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Edited Transcript of AMTB.OQ earnings conference call or presentation 30-Jan-20 2:30pm GMT

Q4 2019 Amerant Bancorp Inc Earnings Call

Feb 4, 2020 (Thomson StreetEvents) -- Edited Transcript of Amerant Bancorp Inc earnings conference call or presentation Thursday, January 30, 2020 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alberto Peraza

Amerant Bancorp Inc. - Co-President & CFO

* Laura Rossi

Amerant Bancorp Inc. - Head of IR

* Miguel Palacios

Amerant Bancorp Inc. - Executive VP & Chief Business Officer

* Millar Wilson

Amerant Bancorp Inc. - Vice-Chairman & CEO

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Conference Call Participants

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* Michael Edward Rose

Raymond James & Associates, Inc., Research Division - MD of Equity Research

* Michael Masters Young

SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Amerant Bancorp Fourth Quarter 2019 Earnings Conference Call. (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. Please go ahead.

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Laura Rossi, Amerant Bancorp Inc. - Head of IR [2]

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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 2019 results. With me this morning are Millar Wilson, Vice Chairman and Chief Executive Officer; Al Peraza, Co-President and Chief Financial Officer; and Miguel Palacios, Executive Vice President and Chief Business Officer.

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 or through our Investor Relations website.

Amerant Bancorp Inc. is referred to herein as the company or Amerant. 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 1 of the company's earnings presentation for a reconciliation of each nonfinancial measure to its most comparable GAAP financial measure.

I will now turn the call over to Mr. Wilson.

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Millar Wilson, Amerant Bancorp Inc. - Vice-Chairman & CEO [3]

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Good morning, and thank you for joining Amerant's Fourth Quarter and Full Year 2019 Earnings Call. Today, we'll discuss Amerant's quarterly and annual results. We will also highlight the progress we've made on our transformation. We will finish by giving some color on what we expect for 2020.

I'll begin with our fourth quarter 2019 highlights, and then I will review our financial performance in greater detail. After our prepared remarks, Al, Miguel and I will address any questions.

Starting on Slide 3 and Slide 4, we have a summary of our performance for the quarter. In Amerant's first full year as a publicly traded company, we executed key elements on our previously outlined strategy, providing value to our shareholders. Net income grew 12.0% year-over-year, and ROA and ROE both saw improvement during the year driven by strong noninterest income and the -- and successful operational efficiency and expense reduction initiatives.

During the year, we reduced 82 full-time equivalent positions as a result of our efficiency efforts. We also prioritized relationship-driven and low-risk domestic loans, finalized the exit from foreign financial institution loans and nonrelationship secured national credits, maintained strong asset quality and optimized our funding costs.

In the fourth quarter, we saw significant growth in noninterest income when compared to the prior quarter. Notably, we realized significant income from derivative sales to our borrowers and a large gain on the sale of vacant land adjacent to our Beacon operations center.

On the loans side, our owner-occupied and 1 to 4 residential portfolios grew in line with our relationship-driven strategy. Demand for residential and small business loans grew in the fourth quarter, resulting from a higher number of applications. While these only partially offset the prepayments in our CRE loan portfolio, they do point to strong loan demand and the expectation of favorable economic conditions in 2020.

On the deposit side, we rolled out several strategies, which we will discuss later, to capture a larger portion of our customers' deposits and provide a quality best-in-class banking experience for our customers.

We also strengthened our footprint in South Florida through the opening of 2 new banking centers in the fourth quarter, one in Miami Lakes and the other in Boca Raton, totaling 3 new banking centers in 2019. We expect to open one more in the first quarter of 2020 in Delray Beach, Florida. These new locations embody Amerant's vision of the banking centers of the future, featuring smaller square footage, enhanced technology and a more focused customer-service approach.

Lastly, we embarked on our digital evolution and started taking actions related to the use of technology to support our business strategies. In December 2019, we engaged Salesforce for its customer relationship management system and seen over its loan origination solution and started implementation early this month. These 2 platforms will help us improve and streamline marketing, sales, onboarding and service processes, reduce turnaround times, facilitate collaboration amongst groups and provide access to relevant information to boost relations and improved customer experience. In addition, the implementation of nCino, in particular, will generate additional savings from platform consolidations.

Moving to Slide 4. Our net income for the quarter was down 6.6% over the last quarter -- over the same quarter last year. On an adjusted basis, the decline over the same quarter last year was 42.8% as the year-ago quarter experienced add-backs from restructuring and spin-off costs. And this year, we had the gain on the sale of land. During this quarter, compared to the same quarter last year, the drivers of decline in net income were lower net interest income due to lower average loan balances at lower rates and higher time deposit costs, lower provision reversal, and this year, we had a gain on the sale of land.

