven by mortgage fund spreads contracting during the performance of the quarter. We had an after-tax decrease of $97.2 million in the evaluation of our AFS portfolio during 2022, which was the direct result of increases in interest rates and is consistent with our interest rate sensitivity analysis for a 300 basic points shock. Note that 73% of our AFS portfolio is guaranteed by the government, while the remainder portion is investment grade. It is also important to comment that our tangible common equity ratio ended at 7.5% after considering the impact of changes in valuation of our AFS portfolio. Continuing to slide number nine, let's talk about the loan portfolio. At the end of the fourth quarter, the total gross loans were $6.9 billion, up 6.4% compared to the end of the last quarter. The increase in total loans was primarily driven by higher CNI loan balances and residential loan purchases during the quarter, despite having received approximately $163 million in prepayments from both CRE and CNI portfolios. Consumer loans as of the end of the fourth quarter were $605 million, an increase of $28 million or 4.8% quarter over quarter. This includes $433 million in higher yield in indirect consumer loans compared to $497 million in the previous quarter. Loans held for sale totaled approximately $62 million as of the end of December, all in connection with the activities of Amram Mortgage. Turning to slide number 10, let's take a closer look at credit quality. Overall, credit quality remains sound and reserve coverage improves over the quarter, despite charge-offs recorded during the same period. The allowance for credit losses at the end of the fourth quarter was $83.5 million compared to $53.7 million at the close of the previous quarter. The change was primarily due to CECL. We elected not to apply the three-year transition provision to our capital calculations. In the fourth quarter, we recorded a One time, day one, $18.7 million adjustment to retain earnings with a corresponding after-tax cumulative effect of $13.9 million to account for the CECL impact as of January 1st, 2022. And a day two, $11.1 million adjustment through provisions to account for the CECL impact for the year ended in December 31st, 2022, including long growth and changes in macroeconomic conditions during the year. The provision for credit losses in the fourth quarter under CECL excluding the retroactive effect corresponding to the first, second, and third quarter of 2022 is approximately $7 million. The provision also included $9.8 million in additional reserve requirements for charge-offs. The total provision recorded for the quarter was $20.9 million compared to a $3 million provision in the previous quarter. Net charge-offs of $9.8 million in the fourth quarter compared to $0.7 million in the third quarter. Charge-offs during the period were primarily due to $5.5 million related to consumer loans, of which $3.4 million resulted from a change in the consumer credit charge-off policy from 120 days to 90 days past due, $3.9 million in connection with a New York-based CRE retail loan, and $1.1 million in business loans. This was offset by 0.6 million in recoveries. The CRE retail loan is expected to transition into OREO during the first quarter of 2023 with no additional changes in valuation once we finalize obtaining ownership. Non-performing assets totaled 37.6 million at the end of the fourth quarter of 2022, an increase of 12.5 million compared to the third quarter, and a decrease of 22 million compared to the fourth quarter of 2021. increase this quarter was primarily due to the new york proper property i previously mentioned and primarily offset by the disposition of a 6.3 million dollar oreo previous quarter the ratio of non-performing assets to total assets was 41 basic points of 12 basic points from the third quarter of 2022 and down 37 basic points from the fourth quarter of 2021 in the fourth quarter of 2022 the coverage ratio of loan loss reserve to non-performing loans decreased to 2.2 times from 2.9 times in the third quarter, and increased from 1.4 times at the close of the fourth quarter of 2021. Continuing to slide 11, total deposits at the end of the fourth quarter were $7 billion, up $456 million from the end of the third quarter. This growth was driven by time deposits which total $1.7 billion of $342 million compared to the previous quarter. Note that domestic deposits account for 66% of our total deposits totaling $4.6 billion as of the end of the third quarter of $455 million or 11% compared to the previous quarter. Foreign deposits which account for 34% of total deposits total $2.4 billion slightly up by $1.5 million compared to the previous quarter. Our core deposits, which consist on total deposits excluding all time deposits, were $5.3 billion as of the end of the fourth quarter, an increase of $114 million, or 2.2%, compared to previous quarter. The increase in core deposits was primarily driven by commercial deposits, inclusive of new funds from our sports partnerships and additional funds from municipalities. The $5.3 billion in core deposits include $2.3 billion in interest-bearing deposits, which increased $154 million versus the previous quarter, $1.6 billion in savings and money market deposits, which decreased $88 million versus previous quarter as opportunity cost of customers increases with interest rates, and $1.4 billion in non-interest-bearing demand deposits of $49 million versus previous quarter. Next, I will discuss the interest the net interest income and net interest margin on slide 12. Fourth quarter 2022 net interest income was $82.2 million, up 18% quarter over