Amerant Bancorp Inc.

Ladies and gentlemen, thank you for standing by and welcome to the AMRIT third quarter 2020 earnings conference call. At this time, our participant lines are in 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. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Laura Rossi, Investor Relations Officer at AMRIT Bank. Thank you.

Thank you, Operator. Good morning to everyone on the call, and thank you for joining us to review Amer and Bancorp's third quarter 2020 results. With me this morning are Miller Wilson, Chief Executive Officer, Carlos Gafiliola, Chief Financial Officer, Miguel Palacios, Chief Business Officer, and T.L. Fisher, Credit Risk Manager. Before we begin, note that the company's press release Comments made on today's call and responses to your questions contain forward-looking statements. The company's business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control, and consequently, actual results may differ materially from those expressed or implied. Please refer to the cautionary notices regarding forward-looking statements in the company's earnings release and presentation. For a more complete description of these and other possible risks, please refer to the company's annual report on Form 10-K for the year ended December 31st, 2019, and quarterly reports on Form 10-Q for the quarters ended March 31st, 2020 and June 30th, 2020, as well as the subsequent filings with the SEC. You can access these filings on the SEC's website. Please note that AMARANT has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances, or changes in expectations, except as required by law. Should also note that company's press release, earnings presentation, and today's call include references to certain adjusted financial measures. also known as non-GAAP financial measures. Please refer to Appendix 1 of the company's earnings presentation for a reconciliation of each non-GAAP financial measure to its most comparable GAAP financial measure. I will now turn the call over to Mr. Wilson.

Mr. Good morning, and thank you for joining Amaranth's third quarter 2020 earnings call. As I did in the past few quarters, I will begin by discussing how Ameren continues to navigate the current environment, including an update around initiatives to put in place to mitigate the impact of the COVID-19 pandemic and our third quarter highlights. Carlos will then review our financial performance for the quarter in further detail. After our prepared remarks, Carlos, Miguel, Tiel, and I will discuss questions. On slide three, we continue to support our employees, customers, and communities throughout the third quarter as we executed against our business continuity plan. On the operational side, we began to roll out a new phase of reintroducing an increased number of employees back to the office, excluding those who faced challenges related to the pandemic that could prevent them from returning. To support these efforts, we have ramped up safety protocols, including implementing staggered schedules in an abundance of caution to protect the health and safety of our employees. Ameren banking centers continue to operate on a regular schedule under strict federal, state, and local government safety guidelines. Additionally, we continue many of the liquidity and risk management practices implemented earlier this year as a result of the pandemic, including proactive, careful, and frequent credit quality assessments of all portfolios. We particularly focused on loans in the most vulnerable industries that have been hardest hit by the pandemic and tightened our underwriting practices to enhance risk mitigation against the challenging market backdrop. While we continued waiving fees in the third quarter, with the exception of late payment fees on loans, we continued to offer loan payment relief options to customers. As of the close of the third quarter, Ameren has only received a limited number of requests for additional payment extensions, which our team is carefully evaluating. Notably, loans under deferral and or forbearance decreased significantly to 71.8 million, or just 1.2% of total loans as of October 23rd, from 654.4 million at the end of the second quarter and 1.1 billion at the beginning of the program in April. Most importantly, 99.9% of loans out of forbearance have resumed regular payments, and 94% of the loans that remain under deferral and or forbearance are backed by real estate collateral. Impressively, Ameren no longer has any deferrals or forbearance on our hotel loan portfolio, which is one of the most impacted industries by this pandemic. This represents a significant improvement to the outlook of our credit quality for future quarters. As we head into the fourth quarter, we will continue to focus on monitoring the performance of all segments of the loan portfolio while providing relief to customers in our communities. We also plan to leverage our new small business relationships as a result of our PPP participation to execute on cross-selling opportunities and drive profitability. Please turn to our third quarter highlights on slide four. I would like to start off by discussing the third section on the slide, credit quality, because I would like to emphasize their success in managing this aspect of our business, despite the current macroeconomic environment. During the quarter, we continued to assess forbearance status and general credit conditions on a daily basis for the entirety of our portfolio, closely examining loans in vulnerable industries, as well as the COVID-19 pandemic. Our efforts were fruitful. In the third quarter, our allowance for loan losses was 1.97%, down from 2.04% in the second quarter, primarily driven by the partial charge-off of the loan to a Miami-based U.S. coffee trader, which we refer to as the coffee trader, mentioned in our two most recent earnings calls. Additionally, we recorded a provision for loan losses of $18 million, which included $5.8 million related to the coffee trader. This compares to the $48.6 million provision in the second quarter. Equally as important, our ratio of allowance to non-performing loans decreased to 1.4 times in the third quarter from 1.5 times in the second quarter. Moving to other highlights, in the third quarter, we recorded net income of $1.7 million compared to a net loss of $15.3 million in the second quarter. I would also note that our non-interest income increased by 2.7% compared to the second quarter, driven by gains on debt security sales. At the same time, our non-interest expenses increased 23.8% quarter over quarter, largely due to higher salaries and employee benefit expenses, which Carlos will explain in more detail. Regarding our balance sheet, total loans were $5.8 billion, up slightly quarter over quarter, mainly driven by solid consumer appetite and increased demand for real estate loans. Total deposits were $5.9 billion, down 2.4% from $6.0 billion in the previous quarter, mainly driven by a reduction of brokered and customer CDs, which declined 101.2 million or 17.2% and 78.9 million or 4.3% respectively during the third quarter. These declines are due to our continued focus on increasing lower cost sources of funds and aggressively lowering CD rates. In the quarter, our cash position remained strong maintaining a substantial borrowing capacity with the Federal Home Loan Bank and a large investment securities portfolio that could be used as collateral for borrowings. Turning to slide five, as I mentioned before, in the quarter we had net income of 1.7 million compared to a net loss of 15.3 million in the second quarter, primarily driven to lower provision for loan losses in the third quarter, offset by higher non-interest expenses and lower net interest income. Our return on assets was 0.08% or 0.16% on an as-adjusted basis. And our earnings per share was 4 cents or 8 cents as an on-adjusted basis. Stockholders' equity was $829.5 million as of September 30, 2020, decreasing by $0.7 million, or 0.1% from the prior quarter, mainly due to the lower net unrealized gains on debt securities available for sale, driven by the sale of debt securities in the quarter, which was partially offset by net income recorded in the same period. Before I let Carlos take you through the quarter in more detail, I want to note that following the close of the third quarter, we announced a voluntary early retirement program and an involuntary service severance plan to better align our operating structure and resources with our business environment. Both plans are to be completed by year-end and result in meaningful future cost savings. I will now hand the call over to Carlos.

