Amerant Bancorp Inc (AMTB) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Amerant Bancorp Fourth Quarter 2020 Earnings Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference to your speaker today, Laura Rossi, Investor Relations Officer. Please go ahead, ma'am.

Thank you, operator. Good morning to everyone on the call and thank you for joining us to review Amerant Bancorp's Fourth Quarter and Full Year 2020 Results. With me this morning are Millar Wilson, Chief Executive Officer; Carlos Iafigliola, Chief Financial Officer; Miguel Palacios, Chief Business Officer; and Thiel Fischer, Credit Risk Manager.

Before we begin, note that the company's press release, comments made 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, quarterly report on Form 10-Q for the quarter ended June 30, 2020, as well as to subsequent filings with the SEC. You can access these filings on the SEC's website. Please note that Amerant has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations, except as required by law.

You should also note that the company's press release, earnings presentation and today's call include references to certain adjusted financial measures, also known as non-GAAP financial measures. Please refer to Appendix 1 of the company's earnings presentation for a reconciliation of each non-GAAP financial measure to its most comparable GAAP financial measure.

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

Good morning, and thank you for joining Amerant's Fourth Quarter 2020 Earnings Call. As I have done in the past few quarters, I'll begin by discussing how Amerant continues to navigate the current environment as well as our fourth quarter and full year highlights. Carlos will then review our financial performance in further detail. After our prepared remarks, Carlos, Miguel, Thiel and I will address questions.

Before I move into the results, I would like to acknowledge that while this past year was unlike any other, I am extraordinarily proud of how well we persisted through it together. I am grateful for all those who work to make this happen, particularly the Amerant team as well as our customers and communities. It is because of all of you that Amerant was able to achieve several significant accomplishments that are even more impressive given the difficult operating environment.

First, we focused on expanding our fee income opportunities and carefully managing expenses. We delivered on our cost efficiency initiatives by diligently streamlining and rightsizing our operations.

Second, we had no provision for loan losses recorded in the fourth quarter. This is a testament to the sound credit quality of our loan portfolio, diligent portfolio monitoring and excellent risk mitigation throughout the year.

Finally, even in this unprecedented year, we successfully completed the sale of $60 million of senior notes in the second quarter and an oversubscribed modified Dutch auction tender offer for the company's Class B common stock totaling $53.3 million in December. This transaction boosted tangible book value per share by $0.75.

However, the achievement I am most proud of was at Amerant's ability to step up to the plate when our community needed us most, providing critical banking services during a time of need. And we are honored and humbled that our community placed this trust in us.

I would also like to recap the actions Amerant took throughout the year for our customers and communities in light of the pandemic. First, Amerant continued to offer payment deferrals and/or forbearance option. As we ended the quarter, the company has received a limited number of requests for additional payment extensions, which are being carefully evaluated.

Second, participating in the SBA's Paycheck Protection Program. From the program's start through its closing in August, Amerant provided over 2,600 PPP loans totaling $223 million to small businesses. We held $199 million in outstanding PPP loans at the end of the fourth quarter with approximately $95 million in associated deposits. This quarter, we focused on processing PPP loan forgiveness requests and continue to do so through the beginning of 2021. We have also started to receive applications under the third round of PPP, which went into effect during the month of January. And we continue to work to leverage these new relationships into future cross-selling opportunities.

Third, we originated loans to small and midsized businesses under the government's Main Street Lending Program in the fourth quarter. Amerant originated $56 million of these loans, of which 95% of the balances were subsequently sold to the Federal Reserve, generating approximately $0.5 million in related fee income.

Additionally, we continue to closely monitor credit and liquidity risk as well as credit underwriting practices to prudently manage our loan portfolio. This includes assessing forbearance status and general credit conditions for all portions of the portfolio on a daily basis with an emphasis on loans in industry most vulnerable to the financial impact of the COVID pandemic.

Finally, and most importantly, as we carried out these actions throughout this year, Amerant's top priority continues to be providing high-quality and uninterrupted services to customers while prioritizing the health and safety of employees, customers and local community.

