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spk08: Good day and thank you for standing by. Welcome to the Amerit Bank Corp third 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'll 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 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host today, Laura Rossi, Head of Investor Relations and Sustainability. Please go ahead.
spk02: Thank you, Liz. Good morning, everyone, and thank you for joining us to review Amaranth Bancorp's third quarter 2023 results. On today's call are Jerry Plosh, our Chairman and Chief Executive Officer, and Charimar 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 it over to our Chairman and CEO, Jerry Plush.
spk04: Thank you, Laura. Good morning, everyone, and thank you for joining Ameren's third quarter 2023 earnings call. We're happy to be here today to update everyone on the continued progress we made during the period. So during the third quarter, we focused on improving balance sheet composition, which included the continued prioritization of organic deposit growth, which enabled us to reduce higher cost institutional deposits, which are highly rate sensitive and therefore subject to flight risk. We've provided more granular information on the sources and type of deposits in today's earnings presentation, and I'll go into that in detail very shortly. We also entered into an agreement to sell the single largest credit exposure in our discontinued New York City portfolio, and you'll see that in loans held for sale, and that's closing is scheduled to take place today. We continue to work on further reductions in non-performing assets, and we've now reached the marketing stage with our real estate owned. We also spent considerable time and energy on the upcoming core conversion in November, and I'll provide more information on that shortly as well. So, while this was not an asset size growth quarter like recent periods, as loans and deposits overall were relatively flat quarter to quarter, And in fact, the key driver of our asset size decrease this quarter was from our using $100 million in excess cash on hand to pay down advances. We made a lot of progress on many fronts, which we will cover as we review the upcoming slides. And as an aside, which Sherry will cover later in her remarks, the loan and deposit pipelines for the fourth quarter are very strong, and we expect to be back in growth mode in 4Q. And in fact, we've already booked $90 million in loan production month to date, which has resulted in a $71 million net increase in loans as of yesterday. So let's turn to slide three, and here we provide a summary of our third quarter highlights. Net income attributable to the company was $22.1 million compared to the $7.3 million in 2Q23. This increase was primarily driven by lower provision for credit losses in 3Q, as the provision recorded in 2Q was substantially higher. The net interest margin was 3.57% compared to the 3.83% we reported last quarter, a few basis points lower than we originally expected. This was driven primarily than higher than expected funding costs and lower loan originations as we continue to prioritize relationship-centric originations and not renew or pursue non-depository financing. So again, back to asset size, we decreased $174 million compared to Q23. Our gross loans were $7.1 billion compared to $7.2 billion last quarter, a decrease of $74 million. And our total deposits were $7.5 billion, relatively flat to the $7.6 billion last quarter. Federal home loan bank advances were $595 million, a decrease of $175 million, or 23%. compared to the $770 million in 2Q due to prepayments we made in 3Q23 as part of our asset and liability management. The company's capital levels continue to be strong and well in excess of the minimum regulatory requirements to be considered well capitalized as of September 30th, 2023. Our tangible common equity ratio remains strong at 7.44% as of September 30th. As we classify the majority of our investment portfolio as available for sale, the mark-to-market on this portfolio is deducted from tangible common equity. We'll get into more detail regarding capital and capital ratios shortly. Also during the quarter, we paid out the previously announced cash quarterly dividend of 9 cents per share on August 31st of 2023. And then lastly, regarding stock repurchases, as you know, we have a $25 million Class A common stock share repurchase program in place And year to date, we've repurchased 260,000 shares for $5 million at an average price of $19 per share, or at 0.9 times price to book value. Availability remaining under this program was $20 million as of quarter end. So let's turn to slide four and take a look at what happened in Shares Outstanding during the quarter. And here you can see that during 3Q, we continued to prudently use our $25 million share repurchase program and we repurchased 142,000 shares of common stock at an average price of $19. We can transition now to slide five, and we'll show you our capital position relative to regulatory minimums. As of 3Q2023, our total capital ratio ended at 12.7%, and our CET1 was 10.3%. Our tangible common equity ratio, which includes 106 million of AOCI resulting from the after-tax change in the valuation of our portfolio was 7.44%. Regarding our tangible common equity ratio, we also show here for reference purposes the impact of adding the $26 million in unrealized losses from our held to maturity portfolio and what that does to TCE, which would result in an adjusted tangible capital ratio of 7.2%, a relatively small impact if included. And tangible book value per share also adjusted for held in maturity stood at 19.9 as of quarter end. We will now take a look at on slide six on deposits and give you an overview of the deposit base. Our total deposits at the end of the third quarter were 7.5 billion and that's down 33 million from the previous quarter. This very slight decrease was driven primarily by reductions in higher cost institutional deposits of 292 million. which was partially enabled by organic deposit growth of $208 million. Of noted, non-interest-bearing deposits increased by $77 million, and time deposits increased by $220 million, and as, of course, customers continued to seek higher returns on their deposits. Note that this increase in time deposits, however, includes brokered time deposits in the amount of $92 million, which was a strategic move to obtain two- to five-year funding, again, as part of asset liability management. And at the same time, as I just mentioned, we reduced federal and low bank advances by $175 million, which are down to $595 million in quarter rent. Please know we remain committed to maintaining our current ratio of loans to deposit with a target of 95% and not to exceed 100%. So we'll turn to slide seven and look at our deposit diversification. And you'll look at the stability we have in this portfolio. And as you can see, it's composed of domestic and international customers. Our domestic deposits now account for 67% of total deposits, totaling $5.1 billion as of the end of the third quarter, and that's down 46 million, or 1%, compared to the previous quarter. And international deposits, which account for 33% of our total deposits, totaled $2.5 billion, up 13 million, or 0.5% compared to the previous quarter. Our domestic deposits include over 48,000 accounts with an average size of 100,000, while our international deposits are approximately 57,000 accounts with an average size of 40,000, which reflects the granularity of our deposit base and stability of this funding source. And as I've shared in previous calls, we intend to take advantage of our infrastructure and capabilities and emphasize international deposit gathering as a source of funds given more favorable pricing while also adding more diversification to our funding base. Our core deposits, defined as total deposits excluding all time deposits, were $5.2 billion as of the end of the third quarter, a decrease of $254 million, or 5%, compared to the previous quarter. The $5.2 billion in core deposits included $1.4 billion in noninterest-bearing demand, up the $77 million I previously referenced, or 6%, compared to the prior quarter. Despite customer demand for higher rate products and in line with our continued efforts to prioritize deep customer relationships. 2.4 billion in interest bearing deposits down 356 million or 13% versus the previous quarter. Primarily driven by the previously referenced reduction in institutional deposits. And 1.5 billion in savings and money market deposits up 26% or 2% versus the previous quarter. So at this point, I'm going to turn things over to Sherry. We'll go over the key metrics, other balance sheet items, and results for the third quarter in more detail.