Thank you, Miller, and good morning, everyone. Turning to slide number six, I'll first discuss our investment portfolio. Our third quarter investment securities balance was $1.4 billion, down from the 1.6 reported last quarter and year over year. As of the end of the third quarter, floating rate investments represented 13% of our portfolio, in line with the 13.6 in the year-ago period. Similarly to the last quarter, we continued to purchase higher yielding corporate securities, particularly financial institutions subordinated debt. Notably, in the third quarter, corporate debt securities comprised 24% of the available for sale portfolio up from the 16% year over year. In addition, this quarter we realized a net gain of 8.6 million on the sale of debt securities. Turning to slide number seven, we provide an overview of our loan portfolio. At the end of the third quarter, total loans were 5.9 billion, slightly up by 50 to a million or 0.9% compared to the end of the second quarter. The decline in economic activity and more stringent credit underwriting standards associated with the pandemic continue to impact our loan production. That said, we saw strong consumer loan activity which this asset class increased by 59 million or 45% quarter over quarter, primarily driven by our participation in indirect lending. We have also seen consumers taking advantage of low interest rate environment via home equity lines of credit. Additionally, real estate loans increased 43 million or 1% quarter over quarter, mainly used land development and construction multifamily residential loans. Turning to slide eight, I would like to provide some color on Ameren's credit quality, which Miller highlighted before. Carefully managing our credit quality continues to be a top priority, particularly in the current macroeconomic environment, and in the third quarter, our efforts were successful. First, our allowance for loan losses reached $117 million at the close of the third quarter, compared to $120 million at the end of the second quarter. In the third quarter, we recorded a provision for loan losses of $18 million. The lowest recorded in any quarter of 2020, down 63% compared to the second quarter. This was largely driven by a significant decline of COVID-19 reserve requirements and the lower reserve requirement on the coffee trader. Also, during the quarter, we charged off $19.3 million related to the coffee trader, which, as we noted last quarter, unexpectedly announced its liquidation plans. Based on the information obtained during the third quarter, we increased Ameren's specific reserves for these loans by an additional $5.8 million. As of September 30th, Ameren's loan loss reserve for this specific coffee trader was $6.5 million, compared to the $20 million as of the end of the second quarter. We continue to monitor the liquidation process very closely. Non-performing assets increased 9.2 million quarter over quarter and 54 million compared to the year-ago period, totaling 86.5 million at the end of the third quarter of 2020. The ratio of non-performing assets to total assets was 108 basic points, up 13 basic points from the second quarter, and up 66 basic points year over year. As we said, while forecasting the impact of the pandemic on our credit quality is challenging, we're being proactive and diligent in monitoring the situation. We benefit from these efforts in the third quarter with sound credit quality and strong reserve coverage, and we'll continue to do so moving forward. Turning to slide number nine, you can see that our loan yield decreased 13 basic points compared to the second quarter. This was largely due to the increase in the non-performing loans and lower market rates on variable rate loans. Our investment yield also declined, largely due to repricing of floating securities, prepayment acceleration, and reinvestment at lower market rates. We partially offset this impact by purchasing higher-yielding corporate bonds, mostly financial institutions, to debt. Moving to slide number 10, total deposits at the end of the third quarter were $5.9 billion, down 2.4% quarter over quarter. This decrease was primarily driven by a 7.4 combined reduction in broker and customer time deposits. This decline was aligned with our strategy to improve profitability across our businesses. In the third quarter, we continued to target lower-cost funding by aggressively lowering our CD rates and repricing relationship money market deposits. As a result, our cost of interest-bearing deposits was down 15 basic points in the third quarter of 2020, compared to the second quarter. Additionally, we have observed an increase in the utilization of deposits of PPP loans. We expect a similar trend in the upcoming quarters as the small business customers continue using these funds. Foreign deposits decreased $25 million, or 0.9%, compared to the prior quarter, representing an annualized decay of 3.8%, compared to an annualized growth of 0.5% during the second quarter of 2020. In the third quarter, Ameran saw an increase in the economic activity in Venezuela, our largest international deposit base, as the local government relaxed COVID-related restrictions. So while deposits were still modestly down quarter over quarter, I'm encouraged by the slower pace of decline as the third quarter 2020 annualized decay rate was only 3.8% in foreign deposits and compares favorably to the annualized rate of 16% we saw in the same period last year. Importantly to