Amerant Bancorp Inc. Q2 FY2024 Earnings Call

Good morning, and welcome to the Amerant Bancorp's Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the call over to Laura Rossi, Head of Investor Relations. Thank you. You may begin.

Thank you, Daryl. Good morning, everyone, and thank you for joining us to review Amerant Bancorp's second quarter 2024 results. On today's call are Jerry Plush, our Chairman and CEO; and Sharymar Calderon, our Executive Vice President and CFO. 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 us today to discuss Amerant's second quarter 2024 results. To start, I'd like to call your attention to how this quarter underscores the continued focus we have demonstrated toward executing on our strategic plan and driving growth, excluding the impact of $5.6 million of deal-related expenses in connection with the sale of the Company's Houston franchise as we disclosed in Form 8-K on July 1, 2024. Our core business demonstrated strong performance, highlighted by solid loan growth, continued improvement in the net interest margin and net interest income. Higher non-interest income and only a moderate increase in expenses compared to the first quarter, primarily from investments we are making in personnel and market expansion. And while total deposits declined by $62.2 million, organic deposit growth in the second quarter nearly offset the runoff of higher-cost municipal deposits and reductions in two large corporate deposit relationships this quarter as well. However, the sustained high interest rate environment year-over-year and higher operating costs have impacted several of our borrowers, as we will cover in greater detail in just a few minutes. This quarter, we saw that upon the receipt of updated financial statements from certain borrowers and covenant testing, there were clear signs for five borrowers to be downgraded to substandard, three of which were previously classified as special mention. Two of the downgraded loans are larger relationships, both of which are paying as agreed. One is the commercial and industrial legacy loan for $26.8 million, and the other, an owner-occupied loan for $28.2 million, which are the more significant drivers of the increase in non-performing loans quarter over quarter. Furthermore, regarding the aforementioned C&I legacy credit, again while paying as agreed, we booked $8 million in provision this quarter resulting from running scenarios from multiple outcomes. We remain optimistic about a positive outcome here in the next several months. And regarding the owner-occupied credit, we are in a very strong collateral position in the 40% range. I think in the case of the downgrades this quarter, the guidance is clear that where there is a sign of a covenant not being met or other weaknesses exhibited, that downgrading is appropriate and that's what we did. More to come regarding credit in the upcoming slides, including the other components of the provision quarter over quarter. We also continued this quarter to execute on prudent asset liability management. Recent results on inflation and industry action to these reports suggest a positive outlook for potential interest rate cuts in the upcoming quarters. Therefore, we continue to position our balance sheet in light of this potential change in interest rates. Regarding our Houston franchise, we are continuously monitoring loan and deposit balances to be sold and we reclassified assets and liabilities to held-for-sale this quarter, which resulted in the charges recorded this quarter associated with this transaction. We still anticipate closing in the fourth quarter of this year, and at that time, the premium from the sale would be recognized as income, net of any final investment banking and legal expenses. So, we'll turn now to Slide 3, and here, you can see that total loans increased by $316.5 million, all driven by organic loan growth. The loan pipeline is strong for the third quarter as we've already closed on approximately $80 million month-to-date here in July and $40 million more is expected before month end. Total deposits decreased $62.2 million as I referenced earlier, as organic deposit growth was offset by the reductions on higher-cost municipal and the two large commercial depositors. We increased Federal Home Loan Bank advances by $50 million to add three-year fixed rate funding as part of our asset liability management strategy. Our assets under management increased $94.2 million to $2.45 billion, primarily driven by market valuations and net new assets. Non-interest income increased to $19.4 million, primarily driven by higher income from loan derivatives in the mortgage business. Non-interest expenses increased to $73.3 million. However, excluding the non-routine transaction costs in connection with the sale of our Houston operations, they remained at $67.7 million comparable to the prior quarter and to guidance. Regarding our expansion in Florida, we officially opened our banking center in Downtown Miami, and we hired our New Palm Beach and Central Florida Market Presidents. Additionally, we signed agreements for a new banking center in Miami Beach and for our Palm Beach regional office and a banking center there as well, both of which we expect to open in the first quarter of 2025. Note that we've received regulatory approval for both locations. We repurchased 200,652 shares for $4.4 million in the second quarter at an average price of $22.17 per share. We had 15.6 million remaining under the current approval as of the end of the second quarter. And of note, in closing on this slide, we paid our quarterly cash dividend of $0.09 per common share on May 30th of 2024. We'll turn now to Slide 4 for financial highlights for the second quarter. Looking at the income statement, diluted income per share for the second quarter was $0.15 compared to $0.31 in the first quarter. This was primarily due to the increased provision for credit losses during the quarter. The net interest income was 3.56% in the second quarter compared to 3.51% in the first quarter. The increase in margin resulted from the higher yielding loan production and lower deposit costs as we reduced higher cost municipal deposits and replaced brokered CD maturities with lower cost ones. Credit quality events continue to be an area of focus and reserve levels are carefully monitored to provide sufficient coverage. The provision for credit losses was $19.2 million, up $6.8 million from the $12.4 million we reported in the first quarter. And again, of note, one legacy credit accounted for $8 million of the provision increase. Non-interest income was $19.4 million in the second quarter, up $4.9 million from the $14.5 million in the first quarter, while non-interest expense was $73.3 million, also up $6.7 million from the $66.6 million in the first quarter. Our total assets came in at $9.75 billion as of the end of the second quarter, slightly down from the $9.82 billion in the first quarter. Our total deposits decreased slightly, as noted previously, down to $7.82 billion, compared to $7.88 billion in the first quarter. Our total loans increased by $316.5 million up to $7.3 billion, up from the $7 billion at the first quarter. Our total securities were $1.5 billion and that was up $51 million from the first quarter, and cash and cash equivalents decreased $350 million to $310.3 million at the end of the quarter. So, if we move on to capital, our total capital ratio at the end of the second quarter was 12% compared to 12.49% as of the first quarter. Our CET1 was 9.7% compared to 10.10%. Our tangible equity ratio was 7.3%, which includes $78.9 million in after-tax charge of the valuation of the available-for-sale investment portfolio. As of the second quarter, our Tier-1 capital ratio was 10.44% compared to 10.87% as of the first quarter. You'll also note that on July 24, our Board of Directors approved a dividend of $0.09 per share that's payable on August 30 of 2024. So, at this point, I'll turn the presentation over to Sharymar to cover metrics and get into the financials in greater detail.