quarter and up 47% year over year. The quarter over quarter increase was primarily attributed to higher rates in total interest earning assets, primarily in loans, driven by combined effect of 125 basic points increase in the Federal Reserve benchmark during the fourth quarter and 75 basic points increased at the end of the third quarter. We observed a beta of approximately 55 basic points in our loan portfolio during the third quarter and a beta of 41 basic points for the full year, which helped to drive our margin. Also contributing to the increase in the net interest income was higher average balances in loans. The increase in net interest income was partially offset by higher rates in interest-bearing deposits, broker CDs, and FHLB advances. As we mentioned in the past quarter, we continue to be very disciplined in managing an increase in our product rates during this interest rate cycle. We adjusted certain interest rate-sensitive products and relationships to partially reflect the increases in the market rate. As a result, we observed a beta of interest-bearing accounts of approximately 49 basic points during the third quarter and 28 basic points for the full year. Moving to the net interest margin, as Jerry mentioned, NIEM was 3.96% of 35 basic points quarter over quarter. The change in the net interest income and the net interest margin was primarily driven by the increase in the yield of our loan portfolio, which is now at 5.85%, an increase of 79 basic points compared to the previous quarter. As I said, in the last quarters, the improvement in the NIN is a reflection of our asset sensitive position. Moving to slide 13, we'll show the interest rate sensitivity analysis. As you can see, our balance sheet continues to be asset sensitive with about half of our loans having floating rate structures and 59% repricing within a year. Our NIN sensitivity profile to interest rate up scenarios has decreased compared to the last quarter due to increased amount in time deposits. These changes are consistent with a more competitive environment for deposit gathering. This quarter, we are showing a potential increase of approximately 5% in net interest income under a 100-day scenario and 8% for an up to 100-day scenario. We will continue to actively manage our balance sheet to best position our bank for expected remaining increases in interest rate as the Federal Reserve continues its effort to tamper inflation in 2023. Continuing to slide 14, non-interest income in the fourth quarter was $24.4 million, an increase of $8.4 million from the third quarter. This was primarily due to a recorded net gain of $11.4 million on prepayment of approximately $175 million of FHLB advances as we took advantage of what we consider was their peak valuation, second, an increase of $0.6 million in fee income from client derivatives, and third, higher market valuations on derivative instruments. Offsetting this increase in non-interest income were higher losses due to the sale of an investment that was then graded below investment grade. We consider $9.1 million of our non-interest income as a non-recurring item. an increase compared to the $1.4 million in third quarter 2022. This was primarily driven by the net gain in prepayment of advances that was previously discussed. Core non-interest income was $15.3 million in the fourth quarter compared to $14.5 in the previous one. Amerind assets under management and custody totaled $2 billion as of the end of the quarter of $184 million or 10% from the end of the third quarter, primarily driven by an increase of $127 million in net new assets, as we continue to execute on our relationship-focused strategy, as well as $67 million from an increased market valuation. Turning to slide 15, four-quarter non-interest expenses were $62.2 million, up 6.1% or 11% from the third quarter, and up $7.2 million year over year. The quarter-over-quarter increase was primarily due to the following. Accrued for severance expenses, as well as higher bonus variable compensation in connection with recent performance, higher loan level derivative expenses related to the client derivative transactions, higher expenses in connection with our brand positioning efforts, such as out-of-home billboards and sports partnerships, higher professional and other services fees, in connection with the adoption of CISO as well as consulting and legal fees and additional projects, and additional depreciation expenses in connection with the closing of a banking center. These increases were partially offset by lower technology expenses as well as the absence of an OREO valuation that we had during the previous quarter. We consider $2.4 million of our non-interest expenses as a non-recurring item. an increase compared to the $2 million in the third quarter of 2022, primarily driven by severance-related expenses, as I mentioned before, and also due to conversion expenses. Coordinate interest expenses were $59.8 million for the fourth quarter compared to $54.2 million in the third quarter. Efficiency ratio closed at $58.4 in the fourth quarter compared to $65.4 in the previous one. and 41.4% in the fourth quarter of last year. The quarter-over-quarter decrease was driven by higher net interest income, while the year-over-year increase was primarily due to the absence of the gain on the sale of the company's headquarter building that was recorded in the last quarter of 2021. Core efficiency ratio, which adjusts for non-recurring items, was 61.3% in the fourth quarter of 2022, compared to 64.1% in the third quarter of 2022. and 75% in the fourth quarter of 2021. Now I will turn back to Jerry for closing remarks.
