Amerant Bancorp Inc. (AMTB) Q1 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Amerant Bancorp first quarter 2020 earnings conference call. At this time, all participant lines are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Laura Rossi, Investor Relations Officer at Amerant Bancorp. Please go ahead, ma'am.

Thank you operator. Good morning to everyone on the call and thank you for joining us to review Amerant Bancorp's first quarter 2020 results. In the call this morning are Millar Wilson, Chief Executive Officer, Carlos Iafigliola, Head of Treasury and Interim Chief Financial Officer, Miguel Palacios, Chief Business Officer and Thiel Fischer, Credit Risk Manager. Before we begin, note that the company's press release, comments made on today's call and responses to your questions contain forward-looking statements. The company's business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control and consequently, actual results may differ materially from those expressed or implied. Please refer to the cautionary notices regarding forward-looking statements in the company's press release. For a more complete description of these and other possible risks, please refer to the company's Annual Report on Form 10-K for the year ended December 31, 2019, as well as to subsequent filings with the SEC. You can access the filings on the SEC's website. Please note that Amerant has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations, except as required by law. You should also note that the company's press release, earnings presentation and today's call include references to certain adjusted financial measures, also known as non-GAAP financial measures. Please refer to Appendix One of the company's earnings presentation for a reconciliation of each non-financial measure to its most comparable GAAP financial measure. I will now turn the call over to Mr. Wilson.

