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,…

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…

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.