spk01: Thank you, Jerry, and good morning, everyone. As part of today's presentation, I will share more color on our financial position and performance. So turning to slide eight, I'll begin by discussing our key performance metrics and their changes compared to last quarter. Noninterest-bearing deposits, the total deposits, increased to 18% in 3Q compared to 17% in the previous quarter. This reflects our deposits first focus and our efforts to increase demand deposit accounts. This positive trend also speaks as to the value of building relationships and all the efforts in our markets despite the challenges of customers seeking higher interest rates and the market competition. Our efficiency ratio was 64.1% compared to 65.6% last quarter, and ROA and ROE were higher this quarter at 0.92% and 11.93% respectively. as a result of the lower provision and one-time charges during the period. For consistency and transparency, we show the three core metrics of ROA, ROE, and operating efficiency, excluding non-routine items, so you can more easily see underlying performance for the quarter. As an example, core efficiency is 62.1% compared to 60.3% in 2Q23, which excludes non-routine charges. These results include certain cost of new applications and services to be used after conversion in parallel with current applications in place. This parallel use of applications will also occur for the full first quarter of 2023 until we complete the commissioning applications in early 2024 and therefore reduce these costs. Due to this, we expect a higher efficiency ratio temporarily until early 2024. Lastly, the coverage of the allowance for credit losses to total loans decreased to 1.40% compared to 1.48% into Q as a result of charge-offs previously reserved. However, excluding reserves for loans individually evaluated, the coverage remains stable at 1.28% unchanged from 2Q. Continuing on to slide 9, I'll discuss our investment portfolio. Our third 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 5.3 years as the model anticipates longer duration due to higher mortgage rates and therefore slower prepayments. As we did last quarter, I would like to discuss the impact of interest rates on the valuation of debt securities available for sale. As of the end of this September, the market value of this portfolio decreased approximately $19 million after tax, compared to a decrease of $13.5 million into Q23. This decrease was driven by rising rates during the third quarter. It is important to note that 75% of our available for sale portfolio has government guarantees, while most of the remaining securities are rated investment-grade. Also, as of the third quarter, our corporate debt portfolio had $124 million in subordinated debt securities issued by financial institutions, compared to $121 million into Q as a result of higher market valuations. Our available for sale portfolio represents 79% of the total investment portfolio, while health and maturity securities represent 17.5%. Continuing on to slide 10, let's talk about the loan portfolio. At the end of the third quarter, total gross loans were $7.1 billion, down slightly 1% compared to $7.2 billion at the end of Q2. The decrease was primarily driven by reduced originations given tighter credit quality requirements and relationship-focused origination. This was noticeable in the commercial loan portfolio, which decreased $124 million to $1.45 billion compared to $1.6 billion into Q23. The single family residential portfolio was $1.39 billion, an increase of $58 million compared to $1.16 billion into Q23. This amount includes $82.5 million in loans originated and purchased during the quarter, primarily done with private banking customers and other strategic relationships. Consumer loans as of 3 Q23 were $439 million, a decrease of $64 million, or 13% quarter over quarter. This includes approximately $255 million in higher yielding indirect loans which were a tactical move for us to increase yields in prior periods. As we mentioned last quarter, we are focusing on organic growth and have not been purchasing any new production since the end of 2022. We estimate that at current prepayment speed, this portfolio will run off over the next two years. During 3Q, we also continued to run off our New York City theory portfolio. We transferred our single highest exposure in our New York City theory portfolio to Hail for Sale and recorded a valuation allowance of $5.6 million upon transfer. This loan had a $43.3 million balance net of allowance at the end of 3Q, and we have scheduled the sale of this facility for later today. The resulting New York City theory portfolio held for investment was $240 million as of 3Q and consisted of 23 facilities. We also had $26 million in loan sales for sale in connection with Ameren Mortgage compared to $50 million in the previous quarter. Given recent industry events in connection with shared national credit portfolios, it is important to note that our exposure to these loans is limited. As of 3Q, we had $177 million in shared national credit, 2.5% of the total loan portfolio. This amount includes the CRE loan held for sale I just mentioned. Also, it is important to note that approximately half of these borrowers have relationships with us. Turning to slide 11, 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 third quarter was $99 million, a decrease of 6.8% from $106 million at the close of the previous quarter. We recorded a provision for credit losses of $8 million in the third quarter, which comprised of $7.6 million to cover charge-offs, $1.4 million due to loan composition and volume changes, and $600,000 added to the provision for credit contingency, which is recorded in other liabilities. These provision requirements were offset by 400,000 released due to credit quality and factor updates, and 1.2 million released due to recovery. It is important to mention that consistent with previous quarterly disclosures in 2023, the quarterly 2022 provision for credit losses now reflects the disaggregated impact of CECL implementation for those specific periods. During the third quarter of 2023, there were net charge-ups of 14.6 million, of which 6.4 million were related to indirect consumer loans, And 9.3 million were related to multiple smaller commercial loans, of which 5.7 million had already been reserved in a prior period. This was offset by 1.2 million in recovery. Our non-performing loans, the total loans, are down to 46 basis points compared to 65 basis points last quarter. This was primarily due to charges mentioned, 8.4 million due to loans sold, 2.6 million due to paydowns, and 0.4 million due to upgrades. Nonperforming assets total $53.4 million at the end of the third quarter, a decrease of $14 million compared to 2Q23, primarily due to the decrease in NPLs. The ratio of nonperforming assets to total assets was 67 basis points, down 14 basis points from the second quarter of 2023. In the third quarter of 2023, the coverage ratio of loan loss reserves to nonperforming loans closed at three times, up from 2.2 times at the end of last quarter, and down from 4.1 times at the close of the third quarter of last year. As we did last quarter, we brought up slide 12 from our loan supplement section to 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 as well as strong sponsorship tier profile based on AUM, net worth, and years of experience for each sponsor. As of the end of 3Q23, we had 30% 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, pharmacy, food, and clothing retailers and banks. 