Amerant Bancorp Inc.
Q4 2020 Earnings Call Transcript

Published: 29 Jan 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Amerant Fourth Quarter 2020 Earnings Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference to your speaker today, Laura Rossi, Investor Relations Officer. Please go ahead ma’am.

[Laura Rossi:]

Thank you, operator. Good morning to everyone on the call, and thank you for joining us to review Amerant Bancorp's Fourth Quarter and Full Year 2020 Results. With me this morning are Millar Wilson, Chief Executive Officer; Carlos Iafigliola, Chief Financial Officer; Miguel Palacios, Chief Business Officer; and Thiel Fischer, Credit Risk Manager.

[Millar Wilson:]

Good morning, and thank you for joining Amerant's fourth quarter 2020 earnings call. As I have done in the past few quarters, I will begin by discussing how Amerant continues to navigate the current environment, as well as our fourth quarter and full year highlights. Carlos will then review our financial performance in further detail. After our prepared remarks, Carlos, Miguel, Thiel and I will address questions. Before I move into the results, I would like acknowledge that while this past year was unlike any other, I am extraordinarily proud of how well we persisted through it together. I am grateful for all those work to make this happen, particularly the Amerant team, as well as our customers and communities. It is because of all of you that Amerant was able to several significant accomplishments that are even more impressive, given the difficult operating environment. First, we focused on expanding our fee income opportunities and carefully managing expenses. We delivered on our cost efficiency initiatives by diligently streamlining and rightsizing our operations.

[Carlos Iafigliola:]

Thank you, Millar, and good morning, everyone. Before we move on to Slide 6, I would like to discuss some balance sheet highlights. On the asset side, as of December 2020, total loans increased 1.7%, compared to December 2019, largely driven by the PPP loans, as well as the purchase of higher yielding consumer loans as Millar mentioned earlier. In the fourth quarter, consumer loans increased 30% quarter-over-quarter and 180% compared to the end of 2019. At the same time, single-family residential loans increased 4% quarter-over-quarter and 15% compared to the year ago. On the funding side, as of December 2020, total deposits were down 2.5% quarter-over-quarter and down 0.4% compared to December 31, 2019. The quarter-over-quarter decline is primarily attributable to the 12% reduction in customer CDs as we continue to focus on increasing lower cost core deposits and also aggressively lower our CD rates. Our stockholders equity decreased by $51 million or 6.1%, compared to the 2019, which is largely the result of the tender offer we completed during the fourth quarter, which resulted in the repurchase of $53.3 million in stocks, excluding fees and expenses or $4.2 million of Class B shares. Moving on to Slide 6, I would like to review our investment portfolio. Our fourth quarter investment securities balance decreased slightly to $1.4 billion from $1.5 billion at the end of the third quarter given prepayments received. Compared to the fourth quarter of 2019, investment securities decreased from $1.7 billion, primarily as a result of our timely execution on the sale of certain securities had at a gain, which otherwise would have been dissipated with the recent steepening of the yield curve. As we said in prior quarters, we successfully managed investment securities portfolio as an economic hedge against the declining net interest income. Given the challenging interest rate environment, we maintain a low percentage of our investment portfolio in floating rate securities. The average duration of the portfolio decreased from 3.8 years during the end of 2019 to 2.4 years in December 2020 due to the acceleration in prepayments fees and the sale of high duration securities before the steepening of the yield curve took place.

[Millar Wilson:]

Thank you, Carlos. Turning to our final Slide, I’d like to close by covering our goals for the New Year. In 2020, we learned a lot about adapting to new technologies and ways of working, protecting the quality of our assets and much more. I expect our team to press forward into 2021 bearing in mind these important lessons. And accordingly in 2021, we will continue to implement and utilize new technologies that allow us to simplify our operations for the benefit of our noninterest expenses, preserve the quality of our assets through proactive frequent monitoring and assessment, execute our relationship-centric strategy to enhance our noninterest income, deposit and loan mix and exercise a dynamic capital management. It was truly a team effort to close 2020 in a position of strength and I couldn’t be prouder of every member of the Amerant family for their perseverance and hard work. As I step aside, I am sure this excellent team led by Jerry Plush will execute on our transformation strategy and an even stronger year of value creation for our shareholders and service to our customers. With that, we will be happy to take any of your questions. Operator, please open the line for Q&A.

[Operator:]

Our first question will come from the line of Will Jones from KBW. You may begin.

[Will Jones:]

Yes. Thanks. Good morning.

[Millar Wilson:]

Good morning.

[Carlos Iafigliola:]

Good morning.

