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spk08: Good day and thank you for standing by. Welcome to Amerit Bank Corp's second quarter 2023 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 the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Laura Rossi, Head of Investor Relations and Sustainability at Ameren Bank Corp. Please go ahead.
spk07: Thank you, Gigi. Good morning, everyone, and thank you for joining us to review Ameren Bank Corp's second quarter 2023 results. On today's call are Jerry Plush, our Chairman and Chief Executive Officer, and Sharemar Calderon, our 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, 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 over to our Chairman and CEO, Jerry Plush.
spk04: Thank you, Laura, and good morning, everyone, and thank you for joining Ameren's second quarter 2023 earnings call. I'd like to first welcome Sherry, who, as our new Chief Financial Officer, is on her first earnings call with us today, and to also thank Carlos C.F. Vigliola for his tenure as our CFO. As recently announced, Carlos became our new chief operating officer in June. I believe having both of them as part of our executive team makes us a much stronger organization. Next, I think it's important to address up front that while this was an outstanding quarter in many ways, the results are clearly overshadowed by the provision expense reflected in the 2Q results. The substantial increase from last quarter was driven by a legacy New York City commercial real estate loan originated in 2016. and from increased negative economic factors used in the CECL calculation. In her section, Sherry will provide additional details of the provision recorded this quarter. The outstanding deposit growth in 2Q and year-to-date that we will review in the presentation reflects our goal of being able to rely on ourselves for organic deposit growth, and we believe this clearly sets us apart from the competition. We've been talking about how essential it is to be a deposits-first, relationship-based bank and it is showing in our 2Q and year-to-date performance. We provided more granular information on the sources and types of deposits in today's earnings presentation, and I will go into it in detail shortly. In addition, this quarter we are reporting on reflects the achievement of the highest core pre-provision net revenue for any quarter in the history of the company as a public company, primarily driven from a higher average balance overall, coupled with a strong net interest margin. So, as a result of higher NII and lower core expenses, we were right at 60% in core efficiency. So, as we go through the slides today, you will see that we have changed the presentation order and we've added some additional slides that we believe will be helpful and add further transparency. So, I'm going to cover key highlights and actions taken in 2Q, along with deposits, liquidity, and capital. And then Sherry's going to cover other balance sheet items and our performance for the quarter in detail. So now we'll turn to slide three. And here we provide a summary of our second quarter highlights. Net income attributable to the company was $7.3 million compared to $20.2 million in 1-2-23. This decrease was primarily driven by the higher provision for credit losses in the period. The net interest margin was 3.83% compared to the 3.9% we reported last quarter, but in line with our previous guidance for the quarter of a 10 basis point margin reduction from 1Q levels. Our assets increased $24 million compared to 1Q23. Total gross loans were $7.22 billion compared to $7.12 billion last quarter, an increase of $102 million, and total deposits were $7.58 billion, up $293 million compared to the $7.29 billion last quarter. The company's capital levels continue to be strong and well in excess of minimum regulatory requirements to be considered well capitalized at June 30, 2023. Our tangible common equity ratio remains strong at 7.34% as of June 30, 2023. As we classify the vast majority of our investment portfolio as available for sale, the mark to market on the portfolio is deducted from TCE. In an upcoming slide, we'll also show TCE if you deducted the market value adjustment related to the held to maturity portfolio, which would result in TCE of 7.16%. Lastly, during the quarter, we also paid out the previously announced cash quarterly dividend of $0.09 per share on May 31st. So now we'll turn to slide four. And here you can see the core PPNR was $39.2 million, compared to the $37.1 million reported in the previous quarter. We recorded a total of $13.4 million in non-routine non-interest expense, mostly offset by total non-routine non-interest income of $12.4 million, which includes $13.4 million in gains on early extinguishment of Federal Home Loan Bank advances. Non-routine non-interest expense items recorded into are listed here in detail. And substantially, all of these were previously furnished in the Form 8K we filed in mid-June in conjunction with our virtual non-deal roadshow. The impact of these non-routine items overall was a net negative of $1 million. We'll turn now to Slide 5 and cover key actions taken during the second quarter. So again, loans, we reported growth year-to-date of $297 million, or 4.3%, and $102 million, or 1.4%, in 2Q. Regarding deposits, we've had growth year-to-date of $535 million or 7.6% and $293 million or 4% in 2Q. Our loan-to-deposit ratio is now 95.2% compared to the 97.6% for 1Q and 98.2% for 4Q of 22. As noted earlier, we're focused on organic deposit growth and reducing reliance on other funding sources except for asset liability needs. We're also working on improving the deposit mix to generate even more core deposits. More on that shortly. Next, our banking center rationalization continues. We've listed here details regarding additions. Our Key Biscayne, Florida location opened in June as planned, and we already have over 16 million in deposits. Our downtown Miami, Tampa, and Fort Lauderdale locations are still in process to open by year end and new in 2Q23. We're under LOI for a private banking location in the River Oaks section of Houston, Texas, and the agreement is in final stages. Approval has already been received from the OCC. On the consolidation side, we closed our FM1960 location in Houston, Texas, and merged it into our Champions Banking Center. And we intend to close our Edgewater location in Miami, Florida, to coincide with the downtown Miami opening. Turning now to the stock repurchase program, We have a $25 million Class A common stock share repurchase program in place, and in May and June, we repurchased 95,262 shares for $1.7 million, so at an average price of $17.42 per share or at .8 price-to-book value. We are prudently balancing between cash on hand, capital levels, and price levels. Availability remaining under this program was $22 million as of quarter end. Next regarding people, we finalized all the expected executive team moves and further optimize our org structure. We're delighted to have these changes behind us to welcome the new people on board and to be totally focused now on the business. And I'm happy to say these changes are already having a significant impact on our results. Our new head of commercial banking and our new Houston market president were on board during the quarter. We merged retail and business banking into one unit to gain synergies between the two lines of business under one