Before I report on our performance and hand over to Carlos, I would like to acknowledge the news that was announced last week. I will be retiring from Amerant at the end of March but will continue to serve on Amerant's board where I look forward to assisting the new CEO in a smooth transition. It has been an honor to serve this organization for over 43 years. I am humbled by the trust placed in me to lead Amerant as its CEO over the past 12 years. Thank you to all my incredible teammates who have worked hard to drive this company forward and will continue to do so under our incoming CEO, Jerry Plush. The future of Amerant is bright, and I look forward to watching Jerry lead the company to the next level.

Turning now to our performance highlights in Slide 4. Of note, net income increased significantly quarter-over-quarter to $8.5 million, up from 1.7 in the third quarter. This increase was largely driven by the absence of provisions for loan losses this period. Further supporting the increase was a higher net interest income, which was up 7.3% from the third quarter due to the lower overall deposit costs and higher interest income on our loan portfolio. Our NIM for the fourth quarter was 2.61%, an outstanding pickup of 22 basis points from 2.39% in the previous quarter. Our fourth quarter noninterest income decreased 43.3% quarter-over-quarter. This decrease was mainly driven by lower net gains on the sale of securities and a onetime loss on the sale of the Beacon operations center, partially offset by derivative and other income. At the same time, we saw our expenses increase 13.5% quarter-over-quarter, largely due to the onetime severance expenses we recorded this quarter as we implemented voluntary and involuntary plans, which we will touch on later.

Finally, on the loan side, Amerant continued to purchase high-yield consumer loans in the fourth quarter. And we are pleased that our consumer and residential loan portfolios increased both quarter-over-quarter and compared to December 31, 2019. On the deposit side, our deposits at the end of 2020 were down slightly compared to the previous quarter and were essentially flat compared to the end of 2019.

Moving to Slide 5. As I just mentioned, our net income for the quarter was nearly 4x the income of the third quarter, but down year-over-year. Our return on assets was 0.42% in the fourth quarter or 0.56% on an adjusted basis, and our diluted earnings per share was $0.20 per share or $0.27 on an adjusted basis, in line with market expectations.

In addition, our credit quality remains strong and our commitment to monitoring credit risk even stronger. As I just mentioned, we recorded no provision for loan losses in the fourth quarter as we saw lower than initially estimated losses and improving economic conditions despite the ongoing pandemic.

And now I will turn the call over to Carlos, who will review our performance in more detail.

Thank you, Millar, and good morning, everyone. Before we move on to Slide 6, I would like to discuss some balance sheet highlights.

On the asset side, as of December 2020, total loans increased 1.7% compared to December 2019, largely driven by the PPP loans as well as the purchase of higher-yielding consumer loans, as Millar mentioned earlier. In the fourth quarter, consumer loans increased 30% quarter-over-quarter and 180% compared to the end of 2019. At the same time, single-family residential loans increased 4% quarter-over-quarter and 15% compared to the year ago.

On the funding side, as of December 2020, total deposits were down 2.5% quarter-over-quarter and down 0.4% compared to December 31, 2019. The quarter-over-quarter decline is primarily attributable to the 12% reduction in customer CDs as we continue to focus on increasing lower-cost core deposits and also aggressively lower our CD rates. Our stockholders' equity decreased by $51 million or 6.1% compared to the 2019, which is largely the result of the tender offer we completed during the fourth quarter, which resulted in the repurchase of $53.3 million in stocks, excluding fees and expenses or 4.2 million of Class B shares.

Moving on to Slide 6. I would like to review our investment portfolio. Our fourth quarter investment securities balance decreased slightly to $1.4 billion from $1.5 billion at the end of the third quarter given prepayments received. Compared to the fourth quarter of 2019, investment securities decreased from $1.7 billion, primarily as a result of our timely execution on the sale of certain securities at a gain, which otherwise would have been dissipated with the recent steepening of the yield curve. As we said in prior quarters, we successfully managed the investment securities portfolio as an economic hedge against the decline in net interest income.

