Good day, and thank you for standing by. Welcome to the Amerant Q4 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star one-one on your telephone. Please be advised today's conference is being recorded. I would now like to hand the conference over to your host today, Laura Rossi, Head of Investor Relations at Amerant. Please go ahead.
Thank you, Michelle. Good morning, everyone, and thank you for joining us to review Amerant Bank Corp's Q4 and full year 2022 results. On today's call are Jerry Plush, our Chairman and Chief Executive Officer, and Carlos Iafigliola, our Senior Executive Vice President and Chief Financial Officer. As we begin, please note that discussions on today's call contain forward-looking statements within the meaning of the Securities Exchange Act. In addition, references will also be made to non-GAAP financial measures. Please refer to the company's earnings release for a statement regarding forward-looking statements as well as for information and reconciliation of non-GAAP financial measures to GAAP measures. I will now turn it over to our Chairman and CEO, Jerry Plush.
Thank you, Laura. Good morning, everyone, thank you for joining today. I am pleased to be here to report on our performance for the quarter and full year. Before we get into that, I would like to first acknowledge and thank all of my colleagues here at Amerant for their dedication and effort again this quarter. We have a great team, and we're excited about the strong additions to the Amerant family this quarter and throughout the year. They will play an essential role in our growth in 2023 and beyond. Moving on to the remarks for the quarter, I'm pleased to share that on January 18th of 2023, our board of directors approved a dividend of $0.09 per share payable on February 28th of 2023.
The ability to pay dividends along with the ability to repurchase stock are essential parts of effective capital management and value creation for our shareholders. More on this in a few minutes. I'll now provide a brief overview of our performance for the Q4 and year, and then Carlos will go over the details. He will then turn it back to me for some observations regarding 2023 as part of my concluding remarks. Let's turn to slide three for a summary of our Q4 highlights.
Net income attributable to the company was $18.8 million, down 10.3% quarter-over-quarter, driven by the recording of a provision of credit losses of $20.9 million, which includes a one-time $11.1 million provision expense in connection with the adoption of CECL, as well as some other items which Carlos will cover in further detail in the coming slides. Please note we will provide disaggregated CECL impacts for each quarter of 2022 on our upcoming 10-K report. Our net interest margin expanded to 3.96%, an increase to 35 basis points quarter-over-quarter. Our balance sheet continued to grow, reaching a record high of $9.1 billion in total assets compared to $8.7 billion as of the close of 3/2/2022.
Total gross loans were $6.9 billion, up $416 million from the $6.5 billion last quarter. The total deposits were $7 billion, up $456 million from the $6.6 billion last quarter. Core deposits also increased by $114 million this quarter compared to 3/2/2022. The company's capital continued to be strong in excess of the minimum regulatory requirements to be considered well capitalized as of December 31, 2022. During the quarter, we paid out the previously announced cash dividend of $0.09 per share on November 30, 2022.
Regarding effective capital management, as I referenced earlier, on December 19th, we announced that our board authorized a new $25 million share repurchase program, which became effective on 1/1/2023. This will remain active for the calendar year of 2023. At the time of this announcement, we stated we do not intend to use this new authorization before reporting the results today. We did not use it. We do now intend to be opportunistic throughout the year to utilize this authorization where appropriate. Let's look at core PPNR on slide four. Core PPNR increased to $37.8 million, up 24.8% compared to the $30.3 million reported in the previous quarter.
As we've consistently stated, we believe it's essential to show the net revenue growth of the company, excluding provisions and non-routine items to show Amerant's core earnings power. Turning now to slide five. Here is a list of several key actions taken during the Q4 . We continue to focus on actions that will drive profitability and improve our efficiency ratio. We also intend to continue investing in future growth, as you will see. We referenced last quarter a commercial property that moved into REO. This was disposed of in October at no additional loss. Regarding an update related to our banking centers, as we previously announced, we did close the Pembroke Pines, Florida location on 10/17/2022, and we consolidated the existing customers into our newer Davie branch location.
We opened in University Place in Houston at the end of October and closed the South Shepherd Banking Center. This is a far superior location for us as the Texas Medical Center, Rice University, Rice Village, and the NRG Center complex are all within a one-mile radius. The downtown Miami location is now expected for March 2, 2023. This will be a flagship location for us in the heart of the city with private banking, wealth management, and commercial banking, all having business development officers located there. We received OCC approval to open a new full-service banking center in Key Biscayne, Florida. Permits are expected sometime this quarter. Opening is expected for the Q2 . We're excited to be opening there. We've already attracted a well-respected team to drive growth. We also received OCC approval for a new location on Las Olas Boulevard in Fort Lauderdale, Florida.
This office is expected to open in 3/2/2023 and will bolster our consumer bank growth, especially in private banking there. We continue to add key business development personnel in domestic retail, private commercial banking, as well as wealth management. Our board appointed Ms. Erin Dolan Knight as a member of the board of directors effective on December 15, 2022. Erin is well-known and respected here in the Miami marketplace, and her knowledge and banking experience make her an excellent addition to our board. As previously referenced, the board authorized a new share repurchase program for up to $25 million of Amerant shares of Class A common stock. On the partnership front, we announced an expanded multi-year partnership with the Florida Panthers, making Amerant the official bank of the Florida Panthers and Amerant Bank Arena.