Good morning and thank you for joining Amerant's first quarter 2020 earnings call. Before we start, I want to take a quick moment to introduce our Interim CFO, Carlos Iafigliola. Carlos has been with Amerant since 2004 and our Head of Treasury since 2015. He played an integral role in our IPO process and is a valued member of our team. We are fortunate to have an executive with Carlos' experience serve as interim CFO and I am excited to welcome him to the call. Today, I will begin with some comments around the current environment and the steps we are taking to ensure business continuity and that we continue to deliver exceptional value to our customers. I will also touch on our first quarter 2020 highlights before Carlos reviews our financial performance for the quarter in greater detail. After our prepared remarks, Carlos, Miguel, Thiel and I will address questions. I want to start by saying that our thoughts are with individuals and communities directly impacted by COVID-19, including healthcare workers on the frontline and all essential workers who keep the country running. It has been incredible to watch the country and the world come together during these extraordinary times. Everyone has a role to play in overcoming this pandemic and Amerant as the largest bank headquartered in Florida is taking its role to provide financial stability and confidence to customers and to the broader economy very seriously. I am proud of the entire company's efforts over these difficult past few months to come together and support each other as well as the communities we serve. Amerant responded to the COVID-19 pandemic by promptly activating its business continuity plan in mid-March which has successfully ensured seamless and uninterrupted service for customers as well as the safety of our employees, customers and communities, which remains our top priority. At a high level, we have implemented remote work arrangements across the organization, currently with 86% of our employees working remotely and shortened banking center hours, encouraging customers to leverage our digital channels, took all necessary steps to minimize the impact on operations and customers as well as critical vendor and supplier readiness, ensured system stability and bandwidth capacity, continued our monitoring to detect and prevent suspicious activity and communicated frequently with customers regarding assistance program and with employees regarding health and safety, remote working tools and security guidelines. I am happy to report that our technology and communications infrastructure, the bedrock of our BCP, is performing well and is table, effectively supporting the work of our teams. Moving to slide four. We continue to proactively provide customers with best-in-class service during this difficult time. Following regulatory guidance on loan modification, we have started offering payment relief options, including interest-only payments and interest deferrals to customers impacted by COVID-19. We are also participating in the Small Business Administration's Paycheck Protection Program with the goal of providing relief to our small business customers. We have seen a significant level of interest in this program and are working hard to ramp up our processing capacity to meet this demand. To further support customers during this difficult time, Amerant has temporarily eliminated ATM fees, waived late payment fees on business and consumer loans as well as deposit account fees and refrain from reporting negative information to credit bureaus, among other individualized account measures. Turning to slide five. We have already received relief requests of $1.1 billion of loans or 20% of our total loan portfolio, with the 20 largest request accounting for 56% of that total. Most of these relief requests are in the CRE hotel, CRE retail, gas stations and apparel manufacturing industries. Additionally, we have received approval for 485 Paycheck Protection Program loans totaling $130 million. Given the current market environment, I want to quickly provide a few highlights around our overall loan portfolio, for which you can find a comprehensive breakdown in the supplemental loan portfolio information section of our earnings presentation. While approximately 30% of our portfolio is exposed to the most COVID-19 impact industry such as CRE, retailers, hotels, restaurants, entertainment, recreation, daycare centers, manufacturing and wholesalers, 50% of these exposures are secured with real estate collateral. Additionally, our CRE portfolio is well diversified by property type and region and has conservative loan-to-value and debt service coverage ratios with strong sponsorship profile and no significant tenant concentrations. The majority of our hotel exposure is to popular travel destinations in Florida and New York. Given the relief request granted, the executive management team has increased its oversight and monitoring of credit and liquidity risks and is working hard to understand and quantify the potential magnitude of the current pandemic on our business. I am proud to say, that at this time, our credit profile and loan portfolio remains very strong. In this time of disruptive markets and high volatility, we have focused our attention on liquidity and credit risks. On slide six, we have detailed several protective measures that we believe will position us well to manage through the current environment. In terms of liquidity, we are maintaining a high cash position seven at the Federal Reserve with $271 million in cash and equivalents as of the end of the first quarter, which is more than double our usual position. In terms of credit risk, we have significantly increased our loan loss provision to account for estimated portfolio deterioration due to COVID-19. Additional measures, which we will discuss in more detail later in the presentation, include proactive pricing of deposits and wholesale funding, leveraging opportunities for higher yield investments and reducing our asset sensitivity, amongst others. Importantly, we continue to monitor our credit exposures as well as credit approval practices on an ongoing basis to safeguard our strong asset base as well as ensure that sound and prudent underwriting standards continue to underpin our business relationships. I am proud of the team's prompt response to the current environment and their dedication to protecting our value while meeting the needs of our customers during these unprecedented times. Turning now to other, the other highlights of the quarter on slide seven. Amerant continued to execute on our relationship centric strategy, prioritize low-risk domestic loans, preserve asset quality and focus on increasing our domestic funding from core deposits while actively managing the investment portfolio and wholesale funding to mitigate the impact of lower rates. As you can expect, first quarter profitability was materially impacted by the loan loss provision. Driven primarily to account for the estimated impact of COVID-19 on our portfolio, we recorded a provision of $22 million in the current quarter compared to a release of $0.3 million in the fourth quarter of 2019 and no provision recorded in the first quarter of 2019. While net income was down, our first quarter operating income, which excludes provision for income tax, provision for loan losses or reversals and net gains on securities, was strong at $16.7 million, up 12.5% from the fourth quarter of 2019 and flat compared to the first quarter of 2019. We continue to monitor our loan loss reserve as market conditions change. We made progress on our other strategic initiative to better cross-sell and increase our share of customer's wallet. This included building stronger customer relationships and enhancing our customer service capabilities to better meet their needs by implementing more disciplined customer outreach, using improved CRM tools and introducing new products and services. We also worked on our digital transformation and expanded our geographic reach by enhancing our online account opening platform for domestic customers. As a result of these efforts, in the first quarter, we increased our domestic deposit base, driven by higher capture of online CDs and relationship money market deposits. In addition, we opened a new state-of-the-art banking center of the future in the affluent coastal city of Delray Beach in South Florida this quarter, in line with our focus to continue improving the bank's customer service capabilities and operational efficiency as well as enhancing our core products and services in the coming quarters. Moving to slide eight. Our net income for the quarter was down 74.9% from fourth quarter 2019 and down 74.1% from the same quarter last year. On an adjusted basis, which excludes restructuring expenses, net income declined 67.9% compared to the fourth quarter of 2019 and was down 73.5% from the first quarter of 2019. Our return on assets was 0.17% or 0.19% on an as adjusted basis. And our earnings per share was $0.08 per share or $0.09 on an as adjusted basis. Allowance for loan losses to total loans increased by 38 basis points from fourth quarter 2019 and by 24 basis points from the year ago period. As I previously mentioned, this increase is primarily due to the loan loss provision of $22 million we recorded this quarter. While the economic disruption caused by COVID-19 pandemic is expected to impact our credit quality, it is difficult to estimate and quantify this potential impact due to the uncertain duration and scope of the slowdown in U.S. and global economic activity. As I mentioned earlier, we will continuously reassess our loan loss provisions and monitor credit quality as market conditions evolve. And now I will turn the call over to Carlos who will go over the quarter in more detail.