Our return on assets was 0.68% or 0.57% on an adjusted basis. And our diluted earnings per share was $0.31 per share or $0.26 on an adjusted basis, in line with market expectations. Al will explain the non-GAAP adjustments and provide more detail on the results shortly.

Our credit and asset quality remained strong this quarter, leading to a release from the allowance of loan -- for loan losses of $300,000. The release was mainly due to certain recoveries and releases that compensated the increase of specific reserves.

And now I will turn the call over to Al, who would go over the quarter and year performance in more detail.

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Alberto Peraza, Amerant Bancorp Inc. - Co-President & CFO [4]

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Thank you, Millar. Good morning, everyone. Before we move on to Slide 5, I would like to touch on the highlights in our balance sheet this quarter. On the asset side, as of December '19, total loans decreased 3% compared to December '18, primarily driven by the completion, faster than anticipated, of our strategic runoff of foreign FI and nonrelationship SNC loans throughout the year. This resulted in a total asset decline of 1.7% for the year.

On the funding side, our domestic customer deposits grew 4% year-over-year due to an

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as we focused on expanding our deposit gathering outside our natural footprint. We also increased our broker deposits but expect to decrease our usage in 2020 as our online product gains momentum. Offsetting the domestic growth, our international deposits continued to decline this quarter as our Venezuelan customers continue to draw down their accounts to fund living expenses or purchase homes abroad.

Our stockholders' equity increased by $87 million or 11.7% compared to '18, mostly due to the net income and the growth in accumulated other comprehensive income primarily stemming from the higher market valuations in our available-for-sale investment portfolio.

Moving on to Slide 5. I'd like to review our investment portfolio. Our fourth quarter investment securities balance increased slightly to $1.7 billion from $1.6 billion at the end of the third quarter and stayed relatively flat when compared to the same period last year.

We continue to actively manage our investment portfolio to ensure adequate liquidity, especially given the decline in foreign deposits. The increase in the investment portfolio during the quarter was primarily driven by strategic purchases oriented to protect our NIM in a declining rate scenario. Along this line, this quarter, we continued to decrease our floating rate portfolio, which now comprises approximately 14% of our investment portfolio, down from 23.4% at the end of 2018.

The average duration of the portfolio increased from 3.4 years at the end of '18 to 3.8 years at December '19 as we added 20-year U.S. treasuries and CMOs with prepayment protection to hedge earnings against further interest rate lines. Finally, our adoption of a new accounting standard applicable to marketable equity securities led to a gain of $700,000 this quarter.

Moving on to Slide 6. We can see some of the movements across our loan portfolio. During the year, total loans decreased $176 million or 3%. This decline was primarily due to the completion of our strategic exit from nonrelationship SNCs and foreign FI loans in the first 3 quarters of 2019, totaling $325.6 million from year-end '18.

CRE loans declined $73 million, mainly on a high level of prepayments, especially in the fourth quarter. These declines were partially offset by $117 million increase in owner-occupied loans. It is important to mention that during the year, our domestic loans, excluding the impact of the runoff of nonrelationship SNCs grew 3.7%, primarily from relationship loans. Compared to the third quarter, total loans experienced a slight decline as CRE prepayments exceeded new production. Our residential loan portfolio experienced a higher level of applications in the second half of 2019, which led to a $12 million increase in the fourth quarter.

In line with our strong commitment to our relationship-focused strategy, we estimate our relationship loan production was approximately $1.2 billion in '19, up approximately 14% from last year.

Moving on to Slide 7. We continue to experience strong credit quality during the fourth quarter, which drove a release of $300,000 from the allowance for loan losses this quarter. This release was largely driven by a lower loan balance and a commercial loan recovery, partially offset by loan factor adjustments and an increase in the specific reserves related to the $11.9 million impaired relationship I will elaborate on shortly.

I want to quickly touch on the phaseout of our credit card products, which we discussed briefly last year. We stopped all charge privileges to existing cardholders, charged off uncollectible balances and are requiring complete repayment of remaining accounts by January 2020. At the end of 2019, the outstanding balance on credit cards totaled $11.1 million with an allowance of $1.8 million, down from almost $34 million outstanding and an allowance of $5.4 million at the end of last year. We continue to monitor this balance closely and are reassessing the required reserve amount until the balance is completely repaid. Going forward, our international and domestic customers may still enjoy credit card products through our referral programs with some of the U.S.'s leading card issuers, namely First Bankcard and American Express.

