Good morning, ladies and gentlemen, and welcome to the Amerant Second Quarter 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time [Operator Instructions]. As a reminder, this conference call. I would now like to hand the conference over to your host, Ms. Laura Rossi, Investor Relations Officer. Thank you. Ma'am, 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 second quarter 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. Before we begin, note that the company's press release, comments made up 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 note 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 and the company's quarterly report on Form 10-Q for the quarter ended March 31, 2020 as well as the subsequent filings with the SEC, which you can access these findings on the SEC's Web site. 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 know 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 1 of the company's earnings presentation for a reconcilication of its non-financial measures to it's most comparable GAAP financial measure. I will now turn the call over to Mr. Wilson.

Good morning, and thank you for joining Amerant's Second Quarter 2020 earnings call. Today, I'll begin by discussing how Amerant continues to navigate the current environment, including an update around the initiatives put in place to mitigate the impact of the COVID-19 pandemic and our second quarter highlights. Carlos will then review our financial performance for the quarter in further detail. After our prepared remarks, Carlos, Miguel, Thiel and I, will answer questions. As I said last quarter, the safety of our employees and customers is our number one priority. Our business continuity plan remains in place. And as a result, we have been able to seamlessly serve customers and keep our employees, customers and communities safe. As the number of COVID-19 cases has increased in the communities where we operate, we are diligently following our business continuity plan and are taking a cautious and safe approach as Amerant employees begin to return to the office. Specifically, employees are only returning to the office voluntarily at a capacity of not more than 25% at any given time. Except our New York LTO, which is capped at 50%. Our BCP continues to successfully support approximately 86% of our employees with remote work capabilities. Regarding our banking centers, we have returned to regular business hours. That said, the entire Amerant team is following strict government safety guidelines as our goal continues to be to provide customers with the service they have come to expect, while maintaining a safe environment. Additionally, Amerant continues to provide customized loan payment relief options to customers impacted by the COVID-19 pandemic in accordance with regulatory guidelines, including interest only payments and forbearance options. At the end of the second quarter, loans outstanding which have been modified under these programs, totaled $1.1 billion. Modified loans from which the…

Thank you, Millar. Turning to Slide 6, I would like to discuss the investment portfolio. Our second quarter investment securities balance was $1.7 billion, down from the $1.8 billion at the end of the first quarter 2020 and relatively flat year-over-year. During the second quarter prepayments on mortgage related securities have stabilized following a surge in expected prepayment during the first quarter. Still, we continue to focus decreasing floating rate investments, given the current interest rate environment. As of the end of the second quarter, floating rate investments represented 17% of our portfolio, down from 18% a year ago. In the quarter, we center our attention on purchasing higher yielding corporate debts, primarily in the subordinated FI sector, to minimize the cost of our senior debt issuance, while maintaining the duration of our portfolio. Turning to Slide 7, we provide an overview of our loan portfolio in the second quarter. At the end of the second quarter, total loans were $5.9 billion, up 3.6% compared to the first quarter of 2020 and up 2.2% compared to December 2019. As Millar mentioned previously, these increases were largely result of the PPP loans originated during the quarter and partially offset by declines in other loan originations, attributable to the current economic environment and more stringent credit guidelines as a result of the pandemic. Loan production in the second quarter centered on the PPP loans to small businesses. As mentioned earlier, as of June 30, 2020, Amerant had received approval and funded over 2,000 loans and more than 219 through this program. Beyond PPP loans, real estate loans were also up quarter-over-quarter and year-over-year due to increases in jumbo mortgages within our single-family residential portfolio. Going to Slide number 8, we see the credit quality of the portfolio. We recorded a provision for…

Thank you, Carlos. Moving on to our last slide, we continue to execute on our goal to drive shareholder value. We remain focused on generating profitability, core deposit and loan growth, as well as maintaining credit quality as we navigate through the economic turmoil created by the COVID-19 pandemic. In the current low interest environment, we also plan to lean more on the careful management of our non-interest expenses and expansion of our non-interest income to drive growth in our bottom-line. Looking ahead, we will continue to focus on proactively assessing our loan portfolio in order to preserve asset quality. In addition, we will be actively prioritizing the preservation of capital. With this close monitoring of all aspects of our business, we will ensure that despite these unprecedented times, Amerant emerges stronger than before. Moreover, we look forward to continuing to support our communities through the COVID-19 pandemic. The entire Amerant team is heads down and pressing ahead on finding solutions for customers, whether it's a customized loan payment relief auction or a new PPP loan. We have dedicated additional employees to these efforts and will continue to be hyper focused on meeting customers’ needs during these times. I know I speak for the entire Amerant team when I say we're truly proud to be providing solutions and helping our communities during this time. With that, we'll be happy to take your questions. Operator, please open the line for Q&A.

[Operator Instructions] Your first question is from Michael Rose from Raymond James. Your line is open.