leader. resulting in significant go-forward savings. We did the analysis to rationalize the organization and several other support areas, which will also result in future period efficiency and personnel expense savings. These changes also improve the ratio of customer-facing to support positions to be close to 50-50, and we intend to further improve this ratio as we go ahead. And finally, we continue to selectively add key business development personnel in the three markets we serve. including as I mentioned the hiring of the new private banking leader in Houston who starts in early August. And we've added three new key commercial business development officers here in South Florida, all of whom start next week. So now we'll turn to slide six and I'll provide an overview regarding deposits as of June 30th. This is one of the new slides I referenced earlier. So again, total deposits at the end of the second quarter were $7.6 billion, up $293 million from the prior quarter. You can see here the increase was primarily in commercial, retail, and private banking, as well as international. Organic growth was even higher for the quarter than the $293 million we just referenced, as we reduced institutional and broker deposits by $136 million and $52 million, respectively. We remain committed to maintaining our current ratio of loans to deposit with a target of 95% and the intent not to exceed 100%. So we'll turn now to slide seven, and here you can see we continue to have a well-diversified deposit mix composed of domestic and international customers. The growth this quarter was primarily driven by increased transaction and time deposits. Domestic deposits now account for 67% of total deposits, totaling $5.1 billion as of the end of the quarter, and that's up $222 million, or 4.5%, compared to the previous quarter. And international deposits, which account for 33% of total deposits, totaled $2.5 billion, and that was up 71 million or 3% compared to the prior quarter. We intend to continue to emphasize international deposit gathering as a source of funds, given favorable pricing, and to take advantage of our infrastructure and capabilities. We believe this is essential to do as it provides additional diversification to our funding base. Domestic deposits include over 50,000 accounts with an average size of $100,000, while international deposits include approximately 58,000 accounts with an average size of $45,000. Our core deposits, defined as total deposits excluding all time, were $5.5 billion as of the end of the second quarter, an increase of $141 million, or 2.6%, compared to the previous quarter. The $5.5 billion in core deposits included $2.8 billion in interest-bearing deposits, up $284 million, or 11.4%, versus previous quarter. $1.4 billion in savings and money market, which was down $76 million, or 5%, versus the prior quarter. And $1.3 million in non-interest-bearing demand deposits, down $67 million, or 4.9%, versus the previous quarter. We'll now move to slide eight, and here we've again included this table to provide additional data regarding deposit insurance coverage. 71% of our deposits are FDIC-insured, and additionally, we carry $275 million in qualified public deposits in the state of Florida as of the second quarter, which are subject to collateral requirements by the state of Florida. Reciprocal deposits, which are 100% insured by the FDIC through the Intrified Network, grew to 1 billion at over 200 counts as of the end of 2Q23. We are proactively marketing this to our customers, and it's branded as Amerit Protect to existing as well as potential customers. And we intend to continue to proactively promote this to protect our customers on an ongoing basis. Additionally, our large fund providers, defined as those with balances above 20 million, are approximately 15% of total funding as of the end of the second quarter. We'll move now to slide nine regarding liquidity risk management. We're going to provide some details, not only on our practices, but on additional actions we've taken to strengthen our funding and capital position. So, our standard liquidity management practice includes such things as regular testing of the lines of credit, daily monitoring of our Federal Reserve account, as well as large fund providers, daily analysis of our lending and deposit gathering pipelines, limits on liquidity ratios, active collateral management, and as shown here, 79% of the $1.26 billion in the investment portfolio have direct or indirect U.S. government guarantees. So in terms of credit availability, total advances from the FHLB were $770 million as of June 30, 23. We have an additional $2.1 billion of remaining credit availability from this source. Based on current collateral availability, our open borrowing capacity with the FHLB is $1.34 billion. Please note that no funds have been needed from emergency funding facilities or from the discount window from the Federal Reserve Bank. Regarding additional actions taken to increase our liquidity position, we have a strong cash position of $381 million at the Federal Reserve Bank. As we just mentioned, we're continuing to work with our large deposit clients to promote AmeriProtect. to ensure all of their deposits are 100% FDIC insured. We increased volumes under this product by $454 million and added 127 accounts to coverage in 2Q. And we continue to include deposit covenants with minimum balance requirements for any new financing relationship. So in terms of liquidity at the holding company, we carry $60.5 million in liquidity on hand, which covers approximately four times our annual OpEx and debt service as of 2Q23. The dividend just declared by our Board will use only $3.1 million of this cash on hand. We'll turn now to slide 10. Here we provide an update on share repurchases and shares outstanding. So, after having elected to pause on repurchases in March, given industry events, we began to prudently use our $25 million share repurchase program again during the quarter. We believe the current market price does not reflect the true valuation of our stock, so this presents an opportunity to repurchase. In 2Q, as I referenced before, we repurchased 95,262 shares of common stock. And I've said this before and I'll say it again today. When done right, in a measured, prudent way, there's nothing better than buying back part of your own business. It shows you believe in what you are doing and the value you can and will create. So we'll turn now to slide 11, and we'll show our capital position relative to regulatory minimums. So at the end of 2Q23, our total capital ratio ended at 12.41%, and our CET1 was 10.02%. Our tangible common equity ratio, which includes $87 million of AOCI, resulting from the after-tax change in valuation on the AFS investment portfolio, was 7.34%. Regarding our tangible common equity ratio, here we show the impact of the 18.5 million in unrealized losses from our held to maturity investment portfolio and what that would have on our TCE, which results in an adjusted TCE ratio of 7.16%. Remember that this is not required, but we show this here to emphasize the relatively small impact this would have if included. And our tangible book value per share, also adjusted for the held to maturity valuation, stood at $20.11 as of quarter end. So with all that said, I'll turn things over to Sherry now. She'll go over key metrics, other balance sheet items, and the results for the quarter in more detail. Sherry?