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 49% 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. Next, I'll discuss net interest income and net interest margin on Flight 13. Net interest income for the third quarter was $79 million, down $5 million, or 6%, compared to the previous quarter. The decrease was primarily driven by higher average rates on total interest-bearing liabilities for both total deposits and official B advances, and higher average balances of customer time deposits. As rates continue to increase during the quarter, we experienced higher beta via the combined effect of rate increases in transactional deposits, repricing of time deposits that had not repriced at current market rates, as well as higher balances in time deposits at current market rates. As you can see in the graph, we observed a beta of approximately 43 basis points on a cumulative basis since the beginning of the interest rate up cycle, but around 104 basis points quarter on quarter compared to 196 in the previous quarter. Moving on to the net interest margin, as Jerry mentioned, NIM for the third quarter was 3.57%, down by 26 basis points quarter over quarter. This was slightly higher than we had originally guided as we saw lower than expected loan closings during the quarter based on our deposits first and relationship-focused lending practices. 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 and name in my final remarks. Moving on to interest rate sensitivity on slide 14, you can see the asset sensitivity of our balance sheet with 53% of our loans having floating rate structures and 52% 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. So we currently have 51% of our adjustable loan portfolio with floor rates. Additionally, you can see here that within the variable rate loans, 37% are indexed to SOFR. Our NIMS sensitivity profile remains stable compared to the previous quarter. We include the sensitivity of our AFS portfolio to showcase our ability to extend additional negative valuation changes. I would like to take a moment to discuss the change in organic improvement in AOCI, which is lower than discussed in previous quarters. The smaller amounts result from revised market expectations regarding easing monetary policy not taking place in the short term as had been expected earlier in the year. We will continue to actively manage our balance sheet to best position our bank for the remainder of 2023 and looking into 2024. Continuing to slide 15, non-interest income in the third quarter was $22 million, down by $4.7 million or 18% from $27 million in the second quarter of 2023. As referenced earlier, $7 million of non-interest income were non-routine items. The decrease was primarily driven by lower gains on the early extinguishment of FHLB advances and lower mortgage banking income. This decrease in non-interest income was partially offset by higher loan level derivative income due to higher volume of derivative transactions with clients and the absence of the $1.2 million loss in connection with the sale of one corporate debt security available for sale. Ameren's assets under management totaled $2.1 billion as of the end of the third quarter, down $55 million or 2.6% from the second quarter. This decrease was primarily driven by lower net new assets and market valuations. When compared to the same quarter a year ago, we saw an increase of $281 million, or 15.5%, primarily driven by net new assets, which were $162 million and higher market valuations. Of note, this week the company approved a restructuring of its bank-owned life insurance program as we surrendered and reinvest in higher-yielding policies, while also increasing team member participation. We expect improved earnings of approximately $2 million per year in future periods. Turning to slide 16, third quarter non-interest expenses were 64.4 million, down 8 million or 11% from the second quarter. As Jerry covered earlier, we consider 6.3 million of our expenses this quarter as non-routine expense items. Excluding these items, core non-interest expenses were 58 million in the third quarter of 2023. The quarter-over-quarter decrease was primarily driven by the absence of many of the items that were included into Q that were no longer in this quarter. as well as lower advertising expenses resulting from campaigns in connection with our partnerships with professional sporting teams, and lower professional fees in connection with call center services that are no longer needed as a result of the engagement with FIS and the absence of additional consulting expenses into Q23. The decrease in non-interest expense was partially offset primarily by valuation expenses related to the transfer of the New York-based CRE loan from Loan Health for Investment to Loan Health for Sale. In terms of our team, we entered the quarter with 700 FTEs, slightly lower from 710 we had in 2Q. Out of the 700 members, 602 are employed by the bank and 98 by Ameren Mortgage. On that note, let's turn to slide 17, which focuses on Ameren Mortgage. On a standalone basis, Ameren Mortgage had a negative PPNR of 1.6 million in 3Q23, which was consistent with 2Q results. Our efficiency ratio, excluding the activities from AMRAM Mortgage, improved from 64.10% to under 62%. During the third quarter, the company originated and purchased approximately $84 million in loans through AMRAM Mortgage. And as noted on the slide, these are related to the bank's customers and relationships. The current pipeline shows $107 million in process or 266 applications as of October 18, 2023, with $84 million in rates locked. And to provide some color on our expectations for next quarter. Regarding growth, we estimate our balance sheet to grow between $250 and $300 million. We foresee deposit growth to continue to be strong. We will use any excess over net loan growth to further reduce higher cost institutional deposits and wholesale funding, including our renewing maturities in 4Q. Given competition for deposits, we expect the NIM to continue to decrease in the fourth quarter, but clearly to a lesser degree than in 3Q. While there are significant maturities of customer time deposits in 4Q, The gap to cover between the average previous rate and the current one is lower. Also, there was a significant emphasis on noninterest-bearing products, as noted in this quarter's results, and we intend to continue to pursue additional growth as we onboard new relationships. Regarding noninterest income, we expect it to be similar to 3Q levels. We expect operating expenses to include nonrecurrent expenses related to the upcoming conversion, while we finalize the commissioning services currently utilized after conversion. Note that there are services that must run in parallel with the new FIS systems that will be discontinued throughout 4Q and in first Q of 2024. Finally, we expect provision for credit losses to be in or around 8 to 10 million next quarter, as we do expect asset growth, as I previously mentioned. I'll now pass it back to Jerry.
