Amerant Bancorp Inc. Q4 FY2023 Earnings Call

Greetings. Welcome to the Amerant 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. 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.

Thank you, Darryl. Good morning, everyone and thank you for joining us to review Amerant Bancorp's fourth quarter and full year 2023 results. On today's call are Jerry Plush, our Chairman and Chief Executive Officer, and Sharymar 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.

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 Amerant 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 note that work continues in a number of areas post conversion as more enhancements are on the way. Moving on to what we will cover on today's call, there are a significant number of items to touch on, including the commercial real estate sale and 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-K covering these on January 16, 2024, but it's important to give additional context on today's call. While these actions created additional non-routine gains or charges this quarter, we expect this to be behind us for 2024 and as mentioned, best position us to execute on our growth strategy. I also want to note we will cover credit in detail and we've added new slides to the presentation with more detail on credit components which Sharymar will be covering shortly. So let's turn to Slide 3 and here we've outlined a number of key items that took place in the 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 reclassified $401 million of Houston based multifamily loans as held for sale and recorded a non-cash charge of $30 million before taxes in the fourth quarter. This sale is expected to be completed this month. As $370 million of these loans are variable-rate and at an average yield of 6.7%, this sale protects the Company in a projected declining rate environment. 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-cost 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 rightsizes our operations in Houston where loans prior to the sale exceeded deposits. Now, let's turn to New York. Here we reduced higher-risk assets as we completed the sale of the highest New York City CRE exposure and exited the nonperforming loan relationship in New York City we discussed on our third quarter call. Our strategy is to exit the remaining New York City loan portfolio. What remains is performing and totals $217 million and consists of 21 properties in 12 relationships. We do have one small credit, which is under $2.5 million that is being monitored. We repaid $585 million in Federal Home Loan Bank advances recording a $6.5 million gain for 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 Amerant Mortgage and rightsized staffing given the current rate environment. We approved the plan for the dissolution of the Elant Bank & Trust, our Cayman subsidiary. We wrote off goodwill of $1 million related to the mortgage company and $700,000 in goodwill intangibles related to Elant, with expected annualized savings of $300,000 from closing Elant. We also rationalized headcount across multiple units, resulting in expected annual savings of $1 million after having incurred severance expenses of $1 million. We completed the core system conversion and are actively managing post conversion items. We recorded $1.6 million in final conversion costs related to FIS and software expenses in the fourth quarter of '23. We also restructured bank-owned life insurance to include more current team members in the plan and enhance yield going forward with an earn-back period of approximately two years. This resulted in income tax expenses and other charges totaling $4.6 million. I will now provide a brief overview of our financial position in the fourth quarter and year, and then I will turn it over to Sharymar to go over the details. So let's turn to Slide 4 now for financial highlights for the fourth quarter. Looking at the income statement, diluted loss per share for the fourth quarter was $0.51. This is primarily due to the net impact of those non-routine items 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 Sharymar 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 continue to experience the challenges of a sustained high interest rate environment along with market competition. As a result of 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 $4.5 million from the $8 million in the third quarter and again, Sharymar will cover the credit components in detail shortly. Noninterest income was $19.6 million, down from $21.9 million in the third quarter while noninterest expense was $109.7 million, up $45.3 million from the third quarter. Both noninterest income and noninterest expense contained 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 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 billion from the $7.1 billion in Q3. Our total securities portfolio was $1.5 billion, 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 were part of our ALM actions given an expected decline in rates in 2024. Moving on to capital, our total capital ratio as of Q4 ended at 12.19% compared to 12.7% as of Q3, 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, which substantially improved in the fourth quarter from $97 million seen in the third quarter of '23. Lastly, as of the fourth quarter, our Tier 1 capital ratio was 10.6% compared to 11.08% as of Q3 and it's worth noting that on January 17, our Board of Directors approved a dividend of $0.09 per share payable on February 29, 2024. Moving on to Slide 5, 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, which was 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 run off by mid-first quarter 2024. Our ratio of loans to deposits decreased this quarter to 92.4%. 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 and expect to be back in this range soon. Let’s turn now to Slide 6, showing 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, which is up $340 million or 6.7% compared to the third quarter. International deposits account for 31% of total deposits, totaling $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, reflecting the granularity and stability of our deposit base. As I shared in previous calls, we intend to leverage our infrastructure and capabilities 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 time deposits, stood at $5.6 billion at 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 noninterest-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, primarily due to 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. I will now turn things over to Sharymar, who will cover key metrics, other balance sheet items, credit quality, and third quarter results in more detail.