spk09: Thank you, Jerry, and good morning, everyone. Happy to be here to share more color on our financial position and performance. So turning to slide 12, I'll begin by discussing our key performance metrics and their changes compared to last quarter. Non-interest-bearing deposits to total deposits decreased to 17.1% in 2Q compared to 18.7% in the previous quarter. This comes as no surprise as interest for DDAs is reduced and customers continue to seek higher interest rates on their deposits given market competition. We continue to be keenly focused on increasing this ratio through the different initiatives Jerry mentioned. Our efficiency ratio was 65.6% compared to 63.7% last quarter, and ROA and ROE were lower this quarter at 0.31% and 3.92% respectively, as a result of the higher provision and non-routine charges we discussed. For consistency and transparency, we showed the three core metrics of ROA, ROE, and operating efficiency, excluding one-time non-routine items, so you can more easily see underlying performance for the quarter. As an example, core efficiency is 60.3% versus the 65.6%, which includes non-routine charges. Lastly, the coverage of the allowance for credit losses to total loans increased to 1.48% compared to 1.2% in 1Q as a result of the increased provision associated with the New York City legacy loan and consumer loan charge-offs, as well as updates to the economic outlook. Continuing to slide 13, I'll discuss our investment portfolio. Our second quarter investment securities balance was at 1.3 billion, which remains unchanged compared to the previous quarter. When compared to the prior quarter, the duration of the investment portfolio has extended to 5.1 years, as the model anticipates longer duration due to recent higher mortgage rates and therefore slower prepayments. As we did last quarter, I would like to take a minute to discuss the impact of interest rate increases on the valuation of debt securities available for sale. As of the end of June, the market value of this portfolio decreased $13.5 million after tax, compared to an increase of $3.9 million in the first quarter. The change quarter over quarter was driven by rising rates during the second quarter. Our available for sale portfolio represents 78% of the total investment portfolio, while health and maturity securities represent 18%, and the remaining balance is federal reserve and official B stock. Continuing on to slide 14, let's talk about the loan portfolio. At the end of the second quarter, total growth loans were $7.2 billion, up slightly 1.4% compared to $7.12 billion at the end of the first quarter. This growth was driven by loan origination efforts, primarily in specialty finance and single-family residential mortgage. Partially offsetting this increase were prepayments of approximately $183 million, primarily in commercial and consumer loans. Specialty finance loans increased to $625 million compared to $557 million in 1Q. The single-family residential portfolio was $1.33 billion, an increase of $93 million compared to $1.16 billion in 1Q23. This amount includes $113 million in loans originated and purchased through AMA Mortgage during the quarter, primarily done with private banking customers and other strategic relationships. Consumer loans as of Q23 were $503 million, a decrease of $47 million, or 8.5% quarter over quarter. This includes approximately $312 million in higher-yielding indirect loans, which had represented a tactical move for us to increase yields. As we mentioned last quarter, we are focusing on organic growth and are no longer buying any new production since the end of 2022. We estimate that at the current prepayment speed, these will pay off over the next two years. Also, we continue our runoff strategy of the New York City CRE portfolio. The balance remaining is $292 million consisting of 24 properties. Loans held for sale, which are all in connection with AMRA mortgage, total $15 million as of 2Q23 compared to $65 million as of the previous quarter. In line with our business focus in Tampa, we will continue to include this market to show our progress as a percentage of the total portfolio, which was almost 4% as of the end of the quarter. Tampa represents a significant source of growth opportunity for us for full banking relationships. Of note this quarter, we successfully completed our transition from LIBOR to SOFR to ensure existing contracts have a robust fallback language that includes a clearly defined alternative reference rate. We converted approximately 390 loans with a total loan balance of approximately $1.1 billion. Turning to slide 15, let's take a closer look at credit quality. Our credit quality remains sound and reserve coverage is strong. The allowance for credit losses at the end of the second quarter was $106 million, an increase of 25.6% from $84.4 million at the close of the previous quarter. We recorded a provision for credit losses of $29.1 million in the second quarter, which includes $15.7 million in additional reserve requirements for credit quality in charge of, $1.4 million to account for loan growth in the quarter, and 12 million to reflect updated economic factors. It is important to mention that the quarterly 2022 provision for credit losses now reflects the desegregated impact of CECL implementation for those specific periods. During the second quarter of 2023, there were net charges of 7.5 million in which 7.6 million related to indirect consumer loans and 1.5 million related to multiple commercial loans. This was offset by 1.6 million in recoveries. Our non-performing loans to total loans are up to 65 basis points compared to 31 basis points last quarter. This is primarily due to the further downgrade from a special mention of a New York City CRE loan for $24.3 million and a commercial loan for $1.5 million. Non-performing assets total $67.4 million at the end of the second quarter, an increase of $18.7 million compared to 1Q23. This includes the increase in NPLs and a $6.4 million decrease in other repossessed assets related to the sale of transportation equipment repossessed and disclosed last quarter. The ratio of non-performing assets to total assets was 71 basis points, up 20 basis points from the first quarter of 2023. In the second quarter of 2023, the coverage ratio of loan loss reserves to non-performing loans closed at 2.2 times, down from 3.8 times at the end of the last quarter, and from 2.8 times at the close of the second quarter of last year. Now in slide 16, we discuss our CRE portfolio in further detail. We have a conservative weighted average loan to value of 59% and debt service coverage of 1.4 times, as well as strong sponsorship tier profile based on AUM, net worth, and years of experience for each sponsor. As of the end of Q23, we had 31% of our CRE portfolio in top tier borrowers. We have no significant tenant concentration in our CRE retail loan portfolio, as the top 15 tenants represent 22% of the total. Major tenants include recognized national and regional grocery, stores, food, and clothing, among others. Our underwriting methodology for CRE includes sensitivity analysis for a variety of key risk factors like interest rates and their impact over debt service coverage ratio, vacancy, and tenant retention. Please note that over 45% of our CRE portfolio has been hedged by the borrowers via interest rate caps or swaps, which in turn protects them against rising rate environments. I'll discuss net interest income and net interest margin on slide 17. Net interest income for the second quarter was $83.9 million, up $1.5 million, or 1.9%, compared to the previous quarter. Our asset-sensitive position enabled us to offset via repricing the incremental cost of deposits we recorded during 2Q due to higher market rates and balances, as well as the cost of borrowing, which also increased via rates despite lower balances. The increase was primarily driven by Higher rates on total interest-earning assets, primarily loans and interest-earning deposits with banks, in line with the 25 basis point increase in the Fed's benchmark rate in 2Q. Increased