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spk03: Greetings, welcome to the Amerit Bancorp fourth quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I would now like to turn the conference over to Laura Rossi, Head of Investor Relations and Sustainability. Thank you, you may begin.
spk08: Thank you, Daryl. Good morning, everyone, and thank you for joining us to review Ameren Bancorp's four-quarter and full-year 2023 results. On today's call are Jerry Plush, our Chairman and Chief Executive Officer, and Shalimar 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.
spk02: Thank you, Laura. Good morning, everyone, and thank you for joining today's call. Today, we will cover our performance for the fourth quarter and full year. But before we do this, I would like to acknowledge and thank all of my Ameren colleagues for their dedication and effort this quarter as we completed our conversion to new core systems. This project, which required a significant amount of planning and effort, was a huge undertaking, and the team was up to the challenge. Please know that work continues in a number of areas post-conversion as more enhancements are on the way. So, moving on to what we will cover on today's call. There are clearly a significant number of items to touch on, including the commercial real estate sale and a number of additional actions we took this quarter to best position our company for 2024, given an expected decline in interest rates. For reference, we filed a Form 8 covering these on January 16, 2024, but it's important to give some additional context on today's call, which we will do. While these actions created additional non-routine gains or charges this quarter, We expect this to be behind us for 2024, and as I mentioned, best position us to execute on our growth strategy. I also want to note here that we will cover credit in detail, and we've added a number of new slides to the presentation with more detail on credit components, which Sherry will be covering shortly. So we'll turn now to cover slide three, and here we've outlined a number of key items that took place in fourth quarter. First, deposits grew by $326 million, reflective of our deposits-first organic relationship-based approach, while total loans grew $132 million. As previously reported, we made the decision to reclassify $401 million of Houston-based multifamily loans as held for sale, and we recorded a non-cast charge of $30 million before taxes in the fourth quarter. This sale is expected to be completed sometime this month. As $370 million of these loans were variable rate and at an average yield of 6.7%, This sale protects the company in a projected declining rate environment. Also, this strategic asset liability move, together with our projected increase in earning assets, is expected to create a net positive on margin after the first quarter, as we plan to use the proceeds of the transaction to reduce higher-costing non-relationship institutional deposits at an average cost of 5.6%. Finally, this repositioning also reduces CRE exposure. It's important to note that this sale also right-sizes our operations in Houston, where loans prior to this sale exceeded deposits. So we'll turn now to New York. And here we reduced higher risk assets as we completed the sale of the highest New York City CREA exposure, and we exited the non-performing loan relationship in New York City we discussed on our third quarter call. And it's all part of our strategy to exit the remaining New York City loan portfolio. Speaking of the portfolio, what remains is performing in totals $217 million and consists of 21 properties and 12 relationships. We do have one small credit, which is under $2.5 million, that is being watched. We repaid $585 million in federal home loan bank advances, recording a $6.5 million gain for the early repayment, and the replacement funding provides for a lower cost of funds going forward. We rationalized certain organizational components, such as acquiring the remaining ownership interest in Amarant Mortgage and right-side staffing, given the current rate environment. And we approved a plan for the dissolution of the Lawn Bank and Trust, our Cayman subsidiary. We wrote off goodwill for $1 million related to the mortgage company and $700,000 in goodwill intangibles related to a lawn, with expected annualized savings of $300,000 from closing a lawn. We also rationalized headcount across multiple units resulting in expected annual savings of a million after having recorded severance expenses of a million. And as noted, we completed the core system conversion and we're actively managing post-conversion items. We've recorded 1.6 million in final conversion costs related to FIS and software expenses in the fourth quarter of 23. We also restructured banked-owned life insurance to include more current team members in the plan and to provide for an enhanced yield going forward with an earned back period of approximately two years. This resulted in income tax expenses and other charges totaling $4.6 million. I'll now provide a brief overview of our financial position in the fourth quarter and year and then turn it to Sherry to go over the details. She'll then turn it back to me for some comments regarding 2024 as part of my closing remarks. So let's turn to slide four now for financial highlights for the fourth quarter. Looking at the income statement, diluted loss per share for the fourth quarter was 51 cents. It's primarily due to the net impact of those non-routine items we recorded during the period that I just covered. The net interest margin increased to 3.72% from 3.57% in the third quarter, which includes interest collected along with a loan principal recovery, which Sherry will go into further detail in a few minutes. Exclusive of this recovery, we would have been relatively even with the third quarter. Although we, like others, continue to experience the challenges of a sustained high interest rate environment along with market competition, and as a result, a higher cost of funds, this quarter we reached an inflection point in margin compression. Credit quality events continue to be an area of focus, and reserve levels are carefully monitored to provide sufficient coverage. Our provision for credit losses was $12.5 million, up $48.5 million from the $8 million in the third quarter. And again, as I mentioned, Sherry will be covering the credit components in detail shortly. Non-interest income was $19.6 million, down from $21.9 million in the third quarter, while non-interest expense was $109.7 million, up $45.3 million from the third quarter. Both non-interest income and non-interest expense contain non-routine items this quarter that I've already commented on. Total assets reached a record high of $9.7 billion, up from $9.3 billion as of the close of the third quarter. Total deposits also increased to $7.9 billion compared to $7.5 billion in