We're excited to not only be able to say we're the official bank of the Panthers, but to also have them as one of our newest customers. The same goes for our partnership with the Miami Heat. Banking with us is an essential part of these partnerships. We'll talk more about this in our concluding remarks. Then finishing up this slide, we became a large accelerated filer and adopted the current expected credit loss accounting standard, which Carlos will go into details shortly. Now we'll turn to slide six. Here are our select key performance metrics and their change compared to last quarter. Our net interest margin improved to 3.96% compared to the 3.61% in the previous quarter. Our efficiency ratio improved to 58.4% compared to 65.4% last quarter.
Please note that the core efficiency ratio for 4/2/2022 was 61.3%. For consistency and transparency, we included the three core metrics of ROA, ROE, and efficiency, excluding any one-time or non-routine items in the footnotes in this slide, you can easily see the underlying performance for the quarter. We'll turn now to slide seven, which focuses on Amerant Mortgage. On a standalone basis, Amerant Mortgage had net income of $0.9 million, an increase of $100,000 or 13.9% compared to Q3. Primarily the result of mortgage banking in-income from transactions with the bank. On a consolidated basis, we recorded a net loss of $1.5 million for the Q4 in connection with the operations of Amerant Mortgage.
Year to date 2022, the company has purchased approximately $413 million in loans through Amerant Mortgage, which includes loans originated and purchased from different channels. The current pipeline shows $64 million in process or 88 applications as of January 12th of 2023. With that said, I'll now turn things over to Carlos, who will walk through our results for the quarter in more detail.
Thank you, Jerry, good morning, everyone. Turning to slide eight, I'll begin the discussion with our investment portfolio. Our Q4 investment securities closed at $1.3 billion. We also had a strong cash position of $290 million for the end of the quarter. When compared to the prior year, the duration of the investment portfolio extended to 4.9 years due to higher market rates and lower prepayment speeds recorded in our mortgage-backed securities. As I shared last quarter, our investment strategy has focused on achieving right balance between yield and duration while maintaining a high credit quality in the portfolio. The floating portion of our investment portfolio increased to 13% compared to 11% in the previous year.
As I had done in the previous quarters, I would like to reference the impact of the interest rate increases on the valuation of the debt securities available for sale. As of the end of the Q4 , the market value of this portfolio had increased by $3.9 million after tax compared to the decrease of $35 million in the Q3 . The quarter-over-quarter increase was driven by mortgage bond spreads contracting during the performance of the quarter. We had an after-tax decrease of $97.2 million in the valuation of our AFS portfolio during 2022, which was direct result of increases in interest rates and is consistent with our interest rate sensitivity analysis for a 300 basis points shock.
Note that 73% of our AFS portfolio is guaranteed by the government while the remainder portion is investment grade. It is also important to comment that our tangible common equity ratio ended at 7.5% after considering the impact of changes in valuation of our AFS portfolio. Continuing to slide number nine, let's talk about the loan portfolio. At the end of the Q4 , the total gross loans were $6.9 billion, up 6.4% compared to the end of the last quarter. The increase in total loans was primarily driven by higher C&I loan balances and residential loan purchases during the quarter. Despite having received approximately $163 million in prepayments from both CRE and C&I portfolios.
Consumer loans as of the end of the Q4 were $605 million, an increase of $28 million or 4.8% quarter-over-quarter. This includes $433 million on higher yielding indirect consumer loans compared to $497 million in the previous quarter. Loans held for sale totaled approximately $62 million as of the end of December, all in connection with the activities of Amerant Mortgage. Turning to slide number 10, let's take a closer look of credit quality. Overall credit quality remains sound and reserve coverage improves over the quarter, despite charge-offs recorded during the same period. The allowance for credit losses at the end of the Q4 was $83.5 million, compared to $53.7 million at the close of the previous quarter. The change was primarily due to CECL.
We elected not to apply the three year transition provision to our capital calculations. In the Q4 , we recorded a one-time day one, $18.7 million adjustment to retain earnings with a corresponding after-tax cumulative effect of $13.9 million to account for the CECL impact as of January 1, 2022. A day two, $11.1 million adjustment through provisions to account for the CECL impact for the year ended in December 31, 2022, including loan growth and changes in macroeconomic conditions during the year. The provision for credit losses in the Q4 under CECL, excluding the retroactive effect corresponding to the Q1, Q2, and Q3 of 2022, is approximately $7 million. The provision also included $9.8 million in additional reserve requirements for charge-offs.
The total provision recorded for the quarter was $20.9 million, compared to a $3 million provision in the previous quarter. Net charge-offs of $9.8 million in the Q4 , compared to $0.7 million in the Q3 . Charge-offs during the period were primarily due to $5.5 million related to consumer loans, of which $3.4 million resulted from a change in the consumer credit charge-off policy from 120 days to 90 days past due. $3.9 million in connection with a New York-based CRE retail loan, and $1.1 million in business loans. This was offset by $0.6 million in recovers. The CRE retail loan is expected to transition into OREO during the Q1 of 2023, with no additional changes in valuation once we finalize obtaining ownership.
Non-performing assets totaled $37.6 million at the end of the Q4 of 2022, an increase of $12.5 million compared to the Q3 , and a decrease of $22 million compared to the Q4 of 2021. The increase this quarter was primarily due to the New York property I previously mentioned, and primarily offset by the disposition of a $6.3 million OREO previous quarter. The ratio of non-performing assets to total assets was 41 basis points, up 12 basis points from the Q3 of 2022, and down 37 basis points from the Q4 of 2021.