Given the challenging interest rate environment, we maintain a low percentage of our investment portfolio in floating-rate securities. The average duration of the portfolio decreased from 3.8 years to the -- during the end of 2019 to 2.4 years in December 2020 due to the acceleration in prepayment speeds and the sale of high-duration securities before the steepening of the yield curve took place. We continue to look for investment opportunities that offer attractive value while maintaining adequate duration and proactively managing credit risk exposures.

Moving on to Slide 7, let's talk about our loan portfolio. Fourth quarter loan production continued to be challenged following the trend we saw for the most of 2020. Loans totaled $5.8 billion as of the fourth quarter close, which were $82 million lower compared to the third quarter of 2020 and $98 million higher compared to the end of 2019, which includes the origination of loans under PPP. The quarter-over-quarter decrease was driven by the low loan demand and high prepayments received in the CRE portfolio. To offset these factors, Amerant continued to build up into high-yielding consumer loans in the fourth quarter.

Consumer loans totaled $247 million at the end of 2020 compared to $190 million in the third quarter of 2020 and $88 million during the end of 2019. The 2020 year-end balance includes $68 million and $166 million of indirect consumer loans purchased during the fourth quarter of 2020 and the full year 2020, respectively, through this program that we have with (inaudible). The weighted average FICO score on this portfolio of indirect consumer loans as of December 31 is 766. I would like to note that these indirect loans complement our organic loan portfolio but are not meant to replace organic loans as we continue to pursue relationship-driven strategy.

In addition, our single-family residential loans increased quarter-over-quarter and year-over-year as low market rate drove a meaningful increase in refinancing activity. We see residential loan market as a major opportunity going forward. In order to capitalize on growing demand in the residential space, in the fourth quarter, Amerant partnered with a highly specialized team of real estate executives and created Amerant Mortgage, where Amerant Bank is the majority owner. This new and exciting venture will allow us to increase and diversify our fee income via the origination and sale of residential mortgages on a larger scale. In line with this venture, we will be closing our in-house residential lending operations, and our residential team will be joining Amerant Mortgage. We are in the early stages of this operation but look forward to sharing relevant updates in the upcoming quarters.

Moving on to Slide 8. I would like to spend some time discussing Amerant's continued strong credit quality. As a result of the diligent credit risk monitoring throughout the year, we recorded no provision for loan losses in the fourth quarter, a particularly impressive accomplishment under the ongoing pandemic environment. This was due to lower than initially estimated credit deterioration and improved economic activity conditions within our footprint.

The percentage of nonperforming assets remained almost unchanged quarter-over-quarter, while the net charge-off as a percentage of the average total loans was down approximately 100 basis points. In the fourth quarter and continuing into 2021, we saw the positive trend of loans coming out of forbearance as economic activity steadily improves. In the most recent quarters, loans under deferral and forbearance decreased tremendously compared to the third quarter. I'm excited to say that as of December 31, only 0.7% of our total loan portfolio remain under deferral or forbearance. Almost the entirety of existing loans under forbearance are collateralized by real estate. And as a positive note, 99% of the loans out of forbearance have resumed regular payments.

I would like to give you an idea of our risk perception on our main portfolios. We remain cautious on CRE loans as our retail and office-based sectors are still undergoing a paradigm shift, and it's unclear as to where demand will shake out post-pandemic. In this line, in the fourth quarter, our CRE to risk-based capital decreased from 3.25x from 3.46x in the third quarter of 2020. We're optimistic on the C&I side due to the new vaccine, but we remain cautious as its rollout has been choppy and slow, and various cases are expected to increase as new COVID strains are identified.

One macro driver that we expect to benefit from is the continued permanent relocation of residents and businesses from the Northeast to South Florida. We see this trend as a potential significant driver of customers' acquisition and fee income. Barring any macroeconomic changes or headwinds, we believe Amerant's current level of estimated reserves is sufficient to cover probable losses across its loan portfolio. And while downgrades may still occur in the upcoming quarters, we expect to see them slow down compared to earlier quarters of 2020. We also may see a higher charge-off, but we believe current reserves already provide adequate coverage. Amerant's credit quality remains strong. Nevertheless, we remain committed to proactively monitor our risk assessment practices, including examining our respondent to pattern or trends that may arise across certain industries or regions in the quarters ahead.