Nonperforming assets increased $14.8 million during the year and totaled $33 million at December 31, 2019. Nonperforming assets to total assets were 0.41%, up from 0.22% at the end of '18. This increase, as mentioned last quarter, is primarily due to an $11.9 million loan relationship with a South Florida wholesale customer affected by the 2017 hurricanes and 4 other unrelated loans totaling $6.7 million placed in nonaccrual status. Compared to the end of the third quarter of '19, nonperforming assets to total assets remained flat.

Additionally, special mention loans increased by $13.5 million during the year, primarily due to the same $10 million condo construction relationship SNC loan in New York we discussed last quarter, along with 9 unrelated loans totaling $17.8 million. These were partially offset by $14.7 million downgraded, mainly represented by the food wholesale borrower I just mentioned and the upgrade of a $2.2 million owner-occupied loan previously classified as special mention.

Turning to Slide 8. You can see that our loan yield has decreased this quarter by 17 basis points compared to the prior quarter and by 27 basis points compared to the fourth quarter of '18, primarily due to lower interest rates. Compounding the effect of lower interest rates was a higher rate of prepayments, particularly in our CRE portfolio, partially offset by prepayment penalties.

Our investment securities yield declined by 7 basis points from the previous quarter, mainly due to the purchase of $100 million in 20-year U.S. treasuries as a hedge for rate declines. The yield on these securities was approximately 60 basis points below the average investment portfolio yield. Year-over-year, the investment portfolio yield declined 21 basis points, primarily due to the repricing of floating rate instruments and SBAs.

In Slide 9, we highlight Amerant's evolving wholesale funding strategy. We continue to take advantage of yield curve opportunities by replacing maturing advances and selective early termination of higher cost FHLB advances at a net cost of $1.4 million during the year with lower fixed rate advances with callable features. This resulted in a 40 basis point saving in funding costs in the fourth quarter or approximately $700,000. We expect to continue to utilize wholesale funding as needed with short durations or optionality in order to further drive down our funding cost.

Moving on to Slide 10. Total deposits at the end of the year were $5.8 billion, down 4.6% compared to the close of '18 and down 1.1% compared to the third quarter of this year. As we have stated previously, these declines result primarily from lower foreign deposits, which declined by 13.1% during 2019.

The fourth quarter annualized foreign deposit runoff rate was 8.6%, down from 16% in the third quarter as we continue our efforts to gain greater share of wallet from our higher net worth foreign customers. Foreign deposits have fallen at a 12% compounded annual rate since 2015 as our customers draw on their accounts to fund living expenses and increasingly purchase homes abroad.

As this trend continues, we are intently focused on increasing our core domestic deposits, which, despite having a higher cost, present higher growth potential and better cross-selling opportunities for our other products and services. Accordingly, much like the rewards program we announced in the third quarter, in the fourth quarter, we rolled out new services and offerings that provide a better banking experience for our customers. We started providing access to Zelle, a popular digital payment platform that makes it easier for our personal banking clients to quickly send and receive small sums. We ramped up our efforts to raise online deposits outside our footprint, which has contributed $86 million to our deposit base in 2019, and we expect this to continue to grow in 2020.

As a result of our efforts, we closed the year with 54% in domestic deposits, up from 50% at the end of '18. As expected, our cost of deposits increased 19 basis points from the same quarter a year ago and 1.39% primarily due to this shifting mix.

Turning to Slide 11. Fourth quarter 2019 net interest income was $51.3 million, down 9.7% compared to the fourth quarter of '18 due to lower loan volumes resulting from the strategic runoff of the foreign FI and nonrelationship SNC loans as well as lower rates on both repricing and new loans. The higher cost of deposits is a result of less expensive foreign deposits being replaced by higher cost domestic deposits, including online and brokered CDs. These were partially offset by the lower cost of our wholesale funding given the early termination of more expensive FHLB advances, the utilization of lower fixed rate advances with callable features and cost savings realized via the TruPs redemptions.