In the Q4 of 2022, the coverage ratio of loan loss reserve to non-performing loans decreased to 2.2 times from 2.9 times in the Q3 , an increase from 1.4 times at the close of the Q4 of 2021. Continuing to slide 11. Total deposits at the end of the Q4 were $7 billion, up $456 million from the end of the Q3 . This growth was driven by time deposits, which totaled $1.7 billion, up $342 million compared to the previous quarter. Note that domestic deposits accounts for 66% of our total deposits, totaling $4.6 billion as of the end of the Q3 , up $455 million or 11% compared to the previous quarter.
Foreign deposits, which account for 34% of total deposits, total $2.4 billion, slightly up by $1.5 million compared to the previous quarter. Our core deposits, which consist on total deposits excluding all-time deposits, were $5.3 billion as of the end of the Q4 , an increase of $114 million or 2.2% compared to previous quarter. The increase in core deposits was primarily driven by commercial deposits, inclusive of new funds from our sports partnerships and additional funds from municipalities. The $5.3 billion in core deposits include $2.3 billions in interest-bearing deposits, which increased $154 million versus the previous quarter. $1.6 billion in savings and money market deposits, which decreased $88 million versus previous quarter as opportunity cost of customers increases with interest rates.
$1.4 billion in non-interest bearing demand deposits of $49 million versus previous quarter. Next, I will discuss the net interest income and net interest margin on slide 12. Q4 2022 net interest income was $82.2 million, up 18% quarter-over-quarter and up 47% year-over-year. The quarter-over-quarter increase was primarily attributed to higher rates in total interest earning assets, primarily in loans, driven by combined effect of 125 basis points increase in the Federal Reserve benchmark during the Q4 and 75 basis points increase at the end of the Q3 . We observed a beta of approximately 55 basis points in our loan portfolio during the Q3 and a beta of 41 basis points for the full year, which helped to drive our margin.
Contributing to the increase in the net interest income was higher average balances in loans. The increase in net interest income was partially offset by higher rates in interest-bearing deposits, broker CDs, and FHLB advances. As we mentioned in the past quarter, we continue to be very disciplined in managing an increase in our product rates during this interest rate cycle. We adjusted certain interest rate sensitive products and relationships to partially reflect the increases in the market rate. As a result, we observe a beta of interest-bearing accounts of approximately 49 basis points during the Q3 and 28 basis points for the full year. Moving to the net interest margin, as Jerry mentioned, NIM was 3.86% of 35 basis points quarter-over-quarter.
The change in the net interest income and the net interest margin was primarily driven by the increase in the yield of our loan portfolio, which is now at 5.85%, an increase of 79 basic points compared to the previous quarter. I said, in the last quarters, the improvement in the NIM is a reflection of our asset-sensitive position. Moving to slide 13, we'll show the interest rate sensitivity analysis. You can see, our balance sheet continues to be asset sensitive, with about half of our loans having floating rate structures and 59% repricing within a year. Our NIM sensitivity profile to interest rate up scenarios has decreased compared to the last quarter due to increased amount in time deposits. These changes are consistent with a more competitive environment for deposit gathering.
This quarter, we are showing a potential increase of approximately 5% in net interest income under a up 100 scenario and in 8% for an up 200 scenario. We will continue to actively manage our balance sheet to best position our bank for expected remaining increases in interest rate as the Federal Reserve continues its effort to tamper inflation in 2023. Continuing to slide 14, non-interest income in the Q4 was $24.4 million, an increase of $8.4 million from the Q3 . This was primarily due to a recorded net gain of $11.4 million on prepayment of approximately $175 million of FHLB advances as we took advantage of what we consider was their peak valuation. Second, an increase of $0.6 million in fee income from client derivatives.
Third, higher market valuations on derivative instruments. Offsetting this increase in non-interest income were higher losses due to the sale of an investment that was then rated below investment grade. We consider $9.1 million of our non-interest income as a non-recurring items, an increase compared to the $1.4 million in Q3 2022. This was primarily driven by the net gain in prepayment of advances that was previously discussed. Core non-interest income was $15.3 million in the Q4 compared to $14.5 million in the previous one.
Amerant assets under management and custody totaled $2 billion as of the end of the quarter, up $184 million or 10% from the end of the Q3 , primarily driven by an increase of $127 million in net new assets as we continue to execute on our relationship-focused strategy, as well as $67 million from an increased market valuation. Turning to slide 15, Q4 non-interest expenses were $62.2 million, up $6.1 million or 11% from the Q3 and up $7.2 million year-over-year.
The quarter-over-quarter increase was primarily due to the following: accrued for severance expenses, as well as higher bonus variable compensation in connection with recent performance, higher loan level derivative expenses related to the client derivative transactions, higher expenses in connection with our brand positioning efforts such as out-of-home billboards and sports partnerships, higher professional and other services fees in connection with the adoption of CECL, as well as consulting and legal fees and additional projects, and additional depreciation expenses in connection with the closing of a banking center. These increases were partially offset by lower technology expenses, as well as the absence of an OREO evaluation that we had during the previous quarter.
We consider $2.4 million of our non-interest expenses as non-recurring items, an increase compared to the $2 million in the Q3 of 2022, primarily driven by severance-related expenses, as I mentioned before, and also due to conversion expenses. Core non-interest expenses were $59.8 million for the Q4 compared to $54.2 million in the Q3 . Efficiency ratio closed at 58.4% in the Q4 compared to 65.4% in the previous one, and 41.4% in the Q4 of last year. The quarter-over-quarter decrease was driven by higher net interest income, while the year-over-year increase was primarily due to the absence of the gain on the sale of the company's headquarter building that was recorded in the last quarter of 2021.