Thank you Miller and good morning everyone. I will like to start by discussing the highlights of our balance sheet this quarter. On the asset side, total loans this quarter decreased 1.3% from the previous quarter ended December 31, 2019, primarily driven by the seasonality as well as a slowdown in the loan production due to COVID-19. To offset this decline, total investments were increased by 1.8%. This resulted in a total asset increase of 2.5%. As Miller mentioned, our deposit funding was solid this quarter and our deposits were up 1.5% compared to the previous quarter. While international deposits declined 1.8% over the prior quarter as living conditions in Venezuela remain challenged, we saw the pace of decline slow down. Due to acceleration in the decline of international deposits as well as the 4.2% increase in total domestic deposits, which was driven mainly due to the higher capture of CDs and relationship money market, all rose from the company's increased engagement with customers and sales efforts. Lastly, brokered deposits are down 5.2% from December 31, 2019. Stockholders' equity increased by $6.4 million or 0.8% compared to the fourth quarter of 2019 and $62.4 million or 8% compared to the first quarter of 2019. While net income contributed to these increases, higher market valuations of our debt securities available for sale was the largest driver as interest rates continued to decline this quarter. Turning to slide nine, our investment portfolio. On the first quarter, balance increased to $1.8 billion from $1.7 billion at the end of the fourth quarter of 2019 and from $1.7 billion the same period last year. In this part of this quarter, we continue to see accelerated levels of expected prepayment speeds on our mortgage-related securities given the low interest rate environment. To offset this, we rebalanced the portfolio by changing the duration of certain portions in favorable of longer duration assets. Additionally, we continue to decrease our portion of floating rate investment securities as interest rates continued to decline this quarter and are expected to do so in the future. Floating rate investments comprised 14.6% of our investment portfolio as of the end of March 2020, down from 16.8% in the year ago quarter. The higher expected levels of mortgage prepayments this quarter drove down the effective duration of our investment portfolio to three years from 3.5 years in the first quarter of 2019. We continue to focus on shifting our investment portfolio towards higher-yield, longer duration investments in the coming months as well as leveraging opportunities to purchase securities with prepayment protection. Turning to slide 10, our loan portfolio. During the first quarter, loans decreased $76 million or 1.3% compared to December 31, 2019 to close at $5.7 billion due to lower C&I and CRE loan portfolios. As I mentioned earlier, we experienced normal business seasonality compounded with the slowdown in the loan production due to COVID-19. Nevertheless, this decrease was partially offset by quarter-over-quarter growth in the Texas market of $64 million. This quarter, we purchased $60 million in high-yield indirect consumer loans. Total loan production from core relationship businesses totaled approximately $239 million this quarter compared to $275 million in the prior quarter and $334 million in the year ago period as we continue efforts to grow our strategic relationships were offset by COVID-19 environment. Following the completed runoff of our foreign FI and non-relationship SNCs loans last year, higher-yielding, lower risk domestic loans now comprise 97% of Amerant's total loan portfolio in line with our broader strategy to prioritize profitability from core relationships. Turning to slide 11. We recorded a provision for loan losses of $22 million during the first quarter of 2020, compared to a release of $0.3 million in the fourth quarter of 2019 and no provision in the first quarter of 2019. The increase is mainly due to provisions driven by the estimated losses reflecting deterioration in the macroeconomic environment as a result of the impact of COVID-19 across multiple sectors. We believe that recorded provision provide us with comparable coverage ratio in the current challenging environment. Additionally, the increase in provision also includes $1.2 million in additional specific reserves allocated to a multi-loan relationship of a South Florida wholesale borrower disclosed in the previous quarter and $1 million reserves to cover charge-offs of multiple smaller commercial loans. Our ratio of allowance for loan losses to total loans increased 38 basis points compared to the prior quarter. Next, non-performing assets remained stable, up just $0.5 million quarter-over-quarter and up $12.9 million compared to the year ago period, totaling $33.4 million at the end of the first quarter of 2020. The ratio of non-performing assets to total assets was 41 basis points on change from fourth quarter 2019 and up from 26 basis points at the end of the first quarter of 2019. The marginal uptick was driven by $2.9 million in new non-performing loans offset by charge-offs and paydowns. Additionally, special mention loans decreased $13.4 million during the quarter, mainly due to the upgrade of three CRE loans for about $9.3 million to pass, the upgrade of one owner occupied of about $1 million to pass, the paydown of three commercial loans totaling $1.2 million, the downgrade of two commercial loans for about $1.7 million to substandard and the upgrade of one commercial loan of $0.4 million to pass. The decrease was offset by the downgrade of one commercial loan of $0.2 million to special mention during