The NIM for the quarter was 2.74%, a decrease of 21 basis points compared to the fourth quarter of '18. This decrease was due to the increased deposit costs; the low interest rate environment, which also led to higher prepayments on fixed rate loans and heightened competition on C&I loans; and the higher prepayments on SBA and CMBS securities in our investment portfolio. The 2.5% decrease in net interest income and the 6 basis point decrease in the NIM we saw in the fourth quarter compared to the third quarter of this year is attributable to the same low rate environment, which was partially offset by a lower cost of professional funding from the strategies I mentioned, and lower deposit costs especially in relationship money market and tier products, which costs we continue working to drive down. We continue to take actions to drive up the net interest margin, such as optimizing our FHLB funding costs, and have redeemed, inclusive of today's redemption, all of the $50 million of high cost, fixed rate TruPs that we had.

We also entered into interest rate swaps on the remaining floating rate debentures, taking advantage of the yield curve inversion to effectively fix a lower rate for 3 years. The combined effect of the TruPs optimization efforts will produce an annual pretax interest expense reduction of approximately $5.2 million. Other actions taken include cutting rates on deposits while focusing on growing low-cost demand deposits to reduce utilization of broker deposits and more actively requiring rate floors on new loan originations.

Net interest income for the full year '19 was $213.1 million, down 2.7% compared to $219 million in the full year '18. This decrease was mainly driven by higher deposit cost mostly related to time and money market deposits, partially offset by higher income on interest-earning assets due to higher rates in the earlier part of the year and the $2.1 million reduction in interest expense on our FHLB advances due to the callable structures explained earlier. Importantly, our NIM for the full year '19 increased 7 basis points to 2.85% as a result of higher average rates on our interest-earning assets generated in the first half of '19 and our focus on growing higher-yielding domestic relationship-based loans.

Slide 12 shows that noninterest income in the fourth quarter was $16 million, up 33% year-over-year and up 15% from the previous quarter. Several factors drove this improvement, including the fourth quarter's income of $2.5 million from the sale of derivative contracts to loan customers; a $2.8 million gain on the sale of the vacant Beacon land; and finally, an approximately $700,000 benefit from the newly adopted accounting standard applicable to marketable equity securities.

These improvements in the fourth quarter were partially offset by $1.4 million in net penalties on the early termination of the Federal Home Loan Bank advances during the year as we replaced expensive medium-term advances with long-term callable structures, $500,000 lower income from credit card fees as we continued phasing out our legacy credit card products and $500,000 less income from the discontinuation of services provided to the company's former parent and its affiliates. With the combination in fourth quarter of '19 of the previously announced acquisition of the Cayman Bank, the company no longer offers any services to its former parent or its affiliates.

Noninterest income in 2019 of $57.1 million was up 6% compared to 2018. The drivers for the year include an increase of $3.7 million in derivative contracts sold to borrowers, the fourth quarter sale of a vacant Beacon land, the $1.9 million gain on the sale of municipal bonds and floating rate corporate securities from earlier this year and the recently adopted marketable equity securities value adjustment, partially offset by the FHLB early retirement penalty, the decline in brokerage fees as a result of lower fixed income trading volume by our customers, lower income from the discontinuation of services to the company's former parent and its affiliates and lower wire transfer and credit card fees.

Amerant's assets under management and custody increased $223.6 million or 14% to $1.82 billion at year-end compared to $1.59 billion at the end of '18, primarily due to market appreciation and the completion of the Cayman Bank purchase.

Moving to -- on to Slide 13. Fourth quarter noninterest expense was $51.7 million, down 5.3% year-over-year and down 1.9% from the third quarter. These decreases were largely the result of lower employee salary and benefit costs as a result of our 2019 workforce streamlining efforts. Compared to the third quarter, marketing expenses were lower contributing to the decrease in the noninterest expense in the period, among other incremental cost savings. Partially offsetting these savings was a $2 million increase in long-term incentive compensation plan cost tied to the performance against strategic targets established for the year 2016 through 2019 and $1.9 million higher professional and other service fees resulting from provision adjustments recorded in the fourth quarter of '18 after the final spin-off costs were determined.

Noninterest expense for fiscal year 2019 was down 2.6% compared to '18. This was largely due to the same salary and benefits cost savings mentioned, in addition to lower legal, accounting and consulting fees, FDIC credits and a favorable adjustment to depreciation expense on our operations center. These savings were partially offset by higher long-term compensation costs and the $5.9 million compensation expense associated with the 2018 IPO grant.

Restructuring expenses in the full year '19 were $5 million, consisting of $3.6 million in rebranding costs and $1.5 million of staff realignment expenses. We are pleased with our progress on the implementation of our transformation strategy in '19, and we'll continue to look further for operational efficiencies in 2020 and beyond.