Core efficiency ratio, which adjusts for non-recurring items, was 61.3% in the Q4 of 2022 compared to 64.1% in the Q3 of 2022, 75% in the Q4 of 2021. I will turn back to Jerry for closing remarks.
Thank you, Carlos. As I referenced earlier, I'd like to make a few comments on initiatives we have underway. I thought this would be helpful to provide. For most of 2022 and now for the first 4.5 Months of 2023, our team has been and will continue to work diligently behind the scenes preparing for the conversion of our core systems. Slated to take place on May 8th, we believe this will be a significant step forward for us to be able to provide more up-to-date, highly integrated technology, which post-conversion will result in making banking with us easier for our customers as well as our team members. Regarding our digital transformation efforts, another team led by our Chief Digital Officer is working in parallel during this conversion timeline to be ready to greatly enhance our information and data evaluation capabilities.
Called Harmony, it reflects our goal of having far more information readily available when interacting with our customers and potential clients, as well as for management purposes. I'd like to comment next on expansion. We have filed an application with the OCC to open a single location in Tampa to support our growing business opportunities there. We intend to only have one branch there on the first floor of our new regional office location, which we will be announcing soon. This single branch is ideally situated, like the others I referenced earlier in my remarks on the key actions slide, to support deposit market share growth aligned with our goal of continued expansion in private banking and commercial banking.
In conclusion, the benefits from the decisions we made throughout 2022 and from the efforts of our team members are clear, as evidenced by a higher core PPNR, significant net interest margin expansion, another quarter of solid loan and deposit growth, and strong capital ratios. As we enter 2023, please know that we, like others, absolutely recognize the challenges that we will all face given uncertain economic conditions. We like the markets we are in and believe they are showing more resilience than other areas of the country, which is a key differentiator for us. Obviously, we recognize that even the best markets will likely experience some impact. We intend, though, to continue to remain focused on executing on our strategic initiatives as we have in past quarters, as our commitment to be the bank of choice in the markets we serve is unwavering.
With that, Carlos and I will look to answer any questions you have. Michelle, please open the line for Q&A.
Thank you. If you have a question at this time, please press star one one on your telephone. One moment while we compile the Q&A roster. Our first question comes from the line of Matt Olney with Stephens. Your line is open. Please go ahead.
Hey, thanks. Good morning, everybody.
Good morning, Matt.
Morning.
Start with the loan growth, impressive results in the Q4 . Be curious about kind of the moving parts of the loan growth in the Q4 within each category. I guess the outlook for the growth in 2023, and in particular, curious about the appetite to add additional mortgage loans from here and also some additional consumer loans.
Okay. No, it's. Thank you for the question. The changes in the loan portfolio primarily came from the commercial side. CRE was not the biggest component of the growth this time around. It was probably about $40 million. C&I on the opposite side, came with about $120 million, and specialty finance also came with about $70 million. They were probably the biggest driver this quarter. Consumer came with about $100 million coming primarily from the different sources that we have. Those were the primary drivers for the quarter, Matt.
Then the, I guess, expectations for 2023 within some of those categories you mentioned, Carlos, I'd be curious kind of what your, what your thoughts are there.
Hey, Matt, it's Jerry. I think it's probably safe to say if you think about our expectations for the year, we still think with the strong pipelines we have, I think it's safe to say that you'll continue to see a fairly similar distribution. Obviously, it was a lower month or a lower quarter, as Carlos mentioned in CRE, I do think you'll see us look to have a pretty balanced distribution, you know, product-wise. We've hired folks in all of these categories, and retained the team that we had in CRE, you know, that we've had throughout 2022. We do expect to continue to look for C&I bankers, particularly as we continue to expand here in South Florida and also in Tampa and in Houston.
I do think over time you'll see us beginning to build more and more C&I business related. It'll start to become like a greater proportion of the growth.
Well, I guess I'm trying to drill down. Appreciate lots of these loan categories were ramping in 2022 for various drivers, various reasons. I'm trying to appreciate if we should expect a similar level of ramp in 2023 or if it would slow down given some of the, you know, economic uncertainties.
Yeah, look, I think we're gonna obviously, you know, this is all dependent on market conditions. Our view is we've added a lot of quality people, and you would say that every addition adds incremental volume to the organization, right? From the perspective of we're gonna continue to be prudent in our credit decision-making. I will tell you that we're being very diligent about looking for full relationships with anyone who wants to borrow money from us. We're looking for them for the full banking relationship with each and every one of them. I do think it's fair to say that we had an outsized growth
You know, for 2022. I think that's why we gave you guidance that the number would probably look a little bit more like the 10% to maybe 12% range tops. You know, compared to where we are.
Right.
Okay. That's helpful. I guess moving over to the expense outlook, I think you had several adjustments on the expenses, some non-recurring items. I think core expense is still a little bit elevated near that $60 million level in the Q4 . I know you've got lots of projects that you're working on for 2023, so it'd be hard to nail down specifics, but just would appreciate any kind of thoughts on expectations for operating expenses in 2023.
Yeah.