loan balances, primarily commercial and single-family residential, and to a lesser extent, theory and owner-occupied loans. And decreased balances on official B advances, savings, and money market deposits. As rates continue to increase during the quarter, we experience higher betas via the combined effect of rate increases in money market deposits as well as repricing of time deposits that had not repriced at current market rates. As you can see in the graph, we observed a beta of approximately 40 basis points on a cumulative basis since the beginning of the interest rate up cycle, but over 90 basis points quarter over quarter. As we indicated last quarter, a large portion of our time deposits have repriced at current market rates, and a reduced balance is left to reprice, limiting the impact in our interest expense in coming quarters. Moving on to the net interest margin, as Gary mentioned, NIM for the second quarter was 3.83%, down by seven basis points quarter over quarter. As I said, our ability to offset funding costs and contain a further decrease in NIM is a reflection of our asset-sensitive position. However, we expect the margin to continue to be pressured given substantial market competition for domestic deposits and demand for higher rates. I'll provide some additional color on NIM forecasts in my final remarks. Moving on to interest rate sensitivity on slide 18, You can see the asset sensitivity of our balance sheet with 51% of our loans having floating rate structures and 54% repricing within a year. As we have said in previous calls, we continue to position our portfolio for a change in rate cycle by incorporating rate floors when originating adjustable loans. We currently have over 50% of our adjustable loan portfolio with floor rates. Additionally, you can see here the transition to SOFR rates with 30% of our portfolio now indexed to this rate. Our NIMS sensitivity profile remains stable compared to the previous quarter. We include the sensitivity of our available for sale portfolio to showcase our ability to withstand additional negative valuation changes. I would like to remark the organic improvement in AOCI by $12 million due to the expected maturities of the investment portfolio and expectations of rate reductions during 2024. We will continue to actively manage our balance sheet to best position our bank for the remainder of 2023. Continuing to slide 19, non-interest income in the second quarter was $26.6 million, up by $7.3 million or 37.6% from $19.3 million in the first quarter of 2023. As referenced earlier, $13.4 million of non-interest income were non-routine items. The increase was primarily driven by lower losses on the sale of available for sale securities compared to the previous quarter. This increase in non-interest income was partially opted by lower fee income from customer derivatives and by lower mortgage banking income. Amaranth assets under management total $2.1 billion as of the end of the second quarter, up $40 million or 1.9% from the first quarter. This increase was driven by approximately $11 million in net new assets as we continue to execute on our relationship-focused strategy, as well as approximately $16 million from increased market valuation. Turning now to slide 20, second quarter non-interest expenses were $72.5 million, up $7.8 million or 12% from the first quarter. As Jerry covered earlier, we considered $13.4 million of our expenses this quarter as non-routine expense items. Excluding these items, core non-interest expenses were $59.1 million in the second quarter of 2023. The quarter-over-quarter increase was primarily driven by $2.6 million lost on the sale of reprocessed assets in connection with our equipment financing activities, $2 million in impairment charges related to an investment carried at cost in connection with a specific FinTech investment given current investment round, $2 million in higher severance expenses in connection with the organizational rationalization mentioned by Jerry, which provided for an improved ratio of customer facing versus support function. $1.7 million in additional advertising expenses in connection with our partnership with professional sports teams, giving both teams advanced the championship round. $1.6 million in additional expenses in connection with the termination of contract with third-party vendor resulting from our upcoming engagement with FIS. $1.4 million in additional telecommunication and data processing expenses due to the write-off of an in-development software, and $1.1 million of additional branch closure expenses and related charges as a result of her decision to close the Edgewater location in Miami, Florida. The increase in non-interest expenses was partially offset primarily by lower loan level derivative expenses due to the absence of additional expenses in 1Q related to the transition of interest rate swap and cap contracts with clients from LIBOR to a new replacement index. lower salaries, and lower professional fees. In terms of our team, we ended the quarter with 710 FTEs, slightly lower from 722 we had in 1Q. Out of the 710 team members, 617 are employed by the bank and 93 by Amron Mortgage. On that note, let's turn to slide 21, which focuses on Amron Mortgage. On a standalone basis, Amron Mortgage had a negative of PPNR of $1 million in 2Q23, which was consistent with 1Q23 results. Our efficiency ratio, excluding the activities from MRM Mortgage, improved from 65.6% to 63.7%. During the second quarter, the company originated and purchased approximately $113 million in loans to MRM Mortgage and is noted on the slide related to bank customers. The current pipeline shows $95 million in process or $294 in applications as of July 7, 2023, with $121 million in rate slots. Now, before I turn it back to Jerry, I would like to provide you with some color on our expectations for next quarter. Regarding growth, we expect stronger loan growth in the third quarter, given the current pipeline, in line with the 10% annualized growth communicated earlier. Deposit growth continues to be strong, but note that any excess over loan growth will be used to further reduce high-cost institutional deposits. Given the rate environment, we expect margin to reflect rising deposit costs due to competitive pricing. Our expectation is a reduction in NIM in the next quarters of 18 to 20 basis points. For non-interest income, we expect a range of 15 to 16 million next quarter. Regarding operating expenses, we estimate core non-interest expense to remain in the 60 million range. And we expect provision for credit losses to normalize and be in or around 10 million next quarter. I'll pass it over to Jerry for his closing remarks.
spk04: Thanks, Sherry. Let me cover a few items in closing. First, our FIS conversion has been delayed from this quarter to early November. We want to have everything right, as do the folks at FIS, and we agreed after three rounds of readiness testing to push the timing back to ensure everything is just right, no workarounds. So while we were certainly planning on being converted by now, It is absolutely the right thing to do to make sure everything works as it should systemically to ensure a great experience for our customers and our people. Next, in light of the inevitable further margin compression that Sherry just referenced, we're evaluating everything. So from expenses, margin enhancement strategies, growth strategies, among others. I think in light of the pressure on earnings that is coming from higher funding costs, we must look at absolutely everything And we have already begun to do this and will continue to do so. And finally, we expect and intend to continue to grow organically. We are open for business. There are ample opportunities in the markets we serve, and we welcome existing and new customers willing to have full banking relationships to grow with us. So with that, I'll stop. Sherry and I will look to answer any questions you have. So Gigi, if you would, please open the line for Q&A.
spk08: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Michael Rose from Raymond James.