Thank you, Jerry, and good morning, everyone. I'll begin today by discussing our key performance metrics and their changes compared to the last quarter. We continue committed to customer relationships which increased the ratio of non-interest-bearing deposits to total deposits from 17.7% in the first quarter to 18.7% in the second quarter. Aligned with the guidance shared in our past earnings call, net interest margin improved to 3.56% in the second quarter compared to 3.51% in the first quarter. As Jerry just mentioned, this is the result of higher yielding loan production and lower costs of deposits. Our efficiency ratio was 74.21% in the second quarter compared to 72.03% in the first quarter as a result of the non-routine expenses in connection with the Houston transaction. Our ROA and ROE this quarter were 0.21% and 2.68% compared to 0.44% and 5.69% respectively in the first quarter. These decreases were primarily driven by the increased provision for credit losses and non-routine expenses related to the Houston transaction Jerry just mentioned. Tier-1 capital ratio decreased slightly to 10.44% compared to 10.87% due to the change in the asset composition. Lastly, the coverage of the allowance for credit losses to total loans increased to 1.41% compared to 1.38% in the first quarter, driven by the provision for credit losses recorded this period. Moving on to Slide 6, we continue to have a well-diversified deposit mix composed of domestic and international customers. Domestic deposits, which account for 68% of our total deposits, totaled $5.3 billion as of the end of the second quarter, slightly down by $6.8 million or 0.1% compared to the first quarter. International deposits, which account for 32% of total deposits, totaled $2.5 billion, down $55.5 million or 2.1% compared to the first quarter. Total time deposits for the quarter were $2.3 billion, an increase of $65.6 million from the first quarter due to an increase in brokered time deposits of $49.8 million as well as an increase of $15.8 million in customer CDs. Our core deposits, defined as total deposits, excluding all time deposits, were $5.5 billion as of the end of the second quarter, a decrease of $127.8 million or 2.3% compared to the first quarter. The $5.5 billion in core deposits included $2.3 billion in interest bearing deposits, down $302.1 million or 11.5% versus the first quarter; $1.7 billion in savings and money market deposits, up $106.5 million or 6.6% versus the first quarter; and $1.5 billion in non-interest bearing demand deposits, up $67.5 million or 4.9% versus the first quarter. Continuing on to Slide 7, I'll discuss our investment portfolio. Our second quarter investment securities balance was at $1.5 billion, slightly up from the first quarter. When compared to the prior quarter, the duration of the investment portfolio has extended to 5.3 years as the model anticipated slower mortgage-backed securities principal prepayments due to higher market rates at the time of quarter close. The chart on the upper right shows the expected prepayments and maturities of our investment portfolio for the next 12 months, which represents a liquidity source available to support growth and higher interest-earning assets. Moving on to the rate composition of our portfolio, you can see that the floating portion remains unchanged at 12.9% compared to the first quarter. As we mentioned last quarter, we have continued positioning the balance sheet for a decreasing rate environment. Also note that 79% of our available-for-sale portfolio has government guarantees, while the remainder is rated investment grade. Continuing on to Slide 8, let's talk about the loan portfolio. At the end of the second quarter, total gross loans were $7.3 billion, up $316.5 million, or 4.5% compared to $7 billion at the end of the first quarter. This increase was organic, relationship-driven growth and despite a reduction in indirect consumer loans of $31.4 million. The single-family residential portfolio was $1.6 billion in the second quarter, an increase of $107.4 million compared to $1.5 billion in the first quarter. This amount includes loans originated during the quarter primarily done with private banking customers and commercial clients with residential income producing properties as collateral. Consumer loans as of the second quarter were $296.4 million, a decrease of $41.3 million or 12.2% quarter-over-quarter. This includes a $131.9 million in higher yielding indirect loans purchased prior to 2022 as a tactical move to increase yields. Again, we estimate that at current prepayment speed, this portfolio will mostly run off by the first quarter of 2025. Moving on to Slide 9, here we show our commercial real estate portfolio in greater detail. We have a conservative weighted average loan-to-value of 58% and debt service coverage of 1.3x, as well as strong sponsorship tiered profile based on assets under management, net worth, and years of experience for each sponsor. As of the end of the second quarter, we had 30% of our commercial real estate portfolio in top tier borrowers. We have no significant tenant concentration in our commercial real estate retail loan portfolio as the top 15 tenants represent 21% of the total. Major tenants include recognized national and regional grocery stores, pharmacies, food and clothing retailers, and banks. Turning to Slide 10, let's take a closer look at credit quality. Our credit quality remains sound and reserve levels provide sufficient coverage. The allowance for credit losses at the end of the second quarter