Yeah. Carlos, Let Carlos go first. We'll both comment on this one.
had certain items that surged during the last quarter of the year, and I guess one of the items were the accrual for the variable comp. That was definitely one of them, plus the severances, but those are extraordinary items. For the core expenses, we still expect the $58 million-$59 million. Remember that inflation is already being factored in in the cost of the personal expenses, and that's been pretty much there were several adjustments performed during 2022 that will take full effect in 2023. That's part of the change. Additionally to this, we also have the expenses of the projects that you mentioned, that will be recorded as a one-timer as we go through the conversion process. We expect roughly between $58-$59 in core expenses and, including extraordinary, it will be probably closer to $61 approximately with the conversion services.
Yeah. You know, Matt, I just would add to that one of the things, though, there clearly will be some, a little bit of volatility, but it's good volatility when you start to look at it from a standpoint of the, you know, if it's around accruing for, you know, driving deposits and loans, you know, that's a good thing, right? At the end of the day. You know, what the guidance Carlos just gave you is inclusive of what we expect. Obviously, if we have outperformance in a given quarter, just like we just did this quarter, we had a higher number, right, to true up, you know, what we need to accrue for payouts. That I think is probably the only variable and, you know, the only additional comment I'd make on expenses.
Okay. That's helpful, guys. Thanks for your help.
Absolutely.
Thank you.
Thank you. One moment for our next question. Our next question comes from the line of Brady Gailey with KBW. Your line is open. Please go ahead.
Hey, thank you. Good morning, guys.
Morning, Brady.
Kate.
There's now less than $1 billion in assets to go until you hit the $10 billion threshold. And, you know, with 10%-12% growth, it feels like you'll kind of be flirting with that $10 billion maybe by the end of this year. Do you think that you cross $10 billion this year? Can you remind us of any of the expense impacts or Durbin impacts that we need to think about over $10 billion?
Look, I think, you know, we obviously, we said around 10% or so. You know, you're right, we'll be right there. I think that we're gonna be very conscious of, you know, crossing through that. I will tell you, we've been spending a lot of time doing the necessary preparation, and we'll do that throughout 2022. You know, I think Carlos can comment on any kind of Durbin implications, but to be candid, my expectation is if there are, that's closer to a 2024 item.
Yeah. There's, we have been doing analysis, Brady, honestly, the gap of what we need in terms of risk management, integrated audit and full risk and all that regulatory framework of crossing the $10 billion is we're probably already are completed on that end. We do, every, you know, possible sensitivity analysis, risk shocks, et cetera. Those are already covered. I believe the one of the items that you mentioned, Jerry, the Durbin Amendment wouldn't have a significant impact for us. We started estimated, and it's probably in the $500,000 to $1 million a year. That's preliminary expectations what we have.
Again, you have to have a four quarters average, going north of the $10 billion in order for all these changes to kick in. So we definitely keep an eye and, as we get closer, we're definitely gonna do any type of gap analysis to understand. Based on our preliminary assessments, we're in a very good shape to be closer or at $10 billion. Yeah.
Okay. Then just bigger picture on performance metrics. As I look at 2022, you guys basically hit, there's a lot of noise in the year, but you basically on a core basis, hit a 1% ROA. You know, how are you thinking about profitability looking forward? Do you think the 1% ROA is kind of stable from here? Is there room for additional profitability improvement or pushing the efficiency ratio down further?
No, I believe the one is sustainable. We have been doing, you know, a lot of changes in terms of our cost structure and in terms of other income. I believe it's one of the key drivers, it's the financial margin that we believe is very strong. And as you saw, capturing almost, you know, people refers to 125 basic points over the quarter, but in reality, we had the last change of the Federal Reserve on September twenty-first. In reality, it feels like 200 basic points. We believe that we should be stable at around 4% financial margin that will give us the core earnings to keep closer to the 1%. We feel strong on that too.
Okay. Finally for me, just this core system conversion in May. You know, outside of any sort of one-time expenses, will there be any changes in the expense base? Will the expense base go higher with this new system, or does it allow you to potentially become more efficient so expenses could go down? Any impact from that conversion?
Yeah. We will provide more guidance on the decrease on the second semester, probably when we get closer to conversion, 'cause there will be several applications. If you recall, in the Q1 and Q2, we recorded provisions for contract termination for two of our largest technology providers. As soon as we go into conversion and the second semester of 2023 shouldn't have the regular expenses related to this previous technology providers. More to come on that, but we'll pick you up with more information on those decommission as we get closer to conversion.
Okay. post-conversion expenses are more likely to go down.
They should be going down due to this decommission of certain services, correct? Yeah.
Got it. Actually one more. The expense outlook for $58 million-$59 million, is that just for the Q1 of 2023, or do you think that that's kind of the 2023 quarterly run rate for the full year?
That's reflective of what we believe it will be the Q1 . Again, as Jerry mentioned, as we continue to build up business teams and as we continue to, you know... If, for instance, the last quarter of 2022 was a great example. There was a surge in production, so therefore, there was an increase needed in the accrual for variable comp. As we move and as we create more businesses, so that should be subject to change. This guidance is for the Q1.
Okay. Great. Thanks for the color. It was great to see the buyback, but thanks for the color, guys.
Thanks. Thank you.
Thank you. First moment for our next question. Our next question comes from the line of Michael Rose with Raymond James. Your line is open. Please go ahead.
Hey, good morning, guys. Thanks for taking my questions. Just wanted to start on the deposit side and just get an update on. Sorry if I missed this. I hopped on a little bit late. Just any sort of expectations for betas. You know, on the one hand, you guys are pretty rate sensitive and are benefiting, you know, from the Fed's actions. You know, there are some out there, especially some of the larger banks that are now calling for a pivot by the end of the year. Just wanted to see, you know, from a flow perspective, beta perspective, what you guys would expect. The loan-to-deposit ratio is obviously, you know, kind of elevated. You still have, you know, some attrition of the foreign deposits, although they were up this quarter.