note, we continue improvements reflects in the hard work from our team to improve engagement with customers, cross-selling products and services, and strength relationships with our international depositors. I also want to note Ameran began to capture interest-bearing deposits from selected broker-dealers this quarter. These deposits reach $22 million by quarter end and represent a less expensive funding source than broker CDs. I want to highlight Amaran's continued execution against our relationship-driven and customer-centric strategy. In the third quarter, we focus on our dependent existing relationships with customers to grow our share of wallet and deploy new strategies to increase profitability, such as cross-selling the bank's treasury management products and reviewing fees being charged. We also continue to drive customer engagement through targeted calls and ramp up our daily customer contact. As a result of these efforts, we have begun to see positive results materialize. First, AMRAN investment captured new assets of approximately $30 million this quarter, made possible by the strong customer engagement of our team members. Second, AMRAN's participation in the PPP program opened the door to a number of new prospective lending and deposit opportunities which we're aggressively pursuing. Finally, we are pleased to announce that more than 80% of our sales teams are now using Salesforce, a great milestone in our digital transformation strategy. We expect to continue all these efforts to drive our strategy and increase customer share of wallet in the fourth quarter. Moving into slide 11, I'd like to provide some color around Ameren's wholesale funding strategy. As you may recall, in order to manage the low interest rate environment, we modified maturities on 420 million fixed rate FHLB advances during the second quarter 2020, which resulted in a 2.4 million cost savings for the rest of the 2020. For the remainder of the year and into 2021, we will continue to actively leverage opportunities in the wholesale market to decrease funding costs. Turning to slide 12, our P&L items. On slide 12, the third quarter 2020 net interest income was 45 million, down 2.1% from the second quarter of 2020, and down 14% from the third quarter of 2019. The modest quarter-over-quarter decrease was driven by the lower market rates on repriced variable rate loans and lower average balances and yields on securities available for sale, as we repriced and reinvested at lower market rates. This quarter, we also experienced the full quarter impact of interest costs associated with the senior notes we issued back in June. Partially offsetting this decline were lower overall costs in deposits and balance of broker deposits and time deposits, as we explained before, and higher CRE and consumer loan volumes. We were able to save $1 million in interest expense with an average rate drop of about 26 basic points from the second quarter of 2020. This was driven by Ameren's continued efforts to proactively reprice customer time deposits and money market deposits at a lower rate. We also choose not to renew expensive maturing customer CDs. As of the end of the quarter, we held approximately 800 million time deposits slot to mature in the next six months, which we expect to reprice at a much lower rate. As a result, we expect average cost of CDs to decline approximately 50 basic points, helping us to mitigate margin headwinds. Now, turning to the year-over-year decrease in net interest income, which was largely driven by factors discussed in the prior quarters, This quarter's decline was, again, primarily due to the meaningful yield decline in interest-earning assets as a result of the Federal Reserve's two emergency rate cuts this past March. This was partially offset by lower cost of deposits and wholesale borrowings, redemptions of our trust preferred, and higher average loan volume. During this quarter, we have seen our NIN almost reach an inflection point. dropping only five basic points to 2.39% in the third quarter from 2.44% in the second quarter. As we approach the end of the year, we continue to implement several actions to offset the impacts of the low interest rate, including, first, minimizing cost of funds, including strategically and proactively cutting rates on time deposits and relationship money market accounts, as well as pursuing lower cost funding opportunities. Second, actively implementing and managing floor rates in our credit portfolio and increased spreads during extensions and renewals to optimize yields. This strategy produced an improved trend in the third quarter, evidenced by higher spreads in CNI in our Florida market. And third, continue to optimize the yield of our investment portfolio and manage balance sheet sensitivity to mitigate the impact on me via duration. We remain focused on implementing these actions and evaluating others to help us to navigate through the current market environment and build momentum as we enter into 2021. Moving into slide number 13, non-interest income in the third quarter was 20 million or up 3% quarter over quarter and 47% year over year. The quarter over quarter increase in non-interest income was largely driven by a higher net gain on sale of securities. We recognize 8.6 million net gain compared to a 7.5 net gain in the second quarter as we continue to sell securities opportunistically in order to buffer the impact of low interest rate on our team. Notably, we have recorded 25.4 