the period. Following up on the charges related to our credit card product that was discontinued last October, we realized just $0.4 million of credit card charge-offs this quarter, all of which were anticipated and already reserved. Finally, as Miller mentioned, Amerant began offering loan payment relief options to our customers in the first quarter as a result of the COVID-19 impact and in accordance with regulatory guidance. While we have already begun loan loss mitigation efforts, we will continue to actively monitoring those loans with activated relief options in order to proactively identify any early negative industry original trends and pursue remediation efforts in a timely manner. Despite the challenging market environment we are facing, Amerant's credit quality and reserve coverage remains strong as we are proactively working to monitor our assets and employ effective mitigation tools accordingly. Turning to slide 12, you can see that our loan yield decreased 16 basis point this quarter compared to the fourth quarter of 2019, driven by decline in interest rates and subsequent slowdown in the early payment activity, resulting for lower prepayment penalties collected. Additionally, our investment securities yield also declined seven basis point quarter-over-quarter. This decrease was a result of the repricing of floating securities and reinvestment at lower market rates as well as higher expected prepayment speeds in the overall portfolio, partially offset by purchases of higher-yielding longer duration assets such as corporate bonds. Looking at slide 13, I wanted to provide some color around Amerant's wholesale funding strategies. We continue to proactively manage against the decline in interest rate environment and effectively minimize net interest margin sensitivity through number of actions. In the first quarter, we replaced Federal Home Loan Bank advances from both maturities and prepayments at a lower cost. Most significantly, in early April, we successfully modified about $420 million in fixed-rate FHLB advances as we continue to take advantage of interest rate environment and replace these advances with longer duration fixed-rate advances at lower than prevailing rates. This will result in a lower effective cost going forward and generate annual savings of 26 basis points on this portfolio. We expect to realize an associated cost savings of $2.4 million for the reminder of 2020. Additionally, to reduce our funding cost this quarter, we lowered the cost of our brokered CDs by partially replacing higher rate maturing brokered deposits at a lower market rate. We will continue to utilize similar wholesale funding strategies with advantageous durations or using structures that bring down our cost as needed. Moving on to slide 14. Looking at the total deposits at the end of the first quarter were $5.8 billion, up 1.5% quarter-over-quarter and driven by strong domestic growth, which more than offset declines in foreign deposits. Domestic deposits were $3.3 billion in the first quarter of 2020, up approximately 4.2% from the last quarter of 2019. This increase was driven by securing additional online CDs and relationship money market deposits, positive results from our cross-selling efforts. I would like to note that continued growth in online CDs resulted in $69 million of growth the first quarter of the year, representing an increase of more than 50% compared to the fourth quarter of 2019. And while foreign deposit declined $47 million in the first quarter, as Venezuelan customers continue to use their U.S. dollar deposits to fund living expenses, we were encouraged to see that the pace of decline in these deposits have slowed. These improvements, which represent a minus 1.8% change compared to the fourth quarter of 2019 or 7.1% decline on an annualized basis is attributed to the company's increased engagement with customers and sales efforts which continued to strength existing relationships and expansion of Amerant's banking products and services, such as Zelle transfer launched last quarter. In the first quarter, we executed and delivered on our previously stated strategy, to increase domestic deposits, which present higher growth potential and better cross-selling opportunities for other products and services. Our continued efforts have resulted in a deposit mix to 56% of domestic deposits, up from 54% at the end of 2019 and 44% international deposits. While our deposit mix continues to shift, cost of interest-bearing deposits was down three basis points from the fourth quarter of 2019, mainly due to proactive repricing of CDs, relationship money market and tiered products. The slower decline in international deposits also contributed to containing the cost. Turning in to slide 15 for the P&L items. The first quarter of 2020 net interest income was $49.2 million, down 4% from the fourth quarter of 2019 and down 11.2% from the first quarter of 2019. The quarter-over-quarter decrease was driven by lower prepayment penalties, higher volumes in average time deposits and lower average balances. Additionally, the company's variable-rate loans repriced in line with lower market rates following the Federal Reserve's emergency rate cuts on March 3 and 15, which contributed to lower interest income. We neutralized this by proactively repricing customer deposits, replacing FHLB advances at the lower cost via maturities and prepayments and partially replacing higher rate maturing brokered deposits at a lower market rate. The year-over-year decrease was driven by strategic runoff of foreign FI and non-relationship SNCs loans during the first three quarters of 2019, which we have discussed previously, lower yields