the third quarter. While total loans increased $132 million, gross loans held for investments actually decreased to $6.9 from the $7.1 billion in 3Q. Our total securities portfolio was $1.5 billion, and that's up $183 million from the third quarter, while cash and cash equivalents increased $12 million to $321 million at the end of the fourth quarter. The additional securities purchased were fixed rate and they were all part of our ALM actions given an expected decline in rates in 2024. And moving on now to capital, our total capital ratio as of 4Q ended at 12.19% compared to 12.7% as of 3Q. And our CET1 was 9.84% compared to 10.3%. Our tangible equity ratio was 7.33%. which includes $70.8 million in AOCI resulting from the after-tax change in the valuation of our AFS investment portfolio, and which substantially improved in the fourth quarter from $97 million that we saw in the third quarter of 23. Lastly, as of fourth quarter, our Tier 1 capital ratio was 10.6% compared to 11.08% as of 3Q. And it's also worthy to note that on January 17th, our Board of Directors approved a dividend of $0.09 per share payable on February 29th, 2024. So we'll move now to slide five, and I'll provide an overview regarding our deposit base. As I mentioned earlier, total deposits at the end of the fourth quarter were $7.9 billion, up $326 million from the third quarter. This increase was mainly driven by an increase in relationship deposits of $365 million, while institutional deposits declined by $40 million. Speaking of institutional deposits, as I briefly mentioned earlier, we anticipate the balance of this higher cost non-relationship source of funds to be run off by mid-first quarter 2024. Our ratio of loans and deposits decreased this quarter to 92.4%. As we've referenced in prior calls, our goal is to manage it to a target of 95% and not to exceed 100%. We have a strong loan pipeline in the first quarter, so we expect to be back in this range soon. We'll turn now to slide six, and here we show a well-diversified deposit mix composed of domestic and international customers. Our domestic deposits account for 69% of total deposits, totaling $5.4 billion as of the end of the fourth quarter. That's up $340 million, or 6.7%, compared to the third quarter. And international deposits, which now account for 31% of total deposits, total $2.5 billion, down slightly, 0.6%, compared to the third quarter. Domestic deposit accounts have an average balance of $110,000, while international deposit accounts have an average balance of $43,000, and that reflects the granularity of our deposit base and the stability of this funding source. You know, as I've shared in previous calls, we intend to take advantage of our infrastructure and capabilities and begin to further emphasize international deposit gathering going forward as a source of funds given favorable pricing while continuing to add diversification to our funding base. Our core deposits defined as total deposits excluding all-time, total deposits excluding all-time deposits, excuse me, were $5.6 billion as of the end of the fourth quarter, an increase of $332 million, or 6.3%, compared to the third quarter. Included in core deposits are $1.4 billion in non-interest-bearing demand, up $35 million, or 2.5%, versus the third quarter, $2.6 billion in interest-bearing deposits, up $144 million, or 6%, versus the third quarter, and that's primarily the result of continued customer demand for higher-rate products, and $1.6 million in savings and money market deposits, up $153 million, or 10.5%, versus the third quarter. So at this point, I'm going to turn things over to Sherry. She'll go over key metrics, some other balance sheet items, credit quality, and the results in the third quarter in more detail.
spk07: 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 seven, I'll begin by discussing our key metrics for the quarter. Non-interest-bearing deposits to total deposits decreased to 17.8% from 18.2%. Despite the challenges of customers seeking higher interest rates and the market competition, we continue to work hard on our deposits-first focus and increasing demand deposit accounts by building relationships in our markets. While the ratio slightly decreased, total non-interest-bearing balance in fact increased, although not at the same speed as interest-bearing deposits. Net interest margin improves to 3.72% compared to 3.57% in the third quarter. This includes 16 basis points in connection with a one-time loan recovery. We will cover details of name changes quarter over quarter shortly. Our efficiency ratio was 108.3% compared to 64.1% in the third quarter as a result of the $43 million in non-routine, non-interest expense items Jerry just covered. ROA and ROE in the fourth quarter were at negative 0.71% and negative 9.22%, respectively, as a result of the one-time charges and higher provision for credit losses during the period. For consistency and transparency, we showed the three core metrics of ROA, ROE, and operating efficiency, excluding non-routine items, so you can better see our underlying performance for the fourth quarter. As an example, core efficiency for the fourth quarter was 69.7% compared to 62.1% in the third quarter, which excludes non-routine charges. As I mentioned last quarter, these results also include certain costs of new applications and services being used in parallel after the conversion with previous applications in place. This parallel use of applications will occur until we complete the commission applications in the first quarter of 2024 and therefore reduce these costs. Moving on to slide A, I'll discuss our investment portfolio. Our fourth quarter fixed income investment balance was $1.4 billion, slightly up from both the third quarter and the same period from last year. When compared to the prior quarter, the duration of the investment portfolio decreased to five years due to market rates decreasing during the quarter. We added a new chart to show the expected repayments and maturities of our investment portfolio for 2024, which represents the liquidity available to support growth in higher interest earning assets. Moving on to the rate composition of our portfolio, you can see that the floating portion decreased to 13% compared to 15% in the third quarter. This reflects our efforts to position the balance sheet for a decreasing rate environment and achieve the right balance between yield and duration while maintaining a high credit quality of the portfolio. As we have done in previous quarters, I would like to reference the impact of the interest rates on the valuation of debt securities available for sale. As of the end of the fourth quarter, the market value of this portfolio had improved $35 million after tax compared to the decrease of $19 million in the third quarter. The quarter-over-quarter improvement was primarily driven by market rate moves and is consistent