I know those are very low betas. Just kind of holistically, you know, how should we be thinking about betas and flows, both in the kind of higher for longer camp, and then, you know, what actions you would potentially take to limit downside if the Fed does pivot. Thanks.
Yeah. Good question. In terms of beta, Michael, during the quarter, we recorded 0.50 more or less on the deposit side. Something that really helped this quarter around was the stability and the cost of the international deposits. They barely move. We went from probably 0.11 to 0.16, the cost. It continues to be very cheap and very low sensitivity, so that help us a lot with the blended beta for deposits. The 0.50 was definitely a sensitive number, you know, given the changes that we saw in the market. We expect to be closer to between 0.40 and 0.50 for the Q1 .
Remember that liquidity in the financial system is shrinking and the competition for deposits is high right now. There are certain accounts that you definitely need to move and be proactive in adjusting rates. Even though you do it on certain prototypes, you also have to be very, you know, cognizant that there will be changes in other accounts. We expect that 0.40%-0.50% in terms of costs of better reaction to the cost of funds. Important is the behavior of the financial margin. We believe that the level of acceleration that we have in the last quarter of the year wouldn't repeat itself. I believe it was significant. We started to feel like the financial margin will grow, but more incrementally, I would say. Thinking about 4% financial margin, would be kind of the level that we feel that should be steady throughout the year. Jerry?
Yeah. Hey, Michael. I think it's important to note a couple things. We're going to continue to evolve, you know, how we incent our personnel. Again, as I made a comment earlier about we're looking for full banking relationships and, you know, with any, you know, existing and with new customers. We're putting on, you know, a very strong incentive program to really to drive deposit growth first and foremost. If you recall, we've talked frequently about, you know, being a deposits-first bank is one of the most important things. You know, we are laser-focused on maintaining that loans to deposit ratio, you know, and not allowing it to get up above 100%, you know. I think that, you know, we've demonstrated that is something we focused on all throughout 2022. We're going to continue to do that, you know, in 2023.
My comment would be that between all the business development people we've added, you're gonna see incremental volumes come, you know, from a combination of more people, more focus. These new systems are gonna enable it to be a lot easier, particularly as we acquire more and more commercial customers and also, you know, on the municipal side as well.
Mm-hmm.
We think there's a combination of things that will enable us to continue to grow on that side of the balance sheet.
Jerry, that's a great point. Just to kind of follow up on that, I mean, do you feel like you have the products in place that, you know, your competitors have to be competitive, or is that kind of still, you know, a work in progress as, you know, you roll out the core systems, integration and maybe some other products and services? Do you feel like where you are where you need to be, or do you feel like there's still, you know, more work to be done to compete more effectively? You know, because I think everybody has changed their deposit incentives, right? I mean, do you have the product set and capability to, you know, be successful in your strategy? Thanks.
Yeah. No, I definitely think so. I think they're gonna be further enhanced, you know, post this conversion in May. I think that, you know, at the end of the day, a lot of the deposit gathering we do, I mean, we're a people business, right? It's personal, it's relationships. All the expansion we've done in private banking, we'll continue to do. You know, these new offices, I mean, they are in very deposit-rich markets, and this is very targeted by us to be able to basically have some physical presence. You know, certainly not the big size branches of the past, but, you know, certainly smaller and just very well located in the right spots. I think it's a combination of all these things that are gonna get there.
Again, directly to your question, I think it's a question for me of saying, "Hey, we're okay today, and we'll get better as we go forward on the product and service side.
Yeah.
Perfect. And then maybe just definitely one final one for me just on credit, obviously CECL implementation. Ex that, you know, you did build the reserve, which I think is prudent. I appreciate all the detail on the back of the deck on commercial real estate. That's certainly a lot of focus. Can you help us get comfortable with credit and kind of where you are from a reserve perspective? You know, you've had some chunkier loans come through over the past, you know, couple years. Just trying to size, you know, the bucket of, you know, potential credits that you could be working through over the next couple quarters, and if we should, you know, expect the, you know, reserve to continue to grow from here. Thanks.
Yeah. Well, I think you know that under CECL, you know, you will see higher provisioning, right, just as a result because you're doing, you know, lifetime expected, right? So as we grow, you'll see more provision expense than you would have historically seen, you know, and that's really what the purpose of this change was all about, you know, from an accounting standpoint. I think the question on the quarter, and there was definitely a little bit of noise vis-a-vis, you know, we changed a policy on the-
Mm-hmm
...consumer side, where, you know, we were going to 120 days to charge off. We backed that to 90 days. If somebody goes three cycles, it's done, it's charged off, and then it's in full recovery mode. You had a catch-up adjustment that also flowed through. You know, regarding the one specific credit, you know, that Carlos referenced on the call, a couple times related to New York, obviously it's a CRE relationship. It is something we put a lot of time and energy and understanding, and we decided that it was the prudent thing to do on that particular credit to take that $4 million, Well, it's basically a $2.5 million incremental adjustment on that credit in particular. You know, look, we book good size relationships, right?