spk04: Thanks, Sherry. So before I conclude the presentation this morning, I thought first we should give you an update on the upcoming conversion that we mentioned earlier in the call. So here on slide 18, we start with the first thing and most important. We're still on track for our conversion to FIS, which will take place in early November. Our primary objective is to move to a state-of-the-art core system and modern stack. And this, of course, will create a simplified and fully integrated ecosystem of applications and will result in a significant strengthening of cybersecurity and information security infrastructure. We're very confident in partnering with a well-known and recognized provider in financial services that recently rededicated themselves to focus solely on financial services. And above all things, even though I've listed a couple other items here, we believe that the transition will provide the technological platform that will adequately and exceed the expectations supporting our company's growth. We'll turn to physical transformation and give a quick update here on the efforts going on. We've completed the refresh of five branches year to date and have two more to be completed before year end. And this will complete our entire network, which is essential for our team members and customers to have the common look and feel of the Ameren experience in all locations. We have several new locations in the works in downtown Miami and Las Olas, which is downtown Fort Lauderdale, in Tampa and in San Felipe and River Oaks in the Houston marketplace. The consolidation of our Edgewater, Florida location will occur here in the fourth quarter, and it will coincide with the opening of our downtown Miami branch. And as we previously announced, we have new regional headquarters currently in process, both in Broward County, so Plantation, Florida, and in Tampa, Florida. And then we'll turn to give an update on brand awareness. So on this slide, we show the key partnerships we have in place to support and enhance our brand awareness. During the quarter, we announced we entered into a multi-year extension of our partnership with the University of Miami Hurricanes, which comes with significant additional branding opportunities. We also built on our already strong partnership with the Florida Panthers, as we are now the naming rights partner of Ameribank Arena in Broward County. We traded back the helmet sponsor rights, which gave us national exposure for much improved regional focus with naming rights. We also view the naming rights of the Broward County-owned arena as a strategic step as part of our recently announced expansion plans there. And please note that we do not expect to increase marketing expense as a result of any of these partnership agreements, you know, the new deals. We believe that these and our other partnerships position Ameren for unmatched brand recognition and business growth in the markets we serve. So I'll give a couple closing remarks on where we are today. So if you turn to the last slide, here you can see we're nearing the end of our transformation phase. We're excited to have the executive leadership team set, and we remain focused on attracting the right people to complement our existing team to achieve our strategic objectives. And of note, we've continued to add more experienced commercial business development team members here in the fourth quarter. As I just mentioned, we're going to be completing the transition to FIS, which will provide the technological platform to support our growth initiatives. And as I also just mentioned, our planned new locations are nearing completion. So banking centers in downtown Miami, Fort Lauderdale, River Oaks, Tampa, our new regional headquarters, much of which will happen either in the fourth quarter of 23 or early in the first quarter of next year. But at the same time, please know that we will be reducing square footage in other corporate locations by subleasing or exiting space as an offset. And lastly, we're very proud to say that for the second consecutive year, Ameren Bank was recognized as one of Newsweek's top 100 most loved workplaces. So before we move to Q&A, I just want to take a moment and say thank you again to all of my Ameren team members for their dedication, energy, and effort once again this quarter. So with that, I'll stop and Sherry and I will look to answer any questions you have. Operator, please open the line.
spk08: As a reminder, if you'd like to ask a question at this time, please press star 1 1 on your touchtone telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Michael Rose with Raymond James.
spk06: Hey, good morning, everyone. Hope you're doing well. Hey, so good morning.
spk04: So, you know, the step down in core expenses was, you know, better than we were kind of looking for. If I annualize that, it obviously sets a pretty good tone as we think about next year.