Turning to Slide 14. The primary purpose of this slide is to show a normalized noninterest expense for fourth quarter '18 since that quarter included significant restructuring costs. The adjusted increase of 7.8% from the same quarter last year is primarily attributed to the $1.5 million in compensation expense associated with the 2018 IPO, the $2 million in the long-term incentive program adjustments previously mentioned and staff cost of living increases. These increases were partially offset by the significant reduction in staffing during the year. Regarding other operating expenses, the increase was attributed to higher professional and legal fees, including legal and marketing expenses.

Adjusted noninterest expense for fiscal year '19 was $204 million, relatively flat compared to the year-ago period as a result of the 9% head count reduction in '19, offsetting the other drivers I just mentioned.

On Slide 15, we can see that Amerant remains asset sensitive as over half of our portfolio -- loan portfolio is floating rate or matures or reprices in less than 1 year. With the potential of interest rates continuing to decline or remain low, we have taken concrete steps to reduce this sensitivity with a goal of driving our NIM higher.

One of these steps was increasing the duration of our overall investment portfolio, ending the year with 3.8-year duration, up from 2.6 years at the end of the third quarter. We achieved this by the purchase of the 20-year U.S. treasuries and U.S. government-sponsored agencies with -- CMOs with prepayment protection. We estimate that an instantaneous and parallel 25 basis point decline in interest rates on a static balance sheet will reduce our net interest income by approximately $5 million or 2.3% over the following 1-year period, which is slightly more than what we had in our model -- have shown in price -- in prior quarters. Conversely, a 25 basis point increase would benefit our net interest income by approximately $3 million.

I will now hand it over back to Millar to conclude our prepared remarks.

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Millar Wilson, Amerant Bancorp Inc. - Vice-Chairman & CEO [5]

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Thank you, Al.

Moving to our last slide. In 2020, we expect to build on much of the momentum we achieved in 2019. Our goals remain largely unchanged, and we continue to focus on improving profitability through growing loan yields and expanding wealth management and fee-based products while driving down funding costs and maintaining strong credit quality and underwriting standards. Targeted growth of Amerant's core deposits and domestic loans across all our markets, increasing our operational efficiency by continuing our 2019 rationalization efforts through the adoption of new technologies as well as improving the quality of our customer service continue to accrete earnings to our capital to support future activities.

Lastly, before we open the call to questions, I want to provide an update to our initial ROA target from the IPO. As you know, we originally laid out several initiatives which would help us reach a 1% ROA by the end of 2020. We are halfway on this 2-year journey and have successfully executed on all the initiatives that were under our direct control. With today's TruPs redemption transaction, we are completing the redemption of our third most expensive trust preferred security, concluding the 3 redemptions we had planned. We have made significant staff reductions, many in back-office positions, and opened new banking centers with a smaller footprint and enhanced technology.

We continue to improve our loan mix as we ran off international loans and shifted towards higher-yielding domestic relationship-based loans. Additionally, we generated substantially higher fee income from derivatives sold to customers and treasury management products and continue to grow our wealth management business.

To no one's surprise, however, our results have been significantly impacted by a declining rate environment. Instead of the rising rate scenario we had forecasted or even flat rates, we experienced 3 rate cuts in 2019. This significantly impacted 2019 results and will have an effect on 2020.

Given the forecasted flat rate scenario and tightening credit spreads, we no longer anticipate to hit our 1% ROA target by the end of 2020. However, we still view this as a reachable medium-term target as we continue to make significant progress on the diversification of our loan portfolio, fee income, deposit cost reductions and efficiency initiatives.

I want to thank the entire Amerant team for the great work each and every one has done this year. As we complete our first full year as a public company, 2019 was defined by important and necessary change, coupled with careful execution. I am proud of the progress we have made on our transformation strategy and look forward to another year of strong growth, generation of value for shareholders and, most importantly, delivering quality, best-in-class products and banking services to our customers.

With that, we'll be happy to take any of your questions. Operator, please open the line for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Michael Young with SunTrust.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [2]

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Thanks for the outlook there, Millar, on the 1% ROA target. I did want to just follow-up high level on that. I think, originally, the guidance included around 20 to 25 basis points of ROA improvement from higher rates. So is the right way to think of the target for this year is kind of just removing that piece? Or is it actually a detriment, so we should actually think of maybe 30 basis points or so of ROA pressure from the lower rate environment?