spk08: Thank you, Carlos. As I referenced earlier, I'd like to make a few comments on initiatives we have underway. I thought this would be helpful to provide. So for most of 2022 and now for the first four and a half months of 2023, Our team has been and will continue to work diligently behind the scenes preparing for the conversion of our core systems. Slated to take place on May 8th, we believe this will be a significant step forward for us to be able to provide more up-to-date, highly integrated technology, which, post-conversion, will result in making banking with us easier for our customers as well as our team members. Regarding our digital transformation efforts, Another team led by our Chief Digital Officer is working in parallel during this conversion timeline to be ready to greatly enhance our information and data evaluation capabilities. Called Harmony, it reflects our goal of having far more information readily available when interacting with our customers and potential clients, as well as for management purposes. I'd like to comment next on expansion. We have filed an application with the OCC to open a single location in Tampa to support our growing business opportunities there. We intend to only have one branch there on the first floor of our new regional office location, which we will be announcing soon. This single branch is ideally situated, like the others I referenced earlier in my remarks on the key action slide, to support deposit market share growth aligned with our goal of continued expansion in private banking and commercial banking. So in conclusion, the benefits from the decisions we made throughout 2022 and from the efforts of our team members are clear, as evidenced by a higher core PPNR, significant net interest margin expansion, another quarter of solid loan and deposit growth, and strong capital ratios. As we enter 2023, please know that we, like others, absolutely recognize the challenges that we will all face given uncertain economic conditions. We like the markets we are in and believe they are showing more resilience than other areas of the country, which is a key differentiator for us. But obviously, we recognize that even the best markets will likely experience some impact. We intend, though, to continue to remain focused on executing on our strategic initiatives as we have in past quarters. as our commitment to be the bank of choice in the markets we serve is unwavering. So with that, Carlos and I will look to answer any questions you have. Michelle, please open the line for Q&A.
spk04: Thank you. If you have a question at this time, please press star 1-1 on your telephone.
spk03: One moment while we compile the Q&A roster. And our first question comes from the line of Matt Olney with Stevens.
spk04: Your line is open. Please go ahead.
spk02: Hey, thanks. Good morning, everybody. Good morning, Matt. Good morning. Start with the loan growth. Impressive results in the fourth quarter. Be curious about kind of the moving parts of the loan growth in the fourth quarter within each category. And then I guess the outlook for the growth in 23. And in particular, curious about the appetite to add additional mortgage loans from here and also some additional consumer loans.
spk06: Okay. Thank you for the question. So the changes in the loan portfolio primarily came from the commercial side. CRE was not the biggest component of the growth this time around. It was probably about $40 million. CNI on the opposite side came with about 120, and specialty finance also came with about 70. So they were probably the biggest driver this quarter. And then consumer came with about 100 million coming primarily from the different sources that we have. Those were the primary drivers for the quarter, Matt.
spk02: And then the, I guess, expectations for 23 within some of those categories you mentioned, Carlos. I'd be curious kind of what your thoughts are there.
spk09: Yeah. Hey, Matt.
spk08: It's Jerry. I think it's probably safe to say if you think about our expectations for the year, we still think with the strong pipelines we have, and I think it's safe to say that you'll continue to see a fairly similar distribution. Obviously, it was a lower quarter, as Carlos mentioned, in Crete, but I do think you'll see us look to have a pretty balanced distribution product-wise. We've hired folks in all of these categories and retained the the team that we had in Cree that we've had throughout 2022. We do expect to continue to look for C&I bankers, particularly as we continue to expand here in South Florida and also in Tampa and in Houston. So I do think over time you'll see us beginning to build more and more C&I business related it'll start to become a greater proportion of the growth.
spk02: Okay. Well, and I guess I'm trying to drill down and appreciate lots of these loan categories were ramping in 22 for various drivers, various reasons. I'm trying to appreciate if we should expect a similar level of ramp in 23 or if it would slow down given some of the economic uncertainties.
spk08: Yeah, look, I think we're going to Obviously, you know, this is all dependent on market conditions, but our view is we've added a lot of quality people, and you would say that every addition adds incremental volume to the organization, right? And so from the perspective of we're going to continue to be prudent in our credit decision making, I will tell you that we're being very diligent about looking for full relationships with anyone who wants to borrow money from us. We're looking for them for the full banking relationship with each and every one of them. But I do think it's fair to say that we had an outsized growth, you know, for 2022. And I think that's why we gave you guidance that the number would probably look a little bit more like the 10% to maybe 12% range tops, you know, compared to where we are. Right.