spk06: Just as we think about expenses and understanding the FIS conversion will happen in the fourth quarter,
spk04: So maybe a little bit of elevation there, but just help us think about expenses near term and as we think about next year, just given that the transformation efforts are kind of winding down and you're going to begin to reap, I think, more of the rewards from the work that's been done over the past couple of years. Thanks. Yeah, Michael, it's Sherry. I'll take that one. And Sherry, please add your color commentary. You know, the thing that's really important to note Is that our expense base will be elevated again? The bulk of that is related to the fact that we're going to be running parallel, right? So, I mean, both sets of of applications, both the new and existing will be for the quarter. And so, in a lot of respects, that is, you know, from our perspective. Something that for the 4th quarter, and certainly in part of the 1st quarter. Will dissipate you know starting no later than the second quarter of next year, so you know I think sherry's comments were around. You're going to see an elevation and you know, in our mind, you know they're not really going to be part of the core expense base going forward as you'll see the bump up and the decline. Look, I think expenses are something you know i'm going to give an overall remark is something that we are going to be continuously working on and certainly. I hope you could tell with some of the comments that I made that things that we're doing that are new, we are looking to offset them. So when you think about the marketing expense, you know, doing some of those initiatives and there's other things that we're swapping out or not going to do going forward, not expecting increases, you know, the same thing to be said about the facilities expense, you know, Carlos is working tirelessly with his team. on looking at opportunities to pair back. We've talked about things like hoteling, which frankly fits really well with the mostly hybrid work model that we've been using here at Ameren. So I would tell you there's a lot of moving parts in and around expenses that we're going to continue as we know there's an increase, and there will be an increase in technology expense. There's no ifs, ands, or buts. there are other things we're looking to do to reduce that. And we expect to gain additional efficiencies throughout 2024 as we start to see the benefits of having what I think is a much better integrated technology stack. Okay, that's helpful. And then I guess just putting it all together, obviously some headwinds still here on on rates, but I think as we move through the year, move through next year, is it fair to assume that we'll hit a point where we start to kind of achieve positive operating leverage? Is that kind of a realistic goal as we think about the back half of the year? Thanks.
spk01: It is, Michael. So when we think about the environment right now, I think there's consensus that we're either at the peak or close to it. So although there can be different views as to the timing of an inflection point or the speed of a downward trend, Irrespective of that, when we think about the maturities that we have and the gap of pricing that we would cover on those that are subject to repricing, I think it's fair to say that the impact of pressures on the NIM will be lower in the upcoming quarters, even more noticeable starting 2024. Yeah.
spk04: And, you know, Michael, I mean, just to add to that, you know, Sherry and I and obviously the Treasury team and our ALCO committee, or asset liability committee, I should have said, meet and we talk about things. It shouldn't be lost on anyone that the comment I made earlier about a reduction in excess cash being used when there's virtually no spread. We're continuously looking at ways to, given the rate pressures, the competitive pressures on the deposit side, look for offsets. One of the really encouraging signs, though, that I think hopefully everyone has as a takeaway is the jump up in non-interest bearing. And our teams are absolutely incented and are actually starting to deliver more and more of non-interest bearing relationships as part of new relationships. And obviously, we're going back in existing relationships and trying to see where we can also gain additional share there. We're very cognizant, I think as Sherry said, that loan yields at this stage look like they've somewhat peaked, or certainly near the peak, and so it's really incumbent on us on the deposit cost side. As you can tell, we've only added broker and for duration and liabilities, and frankly those rates are cheaper than even the shorter term stuff that people are paying right now. that's not as much of a drag as one might think, you know, as you, as you think about the NIM going forward.
spk06: Very helpful. And, um, you know, it's good to see just finally for me, just, it's good to see, um, you know, TC up a little bit, uh, you know, capital up a little bit this, this quarter, you continue to utilize the buyback.
spk04: You're still trading below tangible book, still have authorization. Just wanted to get your kind of near term thoughts on, on usage of the buyback, uh, from here and just balancing, uh, you know, some of the headwinds that are out there from a capital perspective. Thanks. Yeah, you know, we talk about capital levels all the time, of course, like others do. And our view is that, you know, you need to look at all the tools in the toolkit. Certainly buybacks are one of those. Obviously, we've continued, you know, our board approved Continuing to pay the dividend and we like where we are capital wise. We certainly don't like where we are valuation wise I'm sure that that is agreed upon by everyone But our view is that you know, we do need some of this capital You know from a growth standpoint and so it's going to be a balancing act and I think again that's what's nice about having the full set of tools and Um, and not being restricted to just 1 or the other right that we're going to use it all for growth or that we, you know, our view is it's a combination of these things, right? You know, so how we pay on dividend, how we utilize the buyback authorization, how we manage in what our expectations are for growth. And by the way, we're not going to grow for growth sake. It's profitable growth, right? It is not going to be. that obviously this is a nice quarter to add back to capital at $22 million. Our view is we need to be running in those levels going forward to support the growth plans that we have. But I mean, I just want you to know, we sort of don't look at one of these things standalone. We look at all of them. Needless to say, we do agree completely that when you're below book value, that that provides an opportunity to buy back.
spk06: Thanks for all the comments. I'll step back. Okay. Thanks, Michael.
spk08: Our next question comes from the line of Brady Gailey with KBW.
spk07: Hey, thanks. Good morning, guys.
spk04: Good morning, Brady. Good morning, Brady.
spk07: So the net interest margin guidance for 4Q as far as being down less than 3Q, that's a pretty you know, wide range, just given 3Q is down about 25 basis points. Is there any way to, you know, tight that range for 4Q? And then how, do you think that 4Q will be the bottom in the NEM and you could see some expansion next year? Do you think there could be more downside in 24?
spk04: Yeah, Brady, look, I think this is the quarter, right, where asset yields kind of top out. I think deposit costs continue just for competitive purposes. Look, everyone, I'd like to say we're putting on the right kind of deposits. You know, we've talked a lot about not just putting on, you know, and we've run down all that institutional stuff that comes from aggregators. Our view is that, yeah, of course there's going to continue to be pressure on funding costs. You know, that we certainly think between what we need to offer and what consumers are demanding are, you know, is going to result in pressure. You know, whether that remains to be seen is that, you know, somewhere within the range of, you know, much lower to midway, you know, I would tell you right now expectations are that it's really going to depend on us and our ability to generate more noninterest bearing and frankly even more lower cost international to supplement, you know, what we're doing domestically. So I think it's really going to be something that could be a wide range on that. And I think that's why Sherry and I have not given you something very specific. I would just say it's certainly not going to be as dramatic. The flip side is there's definitely going to be some. So yes, I know it's a wide range, but I think that everyone in the marketplace, this is the period where Will it level in 24? Absolutely. That's our expectation. I think we have another quarter of where there's going to be some compression. It's inevitable just given market conditions.