spk03: Hey, good morning, everyone. Thanks for taking my questions. And maybe we could just, hey, how are you, Jerry? Maybe we could just start on deposits, understanding that, you know, the NIB mix, you know, dropped like everybody else. You guys are at 17%. I know you have a lot of initiatives in place. You have a very sticky and lower cost, you know, foreign deposit element, which is, you know, clearly, you know, very unique and I think a very positive thing in this type of environment. Here you're on the margin of Guy, just trying to, you know, get a sense for are we kind of nearing after this quarter's kind of expected compression? Are we nearing a bottom just given some of the efforts that you're going to undertake? And any deposit growth obviously paying down some of the higher cost stuff, just trying to get a sense for are we at or near a bottom for NIM after this quarter? Thanks.
spk04: Yeah, hey, Michael, great question. And certainly one we want to see happen as well. The answer, which is, you know, look, we feel there's clearly going to be a drop, you know, competitive pressures, you know, whether you're raising money in money market and or, you know, the different maturities that are out there or terms on CDs, right? And let's, let's just clarify customers have clearly expressed strong preference to be actively managing their money. And so you're seeing that in terms of what's getting, you know, the real growth is really coming. Well, again, in core, you're seeing equal, if not bigger growth happening in time deposit. So, you know, in our case, we actually grew not interest bearing, but to your point, as a percentage, it's declined because, again, it's been overshadowed by the greater growth in the other categories. Our view is that I think it's probably a little too early to tell, but we certainly believe that our goal is to not have consistent quarters of margin compression going forward. We'd like to think that we can proactively manage this. And again, depending on the rate increases, we'd obviously see an increase in yields out of the loan portfolio given the higher percentage of variable to fix that we've got there. So, you know, I think, you know, where we are right now is, you know, we do believe that it's going to come in, you know, that solid, you know, 18 to 20 lower. We are going to grow. I mean, the view is we've got great pipelines on both sides of the balance sheet. But, you know, it is important to recognize that, you know, the key for us to keep our cost down is clearly to focus on non-interest bearing. So getting more relationship, core operating accounts. And it's also to continue the growth and to really ramp up the growth in the international side because we see, obviously, the advantage there is we can attract a lower cost and a very sticky deposit.
spk03: Very helpful. And that kind of leads into a follow-up question. You kind of mentioned pipelines being solid. I think growth, loan growth this quarter was like 7% annualized. You talked about it being stronger in the third quarter. You know, just wanted to get a sense how much of that is from, you know, maybe some of the newer markets like into Tampa and some of the hiring efforts in Houston. Or is it really just that, you know, the markets in South Florida are just really that strong and there's a lot of demand out there? Is it more kind of just, you know, growth in some of these new markets and market share gain versus maybe some competitors trying to get a better sense for where the growth is coming from? Thanks.
spk04: Yeah. We actually see growth potential in all three markets. So if you consider, and you know, in, in South Florida would break it up, right? The three counties across the three counties, um, in addition to the greater Tampa Bay area, as well as in Houston, um, we are definitely seeing, um, solid demand in all three. I don't, um, think it's overweight in one versus the other, you know, Tampa, the team has been building, you know, Jason's been there now, um, a little over a year. We're at a team of 20 plus when you count in some of the mortgage personnel that work out of that office. And it's really beginning to show in the momentum that they've got in their pipeline. Caroline joined us, obviously, in the past quarter. I think she's doing a very nice job getting her hands around things there and proactively out and meeting with customers and meeting new customers. So, you know, as I said, we're open for business. The thing that we are requiring with any new customer and certainly any customer that wishes to renew, expand relationships, is we want a fuller relationship with all our customers. And that's where a fair bit of this deposit growth is coming from. You know, we are mining, so to speak, you know, our own customer base in addition to requiring, as we said, you know, we put deposit covenants in place. And there's got to be very, very – good reasons if there isn't to meet a certain standard that there are other opportunities with that customer to eventually get there. So we're excited. And you know, I think it's important, Michael, just real quick. We not only hold, you know, what I'll call the classic credit committee review, the pipelines, talk about that on the loan side. Every week we hold a weekly roundtable on deposit pipeline. And so every business leader in the organization, every region in the organization is represented. And we go over deposit opportunities. So, you know, I think, again, that's shown in our numbers and we fully intend to just continue to press our efforts in both sides.
spk09: And Jerry, to complement that too, when we're thinking about our overall growth strategy in each of our markets, I think it's also important to mention our focus or we are looking into our international deposits with the lower cost that they come through. So I think it's built within our strategy for Houston, Tampa, and Houston, Florida.
spk03: I appreciate the call. And maybe just finally for me, you know, Jerry, you mentioned, you know, everything's kind of on the table on the expense side, just given the revenue challenges that are out there. You guys have chopped a lot of wood since the IPO in that regard. You know, from here, it seems like it's probably, you know, gets a little bit more difficult. Just trying to size up, you know, where the opportunities could be to, to kind of cut around the edges just assuming that, you know, the home runs are gone and you're going to be looking for more singles and doubles types of, you know, expense reduction efforts. Thanks.
spk04: Yeah, Michael, I'll give you a good example. Something as simple as total square footage in the organization, we're reassessing needs. We're certainly looking, and, you know, I've told a lot of folks in the organization already, you know, even the potential with the number of folks that we have sort of in the and a hybrid work situation, whether we could eventually go to more of a hoteling scenario. So, you know, when I say everything's on the table, we're basically looking at every single expense line item that you see in our, you know, sort of the consolidated level, I'll call it, you know, or summary level in the P&L and breaking down every single GL that feeds those and reassessing everything that's there. So I'm excited because I think we have come up with a few things. I think the really important thing to share with you, Sherry and I have lots of opportunities, just given the number of investor conferences that are coming up here in the third quarter, to bring updates on our progress on all of that in August and in September. The way I look at it is we've got three 8K filings with documents to give you updates as we fully uncover things and move things forward. You know, nothing today to share. Obviously, we would have done that, but, you know, my view is lots of work in process, and we do think that there are opportunities.
spk03: Thanks, Jerry. Jerry, appreciate the caller. I'll step back. Thanks, Michael.
spk08: Thank you. One moment for our next question. Our next question comes from the line of Graham Dick from PSC.