spk02: Okay. That's helpful. And then I guess moving over to the expense outlook, I think you had several adjustments on the expenses, some non-recurring items. I think core expenses still a little bit elevated near that $60 million level in the fourth quarter. I know you've got lots of projects that you're working on for 23, so it might be hard to nail down specifics, but just would appreciate any kind of thoughts on expectations for operating expenses in 23. Yes.
spk08: Carlos, we'll both let Carlos go first. We'll both comment on this one.
spk06: Yeah. So, no, definitely we had certain items that surged during the last quarter of the year, and I guess one of the items were the accrual for the variable comp. That was definitely one of them, plus the severances, but those were extraordinary items. For the core expenses, we still expect the $58 to $59 million. Remember that inflation, it's already been factoring in the cost of the personal expenses, and that's been pretty much there were several adjustments performed during 2022 that will take full effect in 2023. That's part of the change. And additionally to this, we also have the expenses of the projects that you mentioned, that that will be recorded as a one-timer as we go through the conversion process. So we expect roughly between the 58 to 59 in core expenses, and including Extraordinary, it will be probably closer to the 61 approximately with the conversion services.
spk08: Yeah, you know, Matt, I just would add to that, that one of the things though, there clearly will be some, a little bit of volatility, but it's good volatility when you start to look at it from the standpoint of the, you know, if it's around accruing for, you know, driving deposits and loans, you know, that's a good thing, right, at the end of the day. And so, you know, what the guidance Carlos just gave you, is inclusive of what we expect. But obviously, if we have outperformance in a given quarter, just like we just did this quarter, we had a higher number, right, to true up, you know, what we need to accrue for payouts. So that, I think, is probably the only variable and, you know, the only additional comment I'd make on this.
spk02: Okay. That's helpful, guys. Thanks for your help. Thank you. Absolutely.
spk03: Thank you. And one moment for our next question.
spk04: And our next question comes from the line of Brady Gailey with KBW. Your line is open. Please go ahead.
spk05: Hey, thank you. Good morning, guys. Good morning, Brady. So there's now less than a billion in assets to go until you hit the $10 billion threshold. And, you know, with 10% to 12% growth, it feels like you'll kind of be flirting with that $10 billion maybe by the end of this year. Do you think that you crossed – 10 billion this year. And can you remind us of any of the expense impacts or Durban impacts that we need to think about over 10 billion?
spk08: Yeah, look, I think, you know, we gave, obviously we said around 10% or so, you know, you're right. We'll be right there. I think that we're going to be very conscious of You know, crossing through that, I will tell you we've been spending a lot of time doing the necessary preparation, and we'll do that throughout 2022. You know, I think Carlos can comment on any kind of DERB and implications, but to be candid, my expectation is if there are, that's closer to a 2024 item.
spk06: Yeah, we have been doing analysis, Brady, and honestly, the gap of what we need in terms of risk management, integrated audit, and bold risk, and all that regulatory framework, crossing the $10 billion, we probably already are completed on that end. We do every possible sensitivity analysis, risk, shocks, et cetera. So those are already covered. I believe one of the items that you mentioned, Jerry, the Durbin Amendment, wouldn't have a significant impact for us. We started estimated, and it's probably in the $500 to $1 million a year. That's preliminary expectations, what we have. But again, you have to have a four quarters average going north of the 10 billion in order for all these changes to kick in. So we definitely keep an eye, and as we get closer, we're definitely gonna do any type of gap analysis to understand. But based on our preliminary assessments, we're in a very good shape to be closer or at 10 billion, yeah.
spk05: Yeah, okay. And then just bigger picture on performance metrics. As I look at 2022, you guys basically hit, there's a lot of noise in the gear, but you basically on a core basis hit a one ROA. How are you thinking about profitability looking forward? Do you think the one ROA is kind of stable from here? Is there room for additional profitability improvement or pushing the efficiency ratio down further?
spk06: No, I believe the one is sustainable. We have been doing, you know, a lot of changes in terms of our cost structure and in terms of other income. I believe it's one of the key drivers. It's the financial margin that we believe is very strong. And as you saw, capturing almost, you know, people refer to 125 basic points over the quarter. But in reality, we have the last change of the Federal Reserve on September 21st. So in reality feels like a 200 basic points. We believe that we should be stable at around 4% financial margin that will give us the core earnings to keep closer to the 1%. So we feel strong on that too.