with our interest rate sensitivity analysis for down 100 basis point shocks. We had an increase of $9.4 million after tax for the full year of 2023. It is also important to comment that our tangible common equity ratio ended at a solid 7.3% after considering the impact of changes in valuation of our ASS portfolio. Note that 82% of the total portfolio has government guarantee, while the remainder is rated investment grade. Continuing on to slide nine, let's talk about our loan portfolio. At the end of the fourth quarter, total gross loans were 7.3 billion of 1.9% compared to the end of the third quarter. The increases were primarily driven by increases in single-family residential loans, land development, commercial loans, as well as construction loans. Consumer loans, as of the end of 4-23, were $403 million, a decrease of $36 million, or 8.2% quarter-over-quarter. This includes $211 million in higher-yielding indirect consumer loans compared to $255 million in the third quarter, which were a tactical move for us 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 by the first quarter of 2026. As Jerry mentioned, during the fourth quarter, we completed the sale of the highest theory exposure and exited the non-performing loan relationship both in New York as part of the company's strategy to exit its remaining New York City loan portfolio. The theory loan sale resulted in a loss on sale of approximately 2 million in 4Q23, and the non-performing loan was modified and paid off. Our loan portfolio had a yield of 7.09% in 4-2-23. This includes the loan recovery recorded during the period. To provide a more comparable figure, the yield of the loan portfolio excluding this recovery was 6.93%. Moving on to slide 10, here we show our theory portfolio in further detail. We have a conservative weighted average loan to value of 58% and debt service coverage of 1.3 times as well as strong sponsorship tier profile based on AUM, network, and years of experience for each sponsor. As of the end of 4-2-23, we had 31% of our CRE portfolio and 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, pharmacies, food and clothing retailers and banks. Our underwriting methodology for CRE includes sensitivity analysis for multiple risk factors like interest rates and their impact over debt service coverage ratio, vacancy, and tenant retention. As Gary mentioned, during the fourth quarter, we classified $401 million of our multifamily loans in Houston as helper sales. The transaction is expected to close later this month and have an impact to tangible common equity of a reduction of approximately 23 basis points on day one and to common equity tier one of an improvement by approximately 12 basis points. With the proceeds of the sale, we expect to reduce in 1 to 24 higher cost non-relationship institutional funding of $260 million at an average rate of 5.6% and invest the remaining proceeds in fixed rate earning assets. Now turning to slide 11, let's take a closer look at credit quality. Overall, credit quality remains sound and reserve coverage is strong despite charges reported during the quarter. Non-performing assets totaled $54.6 million at the end of the fourth quarter of 2023, an increase of $1.2 million compared to the third quarter, and an increase of $17 million compared to the fourth quarter of 2022. The increase in the fourth quarter was primarily due to John Grayston on accrual of two commercial Texas loans totaling $12.3 million with $4.1 million in allocated reserves, and one commercial Florida loan totaling $7 million with $3.9 million in allocated reserves. offset by the exit of the theory New Year's loan totaling $23.3 million with an associated charge of $10.3 million, of which $8.5 million was in specific reserves in previous quarters. The ratio of non-performing assets to total assets was 56 basis points, down one basis point from the third quarter of 2023, and up 15 basis points from the fourth quarter of 2022. Our non-performing loans to total loans are 47 basis points compared to 46 basis points in the third quarter. In the fourth quarter of 2023, the coverage ratio of loan loss reserves to non-performing loans closed at three times, consistent with three times at the end of the third quarter, and increased from two times at the close of the fourth quarter of 2022. Now moving on to slide 12, which is a new slide we added this quarter to better show the drivers of the allowance for credit losses. At the end of the fourth quarter, the allowance was 95.5 million, a decrease of $3.3 million or 3.3% compared to $98.8 million at the close of the third quarter. The drivers of the allowance movement this quarter were $20.6 million in charge of, out of which $12.1 million are incremental charges in the quarter, and are primarily related to the indirect consumer portfolio, the exit of the New York City non-performing loan, and some smaller balanced business loans, and $4.5 million released due to the transfer of the Houston multifamily loans to Health for Sale. These are offset by $2.6 million related to credit quality and macroeconomic factor updates, $1.8 million due to net loan growth, and $5.3 million in recoveries primarily related to a commercial LATAM loan that was charged off back in 2017. We recorded a provision for credit losses of $12.5 million in the fourth quarter compared to an $8 million provision in the third quarter. The provision included $0.5 million for reserves for contingency. Slide 13 is also new. and provides a closer look on this topic to illustrate what the incremental charges in the quarter were, excluding previously reserved items. In that line, the $20.6 million in charge-offs included $10.3 million from the CRE New York non-performing loan that we exited in 4Q, for which we had recorded specific reserves of $8.5 million in 3Q. Therefore, the impact for this quarter was only $1.8 million in additional provision expense related to this loan. Additionally, we charged off $7 million related to the indirect purchase consumer loans, and 3.3 million due to multiple smaller balanced banking loans. The impact to provision due to these incremental charge-offs was 12.1 million this quarter. We introduced slide 14 this quarter to provide more color regarding criticized loans. Special mention loans increased by 16.4 million or 55.8%. The increase is primarily due to five commercial loans totaling 34.8 million downgraded to special mention during the quarter. Consisting of one commercial Florida, ABL loan totaling $18.7 million, three owner-occupied loans totaling $13 million, and one commercial Texas unsecured loan totaling $3.1 million. The increases were offset by two commercial loans totaling $17 million that were further downgraded to non-approval during the quarter, as mentioned in the previous NPO discussion. Next, I'll discuss net interest income and net interest margin on slide 15. Net interest income for the fourth