[Will Jones:]

Hey guys. So I just wanted to start on net interest margin. It was up nicely linked-quarter at 2.61% and a lot of this is due to some of the attrition in the time deposit portfolio which you guys have been talking about for a little while. And I believe you call out, maybe another $520 million that will mature in the first quarter. Where do you expect those will reprice? And how does this impact your thoughts about the trajectory of the forward NIM?

[Millar Wilson:]

Okay. Thank you for the question. We have seen this progression of events on the repricing of the time deposits and forward-looking, we still have approximately another $500 million probably upcoming in the next three months that will come to reprice and more in the future. And speaking about the short-term, we are probably going to have an additional drop of about 33 basis points in the cost of the time deposits. That will probably translate into five to seven basis points extra reduction in the cost of funds. So, based on that, we expect our NIM to be within the range of the 265 to 275 going forward. So, yes, we definitely see an improvement coming from the cost of funds.

[Will Jones:]

Great. That’s awesome to hear. And then, could you just remind us how much PPP fees Amerant has yet to recognize?

[Millar Wilson:]

So far, we have recognized just a fraction of it, because the – we have probably received $30 million or so in forgiveness.

[Carlos Iafigliola:]

Yes, as of today. Two days ago, we have 30% of forgiven loans, which is around $67 million. So, but that’s for generally. That’s the most recent NIM.

[Millar Wilson:]

When you talk about the quarter end, it’s $30 million.

[Carlos Iafigliola:]

It’s $30 million, correct.

[Will Jones:]

Okay. Great. That’s helpful. And then, I just wanted to move on Amerant Mortgage. It was really nice to see you guys launch this new division as a nice diversity to your fee businesses. Could you just give us a sense for the vision of Amerant Mortgage in terms of what you think, because your revenue contribution could be over time and should we expect some near-term expense this year with the startup?

[Miguel Palacios:]

Yes. Hi, it’s Miguel. This is one of the most exciting things that we have done during the last quarter. Definitely, we acquired a very talented group from a competitor and we are going to be able to transform the business to 180 degrees, mainly before our focus was 90% relationship, 10% sales. We are going to turn it around completely. Our main focus will be improving our interest income and expanding from Florida nationwide. We are still on the early stage. I believe that it will be great seeing starting application process in the month of April through May. And we would like to see how that progress, we will invest often in change of platform that people that is with all the group and they are already working on that. We are going to be already acquired ticket for GSE which we didn’t have before. So definitely it’s a very, very exciting moment for the group. As we roll in our existing production which increased almost 60% in 2020, we will definitely – we will be changing that the level of production through the end of the year. So far, we are still working on the process and we believe in the next quarter, we will be able to provide more certain facts on how we are seeing the production, but definitely, it’s going to be a totally different from what you have seen us today.

[Will Jones:]

Okay. Great. And then, can you just foresee any one-time costs coming out of that startup? Maybe that would happen in the first, second quarter?

[Millar Wilson:]

We did a capital infusion to that entity for $10 million. And, but again, the – most of the cost will come from the new systems that will come along, et cetera and we do not expect at this point, we are still in the process of gathering all the platforms that we are going to use and we had an initial estimate, but of course, it’s – we need to go through the implementation process. That may take longer or short period of time, we are particular in that process. So we – but we do not anticipate that will be a significant cost to get the company up and running.

[Will Jones:]

Great. That’s great color. And then, just last one from me. The consumer loan book has been a really nice source of growth for you guys as recent. It is up nicely linked-quarter. Could you just refresh us on your appetite continue growing this book? And I think you previously targeted consumer loans around 3% of the whole portfolio. Do you think this would be one of your base sources of growth moving forward?

[Millar Wilson:]

Yes, we see this as a complement of our loan portfolio. By any means we are trying to convert a big percentage of the loan portfolio towards this asset class. As of now, as you said, we have around 3%. But we are not planning this to become an asset class that will occupy more than 10% of the loan portfolio. So it’s something that will be very well contained and it’s just – it’s a source to increase profitability and keep all elements under control.

[Will Jones:]

Okay. Great. Well, that’s it for me guys. I just wanted to say congratulations to Millar on your great Amerant career and wishing best of luck in retirement.

[Millar Wilson:]

Thank you very much. I appreciate that.

[Operator:]

Our next question will come from the line of Michael Rose from Raymond James. You may begin.

[Michael Rose:]

Hey. Good morning. How are you?

[Millar Wilson:]

Good morning, Mike.

[Carlos Iafigliola:]

Good morning, Mike.