and increase earning assets as the Federal Reserve rate decreased it the benchmark three times during 2019 and two emergency cuts I just explained and finally higher rates and CDs. The net interest margin for the first quarter of 2020 was 2.65%, a decrease of nine basis points from the prior quarter and 31 basis points compared to the first quarter of 2019. Looking ahead, we anticipate that our net interest income and net interest margin will continue to be pressured, largely as a result of the current low interest rate environment due to COVId-19. The continued run-off of our low-cost international deposits will also be a contributing factor. That said, we are being proactive in managing these challenges. Especially we have done, one, redeemed $27 million in trust preferred securities, reducing annual cost funding for about $2.4 million. Two, proactively cut rates on time deposits, relationship money market and tiered pricing for top commercial customers. Three, leverage opportunities for higher yield investments and lower-cost funding, including FHLB and brokered CDs. Four, worked to reduce asset sensitivity, which I will discuss in depth later. And five, focused on relationship accounts to enhance demand deposit balances and online CDs as lower-cost alternative to brokered deposits. And six, modify maturities on $420 million of fixed rate advances, as I mentioned previously, resulting in 26 basis points of savings for this portfolio. We are confident these actions will help us to navigate through the current environment. Now turning to slide 16. Non-interest income in the first quarter was $21.9 million, up 37.2% quarter-over-quarter and up 66.5% year-over-year. First quarter non-interest income was largely driven by $9.2 million net gain on the sale of 20-year treasury securities in order to replace them with longer duration bonds to mitigate higher expected prepayment speeds in additional to the $0.9 million in income from derivatives sold to customers. Additionally, this quarter benefits from the absence of FHLB advances early termination costs we had in the fourth quarter of 2019 and $0.5 million in new credit card annual referral fees resulting from our partnership with AMEX. Having said this, non-interest income in the first quarter was partially offset by lower wire transfer fees attributable to the implementation of Zelle, lower derivative income due to decline in customer activity and the absence of meaningful one-time gain on the sale of land we had in the previous quarter. The 66.5% million year-over-year increase was mainly driven by the gain of the treasury securities in addition to a 12.1% increase in brokerage and advisory fees, compared to the first quarter of 2019. This increase in fees was a result of an improved allocation of assets under management in our advisory services and higher customer trading activity following market volatility. Amerant's assets under management and custody decreased $121 million to $1.57 billion in the first quarter of 2020 from $1.69 billion in the first quarter of 2019. This decrease reflects the lower valuation resulting from the COVID-19 driven global market crisis partially offset by approximately $20 million we captured in net new assets. Moving on to slide 17. The first quarter non-interest expense was $44.9 million, down 13.3% quarter-over-quarter and down 13.6% year-over-year. This quarter-over-quarter decrease is largely due to lower salaries and employee benefits of $6.7 million resulting from changes to various variable compensation programs as we continue to comprehensively review our total employee compensation practices and from a decline in the amortization expense related to the 2018 IPO restricted stock grant. Additionally, we have lower legal and other professional fees, mainly due to a decline in amortization expenses related to directors based compensation. The year-over-year decrease was a result of the salary and benefits factor I just mentioned in addition to be absence of rebranding costs that we incurred last year. Turning to slide 18. First quarter adjusted non-interest expenses was $44.5 million, down 13.8% quarter-over-quarter and down 12.7% year-over-year. In the first quarter, we had restructuring expenses of $0.4 million, primarily associated with our staff realignment efforts as well as our digital and technological transformation which we spoke about at the beginning of this presentation. We incurred the majority of this transformation expenses as we move forward in the implementation of several CRM loan origination and online and mobile banking platforms. Restructuring expenses decreased 62.1% in a year-over-year basis in the first quarter due to the absence of rebranding costs related to the prior year's transformation efforts. While we have reduced our staff by 7.2% since the first quarter of 2019, we have not made any staffing changes in response to COVID-19. Moving on to slide 19. As we have said in prior quarters and throughout this call, Amerant continues to be sensitive to interest rate as over half of our loan portfolio is floating rate structures or matures within a year. Our team is working hard to reduce asset sensitivity in the current low interest rate environment and we are actively managing the investment portfolio in order to improve our NIM. In line with this and as I previously mentioned, in the first quarter, we sold off approximately $100 million of 20-year treasury securities and purchased 30-year treasuries, CMOs and other securities with prepayment protection to mitigate higher expected prepayments on the mortgage-related securities. Now I will hand it over back to Millar to conclude our prepared remarks.