Thank you, Jerry, and good morning, everyone. As part of today's presentation, I will share more details about our financial position and performance. Turning to Slide 7, I'll begin by discussing our key metrics for the quarter. Noninterest-bearing deposits to total deposits decreased to 17.8% from 18.2%. Despite the challenges of customers seeking higher interest rates and market competition, we continue to work on our deposits-first focus and increasing demand deposit accounts by building relationships in our markets. While the ratio slightly decreased, total noninterest-bearing balances in fact increased, although not at the same speed as interest-bearing deposits. Net interest margin improved 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 NIM 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 noninterest expense items Jerry just covered. ROA and ROE in the fourth quarter were a negative 0.71% and negative 9.22% respectively, due to 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 to provide a clearer understanding of 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 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 continue until we complete commissioned applications in the first quarter of 2024 and thereby reduce these costs. Moving on to Slide 8, let's 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 decreasing market rates during the quarter. We added a new chart to show the expected repayments and maturities of our investment portfolio for 2024, representing liquidity available to support growth in higher interest-earning assets. Moving on to the rate composition of our portfolio, 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 the high credit quality of the portfolio. As in previous quarters, I would like to reference the impact of 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 by $35 million after-tax compared to a $19 million decrease 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 shock. We had an increase of $9.4 million after-tax for the full year of 2023. It's also important to mention that our tangible common equity ratio ended at a solid 7.3% after considering the impact of changes in valuation of our AFS portfolio. Note that 82% of the total portfolio has government guarantees, while the remainder is rated investment grade. Continuing on to Slide 9, let's discuss our loan portfolio. At the end of the fourth quarter, total gross loans were $7.3 billion, up 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 Q4 '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 speeds, this portfolio will be off the books by the first quarter of 2026. As Jerry mentioned, during the fourth quarter, we completed the sale of the high CRE exposure and exited the nonperforming loan relationships in New York as part of the company's strategy to exit its remaining New York City loan portfolio. The CRE loan sale resulted in a loss on sale of approximately $2 million in 4Q23 and the nonperforming loan was modified and paid off. Our loan portfolio had a yield of 7.09% in Q4 '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 CRE 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 a strong sponsorship peer profile based on AUM, net worth, and years of experience for each sponsor. As of the end of Q4 '23, we have 31% of our CRE portfolio in top-tier borrowers. There is no significant tenant concentration in our CRE retail loan portfolio, as the top 15 tenants represent 22% of the total. Our underwriting methodology for CRE includes sensitivity analysis for multiple risk factors such as interest rates and their impact over the debt service coverage ratio, vacancy, and tenant retention. As Jerry mentioned, during the first quarter, we classified $401 million of our multifamily loans in Houston as held for sale. The transaction is expected to close later this month and had an impact on tangible common equity of a reduction of approximately 23 basis points on day one and to common equity Tier 1 of an improvement by approximately 12 basis points. With the process of the sale, we expect to reduce in Q1 '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 recorded 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 the 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 allocated reserves. This was offset by the exit of the CRE year loans totaling $23.3 million with an associated charge-off of $10.3 million, of which $8.5 million wasn't specific reserve in previous quarters. The ratio of non-performing assets to total assets was 56 basis points, down 1 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, an increase from two times at the close of the fourth quarter of 2022. Now moving on to Slide 12, which is a new slide 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-offs, of which $12.1 million are incremental charges in the quarter, primarily related to the indirect consumer portfolio, the exit of the New York City nonperforming loan, and some smaller balanced business loans. This was offset by a $4.5 million release due to the transfer of the Houston multifamily loans to held for sale. These are offset by $2.6 million related to credit quality and macroeconomic sector 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 contingencies. 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 nonperforming loans that we exited in Q4 for which we had recorded specific reserves of $8.5 million in Q3. 