spk07: All right. Yeah, that's fair. And then I want to make sure I heard you, Ray, your comment about the loan yield has peaked. I mean, I know the loan yield was flat length quarter. And I know your loan yield, I mean, it's 6.8%. I mean, that's above average and a great loan yield. But I just wanted to make sure I understand that dynamic well, that the loan yield has peaked. Because I would have thought there would have been maybe some continued, especially like CRE loan repricing higher, and you could see that yield drift higher. But you're saying you think it's flat from here?
spk04: Look, I think our view is the biggest driver in increasing loan yields has been the fact that we've been an asset-sensitive organization. And so the positive has been that that's been the bigger driver versus higher rate new production. You're absolutely asking the right question, which is, yes, we will have higher rate new production in the fourth quarter. I don't know that that'll be as meaningful enough to make it more than just give you the view of, hey, it's flattish, maybe is a better way to say it, as opposed to we think we are going to continue to see improvement in the fourth quarter. Do I believe if we can book 3-400 million in production, net new production, that there'll be some pop? There should be, for sure. But I still think that the way we're looking at things, there's also some other stuff that'll come off that, you know, may have been, you know, really part of that asset sensitive repriced portfolio, right? So, You know, it's really a mixed issue that will come into play there. But my view is I think, you know, we're better off telling you flattish and give you the positive upside, you know, depending on production.
spk07: Okay. All right. And then the surrendered bully and the $2 million benefit, was any of that in the three-key run rate, or is that all a positive kind of looking forward?
spk01: Yeah.
spk07: it's a positive looking forward we expect that yield to materialize fully in 2024 going forward okay all right and then finally for me just a bigger picture question i know we have the you know one percent roa target out there you guys were pretty much at that level last year um but you know um not near that level year to date this year and i mean maybe the industry is not even there either i know profitability is under pressure everywhere But any updated thoughts on your timing as far as when you could hit that one ROA?
spk04: Yeah, look, we absolutely expect to be back on track in 2024. I think with the great additions we've been getting on the team with all the other initiatives we've been talking about, you know, I do want to just comment, you know, as an organization, we've had considerable time, energy and expense around this core conversion. There's a lot of additional support that is going into this and our view is getting this done is gonna really clear the runway for us as we go into 2024. So I think you have the positive of all these great people that have joined the, in my opinion, an already great team. And, you know, you get the production that's going to come from that. You get the conversion past this. You get the halo effect of, you know, all this great new branding, you know, and it's much more targeted branding. I expect a much stronger 2024. Look, the reality is that also you have to caveat that is that also depends on the economic conditions that go forward in 24. But we are doing all the things we can within our control. to drive towards making sure that we're back in track in that 1% plus 12% type of metrics that we talked about. And as Sherry mentioned in her comments, look, we're going to have a bumpy fourth quarter, first quarter, just if you looked at a pure efficiency ratio just from, and we're giving you that without trying to exclude those things like they're one time or non-recurring. We're just saying, look, the efficiency is going to be higher because we have to incur these expenses. So But the expectation is absolutely to get this place back on track and get back in that 60%, you know, to a 60% range. I think we've hit, you know, and then unfortunately have had the bounce back up. But I also would tell you, Brady, look, we've had a choppy year. And I think, you know, because obviously there's been some one-time items in the higher provision we reported last quarter. You know, we think that we've done a really good job of assessing risk in the portfolio and getting, you know, which is why our reserve coverage is higher. You know, and in this quarter in particular, you know, I do just want to note, we had some elevated charge-offs, but we're accelerating our efforts to try and get the NPLs and NPAs off our books. And so, that created some additional noise. I know you commented on that in your write-up. You know, our view is it's better to get this stuff done and off the books as fast as possible and get them back into earning status, get that money back into earning status. That's going to help too.
spk07: Okay, great. Thanks, Jerry. Yep.
spk08: Our next question comes from the line of Steven Scouten with Piper Sandler.
spk06: Hey, good morning, everyone. Hey, Steven. I guess I'd love to kind of touch on credit if we could and kind of maybe if you could give a view for how you think credit costs could kind of stabilize from here and what you would kind of say to investors to give them some confidence around that. It's been obviously choppy for the last four quarters and maybe specifically the pace of charge-offs you might expect from the consumer direct portfolio at this point.
spk04: Yeah, I think let me go in backwards. We expect that to improve the indirect consumer charge offs on a go forward basis. I think Sherry made a comment. That portfolio, the expectation duration wise, you know, it's getting smaller and smaller every quarter and, you know, maximum 2 years out before it's completely run off. So that would be the view, yes, that will improve as we move forward. We think we saw an acceleration and now it's coming the right direction for us. We've had a couple million dollars worth of charges that related from small business. Our view is that's been a business we've really tightened our credit criteria. It's not actually something we've done as anywhere near the emphasis that had been done in the past. And, you know, the expectation is there that some we're going to continue to closely monitor. But the big thing has been these, you know, of you just saying in the last several quarters, there have been a bunch of legacy credits. Yes, there was one that was a South Florida credit in the first quarter, no question. But there have been a bunch of these legacy credits. And it's one of the reasons why we stepped up and accelerated, you know, made the decision to take the haircut on selling this New York Cree property It was the single largest exposure left in the portfolio. Frankly, it's one of the largest single exposures we had in the entire portfolio. And our view was better to take that haircut now and get that off the books. And as you can see, we produced our exposure down to 240 million as a result of that sale. And the view is we've got a good line of sight into performance on the rest of that portfolio. So all that being said, you know, look, the crystal ball you have with this, we think our teams are doing a really good job of staying on top of relationships, you know, following through with know your customer, you know, could there be an unexpected, of course, but the view right now is we think we've done a really good job of looking certainly at the largest ones, which have created the most noise. But again, you know, there's been a lot. Unfortunately, we have had some significant events around that New York Cree portfolio. And, you know, that's no surprise. I think we've, you know, played even more and more attention on that one.