Thank you Carlos. Moving on to our last slide. We continue to execute on our goal to drive shareholder value. While our focus remains centered on driving profitability, core deposit and loan growth, we have added objectives that will ensure we are able to successfully navigate the current COVID-19 situation. Notably, with regards to our credit quality, we will be focusing on proactively assessing and monitoring our loan portfolio in order to preserve asset quality. In addition, we will be actively prioritizing the preservation of capital. Now more than ever, executing on our strategy is critical and we will continue to pull levers to successfully manage through the current COVID-19 environment while positioning our business for long term success. With that, we will be happy to take your questions. Operator, please open the line for Q&A.

[Operator Instructions]. And our first question is going to come from Michael Young from SunTrust. Your line is now open.

Thanks. Good morning everyone.

Good morning Mike.

Good morning.

Maybe just starting off, as we look at the capital preservation focus that you mentioned, Millar, could you talk about actively what you are going to do to preserve capital? What your expectations are for growth? And any portfolio shrinkage in addition that we might expect from here?

Well, we expect capital growth to come primarily from earnings in the future in the near term. I don't expect any shrinkage of the asset side. I think the loan portfolio will maintain or possibly grow, not significantly. I think those are key comments that we are able to make this time on that.

Okay. And then maybe just really quickly on the CRE portfolio. I appreciate all the disclosure. But I just wanted to talk to high level about the New York piece of that specifically. Can you provide a little more detail there on whatever mitigating factors you see? I know that was a pretty strong relationships and strong tenant or owners that you have up there. But maybe just walk us through a little more detail on those projects?