spk05: And then finally for me, just this core system conversion in May, outside of any sort of one-time expenses? Will there be any changes in the expense base? Will the expense base go higher with this new system, or does it allow you to potentially become more efficient so expenses could go down? Any impact from that conversion?
spk06: Yeah, we will provide more guidance on the decrease on the second semester, probably when we get closer to conversion, because there will be several applications. If you recall in the Q1 and Q2, we recorded provisions for contract termination for two of our largest technology providers. So as soon as we go into conversion and the second semester of the 2023 shouldn't have the regular expenses related to this previous technology provider. So more to come on that, but we'll feed you up with more information on those decommission as we get closer to conversion.
spk05: Okay. But post-conversion, expenses are more likely to go down?
spk06: They should be going down due to this decommission of certain services. Correct. Yeah. Got it.
spk05: And actually one more. So the expense outlook for 58 to 59 million, is that just for the first quarter of 2023? Or do you think that that's kind of the 2023 quarterly run rate for the full year?
spk06: That's reflective of what we believe it will be the first quarter. Again, as Jerry mentioned, as we continue to build up business teams and as we continue to, you know, if For instance, the last quarter of 2022 was a great example. There was a surge in production. So therefore, there was an increase needed in the accrual for variable comp. So as we move and as we create more businesses, so that should be subject to change. But this guidance is for the Q1.
spk05: Okay, great. Thanks for the color. And it was great to see the buyback. But thanks for the color, guys. Thanks. Thank you.
spk03: Thank you, and one moment for our next question. Our next question comes from the line of Michael Rose with Raymond James.
spk04: Your line is open. Please go ahead.
spk09: Hey, good morning, guys. Thanks for taking my questions. Just wanted to start on the deposit side and just get an update on, and sorry if I missed this. I hopped on a little bit late, but just any sort of expectations for betas? You know, on the one hand, you guys are are pretty rate sensitive and are benefiting from the Fed's actions. But there are some out there, especially some of the larger banks that are now calling for a pivot by the end of the year. So just wanted to see from a flow perspective, beta perspective, what you guys would expect. The loan-to-deposit ratio is obviously kind of elevated. You still have some attrition of the foreign deposits, although they were up this quarter. I know those are very low betas. So just kind of holistically, you know, how should we be thinking about betas and flows, both in the kind of higher for longer camp and then, you know, what actions you would potentially take to limit downside if the Fed does pivot? Thanks.
spk06: Yeah, good question. So, in terms of beta, Michael, during the quarter we recorded 0.50, more or less, on the deposit side. Something that really helped this quarter round was the stability and the cost of the international deposits. They barely moved. We went from probably 0.11 to a 0.16 cost. So it continues to be very cheap and very low sensitivity. So that helped us a lot with the blended beta for deposits. So the 0.50 was definitely a sensitive number, given the changes that we saw in the market. We expect to be closer to between the 40 and the 50 for the first quarter. Remember that liquidity in the financial system is shrinking, and the competition for deposits is high right now. And there are certain accounts that you definitely need to move and be proactive in adjusting rates. Even though you do it on certain prototypes, you also have to be very cognizant that there will be changes in other accounts. So we expect that 0.40 to 0.50 in terms of better reaction to the cost of funds. Important is the behavior of the financial margin. We believe that the level of acceleration that we have in the last quarter of the year wouldn't repeat itself. I believe it was significant. We started to feel like the financial margin would grow, but more decrementally, I would say. So thinking about 4% financial margin will be kind of the level that we feel that should be steady throughout the year. Jerry?
spk08: Yeah, hey, Michael. I think it's important to note a couple things. We're going to continue to evolve, you know, how we incent our personnel. Again, as I made a comment earlier about we're looking for full banking relationships and, you know, with any, you know, existing and with new customers. And we're putting on a very strong incentive program to really drive deposit growth first and foremost. If you recall, we've talked frequently about being a deposits-first bank is one of the most important things. We are laser focused on maintaining that loan-to-deposit ratio. you know, and not allowing it to get up above 100%, you know, and I think that, you know, we've demonstrated that is something we focused on all throughout 2022. We're going to continue to do that, you know, in 23. And, you know, my comment would be that between all the business development people we've added, you're going to see incremental volumes come, you know, from a combination of more people, more focus, and these new systems are going to enable it to be a lot easier, particularly as we acquire more and more commercial customers and also on the municipal side as well. So we think there's a combination of things that will enable us to continue to grow on that side of the balance sheet.