quarter was $81.7 million, up 4% quarter-over-quarter and down 0.6% year-over-year. The quarter-over-quarter increase was primarily attributed to higher average rates on total interest-earning assets, primarily loans, increased average loan balances, and lower average balance in FHLB advances. The increase in net interest income was partially offset by higher average balances and rates in money market deposits and customer CDs, as well as lower average balances in deposits with banks. Given there were no market rate increases during the quarter, there is no beta calculation for this period. However, we observed a beta of approximately 47 basis points on a cumulative basis since the beginning of the interest rate up cycle as a result of the combined effect of rate increases in transactional deposits, repricing of time deposits that had not repriced at higher rates, as well as higher balances in time deposits at higher market rates. Moving on to the net interest margin, we added slide 16 this quarter to show the contribution to NIM from each of its components. As Jerry mentioned, NIM for the fourth quarter was 3.72% up by 15 basis points quarter over quarter. The change in the NIM was primarily driven by the increase in the yield of our loan portfolio, which is now at 7.09%, an increase of 32 basis points compared to the third quarter. Interest income for Q23 includes $3.6 million in connection with the loan recovery previously charged off, as I mentioned earlier. Excluding the positive impact of this loan, the NIM would be at $3.56, which is stable when compared with the 3Q23 NIM at $3.57. The NIM reflects the higher yield of our earning assets offset by the higher cost of funds. We expect the margin to be stable through the second quarter. More on NIM in my closing remarks. Moving on to interest rate sensitivity on slide 17, you can see the asset sensitivity of our balance sheet with 52% of our loans having floating rate structures and 56% repricing within a year. We also continue to execute ALM strategies, including hedging interest rate risk as we expect a downward trend in interest rates starting in 2024. As we have said in previous calls, we continue to position our portfolio for a change in rate cycle by incorporating rate floors when originating adjustable loans. We currently have 49% of our adjustable loan portfolio with floor rates. Additionally, you can see here that within the variable rate loan, 36% are indexed to SOFR. Our net interest income sensitivity profile remains stable compared to the third quarter. We also include the sensitivity of our AFS portfolio to showcase our positioning to benefit from a rate down scenario. As I've done in the past calls during this interest rate cycle, I would like to mention the change, in this case the improvement in AOTL. following expectations for easing monetary policy in 2024. We will continue to actively manage our balance sheet to best position our bank for success in 2024 and beyond. Continuing to slide 18, non-interest income in the fourth quarter was $19.6 million, a decrease of $2.3 million from the third quarter, primarily due to lower mortgage banking income, reduction adjustment of $0.7 million in connection with enhancement of BOLI during the quarter, lower fees on customer deposits in the fourth quarter in connection with the FIS conversion, lower gains on the early termination of FHLB advances, and lower loan level derivative income due to less new swap contracts during the quarter. Offsetting the decrease in non-interest income were higher cards and trade finance servicing fees. We consider 5.7 million over non-interest income as non-recurring items, a decrease compared to 6.9 million in the third quarter. Core non-interest income was $14 million in the first quarter compared to $15 million in the third quarter. Ameren's assets under management and custody totaled $2.3 billion as of the end of the fourth quarter, up $197 million, or 9.4% from the end of the third quarter. This increase was primarily driven by increased market valuations following the market rally we saw in the fourth quarter. Turning to slide 19, fourth quarter non-interest expense was $109.7 million, up $45 million, or 70% from the third quarter, and up $47 million year-over-year. We consider $43 million of our expenses this quarter as non-routine expense items, as previously mentioned. The quarter-over-quarter increase was primarily due to the following. Previously discussed charge in connection to the transfer of the Houston Theory Loan Portfolio from loan for investment to loan for sale. Higher professional fees as fourth quarter expenses included the recurrent expenses for FIS for the full quarter, whereas 3Q23 only included expenses for a portion of September. Higher salaries and severance expenses driven by restructuring of business lines and other restructuring activities. Goodwill impairment due to the consolidation of AMRA Mortgage and Dissolution Plan of Elan Banks and Trust in Cayman, as well as other expenses in connection with the Bully restructure. The increase in non-interest expense was partially offset by lower occupancy and equipment expenses, since there were no expenses associated with branch closures during the quarter. In terms of our team, we ended the quarter with 682 FTEs, out of which 65 are in AMRA mortgage, lower from the 700 we had in the third quarter, following strategic reductions in headcount across multiple units. Moving on to slide 20. We reported fourth quarter diluted loss per share of negative $0.51 on net loss of $17.1 million. We recorded an income tax benefit, which impacted our diluted EPS favorably. As we have mentioned earlier, non-interest expense was higher during the first quarter, which resulted to the significant net impact of non-routine items on EPS. I'll now give some color of our outlook for the first quarter of 2024 and 2024 overall. So in summary on the next slide, we would say the following regarding financial expectations. We expect annual loan growth of approximately 15%. Our projected annual deposit growth will match loan growth. We intend to focus on improving the ratio of non-interest bearing to total deposits. Having our new treasury management platform and new digital account opening tools should help in this regard. Our loan to deposit target will remain at 95%. The net interest margin is expected to be stable compared to the normalized 4Q23 results at the 350 to 360 level in the first half of 2024 and improve over the second half of the year. We expect higher expenses in the first half of 2024 given investment in continued expansion, projecting to achieve 60% efficiency in the second half of 2024 as we grow. We intend to continue executing on prudent capital management balancing between retaining capital for growth and buybacks and dividends to enhance returns. And with that, I pass it back to Jerry for 2024 overview and closing remarks.