spk06: Yeah, that makes sense. And so I guess, I mean, it sounds like you feel like maybe you're past the lion's share of the immediate risks. I mean, obviously, like you said, we don't have a crystal ball. We don't know what's coming next year, but I mean, 62, some basis points in net charge of so far this year, 32 last year. If you had to peg a number for 24, kind of somewhere in the middle? Or, I mean, I guess, how do we think about the ability for that to normalize someone?
spk04: Yeah, look, our expectation, again, these have been the lumpy credits. The ones that we had the most, you know, we'll say placed the most time and energy to watch and had concern with. you've now seen come through, right? And if you look at what's in NPLs and NPAs in the real estate owned portfolio, the two largest pieces of that are based off in New York. And so, you know, the view, yeah, I mean, to the extent we can continue to see pay downs in New York, we continue to see, you know, and closely monitor that portfolio. I think the lumpiness that's created those charges will come down pretty significantly, probably to the levels that you talked about in the 30.3% range.
spk01: And Jerry, to add a little bit more color also, if we look at the charge of composition for the quarter, the reduction of eight basis points in the coverage of the reserve, it's related to charge of previously reserves, so that takes the new charge of closer to 30. And when we look into that composition itself, and specifically we look into the indirect portfolio, we are seeing the behavior of a reduction of charges starting to take place this quarter. A little bit later within the quarter than what we were expecting, but definitely behavior showing improvement.
spk06: Got it. Helpful. And maybe moving to the deposit side, Jerry, you noted international deposit growth as a focus, as you have for a bit now, but that book's been relatively flat. What kind of changes course there? What would allow you to grow it? And any CD maturities, coming on that will help on the deposit side at all?
spk04: Yeah, look, I think the team, you know, it's taken us a couple quarters to get the synergy of the group to sort of get our footing of refocusing on this. Remember, we had prior to this year had really been in maintenance mode there, you know, a combination of stabilizing it, you know, back, you know, two years ago to, you know, coming through the other side of COVID. So travel has just resumed. We want to be very cautious and make sure that what we are growing, we have very good KYC, BSA, AML in place. And so I think we've been gaining more and more confidence there. Have to remember that the bulk of that portfolio is customers are using those accounts. So, you know, really the net growth we need to get for this to grow is exactly your question, which is we have to book more new business And our expectation is that is in the process of ramping up. And Stephen, I apologize. I think your second question was around CD maturities in the quarter.
spk06: Yeah, just curious if there's anything coming that would allow some of the funding cost pressure to abate at all. Not that CD costs are going down yet, but just kind of wondering if there's a profile that would help.
spk04: I was going to say, you know, I think what Sherry's remarks were, is that we look at the delta of what is maturing as to be much closer, right? So these were fairly higher cost maturities this fourth quarter. So even if we did a retention, we didn't expect significant incremental expense as a result of that.
spk06: Okay, that's very helpful. And then maybe just last thing for me, sounds like growth is picking back up already this quarter. You said the pipelines are strong. I know, you know, for most of the banks we look at, growth is kind of getting pulled back and people seem a bit more cautious. What kind of gives you confidence in the growth you guys are putting on? Is it new market expansion primarily that gives you that confidence? Or how can you speak to that a little bit?
spk04: I have to tell you, I think it shouldn't be lost. We made a big transition in the team and some of the composition of the team, particularly on the commercial side this year. And I think that that team is really gaining even more and more footing at this point. We're also expanding that team. I can tell you that we've got five new strong business development officers that have either started or will be starting, frankly, next week. Here at the organization, we expect, we've added in Broward, we've added in Miami-Dade. I think we've had another additional person in the on the other side in Houston. And so we feel good about what these new team members are going to be able to bring in addition. And so every time I talk about another person coming on board, you have to kind of think about that as a scorecard of their set of goals, both on the loan and deposit side, that are additive to the core base of people that we have. Look, I'm of the belief that this is a time, it's a wonderful opportunity. People like our story. They want to come here. They believe in what we're doing. The execs have done a great job of attracting some of these folks as well. And so that, to me, is what gives confidence around our ability. And of course, I have to say, You know, we talked about awareness. The awareness levels for this organization just continue to escalate. I get lots of compliments about it, you know, when I'm out in the marketplace and talking with people. And I think that halo effect that comes from that is also extremely helpful in the consideration set. And look, we take every single interaction. You know, I don't want to beat the drum on this one very personally. I think that one of the advantages of banking with a company like ours is the personal interaction you can get with all levels of management, the attention, the quicker turnaround times. And so your reputation builds as a result of that, and that's what gives me confidence that you're going to see growth out of our organization in the fourth quarter.
spk06: Great. That's really good, Kyle. I appreciate the time this morning. Absolutely. Happy to. Take care.
spk08: Our next question comes from the line of Betty Strickland with Jenny Montgomery Scott.
spk05: Hey, good morning. Hey, Betty. Just wanted to start by clarifying on expenses. Is the core expense rate you're guiding to in the fourth quarter, is that going to be similar to the $58 million core that we saw this quarter? And then are the FIS charges being a one-time item on top of that?