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Alberto Peraza, Amerant Bancorp Inc. - Co-President & CFO [3]

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Well, Michael, what's important -- it's Al. What's important to mention is, and to rehash what Millar mentioned, we've achieved almost all of the other targets that we set out to, the fee income, cost reductions, a remixing of the portfolio. All that's missing is the rates. If you recall, when we did the ROA walk initially in the IPO, minus any rate changes, a 2-year -- our 2-year outlook was to be soundly in the 90s in terms of -- and we always said back then that we felt that just a bump in the rates would carry us over to that 1%. And now as a result of -- and remember, the sensitivity that we've been seeing all along -- our asset sensitivity that we've been seeing all along has always been roughly the 25 basis point decline would translate in $4 billion to $5 billion decrease in our net interest income.

So when you have the compounded effect, remember, it's -- we were looking at a 2-year target, so there were still a lot of drivers that have to be done and will continue to be executed during year 2 other than the net interest income. But if you compound the effect of that volume that we put in year 1 of the transformation and as well as the new volumes that we're going to be putting in year 2, that essentially is why we're having to push back that outlook. We -- it's essentially basically the way we see it, it's rates. The only reason we're not meeting this is rates because we feel very comfortable with what we've achieved in all of the other elements of the ROA walk during the first year. And we still got another year to go on those same initiatives to bake even incremental improvement in all of those other measures.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [4]

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Right. And completely understand that. I mean that was why I was just trying to hone in on the rate piece of the ROA walk because I do agree all the rest of the pieces have moved forward and progressed. But that piece, I was just trying to understand if that should be kind of how we think about the ROA target, maybe more for 2020 is just kind of everything x rates as it was in the ROA walk initially or if rates have actually become even a detriment to kind of the benefit that there potentially was from higher rates just because rates have gone so low and inverted at times, et cetera.

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Alberto Peraza, Amerant Bancorp Inc. - Co-President & CFO [5]

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Yes. Well, we -- as I said before, we -- our walk, our ROA walk put us soundly in the 90s, it was somewhere between 90 and 95 basis points without the rates. So that's kind of the starting point that we should be looking at. We thought that -- and I know that we weren't given credit for it because, obviously, we can't control rates. But at that point, we said, look, this is getting us very close in the low 90s and just blip in rates is going to carry us the rest of the way. But quite contrarily, it's been very depressed.

And keep in mind that we've had 3 rate decreases, but we also had a significant dip in rates during the year, more so than the effect of just 3 rate decreases. I mean we had an inverted yield curve for a period of time this year. So that also brought down -- and anything that we were booking at that time was also impacted. The rates on what we were booking during an inverted yield curve situation was also -- is affecting this year and will have a lasting -- will also affect us into the next year.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [6]

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Right. And maybe just switching over to expenses. I know there's a few benefits from lower kind of IPO grant costs next year, and you guys have got the CRE -- CRM system up and some other systems in place. Is there kind of a step function down in expenses at any point? Or is it kind of just a slow grind lower from maybe the 4Q level throughout '20?

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Alberto Peraza, Amerant Bancorp Inc. - Co-President & CFO [7]

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Yes. We're -- if we exclude the cost of the digital project that we're embarking on right now that we've started already, we would see a decline in our run rate. We would still see a decline of probably $1 million to $2 million in our run rate. Some granularity in terms of when some of those expenses come in during the quarter, so maybe some granularity within the quarters. But all in all, we expect a lower operating expense if we exclude -- probably flat, if we consider the important expense -- or the important investment that we're making in this digital evolution, but we would expect -- excluding that, we would expect a reduction, and we're continuing to work with it.

In terms of -- you saw the significant reduction that we've -- at the end -- have done for 2019 in terms of FTEs. We expect to remain -- by the end of next year, we expect to remain relatively flat in our FTEs, but there's going to be some bumps and valleys along the way because we're going to be adding some teams of lenders in Florida, we're going to be adding a team of lenders in Texas. We're adding another team to further advance on our domestic wealth management strategy. So we expect to remain flat in terms -- probably flattish in terms of FTEs with some granularity within the quarters as we are successful in onboarding those teams. And certainly, those teams will then help us with production -- with our production targets and fee income generation after they're in.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [8]

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Okay. So should we kind of think of starting the year in the first quarter kind of similar but maybe slightly down from the fourth quarter run rate? Is that kind of the right messaging?

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Alberto Peraza, Amerant Bancorp Inc. - Co-President & CFO [9]

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Yes. The first quarter will certainly have that immediate drop from the amortization of the IPO grant, remember? That was like $1.5 million every quarter, this in '19. And I believe that goes down to about $700,000 per quarter in '20. So that -- right off the bat, you have a pretty significant decrease of nearly $1 million in the run rate. And then we'll have to see how successful we are and how quickly we can onboard those teams. So that may be -- and also then, the expenses that we incur as we implement the digital tools that Millar mentioned will also have some granularity within the year in the different quarters.