Turning to Slide 9. You can see that our loan yield increased this quarter by 12 basis points compared to the prior quarter but decreased by 71 basis points compared to the fourth quarter of 2019. The quarter-over-quarter increase was driven by the contribution of the implemented floor strategy on the C&I portfolio, prepayment penalties collected and higher average balances on indirect lending. The year-over-year decrease was driven by the lower interest rate environment and a decline in the economic activity due to the pandemic.

On the investment securities yield, a decline of 3 basis points were recorded from the previous quarter and 37 basis points year-over-year due to the many factors that we discussed in previous quarters, including repricing of floating securities, prepayment acceleration and challenging reinvestment due to lower market rates.

Moving to Slide 10. Total deposits at the end of the year were $5.7 billion, down 2.5% compared to the third quarter of 2020 and down 0.4% compared to the close of 2019. The quarter-over-quarter decline in deposits is primarily attributable to the 12% reduction in customer CDs. This decrease in CDs result from our strategy to continue focus on multiproduct relationships with our customers greater than a single product account based on a high-cost CD. This proactive repricing of our CDs and relationship money market, as well as the lower volumes on brokered deposits, all contributed to lower cost of our interest-bearing deposits. Of note, the cost of our interest-bearing deposits was down 14 basis points compared to the previous quarter and 56 basis points compared to the year ago.

Regarding our geographic mix, domestic deposits were $3.2 billion in the fourth quarter of 2020, down 3.2% compared to the $3.3 billion in the third quarter of 2020 and up 2.6% compared to the $3.1 billion in the fourth quarter of 2019. While foreign deposits were $2.5 billion in the fourth quarter of 2020, down 1.5% compared to the $2.6 billion in the third quarter of 2020 and down 4% compared to the $2.6 billion in the fourth quarter of 2019. As discussed in previous quarters, we are focused on increasing our core domestic deposits, deploying our relationship-driven and customer-centric strategy. Over the course of 2020, we saw the fruition of this strategy as it continues to support our profitability enhancement.

On a final note, as economic activity in Venezuela partially resumed, we recorded a higher annualized foreign deposit runoff rate of 6% versus 3.8% in the third quarter. For the full year 2020, the foreign deposit decay rate was 4% compared to the 13% of 2019 driven by the company's sales efforts.

Going to Slide 11. The increased levels of liquidity allow us to decrease our utilization of wholesale funding compared to 2019 in approximately $200 million. As we continue to benefit from the modifications made to the fixed rate FHLB advances earlier this year, we were able to further drop our cost of funds during the quarter by changing the composition of broker deposits. In 2021, we will be opportunistic about the use of wholesale funding as a cost-effective source of liquidity.

Turning to Slide 12, I would like to provide some further detail in our net interest income and NIM. Our fourth quarter net interest income was $48.7 million compared to $45.4 million in the third quarter of 2020. The 7.3% increase in the net interest income and the 22 basis points increase in additional NIM is attributable to: first, lower overall deposit costs and average balances on CDs and broker deposits; second, higher average yield and volumes in loans; and third, increased collection and prepayment penalty fees during the fourth quarter of 2020.

Importantly, in the fourth quarter, we continued to take action to preserve margin, including leveraging opportunities within direct lending products, repricing customer time and relationship money market deposits at lower rates and running off higher-cost maturing broker deposits.

Net interest income for the full year 2020 was $190 million, down 11% compared to the $213 million for the full year 2019. Much like what we have said in the fourth quarter of 2020, the decrease in the net interest income in the full year was largely driven by the lower interest rate environment. NIM for the full year 2020 was 2.52%, down 33 basis points from the full year 2019. This can be attributed to lower average balances and yields on interest-earning assets, partially offset by lower cost of deposits and wholesale funding.

During 2020, Amerant proactively manages investment securities portfolio as an economic hedge against the decline in net interest income. This resulted in an annual increase in securities gains of $24 million, which exceeded the decline of $23 million in the annual net interest income.