was $94.4 million, a decrease of 1.7% from $96.1 million at the close of the first quarter. Our non-performing loans to total loans are up 438 basis points compared to 43 basis points last quarter, which I will cover in detail in later slides. Non-performing assets totaled $121.1 million at the end of the second quarter, an increase of $70.6 million compared to the first quarter, primarily due to the increase in non-performing loans Jerry mentioned in his remarks. The ratio of non-performing assets to total assets was 124 basis points, up 73 basis points from the first quarter. In the second quarter of 2024, the coverage ratio of loan loss reserves to non-performing loans closed at 0.9x, down from 3.2x at the end of the first quarter. Turning to Slide 11, we show the roll forward of special mention and non-performing loans from the first quarter to the second quarter and provide color on the main drivers of these changes. Special mention loans decreased by $8.5 million, primarily driven by $46.3 million in loans previously in special mentions, which were further downgraded to substandard, $7.8 million in payoffs and $5 million in upgrades. These decreases were partially offset by $49.7 million in newly downgraded loans to special mention. The decrease in special mention loans was primarily driven by three commercial loans totaling $46 million that were further downgraded to substandard. These decreases were offset by new downgrades to special mention during the quarter that, although exhibit payment performance, were downgraded due to covenant failures. These consist of two non-owner occupied commercial real estate loans in Florida totaling $33.9 million, one commercial loan in Florida totaling $13.2 million, and one owner-occupied loan in Houston totaling $2.5 million. These increases were offset by paydowns, payoffs, and other smaller changes. The increase in non-performing loans you see on this slide was primarily due to three commercial loans totaling $46 million, which were disclosed in the first quarter as special mention credits and were downgraded based on updated financials received in the second quarter. Additionally, there were two newly downgraded commercial loans totaling $47.3 million in Florida, primarily an owner-occupied credit of $28.2 million in the construction materials manufacturing industry. These increases were offset by paydowns, payoffs, and other smaller changes. Now, moving on to Slide 12, which shows the drivers of the allowance for credit losses. At the end of the second quarter, the allowance was $94.4 million, a decrease of $1.7 million or 1.7% compared to $96.1 million at the close of the first quarter. The provision for credit losses was $19.2 million in the second quarter. Excluding reserve for commitments, the provision was $17.7 million and was comprised of $12.8 million to cover charge-offs, $12.7 million in new specific reserves for non-performing loans, and $1.8 million due to loan composition and growth. The primary driver of the new reserves was one commercial loan totaling $26.8 million in Florida, which had been classified as special mention in the first quarter and for which we booked $8 million in reserves. It is important to note that these were offset by a $5.3 million release related to credit quality and macroeconomic projection updates and a $4.4 million release due to the Houston loan portfolio classification as held-for-sale. During the second quarter of 2024, there were net charge-offs of $19.3 million, of which $5.4 million were related to purchased consumer loans, $9.9 million related to a commercial Houston-based loan, of which $4.9 million was provisioned in the prior quarter, and $4.9 million were related to multiple retail and business banking loans. This was offset by $0.9 million in recoveries. Please note we decided to fully write off the aforementioned Houston-based credit this quarter given longer-than-anticipated litigation and book recoveries as they occurred. Next, I'll discuss net interest income and net interest margin on Slide 13. Net interest income for the second quarter was $79.4 million, up $1.4 million, or 1.8% compared to the first quarter. The increase was primarily driven by higher average balances and rates on total interest-earning assets, mainly on loans and securities available for sale and lower average balances on transactional accounts and brokered time deposits, as well as lower average rates in demand deposits and brokered CDs. The increase in net interest income was partially offset by lower average balance in deposits with banks and higher average balances and rates on Federal Home Loan Bank advances and customer CDs, as well as higher rates in money market deposits. In terms of our deposit beta, considering there was no change in the fed funds rate this quarter, there is no beta calculation for this period. However, we observed a beta of approximately 49 basis points on a cumulative basis since the beginning of the interest rate upcycle, unchanged from the first quarter, indicative of a flattening trend and nearing an inflection point. This cumulative beta reflects the combined effect of rate increases in transactional deposits and repricing of time deposits that had not been repriced at current market rates. Moving on to the net interest margin we show in Slide 14, the contribution to NIM from each of its components. As mentioned, NIM for the second quarter was 3.56%, up 5 basis points quarter-over-quarter. This change in the NIM was primarily driven by the higher interest income resulting from