spk02: Thanks, Sherry. So on our last slide today, I'm going to give some comments on how we see 2024. So starting off, we view this year as very significant as we transition from what has been a multi-year transformation phase over to execution and profitable growth. With the FIS conversion and much of the physical infrastructure changes nearly complete, along with the executive leadership team now in place, this allows for our primary focus to be all about execution. The first two quarters of 2024 will reflect increased investment in business development personnel to drive incremental growth in both the commercial and consumer banks. There are considerable opportunities for solid relationship growth in the markets we serve, and we're seeing a lot of interest from quality people wanting to join our team. The first half of 2024 will also reflect the incremental expense post-conversion as we decommission from previous systems. And now the emphasis shifts from the conversion to accelerating our digital transformation efforts. We have a great team on board driving our efforts, and the utilization of AI as part of this will be something we'll update everyone on throughout the year. We are focused on improved sale efficiencies as well as front and back office efficiencies as our top priorities. And as far as an update on physical distribution, we're finally opening our new locations in downtown Miami, Fort Lauderdale, and Tampa in the first quarter of 2024, and also our new regional offices in Tampa and Plantation. So now we'll shift and talk a little bit about the second half of 2024. We expect to show the growth and profitability that results from the execution of our plan. And in closing, we're reaffirming our commitment to be the bank of choice in the markets we serve. We have been retooling and building for some time to have something very special here, and we believe this is our year to show how it all comes together. So with that, I'll stop, and Sherry and I will look to answer any questions you have. Gerald, please open the line for Q&A.
spk03: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first questions come from the line of Michael Rose with Raymond James. Please proceed with your questions.
spk01: Hey, good morning, everyone. Thanks for taking my questions. Good morning, Jerry. Good morning. Maybe we could just start with the loan sale in Houston. I think when it was announced, it was a pretty large percentage of what was there. And just given what we've seen you do in New York in terms of kind of pulling out of that market, I just wanted to get a sense for what the strategy for Texas is. Is this a market that you're going to look to you know, continue to be in, or is the focus going to be to, you know, just focus on core South Florida, you know, operations at this point? We just love some overarching thoughts. Thanks.
spk02: Yeah. So, Michael, we emphasize that this portfolio of loans were really sort of, we'll call it non-core. They were not broad relationship-based. We don't have full relationships with the sponsors. The remaining portfolio that we do have associated with Houston is, and we believe that that's solid and it makes sense for us in terms of the operations there. I would also make the remark that I covered earlier, again, that we felt that Houston was, in terms of loans versus deposits, not really self-funding. And we think this gets us much closer to right-sizing the operations there. Look, we have great opportunities, we think, in all of the markets we serve. Clearly, we get far more brand recognition right now because of all the steps we've taken in South Florida. But that doesn't mean that we're not looking at opportunities across the entire footprint.
spk01: That's helpful. And then maybe for Sherry, just kind of a modeling question. Certainly a lot of moving parts on the expense side, and I appreciate the color in the slides to get down to closer to a 60% efficiency ratio by year-end, but can you just help us from a run rate perspective in the first quarter, just given that there was so many moving parts, what we should kind of be using as a base, and just given that you guys have some additional investments, looks like in the first half of the year, how should we think about at least expenses over the next quarter or two? Thanks.
spk07: Sure. So what we're seeing in terms of forecasts for 2024 is that we should be, I would say, either stable or even slightly higher, closer to the 68 in the first few quarters of the year. And this is driven, you're going to see some drop-offs of some technology costs or a recomposition of the expenses and higher investments on the people side. as we work towards growth later on in the year. So I think using a 67 to a 69 should be a good range for expectations in the first half of the year.