Turning to Slide 13. Noninterest income in the fourth quarter was $11.5 million, down 43% quarter-over-quarter and down 28% year-over-year. The quarter-over-quarter decrease in noninterest income was due to a $7.6 million lower net gain on sale of securities, the $1.7 million loss on the sale of Beacon operations center during the fourth quarter and the decrease in rental income due to lease terminations from the corporate building in the third quarter. These factors were partially offset by a $0.7 million increase in derivative income as customer activity increased in the fourth quarter, $0.5 million coming from the fee income related to Main Street Lending Program.

As we look to operate to a modern premises, we have decided to sell Beacon Operations Center, but will continue to operate at this location for approximately 2 years under a leaseback until a new upgraded facility is ready.

In the full year 2020, noninterest income was 29% up compared to the full year 2019. The primary drivers for the year included higher net gains on the sale of securities and increased wealth management fees. This was partially offset by the onetime loss of the sale of Beacon Center already mentioned and the absence of $2.8 million gain on the sale of a Beacon land that we recorded last year.

Finally, our assets under management and custody totaled $2 billion at the close of 2020, an increase of $157 million or 9% from the $1.8 billion at the close of 2019. From these increases in AUM, net new assets reached record levels by increasing by $105 million at the close -- compared to the close of the last year or 6% as a result of the company client-focused relationship-centric strategy. Over the past 4 quarters, we gained share of wallet of existing customers and successfully acquired new customers by leveraging the company's full suite of capabilities and offerings. We remain focused on growing the company's domestic and international asset base in the quarters ahead.

Moving on to next slide. Fourth quarter noninterest expenses was $52 million, up 14% from the third quarter and relatively flat year-over-year. The quarter-over-quarter increase was a result of higher severance expenses for the voluntary and involuntary plans approved in October, higher salaries from lower deferred loans origination costs and increased expenses following branch closures. This increase was partially offset by lower variable compensation and employee benefit expenses associated with the retirement plans. Also, lower digital transformation expenses. Our digital transformation remains on track, and we expect to continue to make related investments in the upcoming quarters.

Noninterest expenses for the full year 2020 were down 15% compared to the 2019, which was due to: first, lower salaries and employee benefit expenses following staff reductions; second, changes to variable and long-term compensation programs and defer PPP loan origination costs early this year; and third, lower marketing, legal and accounting fees compared to 2019. The lower full year noninterest expenses was partially offset by higher FDIC assessments and insurance and other expenses related to branch closures.

Restructuring expenses in the fourth quarter 2020 were $8.4 million and increased $6.6 million quarter-over-quarter, largely due to severance and branch closures.

Going to Slide #15, about interest rate sensitivity, you can see that Amerant remains asset-sensitive as over half of our loan portfolio is floating rate or slated to mature within the year. Given this dynamic as well as the low interest rate environment, our team continues to take action to reduce our asset sensitivity and protect our NIM. Specifically, we have implemented the floor rate strategy in our loan portfolio and continue to take advantage of higher-yield loan duration opportunities.

Now I want to take the presentation back to Millar for closing remarks.

Thank you, Carlos. Turning to our final slide. I'd like to close by covering our goals for the new year.

In 2020, we learned a lot about adapting to new technologies and ways of working, protecting the quality of our assets and much more. I expect our team to press forward into 2021, bearing in mind these important lessons. And accordingly, in 2021, we will continue to implement and utilize new technologies that allow us to simplify our operations for the benefit of our noninterest expenses, preserve the quality of our assets through proactive frequent monitoring and assessment, execute our relationship-centric strategy to enhance our noninterest income, deposit and loan mix and exercise a dynamic capital management.

It was truly a team effort to close 2020 in a position of strength, and I couldn't be prouder of every member of the Amerant family for their perseverance and hard work.

As I step aside, I am sure this excellent team, led by Jerry Plush, will execute on our transformation strategy and an even stronger year of value creation for our shareholders and service to our customers.

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

(Operator Instructions) Our first question will come from the line of Will Jones from KBW.

So I just wanted to start on the net interest margin. It was up nicely linked quarter at 2.61%. And a lot of this is due to some of the attrition and the time deposit portfolio, which you guys have been talking about for a little while.