growth and higher yielding loans and non-interest-bearing deposits paired with the reduction of high cost deposits from municipalities and the replacement of brokered CD maturities with lower cost ones. In the short term, we expect the margin to be stable due to higher-yielding loan production, partially offset by the reduction of the indirect consumer loan portfolio and deposit costs given market competition for domestic deposits and demand for higher rates. I'll provide some additional color on NIM in my final remarks. Moving on to interest rate sensitivity on Slide 15, you can see the asset sensitivity of our balance sheet with 51% of our loans having floating rate structures and 58% repricing within a year. We continue to position our portfolio for a change in rate cycle by incorporating rate floors when originating adjustable rate loans. We currently have 49% of our adjustable loan portfolio with floor rates. Additionally, you can see here that within the variable rate loans, 36% are indexed to SOFR. Additionally, we continue to execute asset liability management strategies including hedging interest rate risk as we expect a downward trend in interest rates starting in the second half of 2024 or early 2025. Our net interest margin sensitivity profile remains stable compared to the first quarter. We also show here the sensitivity of our available-for-sale portfolio to showcase our ability to withstand additional negative valuation changes, although we should start seeing an organic improvement in accumulated other comprehensive income if monetary policy changes and interest rates start to decrease later in the year as expected. We will continue to actively manage our balance sheet to best position our bank for the upcoming periods. Continuing to Slide 16, non-interest income in the second quarter was $19.4 million, up by $4.9 million, or 34% from $14.5 million in the first quarter. The increase was primarily driven by higher loan-level derivative income as well as higher other non-interest income due to higher mortgage banking income and the absence of a loss on the sale of the Houston commercial real estate loan portfolio that we had in the first quarter. Contributing to the increase was also the gain on early repayments of $595 million in Federal Home Loan Bank advances. This increase in non-interest income was partially offset by higher security losses during the quarter. Amerant's assets under management totaled $2.5 billion as of the end of the second quarter, up $94.2 million, or 4% from the first quarter. This increase was primarily driven by net new assets and market valuation. Turning to Slide 17, second quarter non-interest expenses were $73.3 million, up $6.7 million, or 10.07% from the first quarter. The quarter-over-quarter increase was primarily driven by an increase in occupancy and equipment expenses, mainly due to the valuation impairment charge of $3.4 million in connection with the Houston branches deemed for sale, $1.3 million in losses on loans held for sale in the second quarter for the transfer of approximately $552 million in Houston that were in loans held for investment prior to the transaction, an increase in advertising expenses in connection with our sports partnership, higher legal fees in connection with the Houston sale, an increase in salaries and employee benefits due to higher average full-time equivalent employees in the quarter, and an increase in loan-level derivative expenses, which were driven by a higher volume of derivative transactions in the second quarter compared to the first quarter. The increase in non-interest expenses was partially offset primarily by lower telecommunications and data processing fees and lower FDIC assessments and insurance fees. In terms of our team, we ended the quarter with 720 full-time equivalents, which is higher than the 696 we had in the first quarter. We added to our business development team again this quarter as part of our growth initiatives. Moving on to Slide 18, we show the elements that contributed to the change in the earnings per share this quarter. We reported second quarter diluted earnings per share of $0.15 on net income of $5 million, compared to $0.31 on $10.6 million net income in the previous quarter, which was primarily driven by the higher provision for credit losses and non-routine expenses in connection with the Houston transaction. I'll now give some color of our expectations for the third quarter. We expect the net interest margin to be stable compared with the second quarter. Regarding non-interest income, we expect it to be approximately $17 million. We expect operating expenses to remain at the $68 million previously mentioned, including onboarding new team members towards our growth plan. Finally, we expect provision for credit losses to be in or around $12 million next quarter, as we do expect asset growth, as I previously mentioned. So, at least half of this amount would be related to growth in the quarter. We currently estimate the Houston transaction will close mid-fourth quarter with the premium on the transaction settling prior to year-end. This premium, while in a different quarter, will more than offset the charges recorded in the second quarter. We are focused primarily on achieving the 1% return on assets and 12% return on equity target we established for ourselves. It is more likely now that the 60% efficiency ratio could slide to the first quarter of 2025 as we continue to see opportunities to keep investing in our future. I will pass now back to Jerry for closing remarks.