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Operator [10]

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(Operator Instructions) Our next question comes from the line of Michael Rose with Raymond James.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [11]

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I just wanted to go back to expenses, Al. I think last quarter, you talked about a sub-$50 million per quarter kind of run rate. I know there'll be some puts and takes. This quarter, you had another benefit from the FDIC charge reversal. And I know, looking forward, obviously, the TruPs costs will -- or excuse me, the restricted stock costs will come out. Can you just give an update there? And maybe touch on some of the hiring efforts that you have? I know you guys are actively seeking to build out the Texas market.

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Alberto Peraza, Amerant Bancorp Inc. - Co-President & CFO [12]

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Well, we expect the run rate roughly to -- excluding the investments in digital, we expect it to be somewhere in the area of $48 million to $49 million. So that would be definitely a reduction in cost. In terms of the -- I'll let Miguel talk a little bit about the efforts to hire those teams. But generally, the focus in terms of the lending, the 2 lending teams is probably going to be -- to pump up our C&I -- our efforts to increase further C&I and probably have less reliance on CRE. But I'll let Miguel speak a little bit about that.

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Miguel Palacios, Amerant Bancorp Inc. - Executive VP & Chief Business Officer [13]

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It's Miguel. Definitely, we -- going back to maybe expanding a little on the production side and the lending team. Last year, we dedicated the whole year to delivering products and improving through the strategy, the transformation from RMs to lenders. This year, we will add some additional tools but more for the second half of the year with the CRM and the nCino platform. And definitely, we believe that now it's time to start investing and attracting additional team because the incremental production that we have had in the last 3 years has been without increasing on an important asset C&I team. So we do believe that, that will help a lot on the process of increasing production and maybe we can see some stabilization on the payoff side. So definitely, we are cautiously optimistic on that sense.

In the case of -- on the Texas team, we have some hiccups on the LPO. We have some talent acquisition that came in but didn't stay during the year. So definitely, we're going to be doing this part of dedicating more time to the talent acquisition. And with the new tools that we're going to be having, it's going to be great.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [14]

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Okay. So putting that all together, Al, I think, what you're saying is the kind of the $50 million with the technology and digitization costs is probably still the right way to think about it.

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Alberto Peraza, Amerant Bancorp Inc. - Co-President & CFO [15]

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Yes. And including those teams, which are an incremental cost. Definitely.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [16]

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Correct. Just wanted to talk about the -- switching to margin, PAT, obviously, on hold, deposit costs were essentially flat. You guys had good domestic growth, but obviously offset by the continued Venezuelan runoff. How should we think about the trajectory of margin from here? I mean should we think about it being relatively flat given some net loan growth this year? Just any thoughts would be helpful.

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Alberto Peraza, Amerant Bancorp Inc. - Co-President & CFO [17]

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Sure. Our outlook is that if you look at 2020 as a whole, we would expect to be probably flat to maybe a small pickup from where we are sitting now in Q4. We do expect probably Q1 to take another dip. I think there, we will have -- essentially, we'll be feeling the full effect of the more recent rate cuts, which weren't really -- that weren't cooked in totally into the Q4 numbers. But I think after Q1, we expect that to return to an improving trend. And I would -- we're probably looking at a NIM by Q4 -- somewhere in the 2.80s is kind of our outlook. So we will end somewhere, on average, about the same place we are today.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [18]

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Okay. And what's driving that big uptick? I know part of it is going to be the TruPs cost. But besides that, I mean, what else is driving that kind of 2.80% number that you talked about?

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Alberto Peraza, Amerant Bancorp Inc. - Co-President & CFO [19]

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Sure. Of course, the TruPs, as you mentioned, but also a full quarter effect as well of a lot of the strategies that we've been implementing in treasury to try to control our institutional funding costs. We're also doing a lot of work on increasing our core deposits, our domestic core deposits. We're certainly starting to lower our rates, even our promotional rates, our bundled product rates, all those rates are starting to -- started coming down. We're going to also be doing a lot -- continue to do a lot of work on our out-of-footprint deposit captures, so online deposits, which give us an opportunity to be selective, go in and out of certain different markets that we're now physically in without the danger of contaminating our domestic -- the cost of our domestic base.