million in net gains on the sale of securities so far this year. Additionally, deposit and other service fees were higher this quarter, driven by an increase in wide transfer fee due to a surge in transaction volumes as well as higher foreign wide transfer rebates. Partially offsetting this increase was a decline in derivative income and the normalization of brokerage fees that were elevated in the second quarter in connection with the company's bond issuance in the month of June. Moving on to slide, moving on the year over year, 47% increase on non-interest income was recorded. This meaningful improvement was primarily due to the net gains on the sale of debt securities and additional brokerage and advisory fees. Ameren's assets under management and custody increased 47 million to 1.8 billion in the third quarter of 2020. This increase is mainly due to 30 million in new assets, as we execute against our relationship-driven and customer-centric strategy by increasing the share of wallet and acquiring new customer base. We remain committed to growing our domestic and international AUM base going forward. Moving into slide 14, third quarter non-interest expense was 46 million, up 24% quarter over quarter, and down 14% year over year. This quarter-over-quarter increase is largely due to higher salaries and employee benefits and other operating expenses resulting from the absence of the deferred direct cost associated with the origination of the PPP loans, which consisted of $7.8 million of salaries and other employee benefits and $0.7 million of other operating expenses. Additionally, we incur in higher FDIC expenses as well as marketing costs from resumed efforts following slow activity due to COVID in the second quarter. Partially offsetting this increase were declines across professional and other services fees, insurance, tax expenses, and deferred stock compensation expenses. The year-over-year decline was largely explained by significantly lower salaries and employee benefit expenses as we realigned Amaran's compensation programs due to the impacts of COVID-19. We also have reduced marketing expenses, legal and accounting fees, and other non-interest expenses which were related to our transformation efforts. Partially offsetting these declines were higher FDIC assessment and insurance costs, as well as increased consulting fees in connection with our ongoing digital transformation efforts. Looking ahead, we remain committed with our efficiency improvements while providing the bank journey for all our customers ahead. In particularly, we will focus on our digital transformation and expect to continue achieving milestones in the near term. This includes finalizing the rollout of Salesforce across all business lines, as well as Encino for commercial use by the end of the fourth quarter, with Encino retail used to be rolled out next year. I would like to emphasize the importance of Salesforce as a key element in the onboarding and servicing of customers. Salesforce will help us to integrate marketing campaigns and streamline the cross-selling process. On the loan origination side, Encino will fully integrate it with Salesforce and will generate significant efficiencies in the origination on the writing and portfolio management stages. Also, as previously announced, effective tomorrow, two retail banking centers will be closed. We will continue to analyze and optimize retail banking centers as part of our efficiency efforts. In line with Miller's early remarks, AMRAN's board approved a voluntary early retirement plan as well as an involuntary severance plan early this month. For the voluntary plan, eligible employees have 45 days to confirm their participation. So we will get an idea of the overall impact of these initiatives later this year. On the other hand, we expect the involuntary severance plan to impact approximately 37 employees and resulting approximately $1.9 million in one-time termination costs in the fourth quarter, with over $5.8 million of annual cost savings starting in 2021. These plans are expected to be completed by year end, and we will provide an update during the fourth quarter earnings call in a few months. I would like to take a moment to look back on our efficiency efforts since the time of our IPO. As of the third quarter 2018, we had a total of 948 FTEs. We continue our efforts, and as of the end of 2020, we have reached 807 FTEs, which represent a 15% decline. If we take into account the two separation plans I just described and assume a similar acceptance rate for the voluntary plan as the one experienced in 2018, we expect to reach approximately 750 FTEs, which would represent a drop of 21% compared to the third quarter of 2018. In reference to the adjusted metrics, Non-interest expenses was $44 million, up 23% quarter over quarter and down 15% year over year. We had restructuring expenses of $1.8 million this quarter compared to $1.3 million last quarter. This quarter cost includes $1.2 million in digital transformation expenses and $0.6 million of staff reduction costs. Restructuring expenses decreased 46.2% year over year in the third quarter due to the absence of rebranding costs incur related and transformation efforts in the prior year. Moving into slide 15, we continue to have an asset-sensitive position, and in order to mitigate the impact on the mean from lower interest rate, we actively manage our investment portfolio. Now, I will hand it back to Miller for the conclude remarks.