Yes. Surprisingly, we are seeing a very strong behavior from our sponsors in New York. We have not seen until we go in detail regarding the relief, but we have not seen that much from requests from the New York portfolio. It's holding steady. On the hotel side, you could say it could be impacted. They are performing. They have security, liquidity and the big hotel that we have in the Kennedy Airport, they have liquidity up to September. They are at 20%. They are working with the port authority because it's one of the shareholders. We have not seen any concern related to that. So in that sense, on the hotel side, which is one of the most affected during this COVID, we don't see any issue. In the retail side also, the behavior has been as expected due to the very small portion of relief we have received. As we mentioned before, our retail portfolio is mainly composed to team work by retail, very strong top Tier 1 sponsors. And so far, we are cautiously but we have not seen any major impact nor any concern. All will depend on how long this could last. We believe that based on the information we have, if it holds until May 15 or maybe end of May, we might see a small increase in relief but so far not significantly at all.

Okay. Great. And maybe next just on the net interest income. I appreciate all the color, all the restructuring that's been going on. Obviously rates have moved a lot here late in the quarter and there was some implications on funding cost. Could you maybe just give us a little bit of understanding or detail kind of where we finished the quarter in terms of net interest margin and any expectation as we move forward into 2Q?

Yes. You probably don't see the full effect of the decrease in the interest expenses because it was just a few weeks, Most of the actions were taken towards the end of March as this crisis evolved. But definitely, there was a significant decrease in the cost of fund of advances. We probably have a average cost of 1.48% towards the quarter-end. And nowadays, that's probably closer to the 1.20%-ish cost of funds adjusting advances. And in cost of deposits, if we take into account all the changes, in some products we have reached a beta of 0.65% in our most high-yielding products. So there is definitely a drop in the cost of funds that we will probably be closer to the 1% towards the end of the month of March and also during the month of April as repricing of CDs will come and definitely those will have an impact on the cost of funds going forward.

Okay. And one more from my side, just kind of high-level question on the expenses. There were a good bit of investments and technology investments, et cetera that were initially planned following the IPO. Can you give us an update on kind of your thoughts relative to that? New branch openings, et cetera? And if some of that can be foregone or delayed, what can that mean for the expense run rate on a go forward basis from here?

Okay. We have no more new branches in our plans at the moment. Our expense on the digital transformation continues. We have not cut back on our strategic plan. In fact, we feel, given everything that's happening with the COVID-19 pandemic, more and more of our focus will be on the digital side of the business. So it's really important to keep that going and we feel that we have taken successful steps to get that into place and will be starting to show its fruits some time this year, as we come out of this pandemic as well. Mike, I just wanted to go back on your capital question and give like two points. Remember, we don't pay dividends and it's not planned for us to pay dividend. And we don't do share buybacks. So we don't have a formal plan to do share buybacks and it's unlikely that we would do any in the current environment, even though with the price of our shares, it's very tempting.

Understood. Thank you. I will get back.

Thank you. And the next question comes from Michael Rose from Raymond James. Your line is now open.

Hi. Good morning everyone.

Good morning.

Good morning Michael.

I just wanted to circle back on the margin question. You guys gave a lot of color. But if I go back and look at your 10-K, the sensitivity is about a 10% reduction in net interest income for 100 basis point move, so that would imply about 15% reduction. And then if I look this quarter, it looks like your asset sensitivity actually increased, obviously given some of the moves you made. So how should we think about that in the context of some of the medication efforts that you have talked about? Is that a good place to start?

Yes. Definitely. So one of contention points of the asset sensitivity has been the investment portfolio. As you know, more than half of our loan portfolio is floating and that's pretty much the nature of the type of lending that we do. So the investment portfolio has been critical to reshape the duration of the whole balance sheet. Adding items that barbell the duration of the overall investment portfolio have been critical to protect not only the duration of the balance sheet but also the earnings of the bank. So we have been active on that and also on the cost of funds and taken proactive actions on every professional funding that we have available to make sure that we minimize its cost as much as possible. That will definitely help us to mitigate the impact that you saw on the net interest income sensitivity analysis.