I believe you called out maybe another $500 million, $520 million that will mature in the first quarter. Where do you expect those will reprice? And how does this impact your thoughts about the trajectory for NIM?

Okay. Thank you for the question. We have seen this progression of events and the repricing of the time deposits. And forward-looking, we still have approximately another $500 million probably upcoming in the next 3 months that will come to reprice and more in the future.

And speaking about the short term, we're probably going to have an additional drop of about 33 basis points in the cost of the time deposit that will probably translate into 5 to 7 basis points extra reduction in the cost of funds. So based on that, we expect our NIM to be within the range of the 2.65% to 2.75% going forward. So yes, we'll definitely see an improvement coming from the cost of funds.

Great. That's awesome to hear. And then can you just remind us how much PPP fees Amerant has yet to recognize?

So far, we have recognized just a fraction of it because the -- we have probably received $30 million or so in forgiveness.

Yes. As of today -- 2 days ago, we have 30% of forgiven loans, which is around $67 million. So -- but that's for January.

That's the most recent.

When you talk about the quarter end, it's $30 million.

$30 million. Correct.

Okay. Great. That's helpful. And then I just wanted to move on to Amerant Mortgage. It was really nice to see you guys launch this new division as some nice diversity to your fee businesses.

Could you just give us a sense for the vision of Amerant Mortgage in terms of what you think the potential revenue contribution could be over time? And should we expect some near-term expense associated with the start-up?

Yes. It's Miguel. This is one of the most exciting things that we have done during the last quarter. Definitely, we have attracted a very talented group from a competitor. And we're going to be able to transform the business at 180 degrees. Mainly before our focus was 90% relationship, 10% sales. We're going to turn it around completely. Our main focus will be improving our interest income and expanding from Florida nationwide.

We are still at the early stage. I believe that it will be great seen starting application process in the month of April through May. And we would like to see how that progress. We will invest also in change of platform. The people that is with us, the group and they are already working on that. We're going to be already acquiring tickets for a GSE, which we didn't have before. So definitely, it's very, very exciting moment for the group. As we roll in our existing production, which increased almost 60% in 2020, we will -- definitely, we will be changing the level of production through the end of the year.

So far, we're still working on the process, and we believe in the next quarter, we will be able to provide more certain path on how we're seeing the production. But definitely, it's going to be totally different from what you have seen of today.

Okay. Great. And then can you just foresee any onetime costs coming out of that start-up, maybe that would happen in the first, second quarter?

There is -- we did a capital infusion to that entity for $10 million. And -- but again, the -- most of the cost will come from the new systems that will come along, et cetera, and the -- we do not expect at this point. We're still in the process of gathering all the platforms that we're going to be using. And we had an initial estimate, but of course, we need to go through the implementation process that may take longer a short period of time. We're in particular in that process. So we -- but we do not anticipate there will be a significant cost to get the company up and running.

Got it. Great. That's great color. And then just last one for me. The consumer loan book has been a really nice source of growth for you guys as recent, it's up pretty nicely linked quarter. Can you just refresh us on your appetite to continue growing this book? And I think you previously targeted consumer loans around 3% of the whole portfolio. Do you think this will be one of your biggest sources of growth moving forward?

Yes. We see this as a complement of our loan portfolio. By any means, we were trying to convert a big percentage of the loan portfolio towards this asset class.

As of now, as you said, we have around 3%, but we are not planning this to become an asset class that will occupy more than 10% of the loan portfolio. So it's something that will be very well contained, and it's just -- it's a source to increase profitability and keep all elements under control.

Okay. Great. Well, that's it for me guys. I just wanted to say congratulations to Millar on your great Amerant career and wish you best luck of retirement.

Thank you very much. I appreciate that.

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

First off, yes, I echo those sentiments, Millar. Congratulations on a well-deserved retirement. It's been nice to watch the progress at least the past couple of years. So congratulations.