Thank you, Carlos. Moving on to our last slide, you will see that our goals have not changed. And in the third quarter, we remained focused on these goals. As I said earlier, we are particularly pleased with our proactive approach to manage credit risk. Our unwavering commitment to assessing forbearance status, general credit conditions, and loans in vulnerable industries on a daily basis paid off. as we recorded the lowest loan loss provision so far this year. In the quarter, we also remained focused on generating profitability and growing loans. We saw a significant quarter-over-quarter increase in net income in addition to strong consumer and real estate loan activity. Looking forward, we will continue to execute on our goals to drive shareholder value We also remain focused on aligning our operating structure and resources with our business activities. Our steadfast commitment to profitability, credit quality, and core deposit and loan growth is more important now than ever. With our goals at the forefront of everything we do at Amerint, we are confident that we will continue to successfully navigate the current economic environment. With that, we will happily take your questions. Operator, please open the line for Q&A.

As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. And our first question comes from Michael Young from Truist. Your line is now open.

Thank you. Thanks for taking the question. I wanted to start just with kind of spread income. I heard the comment that, you know, maybe we're reaching an inflection point there in some of the proactive measures you're taking. But, you know, just on a go-forward basis, is it better to think of sort of NII dollars from here moving higher and maybe the margin kind of, you know, could have a few puts and takes, but overall we're seeing spread income growth?

So, hi, Mike. How are you? How's it going? Yes, there is definitely, if you look at the quarter, despite of the fact of having five basic points of a drop in the NIM, particularly the month of September, we actually saw a bounce back on the NIM on a relative basis. It actually increased 2.47. So, our expectation is that We'll keep working on the cost of funds of the time deposits. As we said, there is an opportunity there to reprice a large portion of the portfolio that is coming due within the next six months. So that will definitely create a room for the cost of funds. So yeah, the answer is it feels like it's decompressing and we're reaching an inflection point.

Okay. And then, you know, just maybe in terms of kind of thinking of the size of the balance sheet on a go-forward basis, are you guys, you know, expect to see kind of a troughing of balance sheet and or net, you know, loan growth kind of picking back up here over the near term? Or do you think that's going to take a little bit of time? And then I guess another question would just be on this securities book. You've taken a lot of gains to kind of offset the lower interest rate environment. Are there more of those that will be taken in the future?

Well, as we have always expressed, the investment portfolio serves as a tool to manage the overall duration of the balance sheet. And we have had that impact on the realized gains for three consecutive quarters. So it has been used on a progressive basis to manage the overall duration and hedge the low levels of the NIEM. So, yeah, so it's being actively used, answering that part of the question. In terms of the size of the balance sheet, we may expect sort of a stabilization of the total size of the balance sheet. We may have sort of, and I know that it's a challenge, you know, when you sell some securities to reinvest, particularly in this point in time. We're always looking for opportunities and that's why the corporate side of the investment portfolio has been increasing a little bit more. I would expect the balance sheet to see stabilization during the fourth quarter, close to the $8 billion more or less. We haven't seen a lot of prepayments coming our way anyways. you know, as things started to get better and opportunities for certain borrowers started to come across, we'll probably be looking to refi and so on, so that will create a little bit more pressure on the total size of the loan portfolio.