Just wanted to start with expenses. So on a core basis, if I back those items out that you called out and then add back the $7.8 million, looks like we're a run rate of about $43 million. So good expense control. Is that a good base in which to build off? And maybe can you talk about some of the expense reduction efforts? I know you mentioned the branch, a few branches you're going to close. Can you give us a sense for kind of what expenses could look like over the next quarter or two? Thanks.

So in terms of the reason reduction that you noticed on the second quarter, so primarily its driven by the PPP origination. As we mentioned on the call, there was about $8 million that were deferred over the life of the loans. And of course, the fee income associated with this loan will also be amortized. So that definitely doesn't represent a structural change on the cost structure of the bank. So that will definitely come back at a rate of about a million a quarter until we reach the two years anniversary of the loans. However, forgiveness or acceleration of the loans will definitely bring back those costs faster as well as the fee income. So I wouldn't take it as a structural change. We still keep our target of being close to the 48 on a quarterly basis. This quarter, we spent about 1 million on the digital transformation, but we expect that to catch up during the third and fourth quarter of the year. Remember that during the first quarter, we under spend on that specific item. So progressively, the normalized cost structure should be closer to the number that we provided before roughly $48 million to $49 million.

And then I noticed that on the foreign deposits the other foreign deposits were up, but the Venezuelan deposits were still down but obviously slower than we've seen. Can you talk about what drove the other foreign deposits higher? And then if this is a good run rate for at least in the near-term attrition for the Venezuelan deposits? Thanks.

The changes on customer service and payments platform has helped to retain those international deposits. And we started at the beginning of the year reserve program also visiting other countries, in particular Colombia, where a lot of Venezuelans moved there. So, we are capturing the same nature of deposit and we are expanding our relationship abroad, and that has stabilized significant the previous deposit decay as it stabilized significant, and we are deep in relationship, which is very important. And also, it has been compensated by commercial international accounts where we continue to have very good relationship and those are impacted very positive the trend.

And then maybe finally for me just on the margin. Obviously, the step down this quarter given the rate sensitivity. Should we expect some modest compression on 4 basis ex-PPP impact as we move into the third quarter? And do you have a sense for how much that might be? Thanks.

Expectation on the impact of the NIM should be roughly close to the 10 basic points extra. So, it should be between the range of the 230 to 240, more or less. We ended up 244. But remember there is still several time deposits that we need to reprice for the remainder portion of the year. Those time deposits definitely they came at a rate of 2019, some of them 2018, which were definitely higher than their prevailing rates that we have in the market as of now. So, you would expect that, that definitely will help the costs of funds progressively. So I would say that we should be able to stabilize NIM between the 230 to 240 more or less.

Your next question is from Michael Young of SunTrust. Your line is open.

I wanted to maybe just start on the credit side with the relationship that you guys identified and announced previously and the additional deterioration. Can you just provide any details around how that relationship was identified as a problem? And then how kind of the resolution efforts are going at this point?

This is a relationship that has been in the books for more than 15 years. It had been monitored at least 20 times during those years. We did about $1 billion in constant self liquidation transactions on an average of between $300,000 to $400,000. And since the pandemic started, as you know, we started on monitoring our our portfolio, and we had constant communication with all our customers in particular with this customer. We have communication in March, and in April, and in June. We were provided financial statements for December and March that did not require any forbearance, and we received payments through the month of May and June. Definitely, it was an impact, because non-information of the liquidation process was given to us. We knew about this on a search with older companies that are in the sector. So definitely, we have not had any contact with the company nor the liquidator, only with liquidator through our legal counter. So we’re still monitoring the situation. And by no means, there was a sign on any weakness nor in our process, nor on conversation with the company.

It was kind of a digital event, it was fine until it gets that.

So have you conducted any sort of review as a result of this of kind of the rest of the portfolio, or are there any other relationships that kind of would mirror this relationship in terms of what they do on an operating basis?

Yes, we definite -- not in particular, because of the situation we have the review with between risk, credit and the business. We have review almost 100% of the 20 portfolio, almost 65% of the overall credit portfolio. In particular in the credit commodities sector, we have a small presence. Utilization has dropped significant. Those relationships are mainly on the scrap metal and some proteins. They are under ABL with participation or with a lead bank that has expertise on those commodity traders. The ABT transaction are not relying on inventory, the majority are trade secure and all ensure sorry, and also based on account receivables with an outage every year or twice a year monitor by availability. So, we don't foresee any issues. We have received financial information from at least until April and May and we are constantly reviewing those credit and today, the exposure is around $80 million.

And I guess just with this specifically identified relationship. What happened from a process standpoint that allowed them to end up in that big of a net loss position?