Okay. So I guess to sum it up, you guys are expecting less than what the model showed, at least at the end of the year, in terms of impact on NIM and NII.

Correct. That's right. It shouldn't be, well, you have the impact of obviously 150 basis points less due to the Fed funds cut but obviously there were different actions that we are taking in balance sheet to try to mitigate that effect. As you know, decreasing the lag on the drop of deposits and being proactive with the betas and trying to make everything possible on the tools that we have available to minimize its impact.

Okay. That's very helpful. Can you update us, Millar, on where you are in some of the process improvement efforts? Obviously, this quarter we saw a nice step down in salaries and professional fees. I know there is some tech initiatives. I don't know if any of that's been pushed out just because of the pandemic that we are going through. But can you just give us an update on where you stand? Thanks.

No. We haven't pushed out any of our strategic objective investments. We continue to press on with the development of the CRM and loan onboarding process as well as some other additional products. The initiative regarding cost saves continues very actively. We are looking to continue to generate more cost saves as the year goes along. Carlos, I don't know if you have to add anything to that?

Yes. In terms of the digital transformation, pretty much the project goes as schedule. The estimated impact that we have explained before was close to the $8 million, probably total investment. But that will be over the course of two years. And so it goes as expected. So we firmly believe that COVID-19 has been a catalyst to all the technological changes. And now more than ever, this technological improvements are critical to keep going after COVID-19.

Okay. So just based on the investments and the cost savings, does that mean, at least in the near term, we could expect expenses to be relatively flattish from here?

The non-interest expense, you should probably be, the amount that we reported this quarter will definitely have, it's been impacted by COVID-19 definitely due to the HR kind of adjustments obviously because of the situation. But you should probably be in the range of the $47 million, $48 million, more or less. That will be the normalized number. And digital transformation, it goes as scheduled. So you should expect that CapEx to keep going over the next two years, over this year, 2020 and 2021.

Very helpful. Thanks for taking my questions.

Okay.

Thank you. [Operator Instructions]. Next question comes from Brady Gailey from KBW.

Hi. Thanks. Good morning guys.

Good morning.

Good morning.

I just wanted to follow-up on Michael's question on the expense base. When you look at the compensation line, it was down notably. Was there an impact there from the stock price falling and maybe lack of share-based compensation that may have been in that run rate previously?

Well, clearly, we expect that the run rate of variable compensation in this year will be down compared to prior years. And that is one of the impacts that you are seeing there.

Okay. All right. So I mean the comp line was down on a linked quarter basis almost $7 million.

Yes. About $6.7 million.

Yes. And just a little more color on what the drivers were there?

There's two aspects to our variable compensation. There is your annual cash bonus and there is also the long term incentive compensation, both of which were impacted by the expected performance that we are going to have this year.

There was another, I guess, part of the 2018 IPO grant, I guess the biggest amortization portion, it came during the year 2019. So that's no longer there or it's at a lower pace. That also helped this quarter.

Okay. And then I know we were -- sorry. Is there something else?

Yes. I was just going to say, we discussed in prior quarters how the amortization of the IPO grant was front loaded because of the accounting rule. So the cost in 2019 was significantly higher than it would be in 2020 and in 2021.

Okay. And then moving on to CECL. I know you guys were not planning to adopt CECL regardless of COVID-19 or not. Remind us, when do you guys plan to adopt CECL? Is that known at this time?

We are expected to be under CECL as soon as we potentially leave our emergent institutions condition or 2023.

At the latest, it would be January 2023.

Correct.

Okay. All right. Great. Thanks guys.

And thank you. I am showing no further questions. And I would now like to turn the call back over to Mr. Wilson for further remarks.

Okay. Thank you for joining our first quarter earnings conference call. The full Amerant team is committed to executing on our strategy and navigating the current COVID environment not only to position the business for future success, but to do so for our shareholders, customers, employees and other stakeholders. Thank you very much.

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