spk05: Hey, guys. Good morning. Hey, Graham. So I just wanted to start on the buyback. I saw you guys use a little bit of it this quarter. I just wanted to get your sense for your appetite on that going forward. I know you said the shares are attractive here and there's no better investment than your own stock. And the bank seems pretty well capitalized with common equity tier one over 10%. So just trying to get a sense for what you guys might do on that front and how active you might be. It seems like there's a lot left in the authorization relative to what you guys have used so far.
spk04: Yeah, Graham, good question. We've been slow and steady with it. I think we've been very consistent. That represents we're not going out at any given day and and doing a big slug, we are consistently evaluating opportunities. And I think that that's the way we'll continue. Sherry and I, and we've chatted obviously very openly with our board of directors about this. You have to be incredibly prudent when you look at this, right? Because it's a balancing act. We've got to grow our capital to grow our balance sheet. You know, we want to continue to pay dividends. So, you know, we're looking at all of the different moving pieces. But we think it's incredibly important to make sure people know we have an active program. We intend to continue to pursue where there are opportunities. And, you know, whether we take up a lot of that rest of that between now and next quarter or, you know, We have a new expectations of price that, that put us in a place where we feel comfortable that we don't necessarily have to, we're going to be opportunistic, you know? And so I would just kind of sum it up that we have it in place. It's something that we balance. We look at our cash needs at the whole code. We look at the capital levels, but we also obviously have a clear eye towards, you know, this is a really important tool, you know, in terms of the way we manage the company. to have a program out there and to be actively using it.
spk05: Okay, understood. And then I just wanted to flip to credit quickly and just kind of drill down a little bit, I guess, more on the New York portfolio and I guess the office book and the multifamily book in particular. But just on the office book, I know it's relatively small, only $38 million, but I wanted to get your sense for how that book is performing and how you might think it plays out over the next couple of years. I saw the debt service coverage ratios 1.1 times or whatever. Are you seeing any trends on that front in terms of your borrowers being able to generate rent growth or the otherwise?
spk04: Yeah, look, I think at this time we don't have certainly any immediate issues on anything within office. It's two loans. Um, you know, I will tell you that our new head of, of commercial banking, um, Juan has to read, but has been in, uh, very, very active in being out meeting with customers has been to New York has done the full KYC visited all of the properties with other team members from the organization. And, you know, the, the one, unfortunately that, you know, we've circled this quarter. really seems to be the singular problematic one. They're really, at this point, you know, based on those reviews, I don't really see that there's anything else material like that on the horizon. Right.
spk09: And just to add a little bit of color on the office space in New York, we have loan to values an average of 70% and a debt service of 1.2. Okay.
spk05: That's helpful. And then lastly, I just wanted to hit on the NIM quickly. I guess your NIM guide of down 18 to 20 basis points, what sort of, do you guys have any update on where you guys think the total deposit beta might shake out maybe by the end of the year if we get Fed pause?
spk09: When we look into how the beta has behaved in Q1 and Q2, I think it's It's fair to say that at least for Q3, we expect that beta to be somewhere in between the results for both quarters, even considering a stable rate from the Fed, right? So it may shift to somehow a decrease going forward. I think we've captured some of that already in our historical results these past two quarters, but I think it would be a good estimate to say between Q1 and Q2 results.
spk04: Yeah, I do want to also comment, you know, on the NIM compression. You know, one of the first things, and I think one of the big accomplishments this quarter was the pay down of institutional. And one of the reasons we wanted to break that out, and it's really not to, you know, other than to highlight that that tends to be the highest costing funding that we have, you know, on the liability side. And so that's an area of focus for us. So when we can exceed deposit growth and be able to continue to maintain our loan to deposit ratio where we were, our intent is to drive costs down. So back to the NIM itself, if we believe we can generate more international, obviously that's a very favorable data. We can, as one of the earlier questions was, you know, continue to ramp up on non-interest bearing. And I will tell everyone the We believe we have a lot of opportunity once this conversion is complete because we really like the platform capabilities that we will have. We've already moved all our customers over to a remote deposit capture. We will obviously be introducing them to a very comprehensive platform that we just think will really give us a competitive advantage going out. opportunity for us to get more lower cost, better beta deposits in the organization. So just for what it's worth, I recognize that the drive up in beta is clearly directly linked into what we're seeing as it relates to the higher costing deposits we've been putting on.
spk09: Right. And when we think about the repricing that's we do see that we do have part of our portfolio up for repricing. But when we look at the gap of the rate, we're expecting that most of our deposits already captured that increase rate. So we do have some coming up in repricing, but that already is capturing the higher rate. So that's how it's offsetting or getting us to a slightly decrease there.
spk05: Okay. Very helpful. Thank you, guys. Absolutely.
spk08: Thank you. One moment for our next question. Our next question comes from the line of Brady Gailey from KBW.
spk06: Hey, thanks. Good morning, guys.
spk08: Good morning, Brady.
spk06: So I just wanted a little more color on what is happening with this $24 million multifamily loan in New York that I think was the one moved into non-performers this quarter. Could you just give us a little more color on what happened there?
spk04: Sure. I mean, as I've emphasized, it's a legacy credit. It was originated in 2016. It's a multifamily property that's a conversion. Our belief, you know, we're working with the borrower proactively. And, you know, we believe that since the loan matured during the quarter, And clearly did not pay off. We needed to classify it as a substandard loan and put up the reserve that we did. I don't think, you know, just given the ongoing negotiations. That I can go much further than that Brady, but clearly this is 1 that's being very, very proactively managed.
spk09: And I think that also, Jerry, to complement that, being this within the multifamily space, I think it speaks as to being a specific item, not something pervasive in the portfolio.
spk06: Is it a rent-controlled property?
spk04: Yes. Okay. All right, and then... No further detail, Brady. Thank you.
spk06: Okay. And then the purchase indirect... consumer loans that drove the, I think it was like seven and a half million net charge-offs. Can you give a little more color on what those were? Do you expect, you know, any sort of forward noise from that?