spk09: So, Jerry, that's a great point. And just to kind of follow up on that, I mean, do you feel like you have the products in place that you know your competitors have to be competitive or is that kind of still you know work in progress is you know you you roll up the core systems um integration and and maybe some other products and services but do you feel like where you were you are where you need to be or do you feel like there's still you know more work to be done to compete more effectively um yeah because i think everybody's changed their deposit incentives right so i mean do you have the the product set and capability to to you know, be successful in your strategy? Thanks.
spk08: Yeah, no, I definitely think so. And I think they're going to be further enhanced, you know, post this conversion in May. And so I think that, you know, at the end of the day, a lot of the deposit gathering we do, I mean, we're a people business, right? It's personal, it's relationships. All the expansion we've done in private banking will continue to do you know, these new offices, I mean, they are in very deposit-rich markets, and this is very targeted by us to be able to basically have some physical presence, you know, certainly not the big size branches of the past, but, you know, certainly smaller and just very well located in the right spots. I think it's a combination of all these things that are going to get there. But again, directly to your question, I think it's a question for me of saying, hey, we're okay today and we'll get better as we go forward on the product and service side.
spk09: Perfect. And then maybe just definitely one final one for me, just on credit, obviously CECL implementation, but X that, you know, you did build the reserve, which I think is prudent. I appreciate all the detail on the back of the deck on commercial real estate. That's certainly a lot of focus. Can you help us get comfortable with with credit and kind of where you are from a reserve perspective, you know, you've had some chunkier loans come through over the past, you know, a couple of years, just trying to size, you know, the bucket of, you know, potential credits that you could be working through over the next couple of quarters. And if we should, you know, expect the, you know, the reserve to continue to grow from here. Thanks.
spk08: Yeah. Well, I think, you know, that under, Cecil, you will see higher provisioning just as a result because you're doing lifetime expected. And so as we grow, you'll see more provision expense than you would have historically seen. And that's really what the purpose of this change was all about from an accounting standpoint. I think the The question on the quarter, and there was definitely a little bit of noise vis-a-vis, you know, we changed the policy on the consumer side where, you know, we were going to 120 days to charge off. We backed that to 90 days. So if somebody goes three cycles, it's done, it's charged off, and then it's in full recovery mode. And so you had a catch-up adjustment that also flowed through. You know, regarding the one specific credit, you know, that Carlos referenced on the call a couple times related to New York, it's obviously, it's a CREE relationship. It is something we put a lot of time and energy and understanding, and we decided that it was the prudent thing to do on that particular credit to take that $4 million, well, it's basically a $2.5 million incremental adjustment. on that credit in particular. You know, look, we book good-sized relationships, right? And to your question about Chunky, we do think that it's really important to recognize that that was, you know, and this kind of goes back to one of the earlier questions, why we're doing so much diversification in terms of the type of loans we're booking going forward, and there's more emphasis On the private banking side, we've ramped our emphasis up in business banking. We're ramping our emphasis up in diversification, in C&I, particularly the addition of equipment finance and doing more middle markets. The question is, we're evolving the portfolio, the composition of the portfolio. The emphasis, I guess, in the past, and you know this, You know, that was a $740 million portfolio two years ago when we made the decision to stop, and it's a commercial real estate portfolio. So if there is some chunkiness that does happen, it was just basically, you know, a result of, you know, these past two credits that have happened and flowed through the P&L this, you know, over the course of 22. There really has been a significant reduction in commercial real estate retail. I can tell you that as it relates to in the portfolio, and certainly it's very selective if we would have done anything like that production-wise.
spk06: I guess the other comment is consumer, and as you referenced, we changed the policy, but still the behavior of that portfolio, losses are below our expectations. It's probably in the 1.5% to 2% losses. And pretty much we run models that take that to 3.5 or 4%. So still the behavior is below those parameters. So performing well compared to that, even though we changed the policy and you see additional charges this quarter in that concept.
spk09: That's great, Pablo. Thanks for answering all my questions, guys. Sure.
spk03: Thank you. And one moment for our next question. And our next question comes from the line of Setti Strickland with Jani.
spk04: Your line is open. Go ahead.
spk07: Hey, good morning, everybody. Hey, Setti. Just sticking with credit for a second, it looks like overall criticized balances were down, which is a positive. But it looks like there was some migration from special mention to substandard potentially. Can you walk us through a little bit more of kind of what you're seeing in that criticized balances?
spk06: Yeah, that was specifically the loan that we mentioned that was downgraded from REM, so special mention to substandard. And that is the source of the additional reserves that we took this quarter. So that loan was dropped from $24 million to $20 million based on a specific reserve. and then it will transition into OREO this quarter. So we made that comment on the call that they will go into OREO with no additional changes in valuation. That was the biggest item, yeah.