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 indirect purchase consumer loans and $3.3 million due to multiple smaller balanced banking loans. The impact of provision due to these incremental charges was $12.1 million this quarter. We introduced Slide 14 this quarter to provide more color regarding criticized loans. Special mentioned 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-accrual during the quarter as mentioned in the previous NPL 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 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, no beta calculation for this period was observed. However, we saw a cumulative beta of approximately 47 basis points since the beginning of the interest rate up cycle due to the combined effect of rate increases, transactional deposits repricing of time deposits that had not repriced at higher rates, and 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 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 Q4 '23 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 stand at 3.56%, which is stable when compared with the Q3 NIM at 3.57%. The NIM reflects a higher yield of our earning assets offset by the higher cost of funds. We expect the margin to remain stable through the second quarter. We will provide more information regarding 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 risks as we expect the downward trend in interest rates starting in 2024. As mentioned in previous calls, we continue to position our portfolio for a change in the 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 that within the variable-rate loans, 36% are indexed to SOFR. Our net interest income sensitivity profile remained 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 past calls during this interest rate cycle, I would like to mention the change, in this case, the improvement in AOCL 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. Moving on to Slide 18. Noninterest 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, a $0.7 million reduction adjustment in connection with enhancing BOLI during the quarter, lower fees on customer deposits in the fourth quarter related to the FIS conversions, lower gains on the early termination of FHLB advances, and lower loan level derivative income due to fewer new swap contracts during the quarter. Offsetting the decrease in noninterest income were higher cards and trade financing servicing fees. We consider $5.7 million of our noninterest income as non-recurring items, a decrease compared to $6.9 million in the third quarter. Core noninterest income was $14 million in the fourth quarter compared to $15 million in the third quarter. Amerant's assets under management in custody totaled $2.3 billion as of the end of the fourth quarter, which was $197 million or 9.4% from the end of the third quarter. This increase was primarily driven by increased market valuations following the market value we saw in the fourth quarter. Turning to Slide 19. Fourth quarter noninterest 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 charge in connection to the transfer of the Houston CRE loan portfolio from loans held for investment to loans held for sale. Higher professional fees in the fourth quarter expenses included the recurring expenses for FIS for the full quarter, whereas Q3 '23 only included expenses for a portion of September. Higher salaries and severance expenses driven by restructuring of business lines and other restructuring activity were also observed. Goodwill impairment due to the consolidation of Amerant Mortgage and dissolution plan of Elant Bank & Trust in Cayman, as well as other expenses related to BOLI restructuring, contributed to the increase in noninterest expense. This was partially offset by lower occupancy and equipment expenses since there were no expenses associated with fresh closures during the quarter. We concluded the quarter with 682 FTEs, down from 700 in the third quarter following strategic reductions in headcount across multiple units. Moving on to Slide 20, we reported a fourth quarter diluted loss per share of negative $0.51 on a net loss of $17.1 million. We recorded an income tax benefit, which positively impacted our diluted EPS. Non-interest expense was higher during the fourth quarter, which resulted in the significant net impact of non-routine items on EPS. Now I'll offer some outlook for the first quarter 2024 and 2024 overall. To summarize on the next slide, we expect annual loan growth of approximately 15%, and our projected annual deposit growth will match loan growth. We intend to focus on improving the ratio of noninterest-bearing to total deposits. The introduction of a new treasury management platform and a new digital account-opening tool should assist in this regard. Our loan to deposit profit target will remain at 95%. The net interest margin is expected to be stable compared to the normalized Q4 '23 results at 3.50% to 3.60% 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, aiming to achieve a 60% efficiency ratio in the second half of 2024 as we grow. We will continue executing prudent capital management, balancing between retaining capital for growth and buybacks and dividends to enhance returns. With that, I pass it back to Jerry for the 2024 overview and closing remarks.