spk04: Yeah, you know, this is a shrinking portfolio. You know, our view is, in particular, the hotspot. You know, we've talked about, you know, the two parties we bought this from, We terminated the programs at the end of last year. It appears the 21 vintage is the one that's running the hottest for credit loss and we've now had consecutive quarters at these levels. As Sherry referenced, we believe this is a portfolio that at the current payment speeds will be gone in under two years. Our view on the loss side is, you know, when she gave loss guidance, is that we've got a view on the loss content, you know, projected forward and believe we've captured that. So you won't see the replenishment into the portfolio. I mean, there could be a couple million here or there, but it's not at the level that, you know, the replacements that there have been in the last two quarters.
spk09: Right. And the 2021 vintage that Jerry was mentioning, When we when we think about the life or the term we believe we're in the peak of the loss and that any Expected losses are already covered through our allowance Okay, and who are the two parties can you just remind us are these like student loans or home improvement loans Now this is debt consolidation loans nationally generated we had no
spk04: Input, you know, this is over the, I'll call it the 48 contiguous. So, you know, that was intended to be sort of the geographic protection that you would have. I think we, you know, it's safe to say the first one was SoFi, right, was the biggest part of the portfolio. You know, and I think in terms of states, the highest concentrations are around 10% in any one state. so inclusive of California.
spk06: Okay. And so in NPAs, you have the $24 million New York multifamily. Then I think you have another $20 million New York-based commercial real estate loan as well in there, right?
spk09: Yes, we do. We have one additional relationship within that. It's an oral property, actually, in the NPAs in New York.
spk06: And can you give us a little more color on that property and what happened there?
spk09: For the commercial property in New York of the Oreo?
spk06: Yeah, the other $20 million property, yep.
spk04: Yeah, we feel we're in a good position on that one, Brady. You know, frankly, I don't see additional concern there at all. It's actually improving. You know, we've got new leases signed. I think we're, you know, the best way to describe that is it's in process on its way to, you know, our belief is it will be very marketable. It's in a very good location, densely populated, high demand in the area, and I think that one is going to be a positive. But, you know, again, We need to continue to make sure we get it fully leased up, and then we'll be in good shape. But we really like the partner that we're working with. We think the folks have done an excellent job in helping us. So I think the outlook on that one is nothing at all like the issues we just reported, obviously, on the repossessed equipment.
spk06: And sorry if I missed it, but that one that's in Oreo, what type of CRE is that?
spk09: It's retail.
spk06: It's retail. Okay. Yep. All right. And maybe just a bigger picture question. I know the ROA has come under pressure here just with, with the higher provision, but you know, I mean, you did on a core basis, you did almost a one ROA last year. So how do you think about, you know, hitting, getting back up to that one ROA level?
spk04: Yeah, look, I think it's clearly more challenging with the NIM considering, you know, you're going to have some NIM compression. And, you know, obviously the last two quarters we've booked some healthy provision expense. If you get the provision expense to go back to the 10 and under range, then, you know, that coupled with our ability, I believe, to generate on both sides of the balance sheet, I think we'd be in a really good spot. You know, we've put, you know, Brady, I think everyone that's followed our story is we've been building our organization, you know, sort of for the long term. This is not a we're trying to just make a few changes and improve results. We're trying to come up with something that can be very consistent on a go forward basis. Obviously, we've had some challenges based on some legacy things that have popped up here. But I think we have the right team, the right infrastructure. Once we get this conversion past us, I think we'll be highly efficient on the back office side as well as in the customer, the ease of customer to use the systems we have. I think it's then a growth strategy. And our belief is we're in good markets that we can continue to grow. They are not in some of the spots in the rest of the country that are having the stress levels. And, you know, our sense is that we are in three of the best markets in the country to be doing business. And all three, uh, you know, from the visits that I'm making in all three are very vibrant. So, you know, we feel that, you know, it's, it's for us, it's going to continue to, and we've talked about this openly. We're not shy about going through 10 billion. We know there are implications to going through 10 billion. but you can't sit at, you know, just in and around the 10 billion and avoid growing. Otherwise, you know, then it's going to be a cost cutting exercise and that's not what we want to do. We've put some real muscle on the infrastructure here and now we've, we've got to grow the organization. So our belief is there's good business to be had. That's why I made the comments in closing that we think that there's a real opportunity for us. We're open for business. We would just want customers that want to use us as a, We're a full-service bank, and that's what we want in our customer relationships. Okay, great. I believe we can get there on growth.
spk06: Got it. Thanks for the call, guys. Sure.
spk08: Thank you. One moment for our next question. Our next question comes in the line of Freddie Strickland from Jannie Montgomery Scott Research Division.
spk02: Hey, good morning, everybody. Hey, Fede. Good morning. Just clarification on that NIM guide. Was that 18 to 20 basis points in the third quarter, or is that over the course of the next two quarters? That's in the third quarter. In the third quarter, okay. And then along that same line of reasoning, and Jerry, I think you touched on this a little bit earlier, but if we see the Fed stop hiking in 2023 – Could we potentially see the margin come back up some in 2024 as earning asset repricing starts to overtake some of the funding costs?
spk04: Yeah, because I think you're going to see pressure that's happening. First of all, stepping back, Fed, a super competitive environment in the CD marketplace and in some of the money market campaigns, and we're seeing it from the largest banks in the country, not just locally from the competition that's headquartered here. With that in mind, that's why the international, that's why the push on more core with our corporate customers as well as with our private banking and other lines of business is really essential for us. We think it can normalize out, and that's where, to the question that was just asked earlier, if you're adding profitable growth, that's what's going to drive your PPNR on a go-forward basis.
spk02: Understood. That makes sense. And then just on the international deposits, I mean, it sounds like you feel like you can continue to grow those. Can you remind us what the average rate is on those? Just curious. I know they're usually lower cost.
spk09: It's around 70 basis points in average for the portfolio.
spk04: Yeah, and I think, FedAid, to give some color, the growth that we're, you know, this is not focused back on, you know, our history. This is a broader look at Latin America and the opportunities that we're seeing in several countries. And there'll be more to come on that over the next couple of quarters as we'll start to talk more and more about where all the growth is coming from.
spk02: Got it. And just one last one for me. You mentioned that $15 to $16 million guide on non-interest income for the third quarter. It seems like a pretty solid link quarter jump. Can you talk through some of the drivers there? What's driving on interest income higher?