Thanks, Shary. So, before we move to Q&A, I'd like to briefly comment on some of the initiatives we're working on to accelerate the execution of our growth plans here in Florida. So, as I noted earlier, loan production was strong in the second quarter and the pipeline for the third quarter of 2024 is on track with our previous guidance of 10% annualized growth. Our deposit growth to fund projected loan growth continues to be our top priority as part of our deposits-first initiative. We continue to actively recruit for additional commercial relationship bankers, private banking officers, as well as market managers in Broward County, Palm Beach County, and the Greater Tampa market. As we ramp up building our team in Palm Beach, we've already taken temporary space in the same building where our regional office and new banking center will be. And as noted before, as part of our expansion in the Greater Tampa market, we intend to open five additional banking centers over the next 24 months. And please note, we're already close to signing a letter of intent for the first location in Downtown Tampa. So, in summary, our focus remains on the execution of our strategic plan as we pursue our goal of being the bank of choice in the markets we serve.

Thank you. At this time, we'll be conducting a question-and-answer session. Our first questions come from the line of Tim Mitchell with Raymond James. Please proceed with your questions.

Hey, good morning, everyone.

Good morning, Tim.

Good morning, Tim.

So let's start out on credit. Appreciate all the color from Shary in the prepared remarks, but just curious, is there one or two of those credits that were downgraded to non-accrual this quarter that are particularly concerning to you? I understand you're still kind of working through a lot. And then just kind of your outlook for charge-offs through the rest of the year. Thanks.

I will address the first question and then let Shary expand on it. Regarding the credits for the quarter, as I mentioned earlier, we have outlined various scenarios with one that we anticipate resolving in the coming months. We have taken a cautious approach by booking the $8 million. This does not necessarily indicate that we believe it is the most probable outcome. However, with the support from private equity in that particular relationship, we see the potential for a very favorable outcome. Concerning the other credit, it is important to note that these two large credits significantly influenced the majority of the non-performing downgrades. The collateral associated with this deal is robust, and from our coverage perspective, it is even more favorable than 40%. We are optimistic about reaching a positive resolution there as well. In this instance, a leadership transition incident occurred, but we believe it is being addressed effectively. Overall, we are hopeful about the potential positive outcomes from both of these larger credits.