You know, and on to the deposits. Michael, it's Miller here. You know, we have these CDs that are repricing, and of course that has a significant impact on our customers, especially because you're dropping the rate significantly. And, you know, when they are single product type customers, we are not afraid to let them go. And, you know, when we believe that they, you know, there's zero opportunity to cross sell to them, frankly, you know, if If it means that they go because we're dropping the rates, so be it. And that may cause the total deposits don't grow or don't grow significantly in the next quarters because of that situation. We prefer to have the impact on the cost go down rather than keep a single product customer with no potential for becoming a relationship.

And it looks this time around based on the liquidity levels that we currently face in the market. Even though we may face runoffs from that perspective, our transactional products have actually come up and have offset somehow. the drop on the time deposits. So I believe there is opportunity with the level of liquidity that we have to continue to reprice aggressively the time deposits and keep improving profitability.

Okay. And then the last one for me, you know, obviously, you know, the 1% ROA target, you guys kind of, you know, backed off of that. A lot of volatility now, so it's kind of hard to have a, see a path forward, but is there, you know, sort of a metric or anything that you're managing to, as we kind of move through this time period, is it efficiency ratio or something else that we should be thinking of as we just kind of look forward?

Well, seeing we got burned by having put in the ROA walk that, you know, we can't, constantly get referred to. We measure ourselves against numerous metrics and we have objectives in those targets. I would tell you that given the current environment, it's very difficult to say with precision where we expect to be in the next quarters. We are currently working on a our budget and our three-year plan. And at that time, we will be more able to express where our targets are. At the moment, it's really in flux.

To complement, I guess, we keep an eye, and as you can see on the last actions that we took on the efficiency ratio, that's an area that that we really wanted and we give a very good view on the presentation on the change on the FTEs. So we're definitely giving a lot of weight to that metric internally.

Okay, thanks. And thank you. And our next question comes from Michael Rose from Raymond James. Your line is now open.

morning everyone thanks for taking my questions um so obviously a very busy quarter a lot of activity going on i just wanted to drill in a little bit to to kind of the expenses um you know how should we think about uh you know i understand that the voluntary retirement program and i understand the example that you gave around potentially getting down to 750 you know ftes you know how should we think about some of the offsets in terms of reinvestment. I assume there's still some more with Encino and some other efforts that you guys have, but just trying to get a sense for where you think the expense base will be as we start the year. I know it's a tough question to answer, but we'd just love to hear kind of the puts and takes and where you think we might end up.

Thanks. Okay, so pretty much And hi, Michael, how are you? For the fourth quarter, what we have so far, it's an estimated cost of the separation plans, which, you know, it may range between $6 to $8 million, depending on the acceptance level. What we could potentially foresee or estimate at this point is that based on the levels of acceptance that we receive in our previous plans that we put together in 2018, if we were to have the same type of acceptance that we had back then, we may experience roughly $8 million of savings a year in the benefits and salaries for employees. which will give you more or less between a 45 to 46 million a quarter of run rate on the non-interest expenses. That's kind of the general picture of the impact of those plans. And again, the run rate that I just said includes the digital transformation effort, so it's a net between all of those impacts.

Okay, so it sounds like it includes some... I was going to say, Michael, we get a better figure towards the end of this quarter because the candidates for the voluntary retirement have a mandatory 45 days to give their decision.

Understood. I was just trying to understand that it does include some reinvestment in digital transformation efforts. I assume it also includes the two branch closures. you know, et cetera, just trying to frame it out. Okay. That's, um, that's very helpful. And then, so I noticed on the, on the loan growth front, you guys actually purchased some consumer loans. Can you just give us some color there on, on exactly what you're buying and what the appetite is for additional purchases as we move forward? Thanks.

Yeah, we, we have, uh, uh, we have created, uh, sort of, uh, a partnership with the, with SoFi, um, We started early this year. As you recall, our consumer exposure in the loan portfolio is little to nothing. So we thought that it would be a good idea to diversify away and increase the yield of the portfolio by adding more of this type of credits. So we started our partnership early this year. We started with some purchases and then, by the way, these are consumer loans. They are not student loans. They are just on the consumer side. So we started to purchase. We had a pause during the month of March. due to the COVID situation and so on. We wanted to understand what changes in the underwriting criteria, et cetera, would apply, et cetera. And then we resume. We are closely monitoring that portfolio on a frequently basis, looking into the delinquencies, looking into all the possible metrics. And as of now, we are close to the $130 million. So it's... So far it has been a good experience, and it provides a diversification for our portfolio, and at the same time it helps with the yield of the portfolio.