Thanks, Sharymar. To conclude, I have some comments on how we view 2024. This year is significant as we transition from a multi-year transformation phase 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, our primary focus is on 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 significant interest from quality candidates wanting to join our team. The first half of 2024 will also reflect the incremental expense post conversion as we decommission previous systems. The emphasis will shift from conversion to accelerating our digital transformation efforts. We have a great team on board driving our efforts, and utilizing AI will be part of this which we'll update everyone on throughout the year. Improved self-efficiencies, as well as front and back-office efficiencies, are our top priorities. We are excited to open our new locations in Downtown Miami, Fort Lauderdale, and Tampa in the first quarter of 2024, alongside our new regional offices in Tampa. For the second half of 2024, we expect to show the growth and profitability resulting from executing our strategic plan. In closing, we reaffirm our commitment to be the bank of choice in the markets we serve. We have been retooling and building for some time to create something special and we believe this is our year to demonstrate how it all comes together. I will now stop, and Sharymar and I will look to answer any questions you have. Daryl, please open the line for Q&A.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Michael Rose with Raymond James. Please proceed with your questions.

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 continue to be in or is the focus kind of to just focus on core South Florida operations at this point? I would just love some overarching thoughts. Thanks.

We want to emphasize that the portfolio of loans we mentioned was mostly non-core and not based on broad relationships. We don't maintain full relationships with the sponsors. The remaining portfolio we have in Houston is strong and aligns with our operational strategy there. Earlier, I noted that Houston's loans in relation to deposits weren't really self-sustaining, and we believe this move helps us better align the operations. We see significant opportunities in all the markets we serve. Currently, our brand recognition has increased in South Florida due to our recent efforts, but that doesn't indicate a lack of interest in exploring opportunities across our entire area of operations.

That's helpful. And then maybe for Sharymar, just kind of a modeling question. Certainly a lot of moving parts on the expense side. I appreciate the color in the slides to get down 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 were so many moving parts what we should be kind of using as a base, and just given that you guys have some additional investments, it looks like in the first half of the year. How should we think about at least expenses over the next quarter or two? Thanks.

Sure. What we're seeing in terms of forecast for 2024 is that we should be stable or even slightly higher, closer to 68% in the first few quarters of the year. You're going to see some drop-off of technology costs or a re-composition of the expenses and higher investments in personnel as we work towards growth later on in the year. I think using a 67% to 69% should be a good range for expectations in the first half of the year.

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 took the reins. Are we done with the majority of the large moves and could we start to see some cleaner results once we get past the first couple of quarters of the year? It sounds like you're shaping up to have solid balance sheet growth this year, both loans and 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 this year and really into 2025. So just wanted to get some color on where you think you are with those efforts and if we could get sufficiency ratio kind of sub 60% driving ROA above 1% and good returns. Not asking for explicit guidance but it does seem like the path forward here, especially once 2025 arrives, is pretty powerful from an earnings perspective. I just wanted to get your thoughts. Thanks.

Thank you, Michael. I would respond by saying we have the right leadership in place, with the physical distribution changes mostly complete. Yes, we will do some additions, but it won't be as significant in terms of new retail or regional hubs. With the conversion behind us, we believe our best days are ahead. It's all about executing our plan, and we've got the right people driving growth and profitability. We're excited about the journey. It's been quite a transition and we genuinely believe we are beyond the transformation phase and ready to grow and execute.

All right. Thanks for all the color. I'll step back.

Thank you.

Thank you, Mike.