And then, in terms of the collateral behind the deal, it is very strong from a coverage perspective. I think it's actually even more favorable than 40%. Our view is that we can see a positive resolution there as well. In that particular case, there was an incident that occurred with a leadership transition that we believe is now well on its way to being resolved. So, with that context, we feel optimistic that positive outcomes could emerge from the two larger ones.

Yes. And then, you had asked about charge-offs for the rest of the year. Shary, if you want to.

Yes, sure. So in terms of charge-off, and I'm going to give more of a rate excluding indirect consumer and excluding this one-time charge-off that we recorded this quarter to fully write off a credit, we should be in around 25 basis points to 30 basis points. If we add back the indirect consumer which is going down in balance quarter-over-quarter, we should be something closer to the 70 and progressively going down until we get to that 30 normalized level.

Okay, great. I appreciate the color. And then switching gears to loan growth. I understand you guys are certainly a higher growth bank than most. But the industry really isn't seeing much growth right now. Just hope you can lay out some of the key drivers of the 10% number. And then as it relates to deposit growth, do you expect deposit growth to kind of maybe pick back up here or just kind of a level you'd like to see the loan-to-deposit ratio trend over time?

Yes. Look, I think it's important to note we've set a target at 95%. Our view was we were never going to continue operating in the 87%-88% range that we had dipped down to post, when we did the sale transactions. And so, we've utilized that excess cash obviously this quarter. And as we noted, we had higher cost to commercial clients that had some significant reductions as well as the higher cost municipal go out which then offsets all the hard work of the growth right on the organic side. So we had a net down $62 million. Our view is always, it has been and will continue to be, that we need to grow deposits in tandem with loans. We want to stay in and around that 95%. That doesn't mean that we'll always hit 95%, we can be within a range of that. So whether it stays in this 93% and change or whether it goes up to 97% and change, our view is the 95% is a target and that's what we want to maintain. Regarding the loan production, it's a combination of in my mind, two things. The drive that's happened across both the consumer and the commercial portfolios with all of the people, the quality people we've added, particularly over the last 12 to 18 months coupled with the quality people we had in the organization, that continues to build. And again, we added a significant number of business development personnel this past quarter as Shary referenced in the increase in headcount. When you get those folks added in a quarter, and now they're here onboarded and beginning to produce, you've now got a full quarter's worth of production that they're now bringing to the table. And so, that's the way we're getting to that annualized growth number.

Awesome. Thanks. Thanks for taking my questions, guys.

Okay. Thank you.

Thank you.

Hey, great. Good morning, everyone.

Good morning, Will.

I wanted to return to the current discussion. Shary, I appreciate your thoughts on the expected direction of charge-offs. I understand that 70 basis points is somewhat above the 40 to 50 basis points we had discussed earlier. My broader question is, if we do see charge-offs in the 70-basis point range while you believe the normal level is closer to 30 basis points, what do you think is the timeline for returning to that 30-basis point range? Do you see it happening in 2025?

The reason for the 70 basis points is primarily due to the indirect consumer portfolio. We estimate that once the indirect consumer portfolio runs off, which we anticipate will be by early 2025, we will return to the normalized level of charge-offs, which is below 30 basis points. So it should be early 2025.

Yes. Okay.

Yes, Will. I think it's important to note that we took a significant commercial charge-off. Shary mentioned this in her comments, with half of it already reserved in the balance. Our perspective is that we anticipate a lengthy resolution period. Given the ongoing litigation in these cases, it seems better for us to resolve this now and recover in future periods. The impact was noticeably more pronounced when comparing quarter-over-quarter. This is likely the only situation where we believed it was crucial to adopt a proactive stance rather than wait to see how things evolved from quarter to quarter. Instead, we chose to address it now and recover as we progress.

Yes, okay. That makes sense. And Jerry, I'll just kind of give you the floor here. What's your kind of pitch that you have your arms ring-fenced kind of around what credit issues you see that are in front of you? I mean, we saw further migration this quarter. Charge-offs are high and they're still going to kind of be in an elevated range. What kind of gives you the confidence that we will ultimately see an inflection that you have your arms kind of ring-fenced around what potential credit problems are out there?