Now to your question about chunky, we do think that it's really important to recognize that that was, you know, and this kind of goes back to one of the earlier questions, why we're doing so much diversification in terms of the type of loans we're booking going forward. There's more emphasis on the private banking side. We've ramped our emphasis up in business banking. We're ramping our emphasis up, you know, in diversification in, you know, C&I, you know, particularly, you know, the addition of equipment finance and doing more middle market. I mean, you know, the question is we're evolving the portfolio, the composition of the portfolio.
You know, the emphasis, I guess, in the past, and you know this, you know, that was a $740 million portfolio two years ago when we made the decision to stop, and it's a commercial real estate portfolio. If there is some chunkiness that does happen, it was just basically, you know, a result of, you know, these past two credits that have happened and flowed through the P&L this, you know, over the course of 2022. There really has been a significant reduction in commercial real estate retail. I can tell you that as it relates to, you know, in the portfolio, and certainly it's very selective if we would have done anything like that and production-wise.
Yeah. I guess the other comment is consumer, and as you referenced, we changed the policy. Still the behavior of that portfolio, its losses are below our expectations. It's probably in the 1.5%-2% losses. Pretty much we run models that take that to 3.5% or 4%. Still, the behavior is below those parameters. Performing well compared to that, even though we changed the policy and you see additional charges this quarter in that concept.
That's all. That's great, caller. Thanks for answering all my questions, guys.
Sure.
Thank you. One moment for our next question. Our next question comes from the line of Feddie Strickland with Janney. Your line is open. Go ahead.
Hey, good morning, everybody.
Hey, Feddie.
Hey.
Just sticking with credit for a second. It looks like overall criticized balances were down, which is a positive. It looks like there was some migration from special mention to substandard, potentially. Can you walk us through a little bit more of kind of what you're seeing in that, you know, criticized balances?
Yeah. That was specifically the loan that we mentioned that was downgraded from pass fail, so special mention to substandard. That is the source of the additional reserves that we took this quarter. That loan was dropped from $24 million to $20 million based on a specific reserve, and then it will transition into OREO this quarter. We made that comment on the call that will go into OREO with no additional changes in valuation.
Got it. Thanks.
That was the biggest item, yeah.
Got it. Sorry, I was having some technical difficulties with my phone earlier, so I missed that. Just curious, where do you see the most opportunity on the non-interest income side? Just kind of wonder what should we expect there as we go through the year? I know it's obviously a challenging environment for mortgage still. You know, it seems like wealth management has kind of been a bright spot for you guys in the past. Just if you could walk through a little bit more of what you're seeing there.
Look, I think with the emphasis we're placing on private banking, there's a natural evolution as these, you know, customers come on to also be able to cross-sell on the wealth side. I think that's one driver. I think the other is we've added some key personnel, very experienced people to help develop, you know, using the capabilities that we've already got in-house to really develop more on the domestic side. You know, historically, we've had a fair bit, virtually all of it being, you know, connected with, you know, the international side, and we think there's just huge upside for us. In terms of expectations, I think it's really a volume play for us to, you know, continue to be a slow, steady build. It's a very, very important part of our plans is to really, you know, drive incremental AUM into the organization.
Yeah. I believe the last quarter was a good example, $127 million of increases in net new assets. We really want to keep up with that behavior of keep growing. Of course, the interest rate cycle is not helping that much the mortgage company. We still, you know, we're having production and we expect it to keep going up with the, you know, with the mortgages and selling into the secondary market.
Got it. That's helpful. Just one last one for me. You know, you guys said that it sounds like the balance between the different loan categories growing throughout the year should be kind of similar to what we had this past quarter. Should we expect consumer stays around 8-ish% of loans over time? Is that kind of the number you're comfortable with?
No, I think you'll see that diminish because, you know, we've done the transition into a white label solution, and that we'll have direct influence over. You know, in terms of if you think about us in historically, you know, Carlos can comment, but, you know, we had a pretty steady appetite of, you know, the indirect from the relationships we had. I think we clearly should see some, you know, trail off from that as the other begins to ramp up.
I guess the best way to describe is that the indirect purchases were done in bulk and were probably bigger in amount every month. We just stopped buying from the indirect sources, and now we're coming in, as Jerry mentioned, on the white label. The white label are focused on footprints where we operate. You have just Houston and Florida. The growth would be slower than the payments coming out from the indirect purchases. It will be a net decrease, so to say. The composition-
Yeah. It won't be as chunky.
Correct.
Got it. Thanks for taking my questions.
Of course.
Sure.
Sure. Have a great day.
Thank you. One moment for our next question. Our next question comes from the line of Stephen Scouten with Piper Sandler. Your line is open. Please go ahead.
Hey, good morning, everyone. Maybe first just following up on that SoFi conversation. Those loans looks like we're down $63 million. How much of that, if any, update on the net charge-offs was related to those loans versus kind of your maybe core self-originating consumer?
It was about $3 million coming from that indirect purchases. We had another search due to the change in policy, but related to the performance was about $3 million. Yeah.
That's helpful. If you could give me an idea of what you guys are booking new CDs at and domestic deposits, it looks like that's probably gonna be the biggest driver of deposit growth from here, at least in the near term. What are you having to pay to get that new CD growth?
Yeah, I think, you know, market rates have run around 4%, and that's where we are, right? Customers seem to prefer the, you know, I'll call it sort of the nine to 12 month buckets and, you know, that's where we're pricing our 12 month product right now.
Yeah, we have it managed via promotion as opposed of changing the rate. We've, you know, we keep it up on the branches and on the website as a promotional rate, that we can discontinue whenever. But it's not affecting our typical repricing of CDs on an ongoing basis.