spk09: Sure. So we, as you can see, we have an increase in AUMs. We have an increase in valuation of those. We believe that's part of it. Also, we are looking into fee income and also some of the mortgage activity we believe will get us to that range.
spk02: That makes sense. Thanks for taking my questions. Thanks, Fede. Have a good one.
spk08: Thank you. One moment for our next question. Our next question comes in the line of Matt Olney from Stevens.
spk01: Thanks. Good morning. Just looking for a few clarifications on the credit front of that provision expense, the $29 million. I think the slide says 60 million comes from additional reserve requirements from credit quality. Was this the mark you took on that the non accrual downgrade or any more color on kind of what that $16 million is?
spk04: Yeah, look, I think if you dissect the provision, there's obviously the two largest pieces I think that were referenced were related to the specific credit in New York, right? And there was also a replenishment on charge-offs. But the other piece that sort of I'll call the biggest of them all was related to what we refer to as the macroeconomic factors we put into the CECL model. I think we, you know, basically evaluated and felt that we took, you know, I won't call it either aggressive or conservative, I think an appropriate look and said, we're going to reflect those in the, you know, and again, that's based on the spread of the business that we have, right? And so, you know, you get that from a third party, it's highly reputable, evaluated, and you put that into your models. Our view is, all right, we don't expect that level to continue in future quarters. And I think, you know, when you look at the overall reserve, we're nearly at a 1.5%, you know, allowance. We think at this stage, given the portfolio, particularly the secured positions that we've got, that that's adequately covering what we think is the risk there. I think the charge-off number, Matt, was the replenishment. A big part of that was the replenishment from those indirect consumer And as I referenced in an earlier point, there's – we believe we've got that lost content. I mean, that could be give or take in future quarters a million or two here or there, but we think we've got that recognized.
spk01: Okay, I appreciate that. And following up on your last point, Jerry, on that consumer indirect piece, I think you disclosed that the 2021 vintage is kind of the hottest in terms of charge-offs. I guess based off the historical data – How long do those losses need before they peak out and start to decline?
spk04: Yeah, I think we're in decline on that now, Matt. I think that's why, given the prepay speeds, I remember when we did the update, you sort of look at this portfolio as probably on a run rate of being able to pay off know around 80 to 100 million every six months and that's the run rate that it's on so a combination of i'll call it payoffs and write-offs right you know get you that number and that's why we said we believe you know we'll have we'll have this behind us um in the two-year horizon completely behind us okay that's helpful jerry and then
spk01: I guess switching a little bit over to the loan growth front, I think you said one of the loan categories driving the growth, at least in 2Q, was specialty lending portfolio. Just remind me kind of what this is again, and does it come with any kind of deposit or funding relationships?
spk04: We have a group, you know, like, so if you think of our typical commercial, what fits in that is, I'll call it your classic corporate middle market asset-based lending, you know, falls under that. Anything else, we put in what we'll call the specialty category. You know, that's where we have our equipment finance activity as an example. You know, we'll call it, you know, sort of typical the non-traditional bank is what we'll call specialty. But when we, a year, almost, I guess, about a year and a half ago, launched into, in a bigger way, into equipment finance, that was really a big part of that division.
spk01: I guess just help me strategically appreciate growing that portfolio at this point, given some of the funding headwinds. Presumably, that portfolio doesn't come with much in the way of funding by itself.
spk04: Yeah, actually, I have to tell you, that's one of the unique things is that, you know, we're putting the same, if you want to bank with us, you got to deposit with us. Not necessarily in all those patients are we getting the core deposit, you know, meaning that we're the primary bank, but we certainly are pushing for our share or we're not interested in doing it. So, you know, I think A good way to think about us, because I agree with you, that's not a traditional way. Typically, equipment finance as an example, even in some respects, other corporate activities, it tends to be like, obviously, commercial real estate. They tend to be fund users, not fund providers. In our case, we're emphasizing that every relationship needs to come with some level of deposits. And we also look at it, Matt, more broadly because we're going after the principles in these relationships on the private banking side. So we're very, very transparent. I can tell you that anyone that comes to visit, anyone I go see, they automatically know that when they ask me a question, if there's anything they can do for us, and I immediately respond, more deposits. We're that laser focused on ensuring that You're not coming to Amerit to just do financing activity. You're coming to Amerit and we're looking for you to think of us as your bank. And so that's beginning to really take hold and shape. And, you know, I have said this in prior calls, I'm really proud of our commercial real estate team for the energy and effort they've put into deposit gathering, because I've not seen that in my career. and other organizations the way our team's been able to do it. But, you know, we're pushing that similarly on EOP.
spk01: Any more color on the loan yields that you're seeing today on the incremental loan growth? I think it's especially finance tickets and then the single family residential loans. Any color on just kind of what the yields are on some of those products?
spk04: Yeah, I think you're, You know there's the occasional in the sevens these days, but I think you're seeing a plus you know, on the vast majority of the production that we're booking which obviously. You know, and, of course, is you know we're we're being and I do think there's a real opportunity for us. In this production going for that we've got an opportunity to put more swap income on our books in three to four to because. customers that are coming in right that are pegged to an index are clearly wanting to swap floating for fixed okay and then uh yeah you know the overhang's still there matt by the way i mean you know all the uncertainty in rates which way things are going to go now is the fed going to continue to move or not i mean i know there's lots of speculation because we got a better inflation number, but I do think that, you know, there's still a lot of people want certainty right now. I think it's one of the reasons why you see the success rate that we're certainly having. I'm not going to comment on others of people want certainty of term. And that's why you clearly see the, the, the inflow that's happening on time deposits, right? So they want it on both sides.
spk01: Okay. Okay. That's all for me guys. Thanks for taking my questions.
spk04: Absolutely.
spk08: Thank you. I would now like to turn the conference back to Mr. Plush for closing remarks.
spk04: Okay. I want to thank everyone for joining our second quarter earnings call. We genuinely appreciate your interest in our company, and thank you for all of your continued support. Have a great day.
spk08: This concludes today's conference call. Thank you for participating. You may now disconnect.
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