Yes, look, I think what we were seeing right, and I referenced this, you're looking at a 500-basis point swing in interest rates that's impacted, particularly as Shary has referenced right. Most of the floating rate we've got is on the commercial and industrial side. And so, when you look at the credits that we're talking about today, the majority are on the commercial and industrial side where those borrowers have had more financial pressure than you've had. They've also had higher operating costs, right, year-over-year, right. Things just simply such as the insurance costs, the increases year-over-year. So our view is the ones who can sustain going forward, right. That we've seen that they've met their debt service covenants, they've met coverage ratios, they've met their requirements for getting their financials done on time, and that we're not seeing deterioration. I think we've seen a pop here of what happened year-over-year in the portfolio. And frankly, if you think about the timing of when you would expect year-end financial information, it's the second quarter. So most of those audited financials or reviewed financials are coming in in the second quarter. And so, that's what I think from our perspective and the discussions we've had gives us more confidence as we look forward on the portfolio. Look, it's not to say that there can't be something else, and by the way, I do want to just make a comment. Anyone who's listened to our calls, met us at investor conferences knows that we book fairly solid financial exposures. When you think about credits we booked, we're referencing $20 million to $30 million exposures. We're booking a lot more of commercial production on our books, so whether it's C&I or commercial real estate, then probably other banks of our size who probably got bigger one to four portfolios than we do, etc. So I think with us that's something else also to take into note. And that's why I wanted to highlight it was two larger credits. It was very specific situations in both of those. And again, the timing of the second quarter and the receipt of information are really important to take into account.

Okay, thanks. Thanks for all that commentary. And then I just wanted to clarify just two quick things on the Houston sale. I know it'll take place in the fourth quarter. In the deck, you kind of called out about $5 million of personnel costs that are associated with that. That'll kind of exit as that transaction comes through. But are there any other costs or any other formal cost savings that you expect to kind of harvest or realize from that transaction that maybe we're not thinking about as we move into 2025?

I think that in addition to direct costs that we have covered as part of the transaction disclosure, I would see an opportunity to be able to redeploy some of the Florida team members that also work in connection with the Houston team to be able to focus on the increased production that we're going to have in Florida.

Yes, I think that's really well said because we are still right up through the closing, which we expect, again, as we've talked about, sometime in the fourth quarter, giving full support. So whether you think about it for operations support, tech support, facility support, you name it, that's all part of what Shary is referencing there. So, yes, those folks can be either repositioned to focus on opportunities here, the growth opportunities, and support here, or if there's any kind of attrition that we've got of existing personnel to offset that. So I think it gives us some capacity as we continue to grow down here in Florida.

Yes. Okay. And then just as we think about how that would translate to where 2025 expenses land, if we get some of this cost savings from the transaction, but a lot of that is reinvested, what is kind of like a good growth rate to think about into 2025 as we think about expenses? I know we're a long way away from that. I'm not trying to pin you to guidance now, but just trying to think about how expenses could look as we kind of exit 2024.

I believe that after we adjust for the Houston transaction, we would still see ourselves closer to $68 million, and this is more about reallocating expenses towards our investments in Florida. Therefore, it should reflect a more normalized level.

Yes, I believe the important point here is that we will provide clear guidance next quarter and in the fourth quarter. The current ramp-up involves not only hiring more staff but also expanding our facilities, specifically targeting growth in Palm Beach and Miami Beach, areas where we previously had no coverage. Additionally, we are focusing on achieving size and scale in Tampa. Some of these expenses will contribute to the offsets that Shary mentioned.

Okay, that's helpful. And lastly, for me, just housekeeping. The provision this quarter, that also included the $4.4 million reversal from Houston, right?

Correct.

Yes. Okay. All right. Thanks for my questions, guys.

Thank you.

Sure, Will.

Hey, good morning, everyone.

Hey, Stephen.

I guess I'm curious. I know, Jerry, you said these are kind of some specific situations around some of the commercial loans, but it's just obviously outside of what we've seen from most of the industry this quarter. So I'm kind of curious, do you think there's any trends happening specifically in Florida in terms of overall economic or business trends that maybe are not as positive as what we've become accustomed to over the past few years? Or are these more idiosyncratic in nature in your view?