Thank you. Our next question comes from Feddie Strickland with Janney Montgomery Scott. Please proceed with your questions.

Hey, good morning, everybody.

Good morning, Feddie.

Good morning.

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. Are expenses flat from the second quarter or do they come back down as some of these dual systems turn into single systems? I guess my question is as we go back towards like a $60 million level or do they stay relatively flat in the back half of the year?

Yeah, we expect that in the second half of the year, expenses will stay flat compared to earlier in the year. The improvement in the efficiency ratio will be driven by the growth component.

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 NPL out of there. Does that mean we should expect charge-offs to step down a bit from here, primarily driven by the consumer portfolio than any other one-off items that might come up in the next couple of quarters?

Yes, from a charge-off perspective, you're right. The drivers of the charge-off this quarter were related to New York nonperforming loans. We are not expecting a similar level of charge-offs coming from the New York portfolio in the next quarters.

To add to that, that's why I referenced earlier that the $217 million left on the portfolio consists of 21 properties with 12 sponsors, and it's all performing. We have one small credit that we're monitoring based on its payment history. But we've made a lot of progress in resolving past issues.

That's helpful. One last thing, just wanted to make sure I heard the NIM guidance correct. I know it's flat in the first half of the year in the 2024 outlook, but I think I heard you say that was going to step back down to the 3.50% to 3.60% range because of that little recovery piece. Did I write that down correctly?

Yes, we are expecting to stay within the 3.50% and 3.60% range in the first half of the year.

We think we've hit the inflection point, and the positive trend resulting from actions we've initiated has actually come sooner than expected.

Got it. Well, that makes sense. I like what Michael said. It sounds like there is definitely profitability growth in the future. So, I'll step back. Thanks for taking my questions.

Thank you.

Thanks, Feddie.

Thank you. Our next question comes from Russell Gunther with Stephens. Please proceed with your questions.

Hey, good morning guys.

Good morning.

Good morning, Russell.

Just a quick follow-up on the margin discussion. Can you share what your interest rate assumptions are that are underlying that guidance?

From a NIM perspective, we're expecting, at least in the first half of the year, for the loan portfolio to stay pretty flat or for loan production coming onto the portfolio to be at the higher end. We're seeing that the overall cost of funds has reset to the current rate level. What you will see in the first quarter is a timing factor regarding the funds coming from the multifamily portfolio, which will be placed into liquid assets as we can redeploy them into the loan portfolio. This will take us to the higher end of the range of guidance provided for the end of the second quarter.

Okay, thank you, Sharymar. And then in terms of your expectations for Fed rate cuts or staying stable, just what is baked into the margin guide for 2024?

For the first half of the year, we're assuming rates will stay stable. We are anticipating some rate cuts in the second half of the year, modeling up to six cuts through the end of Q4.

Okay. So the margin guide includes six Fed rate cuts.

No, Sharymar's explanation is about the sensitivity analysis. The projection is that there will be several cuts in the second half of the year.

Okay, understood. Thank you for clarifying that. How do you expect the cumulative beta to trend as you are thinking about those three cuts in the back half of the year?

We believe that based on our current portfolio, and average maturities on customer deposits, we should see a beta closer to 40% with a 25 basis point cut.

That's great, Sharymar. Thank you. Just one final question. Can you provide color in terms of loan mix drivers and any additional cost associated with hiring new teams as leverage for loan growth expectations?

Both consumer and commercial sides will see additions. In the consumer segment, we will continue building our private banking team, leveraging a strong workforce. There's also significant interest from candidates wanting to join our growing team. The same applies to the corporate side where we've added exceptional talent already. The investments we're making in personnel will help strengthen our presence in high-opportunity markets, particularly in South Florida. We are enthusiastic about enhancing our operations in this area.

That's great. Thank you, Jerry. And thank you both for taking my questions.

Thank you.

Thanks, Russell.