We also have loan growth, which we expect loan growth probably in the mid-single digits, and we expect, as a result of the acquisition of some of these teams, we'll also start ramping up a bit our C&I production. So we -- that sort of mid-single-digit loan growth could maybe even be expanded a little bit if we're successful in getting these teams on early enough in the year.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [20]

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Okay. And maybe finally for me, it looks like you had some growth in your assets under management. Can you give an update there and how -- where we stand with the build-out of kind of the domestic platform as we go forward?

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Alberto Peraza, Amerant Bancorp Inc. - Co-President & CFO [21]

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Yes. In terms of -- I probably should let Miguel speak in more detail about the expansion of the domestic wealth management. But there's -- we're making incremental progress on that. The increase in the AUMs has been essentially just market valuation. But I think it's very important. Remember that, that's still 90-plus percent foreign customers, Venezuelan customers, actually.

So the -- you saw the decay that we had in the foreign deposits, which was 12% in year. So that shows you that the potential that our higher net worth Venezuelan customers have, where the only change has really been the market appreciation, we haven't had a decline, so I think that shows the resiliency of that higher level of Venezuelan customers where we've been able to essentially keep the same amount of assets under management, and they're growing. So they're not depleting it any faster than they're growing.

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Miguel Palacios, Amerant Bancorp Inc. - Executive VP & Chief Business Officer [22]

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And regarding the wealth management teams, we already -- I think that we're optimistic. We hired the head of Delray and Palm Beach. We recruit a very good talent from a top producer and institution on the wealth management side. We'll complete our Dade County RM. We're in the process of hiring also the same structure for Houston. And we're starting to see the progress of having the talent. So the C&I team and the commercial team can start referring owners to this group, and we have seen a very interesting increase on relationship and share of wallet.

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Operator [23]

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(Operator Instructions) We do have a follow-up question from the line of Michael Young with SunTrust.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [24]

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On the foreign deposits, you saw sort of a deceleration in the runoff. But you specifically mentioned that you were seeing more of them being used for foreign home purchases. So should we think of sort of more seasonality around that heading into 2020, maybe with floor decay kind of in the first part of the year and then accelerating into the purchase months?

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Miguel Palacios, Amerant Bancorp Inc. - Executive VP & Chief Business Officer [25]

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We are starting to see some interesting trend on the positive side, and that is a reflection on the fourth quarter. We implemented Zelle platform payments. And also, we're starting to provide to this group the same type of products and bundle that we gave to the domestic market during the last year. We have seen a smaller amount of accounts closing, and we are implementing programs, the referral program for this year. So we believe that we could be on around a 9% to 10% attrition. And definitely, the team is working very hard on how to increase the share of wallet, and basically, we're driving that through our wealth management group.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [26]

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Okay. And I guess, just holistically, maybe Al, just on the deposit costs. We've kind of gone to flat quarter-over-quarter. I know you guys have termed out some deposits over the last year or 2. Is there a point at which we should expect that to start really sliding lower at some point in 2020 or any way to think about that?

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Alberto Peraza, Amerant Bancorp Inc. - Co-President & CFO [27]

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Yes, Michael, our domestic deposit costs are already declining. We've lowered our transactional, even our bundle like money market accounts, we've lowered the rates on those, even the top-notch customers, we've lowered the rates on those. And increasingly, we're seeing time deposits that were probably put on the books say, a year ago, a little over a year ago, they're coming due soon, and they're going to be significantly lower. Let's just say, even if you look at the promotional rate that is out there, they were -- they're coming down from significantly higher rates before.

The issue remains that 9%, as Miguel mentioned, attrition in the Venezuela deposits. It's kind of, to a certain extent, maybe masking that effect. But we are already seeing our domestic deposit cost declining. I think we hit that inflection point sometime in Q4 where our new deposit or deposit -- domestic deposit costs are starting to decline. And again, a lot of the efforts that Miguel and his team are working on to increase our commercial deposits, a lot -- the branches are working on core -- more core deposits. I think that will all help us to contain any decline in the NIM or actually improve the NIM as the year goes on.

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Operator [28]

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This concludes today's question-and-answer session. I would now like to turn the call back to Mr. Millar Wilson, CEO, for closing remarks.

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Millar Wilson, Amerant Bancorp Inc. - Vice-Chairman & CEO [29]

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Thank you for joining our fourth quarter and fiscal year 2019 earnings conference call. I'm proud to say that Amerant has the right strategy in place, and we have reached important milestones in its execution over the course of 2019.

Our team has already hit the ground running for 2020, and we look forward to continuing to create value for all our stakeholders. Thank you very much.

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Operator [30]

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