Okay, so it sounds like maybe you're near a near-term peak with that. And back to the previous question just about the size of the balance sheet, we'll obviously get some PPP forgiveness a little bit this quarter, probably the bulk of it in the first quarter of next year. As we think about the size of the balance sheet and some of these loan growth efforts, including the SOFI loans that you just mentioned, and you've added the securities book a little bit through some financial sub-debt, it appears. Do you get the sense that you can actually net grow the balance sheet X of the PPP runoff as we move through 2021? Thanks.

Yeah, we are actually in the process of evaluating the size that we want to give to this portfolio. We definitely like the fact that it's a very granular portfolio. Average size is very little. And credit quality has been so far very good. Great average FICO score is close to 742. So we definitely, we would like to replace some of our other triple P or other asset class by this type of lending. but we're trying to frame it on the right size for the overall portfolio. That's kind of the general idea. So I guess, as you have seen the progression of events, it's an asset class that we like it, and we feel that we need it in our loan portfolio.

Understood. Thanks for taking all my questions.

Thank you. And our next question comes from Steven Scouten from Piper Sandler. Your line is now open. Hey, good morning, everyone.

Good morning, Stephen. So I guess maybe I'll start with the exposure to kind of these COVID-vulnerable industries, 45%. I mean, obviously I think that's a lot higher than most other banks are quoting. So I'm kind of wondering if you can frame that up any further in terms of how you're classifying those from an LTV perspective in terms of what's falling in those categories, and then just how you think you can convince investors to feel differently about your credit profile. Because obviously where the stock's trading, there doesn't seem to be buy-in there, so I'm just wondering what you feel like the investment community is missing there in terms of your credit quality.

Hi, Steve. Thank you so much for joining us today. Great having you. It was very good having you. So I'm going to give you a little bit of a flavor on this, and then I'm going to have T.L. Fisher from our credit risk team to give you more color. The percentage is pretty much related to the portfolio that we use as a reference to assign COVID-19 loan loss provision. We do our analysis in terms of which industries where immediately affected and progressively affected by COVID. So that part of the portfolio is the one that gave rise to the, I guess, institutional or generic reserves that we set aside for COVID. And now I'm going to have Thiel to give a more color on this.

Hi. So basically what we have been doing during this time is and to segregate and identify those industries that we are escalating their monitoring that we believe are the highly impacted industries. And so those are the ones that we provide in the supplemental information. The CRE retail, the hotel CRE also is two of the industries that we believe are impacted. And as well as some in the commercial and owner-occupied portfolios, some of the industries that we have mentioned before, such as entertainment, restaurants, and some other wholesalers that have related sales to industries that are having impact. So that's what we... classified as potential or highly impacted industries. And we have a grading, so we have high-impacted and medium-impacted industries to try to segregate what is behind it. And what we try to segregate there is, for example, in retail, we try to see what portfolio has loan-to-values above 60%, and those we consider to be the most vulnerable debt than the ones that have lower loan-to-values. Same as for hotels and office space. So that's how we segregate, and that's why you see the 45%, because we are trying to give you a perspective. I mean, the COVID has impacted many industries. It's not just one industry individually. So that's what we segregate of our portfolio. And so what we have been doing is we do monitoring every week of the portfolio, the high exposures of the ones that are on the forbearance that you have seen how we have been having a great success in the forbearance side by reducing that to what we had initially of $1.2 billion, which was almost 20% of our portfolio, and right now it's only 1.7%. So I think that's... And as we review the portfolio, we have been making the decisions to classify our loans that you have seen, the migration of classified loans that we have had.

Okay. Got it. Got it. And like you said, the deferral trends were positive this quarter. And really encouraging to me, I guess, was that you said there's no deferrals within your hotel book portfolio. I'm wondering specifically there what you're seeing with your New York City and Miami hotel exposure in terms of occupancy rates. I know you had a bit of exposure that was over 80% LTV. So just kind of any detail on how you're thinking about that hotel exposure today.

Sure. What we have seen is – and we have seen a steady trend of what we reported last quarter. We have seen that in the high travel areas or the destination travel areas such as Miami Beach. We have seen steady occupancy levels around the 60-something percent occupancy. And where we have seen the issues or not as great recovery, it's been in the corporate type of travel. Those are in town, not in the travel destination areas. Those are the ones who are around the 40% sort of levels. But what we have seen is that the sponsors that we have have put a great effort in keeping these loans up to date and they believe that the increase in occupancy is gonna take them to the next level as we go through the travel season this time around.

Okay, super. Very helpful. And then I guess last thing for me, I'm curious, you guys have a pretty strong low north reserve here, north of 2%. You have what appears to me to be a lot of capital and a stock that's trading below 50% of tangible books. So I'm wondering how you're thinking about share buybacks today and if that's something that could be on the near-term horizon once we get, you know, maybe some additional clarity on the path of the virus?