Okay, that's great. Have you been able to hold spreads, I guess? I mean, obviously the international deposits help a lot in terms of your overall average cost. Have you been able to hold spreads in terms of new production versus what you're having to pay for new funding? Maybe give a feel for where those new loan yields are coming on it.
Yeah, new loans yield. Definitely the changes in SOFR and LIBOR have helped a lot increasing the base rate. We haven't forget, even in this interest rate cycle, to keep being very disciplined with adding floors to lending structures.
I think directly to Stephen's question...
Yeah, the spread. Yeah.
We've maintained the spread.
The spread.
We have not made any adjustments on spread.
But, uh, on the-
Meaning on the plus, the SOFR.
Yeah. On the lending side, it actually had been favorable because of the more C&I component compared...
Exactly.
Compared to C.R.
Yeah. It's definitely composition that drives it.
Mm-hmm.
That's great. Okay, super. I guess maybe just thinking about that holistically as we look at 2023 for NII trends through the year. I know, Carlos, you said you feel like you can kind of hold the NIM flat through the year. I would think just given how asset sensitive you are, if we do actually get what the forward curve is projecting, that would be really hard to keep the NIM flat in the back half of the year. You know, especially if you continue to grow and have to pay for CDs at a, you know, at a near market rate. How do you I guess how do you sustain that NIM throughout the year, and how do you think about the ability to grow NII, maybe particularly in the back half of the year, if rates get pressured back lower?
Well, the question, I guess comes out of Jerry's comment on increasing DDAs and non-interest-bearing accounts. That's one of the items that we'll be working the most. As you noticed, the commercial side was one of the key drivers on the last quarter, and we expect that to continue. You know, onboarding full relationships with DDAs should help us with the DDA side and blending out the cost of funds. That should be one of the offsetting factors of incremental CDs or additional or costly money markets.
Yeah. I think too, Stephen, it's the incentive plan for our biz dev officers. You know, there's a combination here, right? There are more biz dev officers. There's a much greater focus. We're focused on full relationship. You know, it's a combination of things to Carlos's point that will help drive, you know, and keep us growing on, you know, the non-interest bearing side. Because it's critically important that we're considered, you know, having those Relationships with customers. I mean, I think our folks would attest that. We're also looking to sell the totality of the bank. You know, we add a C&I customer, we're looking to do Bank at Work, we're looking to do private banking. You know, I mean, there's all sorts of things that we are emphasizing that historically have not been the priority.
Yep.
I think that you'll see this as a big change for us, and I think that's gonna be very helpful. Look, I think you're spot on. There's gonna be pressure towards this, the back end of the year. I think There's a difference between us thinking about the NIM versus the NII, and I just wanted to make sure we were all aligned on this. You know, obviously, greater outstandings is gonna drive incremental NII every quarter for us. I mean, my sense is you're gonna see NII growth, you know, continue in the organization as we just you know, as we naturally are growing in loans and deposits. There's no question that, you know, market conditions are gonna really have an impact on...
You know, you have competitors that are gonna pay up depending on how they're gonna be in liquidity stress. You know, we're gonna have to selectively react to those type of things. Yeah.
Sure. Sure. That's helpful. Just last question from me. When you guys think about capital, what's kind of your constraining ratio as you think about that? I mean, the $25 million buyback. I mean, you know, where the stock is today, the stock's a lot lower than when you were extremely active in the buyback in late 2021 and 2022. It kind of feels like you're not getting paid for the improvements in the bank, frankly, with where the stock is. How aggressive might you be with that buyback at these levels?
Look, I think what we said was, we will be opportunistic, to exercise that. I also think it's important to say you gotta be balanced, right? I mean, we're in a nice place where, you know, we're trying to make sure we have sort of all the tools in the toolkit, right? Now we have a buyback in place. We continue to pay the dividend, but we're also growing the company. We're using capital, right?
Yep.
I know that we need to be good stewards of capital. I mean, it's probably first and foremost. I think one of the really strong points about us that I think people should take, you know, a lot of comfort in is that 7.5%, you know, ratio is an excellent ratio, right? In this, in this day and age. That's obviously inclusive of the marks.
Yeah.
I think we're in a good place. You know, I just think it's also a function of making sure we're managing all our liquidity sources as well, right? You know, I mean, cash is precious right now, right? Because we've got good demand that we've got to deploy it into. We'll be making lots of trade-off decisions, you know, as to which one's gonna provide the best return-
Right.
You know, on the capital.
Yeah.
Is that 7.5% TCE? Is that kind of the constraining ratio you look to, or is there another ratio you focus on more intently there?
We're looking to Typically for capital planning purposes, we like to look into the tier one which provides a more holistic approach to the position of the company. Yeah. As Jerry mentioned, we like to look at the 7.5 as well, 'cause that includes the change in valuation, as I mentioned, during the year that changed as well so. It's a balancing act right now between the growth that you wanna have and the opportunity that the stock and the market presents.
Great. Thanks for all the color, guys. I thought it was a really impressive quarter, whether or not the market agrees. Congrats.
Thank you.
Thank you.
Thank you. I'm showing no further questions at this time, and I would like to hand the conference back over to Chairman and CEO, Mr. Jerry Plush, for any further remarks.
Thank you again, everyone, for joining the call, and we greatly appreciate it. Have a great rest of the day.
This concludes today's conference call. Thank you for participating. You may now disconnect.