spk01: Okay, very helpful. And then maybe just finally for me, just Jerry, stepping back, I mean, you guys have done a lot over the past couple of years, really, since you kind of took the reins. Are we done with the majority of the large moves? And, A, could we start to see some cleaner results once we get past the first couple quarters of the year? And I think when I put the pieces together, just given what is shaping up to be your expectations are for pretty strong balance sheet growth this year, both loans, deposits, it looks like you're going to have a fair amount of positive operating leverage beginning as we get into the back half of of this year and really into 2025. So just wanted to, you know, to comment where you think you are with those efforts. And then, you know, it looks like you should be able to get the efficiency ratio, you know, kind of sub 60% drive an ROA above 1% and drive pretty good, you know, kind of returns. Not asking for explicit guidance, but, you know, it does seem like the path forward here, especially once we get into 2025, is pretty powerful from an earnings perspective and just wanted to get some Some caller and thoughts from you. Thanks.
spk02: Yeah, no, thank you, Michael. I would respond by saying, again, we have the right executive leadership in place. We've got the physical distribution, the vast majority. Yes, we'll do some additions here and there, but it won't be anywhere near as significant in terms of the amount of different, you know, retail facilities and the regional hubs I just went over. Also, having the conversion behind us. I think it's safe to say that, you know, in terms of trying to shake out, is there anything else, you know, on the non-routine side? We certainly believe that, you know, our best days are ahead. It's going to be all about executing our plan. We think we've got the right people. We think we're adding even more quality people, and that's all going to drive incremental growth and profitability. So we're excited. I think that You know, it's been quite a journey here, and I do think it's important to say that, you know, we really do believe out of this transformation phase, you know, we've got to go full steam ahead on our growth and just execute.
spk01: All right. Thanks for all the call. I'll step back. Thank you. Thank you, Mike.
spk03: Thank you. Our next questions come from the line of Fetty Strickland with Jannie Montgomery Scott. Please proceed with your questions.
spk04: Hey, good morning, everybody. I just wanted to step back to the expense discussion again real quick. Just trying to understand in the second half of the year as we get to that 60% efficiency, is part of that, I guess, are expenses flat from the second quarter or do they come back down just as some of these dual systems turn into single systems? I guess my question is, does it go back towards a $60 million level or do they just stay relatively flat in the back half of the year?
spk07: Yeah. We do expect that in the second half of the year, expenses will stay pretty flat to what we're seeing earlier in the year. I think what you're going to see in terms of the improvement on the efficiency ratio will be driven by the growth component.
spk04: Got it. So it will be on the revenue side. That makes sense. And then moving over to the charge-off piece, I think I heard you say that most of that this quarter was driven by the movement in the New York portfolio, getting that one MPL out of there. Does that mean we should expect charge-offs to kind of step down a bit from here and primarily be driven by that consumer portfolio and, you know, any other one-off items that might come up the next couple quarters?
spk07: Yeah, from a charges perspective, you're right. The drivers of the charge of this quarter were the New York non-performing loan, and we also had some charge-offs related to the indirect consumer portfolio. We are not expecting a similar level of charge-offs coming from the New York portfolio in the next quarters.
spk02: Yeah, and Sede, to add to that, that's why I gave those comments around the $217 million that's left. The portfolio is 21 properties, 12 sponsors. It All performing, we've got a small credit that we've got on our watch list, you know, based on payment history. But I would tell you that, you know, in terms of the size issues, some of the issues that we've had, you know, we've got it already either in NPA, right, because that's the one big REO that we still have. Which, by the way, just making a comment, we're making a lot of progress there. We did get the permits to be able to open the accessibility on that one. I just think we're in a little better place as it relates to what's going to happen there and being able to get that thing moved hopefully here in 2024.
spk04: That's helpful. One last thing, just want to make sure I heard the NIM guide correct. I know it says flat in the first half of the year in the 2024 outlook, but I think I heard you say that that was going to step back down actually to the 350 and 360 range because of that loan recovery piece. Did I write that down correctly?
spk07: Yes. We are expecting to stay within the 350 and 360 range in the first half of the year.
spk02: Yeah. Fede, we think we hit the inflection point, right? I think if you now look at which originally we were thinking wouldn't come until 2024, You know, we obviously, with a bunch of different moves we've made, got there quicker, you know, and that's actually one of the real positives out of the fourth quarter.
spk04: Got it. Well, that makes sense. I like what Michael said. It sounds like you definitely have some profitability growth in the future here. So I'll step back. Thanks for taking my questions.
spk01: Thank you.
spk04: Thanks, Freddie.
spk03: Thank you. Our next questions come from the line of Russell Gunther with Stevens. Please proceed with your questions.
spk06: Hey, good morning, guys. Good morning, Russell. Just a quick follow-up on the margin discussion. Can you guys share what your interest rate assumptions are that are underlying that guide?
spk07: So from a NIM perspective, what we're expecting, at least in the first half of the year, is for the loan portfolio to stay pretty flat or loan production that's coming on to the portfolio to be in the higher end. And from the expense standpoint, we're seeing that the overall, we got to the point where pretty much everything has reset to the current rate level. So we're expecting cost of funds to stay pretty flat. What you're going to see, Russell, is that in the first the first quarter we have a timing component. We have a timing component related to the reallocation of the funds that come from the multifamily portfolio. So some of those will be placed in liquid assets as we're able to redeploy them into the loan portfolio, which will be able to take us to the higher end of the range that we provided guidance on by the end of the second quarter.
spk06: Okay, thank you, Shari. And then I guess, In terms of your expectations for bed rate cuts or staying stable, just what is baked into the margin guide for 24?