[Michael Rose:]

First off, yes, I’d echo those sentiments, Millar. Congratulations on a well deserved retirement. It’s been nice to watch the new progress at least the past couple of years. So, congratulations. I wanted to start on the expenses side, obviously, a lot of actions you guys have taken and I am sorry if I missed this, but $43 million, is that the kind of the runrate we should think about as we move forward? I would expect as we have a little bit of a ramp up in the PPP forgiveness of those fees or excuse me, those expenses are recognized that there could be a little upward trajectory in the near-term. But is there any other things on the expense side that we should be cognizant of whether it’s higher incentive comp this year? I know it was down last year, just looking for a kind of runrate to start the year. Thanks.

[Carlos Iafigliola:]

No. That’s a good question. So the runrate will be closer to the $45 million approximately and that’s something that we – it’s similar to the one that we provided on the last quarter and pretty much because it was – it accounted for the prospective savings that we would have on the voluntary early retirement and on the involuntary separation plans that we had on the last quarter. So, that would be a good estimate of what would be the runrate and that includes of course, all the items and even include the resume of the payments of the long-term incentive plans and variable compensation that we decreased during 2020.

[Michael Rose:]

Okay. And I am sorry if I missed this. But the cost related to the mortgage JV, how much would those be and is that included in kind of that $45 million?

[Carlos Iafigliola:]

No. It’s not included. It’s not included. But we do not expect this to be as significant as mainly software subscription and several other items that we do not anticipate will create a large deviation from this number.

[Michael Rose:]

Okay. That’s helpful. And then, maybe just switching to loans, obviously, we have PPP round three coming on. You’ll have the forgiveness. You talked about the consumer loans at 3% capacity up to 10%. I know you’ve obviously expanded into some other markets and those markets are probably beginning to hopefully ramp a little bit. I guess, the question is, I mean, do you actually think you can grow loan balances year-over-year. Are you still going to have paydowns and payoffs that will offset growth as we move forward? Thanks.

[Miguel Palacios:]

Hi, Michael. Definitely, it’s going to be - it’s going to continue to be a challenging a year and we do expect to continue having payments as we saw in the last quarter and we take that as a base where we had a gross production of $160 million with payments of $200 million. Hopefully, we can control that. We have been very careful on competing on interest on the yields of this – and there is study that we want to continue. Based on that, what we are seeing on the – in our pipeline and the type of reduction that we will see in the next three months related to the PPP. We might be seeing on the first quarter a low-single-digit and increasing it as the economy improve also the line of credit utilization should increase and that had a reduction on almost 50% in the last two quarters of last year. So, from there, we could pivot and start seeing a growth. And for the second quarter, maybe on mid-single-digit depending on how much payoff on the commercial real estate there. The rates that we are seeing on that area is – are not on our scope and we will continue to compete definitely. We have in our strategy to grow the balance sheet and we will monitor the economy how it grows, because nobody thought at this stage of the year we are still waiting for the solution on the vaccination process. Hopefully, that change and we can continue our growth. We are also including our business banking strategy. We are focusing on a more granular transaction. And as you know, that’s smaller the transaction the relationship takes more time, but definitely the yield will be better and we might let go some loans – that are now won’t be part of our strategy. So, it’s going to be a recompensation with that focus of growth.

[Michael Rose:]

Okay. And maybe finally for me, just on the credit front, it looks like credit metrics, even criticized classified were relatively stable, maybe a bit higher yet there was no provision you guys rounded the incurred loss model. How should we think about kind of the reserve levels and future pace of provisioning going forward? I know there is a lot that goes into that, but, I mean, could we expect to see that reserve level come down from here? Thanks.

[Thiel Fischer:]

Hi, Michael. This is Thiel. So, as we have – as you mentioned, the increase was very – I mean, the non-performing loans are very stable. We expect that may –there maybe some in the first quarter. That’s still coming down there. But the outlook on the economic conditions is improving for second quarter and on. And therefore, we expect that the resurge will be based on growth – what we increase in our portfolio. Other than that, we don’t necessarily – we think that that we currently have to cover any potential losses that come our way. And if the economy continue the positive trend, we may think of any releases even it’s in the possibility as well.

[Michael Rose:]

Okay. Thanks for taking my questions. And Millar, congrats again.

[Millar Wilson:]

Thank you, Michael.

[Operator:]

Thank you. All right. I am not showing any further questions in the queue. I’d like to turn the call back over to Mr. Wilson for any closing remarks.

[Millar Wilson:]

Thank you all for joining our fourth quarter and fiscal year 2020 earnings conference call. As the world continues to adjust to the new normal, please note that at Amerant we are doing the same and look forward to continuing to transform in 2021. Thank you all and be safe. Operator, you may now end the call. Thank you.

[Operator:]

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