spk07: Got it. Sorry, I was having some technical difficulties with my phone earlier, so I missed that. And then just curious, where do you see the most opportunity on the non-interest income side? And just kind of wonder, what should we expect there as we go through the year? I know it's obviously a challenging environment for mortgage still, but it seems like wealth management has kind of been a bright spot for you guys in the past. And just if you could walk through a little bit more of what you're seeing there.
spk08: Yeah, look, I think with the emphasis we're placing on private banking, there's a natural evolution as these You know customers come on to also be able to cross sell on the wealth side, so I think that's one driver, I think the other is we've added some key personnel. very experienced people to help develop you know, using the capabilities that we've already got in house. To really develop more on the domestic side, you know, historically we've had a fair bit virtually all of it. being connected with the international side. And we think there's just huge upside for us. So in terms of expectations, I think it's really a volume play for us to continue to be a slow, steady build. But it's a very, very important part of our plans is to really drive incremental AUM into the organization.
spk06: I believe the last quarter was a good example, 127 million of increases in net new assets. We really wanted to keep up with that behavior of keep growing. And, of course, the interest rate cycle is not helping that much, the mortgage company. But we still, you know, we're having production, and we expect to keep going up with mortgages and selling into the secondary market.
spk07: Got it. That's helpful. And just one last one for me. You know, you guys said that it sounds like the balance between the different loan categories growing throughout the year should be kind of similar to what we had this past quarter. So should we expect consumer stays around 8-ish percent of loans over time? Is that kind of the number you're comfortable with?
spk08: No, I think you'll see that diminish because, you know, we're which we've done the transition into a white label solution and that will have direct influence over. So, you know, in terms of if you think about us in historically, you know, Carlos can comment, but, you know, we had a pretty steady appetite of, you know, the indirect from the relationships we had. And I think we clearly should see some you know, trail off from that as the other begins to ramp up?
spk06: Yeah, I guess the best way to describe is that the indirect purchases were done in bulk and were probably bigger in amount every month. We just stopped buying from the indirect sources and now we're coming in, as Jerry mentioned, on the Y-level. But the Y-level are focused on footprint where we operate So you have just Houston and Florida. So the growth would be slower than the payments coming out from the indirect purchases. So it will be a net decrease, so to say, but the composition. And it won't be as chunky. Correct.
spk07: Got it. Thanks for taking my questions. Sure. Have a great day.
spk04: Thank you.
spk03: And one moment for our next question. Our next question comes from the line of Steven Scouten with Piper Sandler.
spk04: Your line is open. Please go ahead.
spk10: Hey, good morning, everyone. Maybe first, just following up on that SoFi conversation, those loans, it looks like we're down $63 million. How much of that, if any, update on the net charge-offs was related to those loans versus kind of your maybe core self-originated consumer?
spk06: It was about $3 million coming from that indirect purchases, and then we had another surge due to the change in policy, but related to the performance was about $3 million. Okay, that's helpful.
spk10: And then if you could give me an idea of what you guys are booking new CDs at and domestic deposits, it looks like that's probably going to be the biggest driver of deposit growth from here, at least in the near term. What are you having to pay to get that new CD growth?
spk08: Yeah, I think, you know, market rates have run around 4%, and that's where we are, right? Customers seem to prefer the, you know, I'll call it sort of the 9- to 12-month buckets, and, you know, that's where we're pricing our 12-month product right now.
spk06: Yeah, we have it managed via promotion as opposed to changing the rate. So we keep it up on the branches and on the website as a promotional rate that we can discontinue whenever. But it's not affecting our typical repricing of CDs on an ongoing basis.
spk10: Okay. That's great. Have you been able to hold spreads, I guess? I mean, obviously the international deposits help a lot in terms of your overall average cost, but have you been able to hold spreads in terms of new production versus what you're having to pay for new funding? Maybe give a feel for where those new loan yields are coming on it.
spk06: Yeah, new loans yield, so definitely the changes in software and labor have helped a lot, increasing the base rate. We haven't forget, even in this interest rate cycle, to keep being very disciplined with adding floors to lending structures. But I think directly to Stephen's question, we've maintained the spread.
spk08: We have not made any adjustments on spread, meaning on the plus.
spk06: Yeah, but on the lending side, it actually had been favorable because of the more CNI component compared to CNRI.
spk08: Yeah, it's definitely composition that drives it.