spk07: For the first half of the year, we have a rate pretty stable. We are incorporating some rate cuts in the second half of the year. We have modeled from light haircuts up to six cuts on rates through the end of the fourth quarter.
spk06: So, okay, so the margin guide includes six Fed rate cuts. No, no, no.
spk02: What Sherry's given you, Russell, is we've looked at a sensitivity of none to up to that many. You know, our projection is that there will be several in the second half of the year.
spk07: Right, but the guidance, Russell, that was shared was through the end of the second quarter, for which our assumption is no cuts.
spk06: Right. Yep, okay, understood. Thank you guys for clarifying that. I guess I would ask then on the beta assumption, so cumulative 47% on the way up, how do you expect that to trend on the way down, as you guys are thinking about those three cuts in the back half of the year?
spk07: Right. So if we think about our current portfolio and we think about, let's say, our average maturities on customer deposits, and we think about our interest-bearing products resetting faster – we should be thinking of with a cut of 25 basis points, we're thinking of a beta closer to 40%.
spk06: That's great, Sherry. Thank you. And then just switching gears, final question for me, guys, really strong expectations. Any color you could share in terms of loan mix drivers? And then I think, Sherry, in your expense comments, you mentioned additional cost around hiring folks. if that is related to any loan growth expectations as well.
spk02: Yeah, look, I think on both sides of, you know, as I said, I've referred to it as consumer and corporate, and in our consumer, it's predominantly additions we'll continue to make in private banking. We have an already strong team that's done a great job, and we believe, and as I mentioned, we have a lot of people that have a strong interest in working with us I think you know the reputation of building through even you know with the some of the ups and downs we've had in the financial results the underlying performance of the company the growth trajectory people you know all the branding we've been doing seeing us in the community we had a lot of people that have a strong interest in being part of our team same thing is true on the corporate side we've added some great folks to an already good team I'm a very solid team for sure and I we are getting strong interest there. So it's a combination of, remember last year we built throughout the year, and now you're going to layer even more personnel in, and basically to put more folks in markets where we think there's great opportunity, where we've got strong presence already throughout Miami-Dade. We know that we can add incrementally to a great team we've got in Broward, and to build even further in Miami. Palm Beach, right? So just here alone in South Florida. And, you know, as we've talked about, we put a new regional headquarters that'll be opening. We also have the new Tampa, our first facility, branch facility going in there. There's going to be additional there as well. So, you know, we just see that, you know, we're taking advantage of a lot of market recognition and a lot of people talking about us to add quality folks in both sides.
spk06: That's great. Thank you, Jerry. And thank you both for taking my questions. Yep.
spk01: Thank you, Russell. Thanks, Russell.
spk03: Thank you. Our next questions come from the line of Will Jones with KBW. Please proceed with your questions.
spk05: Hey, Greg. Good morning, guys. Good morning. Hey, so I just wanted to stick on the growth discussion for a second, Jerry. The outlook, it really is a strong, particularly on the deposit side. I know a lot of your peers would be We really cherish being able to grow deposits at that pace, but what are you having to pay on new deposits to attract that kind of growth, you know, in this upcoming year?
spk02: Yeah, no, you know, I don't know that it's as much to pay on the deposits. It's asking for the business. I think, you know, this is a shift, a cultural shift in our company where we've really emphasized, you know, I've been talking about it, you know, from the previous quarters about deposits first is job one And I just think asking for the business, right? We had been very siloed in approach, you know, years ago. And, you know, the change culturally in the company, it's coming through in the numbers. I actually think, you know, Sherry made a great observation in her comments that, you know, we've almost got an incredible opportunity. Not almost. We have an incredible opportunity. because of the new treasury management platform coupled with a much smoother account opening process on the consumer private bank side, where it's only a couple of steps. I'm really excited to see the change I think we can make in non-interest growth, where as opposed to it having to be, hey, we're growing because we're out issuing time deposits or high-rate money markets.
spk05: Yeah, no, that makes total sense. And are you seeing any green shoots in, you know, the international deposit base? I know you guys have been, you know, really excited about maybe trying to see an inflection point and, you know, and the growth of deposits there. Is any of the guidance, you know, factoring, you know, growth within that international deposit base?
spk02: You know, it's an area where we're, I'll call it the strategy is evolving. We think we've got the right marketing, the right intel that we're developing. And we're going to give you guys, you know, as we come into, I'll call it conference season, probably more and more, you know, from the investor presentations, more details on how that's evolving. So I would tell you it's an area where the team is working hard. They are definitely getting new business. We have some areas where we want to sort of, I'll call it fine tune and focus on. And so that's one where I would say maybe by the mid-February, you know, later first quarter, we'll be able to give even more color about how that's going to play out for 2024.
spk05: Yeah, okay, that's great. And then last one for me, this is, you know, maybe more technical, and I think I might have even found the answer in the slides, but With the multifamily loan sale, within that $30 million charge you guys took, I'm assuming that that was, you know, mostly if not all, you know, rate-related. Was there a credit-related piece to the, you know, that you may have charged off with the loan sale? Or could you just kind of give us the breakdown?