Well, we look at our capital on a frequent basis. We look at the options that we have for usage of that capital. We're currently working on a most recent review of that capital And, yeah, there certainly would appear to be a lot of options at the moment for using our capital. But we don't have anything particular that we could say at the moment on that.

Got it. Got it. Okay. Thanks for the time, everyone. I appreciate the call.

And thank you. And thank you. And our next question comes from Brady Gailey from KBW. Your line is now open.

Brady Gailey Yeah, thanks. Good morning, guys. So, I wanted to follow up on the buyback question. Do you all have a buyback authorization that's out there? And if so, what's the remaining capacity there?

No, we don't have a buyback authorization.

Brady Gailey Okay. So, why wouldn't you have a buyback in place?

We're certainly exploring that as one of the options, but up until now, we've never had a buyback option approved by the board. We have done some privately negotiated buybacks, as we announced, but certainly it's a discussion that we have with the board.

I mean, the stock's at half of tangible book value, and TCE, as you know, is over 10%. It seems like that would be a great idea. My next question is on the employee count. With the actions that you've recently announced, you said it's going to go down to 750 employees. I think that's from a peak of around 950, so you're down 200.

We were actually... We were actually over 1,000 just before the IPO.

Okay, so you're down 250 employees. At 750, is that the bottom, or do you think that over time there's more work to be done there?

Well, there is a... Hi, Brady, how are you? There is, you know, it's a working process. As we mentioned, we are implementing the new technology. There is simplification on the way that we perform processes, simplification in structures. Remember that we came from a different type of organization with more international... flavor somehow. So we progressively are changing, and this is part of the changes that we need to go through. So we're constantly evaluating, looking at the branches, looking at physical space, looking at pretty much everything that is included in the non-interest expense. So what I can say, it's a working process.

Okay. And then I think you just answered my last question, but I was gonna ask on the branch front. I mean, you closed two branches. Is there more opportunity there as well?

I think that, hi, it's Miguel Brady. Like Carlos mentioned, we are constantly analyzing our footprint. We have anchor branches that are very important, but we have a profitability process in each and every location. And we are working aligned with the maturity of the leases and possible relocation and consolidation. And that's an ongoing concern. We want to be efficient and profitable in every of our locations.

I know when we went through the IPO process, you were talking about opening some branches. Are there any additional branches or planned openings that are out there? Not today. Okay.

All right, great. Thanks, guys. And thank you.

Thank you.

And ladies and gentlemen, if you have a question, that is star one. Again, if you have a question, that is star one. And our next question comes from Christopher Maranek from Janie Montgomery SC. Your line is now open.

Hey, good morning. Thanks for taking all the questions this morning. So I had a similar question as Stephen and Brady as it relates to the buyback. If you think about the use of your capital and just balance sheets in here, is there a better return than buying your stock back at 49% a book? I'm just curious if this could have a priority as you think about allocating dollars the next couple of quarters.

You guys keep pressing us. The answer is we look at all options with regard to our capital. We have had discussions recently with our board on these options. And, you know, we expect to be very active with regards to our capital.

Great. Thanks for the additional feedback on that. And then just back to the third-party deposit initiative that was outlined this morning. How does deposit mix kind of look six, nine months from now? Is it going to be different from what we see, or is kind of the 930 deposit mix probably going to be the same?

Well, I think that as you see in a lot of banks, the trend away from CDs is going to continue. I think customers, when they see that the the differential between a money market rate and a CD rate is next to nothing. They're going to go more short-term into money market accounts. But that also fits into our strategy where we are, as I said earlier, we are focusing, as we've expressed in several calls, on relationships. We are not particularly interested in having customers who just have CD money with us and have no interest in extending that relationship with us. And so our expectation over time is that we are gonna grow our core deposit base. It may include some CDs, but it's a relationship. It's not just individual CD customers.

Gotcha. And I guess your relative cost of deposits can continue to improve as a result of this too, right?

Well, yeah. We expect the significant maturities over the next three to five months in CDs. We expect them all to be priced significantly lower.

Great, Millar. Thank you very much. I appreciate it.

Thank you. And thank you. And I'm showing no further questions. I would now like to turn the call back to Mr. Wilson. You may proceed, sir.

Well, thank you for joining our third quarter earnings call. Every day we continue to make progress against our customer-centric strategy and our goals that we have set. We look forward to providing another update on our next call at the end of the quarter. Thank you again for your time today. We will now disconnect.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.