spk10: That's great. Okay, super. And I guess maybe just thinking about that holistically as we look at 23 for NII trends through the year, I know, Carlos, you said you feel like you can kind of hold the NIM flat through the year. I would think, just given how asset-sensitive you are, if we do actually get what the forward curve is projecting, that would be really hard to keep the NIM flat in the back half of the year. especially if you continue to grow and have to pay for CDs at a near market rate. How do you sustain that NIM throughout the year and how do you think about the ability to grow NII maybe particularly in the back half of the year if rates get pressured back lower?
spk06: Well, the question I guess comes out of Jerry's comment on increasing DDAs and non-interest bearing accounts. That's one of the items that we'll be working the most. As you noticed, the commercial side was one of the key drivers on the last quarter, and we expect that to continue. And onboarding full relationships with DDAs should help us with the DDA side and blending out the cost of funds. So that should be one of the offsetting factors of incremental CDs or additional or costly morning markets.
spk08: Yeah, I think too, Steven, it's the incentive plan for our biz dev officers. You know, there's a combination here, right? There are more biz dev officers. There's a much greater focus. We're focused on full relationship. You know, it's a combination of things to Carlos's point that will help drive, you know, and keep us growing on, you know, the non-interest bearing side because it's critically important. that we're considered having those kind of core relationships with customers. So, I mean, I think our folks would attest that, and we're also looking to sell the totality of the bank. We add a CNI customer, we're looking to do bank at work, we're looking to do private banking. I mean, there's all sorts of things that we are emphasizing that historically have not been the priority. And I think that you'll see this is a big, big change for us. And I think that's going to be very helpful. Look, I think you're spot on. There's going to be pressure towards the back end of the year. But I think there's a difference between us thinking about the NIM versus the NII. And I just wanted to make sure we were all aligned on this. Obviously, greater outstandings is going to drive incremental NII every quarter for us. So, I mean, my sense is you're going to see NII growth, you know, continue in the organization as we just, you know, as we naturally are growing in loans and deposits. But there's no question that, you know, market conditions are going to really have an impact on, you know, you just, you have competitors that are going to pay up depending on how they're going to be in liquidity stress. And, you know, we're going to have to selectively react to those type of things. So.
spk10: Sure. Sure. That's helpful. And then just last question for me. When you guys think about capital, what's kind of your constraining ratio as you think about that? I mean, the $25 million buyback, I mean, where the stock is today, the stock's a lot lower than when you were extremely active in the buyback in late 21 and 22. So it kind of feels like you're not getting paid for the improvements in the bank, frankly, with where the stock is. So how aggressive might you be with that buyback at these levels?
spk08: Look, I think what we said was we will be opportunistic to exercise that. But I also think it's important to say you've got to be balanced, right? I mean, we're in a nice place where, you know, we're trying to make sure we have sort of all the tools in the toolkit, right? So now we have a buyback in place. We continue to pay the dividend, but we're also growing the company. So we're using capital, right? I know that we need to be good stewards of capital. I mean, it's probably first and foremost. I think one of the really strong points about us that I think people should take a lot of comfort in is that 7.5% ratio is an excellent ratio, right, in this day and age. And that's obviously inclusive of the marks. And so I think we're we're in a good place. You know, I just think it's also a function of making sure we're managing all our liquidity sources as well, right? You know, so capital's precious. I mean, cash is precious right now, right? Because we've got good demand that we've got to deploy it into. So we'll be making lots of trade-off decisions, you know, as to which one's going to provide the best return, you know, on the capital. Yeah, the market... And is that...
spk10: Is that 7.5% TCE? Is that kind of the constraining ratio you look to, or is there another ratio you focus on more intently there?
spk06: We're looking to, typically for capital planning purposes, we like to look into the Tier 1, which provides a more holistic approach to the position of the company. But, yeah, as Jerry mentioned, we like to look at the 7.5 as well because that includes the change in valuation, as I mentioned, during the year that changed as well. But it's a balancing act right now between the growth that you want to have and the opportunity that the stock in the market presents. Great.
spk10: Thanks for all the color, guys. I thought it was a really impressive quarter. Whether or not the market agrees, congrats. Thank you. Thank you.
spk04: Thank you, and I'm showing no further questions at this time, and I would like to hand the conference back over to Chairman and CEO, Mr. Jerry Plush, for any further remarks.
spk08: Thank you again, everyone, for joining the call, and we greatly appreciate it. Have a great rest of the day.
spk04: This concludes today's conference call. Thank you for participating. You may now disconnect.
Disclaimer