I wanted to start on the expense side. Obviously, a lot of actions you guys have taken. And I'm sorry if I missed this, but $43 million, is that kind of the run rate we should think about? As we move forward, I would expect, as we have a little bit of a ramp-up in the PPP forgiveness as those fees -- or excuse me, as those expenses are recognized that there could be a little upward trajectory in the nearer term. But is there any other things on the expense side that we should be cognizant of whether it's a higher incentive comp this year. I know it was down last year, just looking for kind of a run rate to start the year.

That's a good question. So the run rate will be closer to the $45 million approximately, and that's something that we -- it's similar to the one that we provided on the last quarter and pretty much because it was -- it accounted for the prospective savings that we would have on the voluntary early retirement and the involuntary separation plans that we had on the last quarter. So that would be a good estimate of what would be the run rate. And that includes, of course, all the items and even include the resume of the payments of the long-term incentive plans and variable compensation that we decreased during 2020.

Okay. And I'm sorry if I missed this, but the costs related to the mortgage JV, how much would those be? And is that included in kind of that $45 million?

No, it's not included. It's not included. But we do not expect this to be as significant. It's mainly software subscription and several other items that we do not anticipate will create a large deviation from this number.

Okay. That's helpful. And then maybe just switching to loans. Obviously, we have PPP round 3 coming on. You have the forgiveness. You talked about the consumer loans at 3%, capacity up to 10. I know you've obviously expanded into some other markets, and those markets are probably beginning to hopefully ramp a little bit.

I guess the question is, I mean, do you actually think you can grow loan balances year-over-year? Are you still going to have paydowns and payoffs that will offset growth as we move forward?

Michael, definitely, it's going to be -- it's going to continue being a challenging year, and we do expect to continue having payments as we saw in the last quarter. And if we take that as a base, where we had a gross production of $160 million with payments of $200 million, hopefully, we can control that. We have been very careful on competing on interest on the yields of the transaction and the strategy that we want to continue.

Based on that, on what we're seeing in our pipeline and the type of reduction that we will see in the next 3 months related to the PPP, we might be seeing on the first quarter a low single digit and increasing. As the economy improved, also the line of credit utilization should increase, and that had a reduction of almost 50% in the last 2 quarters of last year. So from there, we could be pivot and start seeing growth.

And for the second quarter, maybe on mid-single digits depending on how much a payoff on the commercial real estate, the rates that we're seeing on that area are not on our scope, and we will continue to compete definitely. We have -- in our strategy to grow the balance sheet. And we will monitor the economy, how it grows because nobody thought that at this stage of the year, we're still waiting for the solution on the vaccination process. Hopefully, that changed, and we can continue our growth.

We are also including a business banking strategy. We are focusing on a more granular transaction. And as you know, a smaller, different size of the relationship, it takes more time, but definitely, the yields will be better. And we might let go some loans that -- they're not going to be part of our strategy. So it's going to be a recomposition with a focus of growth.

Okay. And maybe finally for me, just on the credit front, it looks like credit metrics, even criticized classified were relatively stable, maybe a tick higher, yet there was no provision. You guys are under the incurred loss model. How should we think about kind of the reserve levels and future pace of provisioning going forward? I know there's a lot that goes into that. But I mean, could we expect to see that reserve level come down from here?

Michael, this is Thiel. So as we have, as you mentioned, the increase was very -- I mean the nonperforming loans were very stable. We expect that -- there may be some in the first quarter. They're still coming down there. But the outlook on the economic conditions, it's improving for second quarter and on. And therefore, we expect that the reserves will be based on growth, what we would talk about with -- increasing our portfolio. Other than that, we don't expect -- we believe that the reserve we currently have sufficient to cover any potential losses that come our way. And if the content of the economy continues, it's a positive trend, we may think of any releases or even it's in the possibility as well.

Okay. And Millar, congrats again.

Thank you, Michael.

(Operator Instructions) I'm not showing any further questions in the queue. I'd like to turn the call back over to Mr. Wilson for any closing remarks.

Thank you all for joining our fourth quarter and fiscal year 2020 earnings conference call. As the world continues to adjust to the new normal, please note that at Amerant, we are doing the same and look forward to continuing to transform in 2021. Thank you all and be safe. Operator, you may now end the call. Thank you.

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