I have to tell you, Stephen, I think they're far more idiosyncratic. We've talked about the one being a specialty healthcare industry-related credit. The other one is absolutely the change of leadership. I don't want to go into all the details, but the CEO's change or the passing of someone obviously had a significant impact in that particular credit. Our view is there's a path to a good resolution on these. And again, what I said before, I think we ran multiple scenarios to make sure that we took a prudent, we'll call it, approach to the one to make sure. But again, given that's private equity backed, we feel that there's a path to getting done, and we're going to know that here in the next couple of months.

Yes. Given what you've seen, along with the observation that there are a few larger commercial loans, does your balance sheet appear different from other banks of similar size? Does this make you more cautious about near-term growth, particularly in the larger commercial sector?

I think we're continuously refining on a risk appetite perspective to make sure that we're not going to be booking something that becomes so specialty oriented or could create some sort of another more challenging scenario for us if there were a credit event there? And I think that our view on this. And again, remember, the interesting thing with these, Stephen, is you're dealing with a situation where these loans are performing, right? They're paying as agreed, so it's odd to say they're non-performing, right, in that respect. But I think that the way I look at it going forward is still, look, we've got a lot of expertise in the building, and we've added a lot more expertise both on the commercial side. I mean, from the leadership of the commercial bank down through the leadership in credit. I mean, we've added really, really strong folks in both the commercial and commercial real estate side. So I think the strength of the teams gives me a lot more confidence about the forward view when you think about meeting the growth.

Yes, that's helpful. Okay. And then just maybe last thing around this topic. As you get to, let's call it 2Q 2025 for argument in the indirect, consumer runs down, and we're past these more elevated net charge-offs. Was that a kind of fair percentage for the loan loss reserve? I mean, would you expect it to come down from this 1.41% back to, I don't know, maybe 1.20% level we saw in 1Q 2023? Or what's kind of a normalized level for the reserve area?

Look, I think it's always going to be something probably closer in the 1.25% range. Remember that in our particular case, there's a couple of specific reserves in that mix of the 1.40% plus right now. So, as you get to a resolution on those credits, I think you'll naturally see us be more in the 1.25% range. And as we think about production on a go-forward basis, we're always looking that it's roughly around 1% just given the asset mix.

Yes, perfect. And the last thing for me is regarding the discussion about balance sheet preparation for lower rates. Can you remind me what that entails and if there's anything that might significantly alter your current asset sensitivity?

In preparation for the downward trend in rates, we are working with floor rates while continuing to produce loans on the credits. We have several hedging options, including low and high floors, and we are also integrating deposits that are linked to these loans. These deposits are interest-bearing and will reprice automatically in line with the loan repricing. In a scenario where rates decrease, we have calculated potential impacts from 25 basis point cuts, which would result in less than $500,000 in activity for us over a full quarter.

Okay, great. Thanks for all the color and the transparency today.

Thank you, Stephen.

Okay. Thanks, Stephen.

Hi, good morning.

Good morning.

Hey, Jake.

I apologize if I missed this, but was there any negative impact on the net interest margin from the interest accrual reversals due to the higher non-accrual loans in the quarter?

There was a net interest margin impact, but because most of these credits are still performing, the amount that we had to reverse for that last period was not as significant. If they had been without payment performance, the reversal would have been higher, but there was a slight impact into the net interest margin. Yes.

Okay.

It's roughly $700,000.

Okay. Thank you.

Sure.

And then the one other question that I wanted to ask was just any updated thoughts around the potential for utilization of the buyback. Obviously, this quarter was a little more elevated than it has been in recent periods. Just kind of wanted to get your updated thoughts there.

Yes, we are still authorized for another 15.6 million. During the second quarter, given the circumstances, we initiated a 10b5-1 plan and established parameters. We have been continuously active in the market, and we are still operating under that plan. We will continuously assess our capital needs and growth strategies. We have consistently emphasized the importance of maintaining our strong capital ratios, and future earnings will be crucial for us to continue buybacks after the third quarter. Our expectations are for improved performance moving forward to support this as we approach late third quarter and into the fourth quarter. We view the buyback as an important tool, which we have always stated. We take seriously the events of this quarter related to the additional provision, but aside from that, we have demonstrated strong performance, and we are confident we can maintain that performance going forward.

Appreciate the thoughts, Jerry. Thanks.

Absolutely. Thanks, Jake.

Thank you, Jake.

Thank you. We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Jerry Plush for closing comments.

All right. Thank you, everyone, for joining our second quarter call. We appreciate your interest in our company and your continued support. 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.