spk04: Yeah, no, we expect, look, we had said, I think Sherry and I had talked in prior quarters that, you know, the targeting was anywhere between sort of, I'll call it a 59 and a half to 61-ish range. And then you're going to see the elevated expense that takes place. Now, that's before we do anything of some of these other additional expense initiatives that I was mentioning earlier. You know, I'd love to give you more color, but I would prefer to just say that what you're going to see in 4Q, right, of, you know, we'll call it, you know, $5, $6 million expense of running everything at the same time is more of an anomaly for the period than it is, you know. So, that's why when we started to talk about this, Yeah, if you peeled it back, we still think our run rate is in and around that range. But let's be clear. We are going to have in 2024 elevated technology-related expense as part of this process that will then, as we decommission things over time, that's going to be a continuous improvement exercise for us as an organization. So it will probably, as we said, certainly stay elevated in Q1 at a minimum. Sherry, I don't know if you want to add any color.
spk01: No, no, that's completely right. It's kind of the effect of running these applications and technology efforts in parallel.
spk05: Got it. So then it sounds like over time you think you can kind of hold that a little more flat as you redeploy some of those cost saves that you get as you quit running things and parallel into other technology initiatives and other areas of the bank.
spk04: Yeah, and Fede, in fairness... you know, just based off the comments I was making, you know, from the last set of questions, you have to take into account with us, you know, our expectation counter to a lot of other people is that we're expecting to continue to grow. And it's a combination of, we just see a good opportunities in the marketplace. And so you're going to have, you know, a higher, you know, I'll call it earnings base as well that comes into play. So, Some of that is a direct result of some of these other investments that we're making in people. But I will tell you, we're continuously evaluating how, as this technology gets deployed, that we can better assess our ratio of business development and support. The expectation is you're going to see us go into a true continuous improvement mode in 2024. You know, frankly, in 2023, It's been all about bringing in some new team members to add additional growth, but the vast majority of efforts, you know, again, under the, I'll refer to it as unnoticed and under the surface, there's just been an incredible amount of energy and effort by this team focused on this FIS conversion. And it's a massive undertaking. You know, sometimes people may not quite remember, but we're converting everything. I mean, when I mean everything, everything. And so this is a major, major undertaking for our company, and we could not be more excited for that date in early November to come and finally get to the point where, yes, we'll start to see that the pressure will be on making sure our customers are okay, we're onboarding new business okay, and we can get back to really focusing more and more on, as I said, continuous improvement efforts.
spk05: Understood. That's helpful. Thanks for the color on that, Jerry. And just switching gears for a moment here, I appreciate the detail on rate sensitivity on slide 15 of the deck. I'm trying to understand that second circle chart. Is that saying that 52% of all loans reprice within a year, or is that 52% of fixed rate loans? And the reason I ask is I'm just trying to understand both the dollar amount of the loans repricing and the average pickup you could potentially see in spread as those loans are renewed, kind of going into 2024.
spk00: Sorry, I'm going back to the slide. So 52%, 47% of our fixed rate loans. One quick second.
spk05: Sure, I'm talking about that second circle chart by repricing term.
spk01: Yes, so that's 100% of the portfolio. 100% of the portfolio will be repricing within less than one year.
spk00: 52% of the portfolio will be repricing within less than one year.
spk05: Do you have the amount of the fixed portfolio that's repricing over the next year? If you don't, that's fine. I can follow up later.
spk01: We will be able to provide later, yes.
spk05: Great. Thanks for taking my questions, guys.
spk08: Our next question comes from the line of Matt Olney with Stevens.
spk03: Hey, good morning. This is Jordan on for Matt. I just wanted to get a clarifying question on that NYC loan sale that's going to be taking place today. I just wanted to get a question about the additional loss, if there is going to be any, given it's at fair value. If you could just give any color around that, that would be great.
spk04: Yeah, look, our view was we took a mark on that as of obviously quarter end of what we saw. But I'll let Sherry go ahead. I know it was in her comment.
spk01: Yeah, so we did take a valuation adjustment at the point of transfer. This was prior to balance sheet of $5.6 million. In the actual sale that will take place later today, we do expect some loss on sale between $1.8 to $2 million to be recorded.
spk03: Sorry, what was the number, 1.8?
spk04: Yeah, it's a non-recurring charge and we expect we have an offset in mind as well. So our view was, look, this was a great move to reduce the highest single point exposure we had left. I think it's in a highly volatile segment of commercial real estate in New York and our view was We need to move on this because just given market conditions there, it's better to move on and not take the risk. Particularly, I think there's refinance risk that would come with some of these deals, not just necessarily this one, all deals. And so our view is this was a very proactive move by us to get this done and over with.
spk03: Understood. Thank you. And then just maybe one more question. You talked about that BOLI restructure and having a $2 million benefit, but then you also talked about fee income kind of staying flat at the $15 million level. Is there anything that's going to be offsetting that $2 million benefit, any line items that we should be aware of?
spk01: No. The benefit of $2 million that we're expecting out of the restructure is moving forward fully 2024. We're not capturing 100% of that benefit this fourth quarter because there's some steps still from an admin perspective that have to take place under restructure. That's why we're providing guidance closer to the results of the $15 million we had in 3Q. But no, no additional offsets that we're seeing over that.
spk03: So 2024 fee income is going to be a bit higher than from the current $15 million level?
spk01: That's the expectation, yes.
spk03: Okay, perfect. Thank you for taking my questions. I appreciate it. Absolutely.
spk08: Thank you. That concludes today's question and answer session. I'd like to turn the call back to Jerry Plush for closing remarks.
spk04: Thank you, everyone, for listening in on today's call. We greatly appreciate your interest in Emirates. Again, thank you very much, and have a great day.
spk08: This concludes today's conference call. Thank you for participating. You may now disconnect.
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