spk02: Yeah, no, Will, they were all performing. They were all high-quality. There's low loan-to-values on those, no issues on those properties.
spk05: Yeah, okay. Any other, you know, larger, you know, chunkier pieces of the portfolio that you may look to do, you know, a similar strategy with? Or was this really just kind of a one-time, you know, opportunistic?
spk02: Yeah, this is definitely a one-time opportunistic evaluating. Again, I think we've kind of hammered around this a lot, you know, hammered this home that we want to be a relationship-based organization, you know, and while There's others that may not take that same approach as us. That's one of the biggest drivers of why we identified that portfolio in particular as one that made sense for us to exit and to basically replace it with, you know, knowing the sponsors and having a much broader relationship with those sponsors.
spk05: Yeah, okay. Great. Well, thanks for the color.
spk02: Sure.
spk07: Thank you.
spk03: Thank you. Our next questions come from the line of Steven Scotland with Piper Sandler. Please proceed with your questions.
spk00: Hey, good morning, everyone. Just first, I was curious if you had an update on the consumer balances. I don't think I saw that in the slide deck anymore, the indirect consumer. Just kind of curious where that falls and what the pace of runoff you think is from here. Yeah, around the indirect consumer.
spk02: Right? Stephen, just to clarify, you're talking about the indirect? Yeah.
spk00: Yeah, I think it was in the slide previously, maybe $250 million or something.
spk02: Yeah, it's about $220 million, you know, and I think as Sherry commented, the expectation is based on current payment rates, it'll be off the books over the next, I guess the best way to say it is by the end of 2025. you know, maybe a little bit residual into the first quarter of 26. Okay.
spk00: And I know there was kind of a question around that book with charge-offs in a sense, but obviously, you know, charge-offs have been elevated kind of the last couple years. What do you think a normalized level of net charge-off is for you guys in this kind of environment with the book you have today after kind of clearing the decks a bit from here?
spk07: Yeah, if we remove these charge-offs from the indirect consumer and we look at a more normalized charge-off level, we're seeing a close to 30 basis.
spk00: Okay, 30 bids X the indirect consumer, and then that'll just kind of be piecemeal over that two years as that book runs off. Right. Yeah.
spk02: Look, I think what's happening, Stephen, in that portfolio is, you know, you remember these are debt consolidation loans. You know, it's a pretty granular portfolio. It's not concentrated in any one state, but I do think it reflects, you know, the consumer debt load and the pressure that's on the consumer, and so we're seeing that. I think the one portfolio, you know, because of the different vintages, is actually starting to show signs of, you know, the charge-off levels improving, you know, or I guess I should say declining, so... you know, we're hopeful that we'll continue to see that.
spk00: Yeah. Okay. And then just kind of last question around the NIM. So it sounds like, so we're not taking the 372. I guess if we take the 372 minus the loan recovery, so kind of starting from 356 and then kind of flattish from there. And then even with, if you could just repeat what you have in there from a FedCup perspective. But how do we think about the ability to expand NIM with the asset sensitivity there? I would have expected with it down 100 basis points, I think you showed, down 3.1%. So kind of wondering how that plays out in a down rate environment that we think we might see moving forward.
spk07: Right. So going back to the first part of the question, when we think about the NIM for the first quarter of 2024, We are expecting to see a slight reduction on average balance sheet size because we're going to use a portion of the proceeds to pay off institutional funds. That should pick up once we continue with the loan pipeline materializing, right? So that's what's going to make us go from the lower to the higher end of the range of the guidance we provided through the end of the second quarter. As we think about the NIM more prospectively and how we're managing the rates or protecting the balance sheet from a downward trend, there are a couple of things we're thinking about. So the first one is from the investment portfolio, the purchases we have made and that we're looking forward from an expectation are on fixed rate securities, but also looking at the quality of those securities and characteristics that slow down the level of prepayments in a typical prepayment speed environment that we would have on a downward trend. The second piece is on the loan side, and I think I mentioned something of this in my comments. It's the floor that we are using for variable rate loan production and also looking into fixed rate loan production as well. That, together with the resets of our liability side and seeing an increase in interest-bearing products versus CDs, are positioning our balance sheet in a better spot for a downward trend.
spk00: Okay. That's extremely helpful. And just last thing, I guess, is the core spread you're seeing today, what are you seeing kind of on new loan production versus where new deposits are coming on? I guess as we think about this, maybe 15% loan and deposit growth next year, kind of what that core spread looks like.
spk07: I think the spread is pretty similar to what we're seeing in the fourth quarter production. I think we got to a point where the deposit side already maxed the rate level and the loan production is already at the high level as well. So I think if we're going to think about projections for the first half, I would see a pretty stable level versus the fourth quarter of 2023. Okay.
spk03: Thanks for the time, guys.
spk06: Thank you.
spk03: Thank you. We have reached the end of our question and answer session. I would now like to turn the floor back over to Mr. Jerry Plush for any closing remarks.
spk02: Yes. Thank you, everyone, for joining our fourth quarter and full year earnings call. We're excited about the foundational progress we made throughout 2023 toward becoming a stronger, higher-performing bank. As I noted earlier, we're now focused on executing on our strategy to show how it all comes together. Thank you again for your continued support and interest in Amerit, and have a great day.
spk03: Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.
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