Thank you. Our next question comes from Will Jones with KBW. Please proceed with your questions.

Hey, great. Good morning, guys.

Good morning, Will.

Good morning.

So I just wanted to stick on the growth discussion for a second. Jerry, the outlook really is strong, particularly on the deposit side. I know a lot of your peers would cherish being able to grow deposits at that pace. What do you have to pay on new deposits to attract that kind of growth in this upcoming year?

I don't know that it’s much to pay on the deposits. It’s about asking for the business. This is a cultural shift in our company where we've really emphasized deposits-first as job one. We're building relationships rather than relying solely on high-rate offerings. Sharymar pointed out that our treasury management platform and streamlined account opening process should create positive momentum and enhance noninterest-bearing growth.

Yes, that makes total sense. Are you observing any green shoots in the international deposit base? I know you have been excited about growing deposits there. Is that guidance factoring in growth within the international deposit base?

It's an evolving strategy. We've developed the right marketing and intelligence, and will provide updates once we hit mid-February and into the first quarter. Our team is working hard to gain new business in this segment.

Okay. That's great. And then last one for me, this is more technical. With the multifamily loan sale, within that $30 million charge you took, I assume that was mostly, if not all, rate-related. Was there a credit-related piece to the charge-off with the loan sale or could you just give us the breakdown?

Yes, those loans were all performing and high quality, with low loan-to-values, so there were no significant issues with those properties.

Okay. Any other larger, chunkier pieces of the portfolio that you may look to do a similar strategy with, or was this just really a one-time opportunistic decision?

Yes, this is primarily a one-time, opportunistic evaluation. We aim to be a relationship-driven organization, moving away from non-core strategies.

Okay, great. Well, thanks for the color.

Sure.

Thank you.

Thank you. Our next question comes from Stephen Scouten with Piper Sandler. Please proceed with your questions.

Hey, good morning everyone. Just firstly, 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 curious where that falls and what the pace of run-off you think it is from here?

The indirect consumer balance is around $220 million, and based on current payment rates, we expect it to run off by the end of 2025, with a bit of residual in the first quarter of 2026.

Okay. And I know there was kind of a question around that book with charge-offs. Elevated charge-offs have been seen over the past couple of years. What do you think a normalized level of net charge-offs is for you guys in this kind of environment with the book you have today after clearing the decks a bit?

Excluding indirect consumer, we're seeing a normalized charge-off level close to 30 basis points.

Okay, 30 basis points ex-indirect consumer and then that'll just kind of be piecemeal over the next two years as that book runs off.

Right.

The indirect consumer portfolio consists of debt consolidation loans that are granular. We're observing improving charge-off trends in this portfolio as well.

Yeah. Okay. And then just kind of last question around NIM. It sounds like, so we're not taking a 3.72%. If we take that 3.72% minus the loan recoveries starting at 3.56% and then kind of flattish from there because you could just repeat what you have in terms of Fed cut perspective, but how do we think about the ability to expand NIM with the asset sensitivity there?

Considering the first quarter of 2024, we expect a slight reduction in average balance sheet size due to funds used for paying off institutional deposits. With the loan pipeline materializing, we foresee an increase as we move into the higher end of our guidance range by the end of Q2. Regarding NIM, we believe we can protect our balance sheet from a downward interest rate trend through our investment portfolio composition and variable loan rates with floors. This should allow us to manage the downward trend effectively.

Okay. That's extremely helpful. Just the core spread you're seeing today, what are you seeing on new loan production versus where new deposits are coming in, as we think about this 15% loan and deposit growth next year? What does that core spread look like?

The spread is pretty similar to our observed levels during Q4 production. The deposit side has nearly maxed out rate levels, and loan production has also reached high levels. We expect this to remain stable in the first half of 2024.

Okay. Thanks for your time, guys.

Thank you.

Thank you.

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.

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 our strategy to show how it all comes together. Thank you again for your continued support and interest in Amerant. Have a great day.

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.