We are on the review with the legal. We have not determined the cause of the issue. As I mentioned, we received financial information up to March. We received payment on through May and June. The last communication with them was typical answer related to a slowdown in sales due to COVID but there was no specific reason. And like I said, we have not being able to talk to the management of the company basically because of the type of liquidation that they decided to go through. And it's important to mention that this company has went through a previous volatility and commodity prices in the past in the 2011 of the crisis, 2014 drought. So there is no indication that this company was not going to be able to do sustain or weather this situation and what reported by the financial performance that we were receiving.

And I guess aside from that, did you guys provided an amount of loans that are currently in some state of deferral or forbearance, and any breakdown on that by category?

So as provided in the documents, we have approximately, I mean, from what is left and I've mentioned there's about $500 million that expired and that we have those that were due, we have received almost everything and/or they have resumed payment of almost everything that we do. There's another $300 million that are coming due and payment mid to resume by the end of this month and we, based on conversations we've had with the customers in the region, the improvement that we have seen in some of the collections and occupancy levels, we believe that that's not going to be an issue. From what is left, we will have about 12% of the real estate portfolio. We’re still be in one type of forbearance. And then from the commercial another 10%. So we think that this number will be reduced from the 20% that we see there to about 8% or 9% of the portfolio. And then as the situation progresses and things are, reopenings are happening, we believe that that number should improve. We have seen that many of the customers have used it first 90 days as liquidity management for the prevention. And we have seen that in the second extension, they have not need for that, those one.

I guess that that's a very important point, because one if you look at the trend of the forbearances after reporting on the first quarter 1.1 billion, you went to 500 million now in the second quarter. And most of what we discuss in the first quarter was that we identified that most of our customers were using this type of arrangements to preserve liquidity. And now it's kind of that tat is consistent with the performance that we're seeing that now we just have 500 million stiil under forbearance.

Your next question is from Brady Gailey from KBW. Your line is open.

So I was wondering about your ability to further reduce the cost of deposits. The cost of deposits was down in the second quarter but it's still relatively high versus peers that over 90 basis points. How rapidly do you think you can get that down? And how low do you think you can get on the cost of deposits from here?

So there is one immediate action that we're working and actually it has been a work-in-progress since Q1, which was the progressive repricing of our high cost time deposits. So, we have changed our table rates several times since the fed fund drops significantly in March and now, we continue to do so. So, based on the repricing schedule that we have on the time deposits, which is roughly between $300 million to $400 million for now through the end of the year, there should be an opportunity to reprice those time deposits to, let's call it, between 0.5 basis points to 0.75 basis points, and that would definitely create an opportunity for cost savings. Additionally to that we're evaluating our premium products like the relationship money market, which is roughly $400 million in balances that cost us roughly 1% that also being review for further drops. So, that combination between the actions that we can take in those premium products plus the repricing of time deposits, you will definitely see a potential savings coming into the interest expenses.

So I know a lot has changed from when you guys went public. We have the pandemic rates are now at zero, it's harder to grow loans but a lot of what we talked about on the IPO roadshow was this profitability improvement story. So, you've had several things go against you. But as you look at the opportunity you have on the expense side to reduce expenses as a way to increase profitability. Is that something you're considering further reducing the expense base from here?

Definitely, that's a work in process that we have been working for about two years now. We have several strategies that constantly evaluate our cost structure, not only headcount but physical space. As we disclosed today, there are two brunches that are being closed. So there is multiple efforts being done throughout the whole balance sheet to identify what areas are subject to have more drops in the cost structure. We continue to do so. So as I said from physical space through implementation of technology to create more efficiencies and increase productivity, we are working on that day-by-day. And of course, efficiency impacted by the drop in the NIM so that doesn't definitely play in our favor. But it's a work in process and rest assured that we're working on that.

And then just finally for me back to the loan modifications. So I read in the press release you're at $1.1 billion as of June the 30th. So what you're saying is, as of now that number has dropped to $500 million. Is that correct?

The $1.1 billion is loans that we have approved for -- or they were under forbearance, and they are -- those are the ones that are outstanding. Those are the loans that we provided forbearance and they're still outstanding. But out of that, we have already received payment or we expect to receive payment and some that have expired in forbearance period. And whatever is left is $500 million that we mentioned.

Better to say about $600 million out of the $1.1 billion, they expired their forbearance period, and they are coming in due for payments. Some of them already received payments as of July 17th, some of them are due for payment before July 31st.

And it's a constant communication with the customer. And customers are now requiring the extension. There are some that since the beginning were 480 days. So we’ll still be there. But definitely if the trend continue like that it’s a good sign and also we're monitoring the situation of each of the regions where we are.

I'm showing no further questions at this point. I would like to turn the conference back to you, Mr. Wilson.

Thank you for joining our second quarter earnings conference call. As we manage through the unknowns of the current COVID environment, we intend to continue to implement mitigation strategies that ensure long-term success for the benefit of all our stakeholders. We look forward to continuing to communicate with you regarding our progress in the quarters ahead. Thank you again for your time today. We will now disconnect.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.