Amerant Bancorp Inc (AMTB) 2022 Q3 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Amerant Third Quarter 2022 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to hand the conference over to Laura Rossi, Head of Investor Relations. Please go ahead.

Thank you for joining us to review Amerant Bancorp's Third Quarter 2022 Results. On today's call are Gerry Plush, our Chairman and Chief Executive Officer; and Carlos Iafigliola, our 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, reference 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, Gerry Plush.

Thank you, Laura. Good morning, everyone, and thank you for joining Amerant's Third Quarter 2022 Earnings Call. I'm pleased to be here today to report on our results for the quarter. But before we do that, I'd like to acknowledge the impact Hurricane Ian had on Southwest Florida. Our thoughts and prayers go out to those most affected by the storm.

At Amerant, we've been actively involved in several efforts to support impacted communities recover from this unfortunate event, and we look forward to seeing everyone affected back on their feet.

From a business perspective, we are fortunate to report there have been no significant impacts identified in our Florida loan portfolio.

Moving on to the remarks of the quarter. On October 19, 2022, and our Board of Directors approved a $0.09 per share dividend payable on November 30 of this year. As I've shared in previous calls, paying dividends are an essential component of our plan to provide greater value to our shareholders.

I'll now provide a brief overview of our performance in the third quarter and outline the steps we took to best position ourselves for the balance of the year and beyond. And then I'll hand it over to Carlos to get into the details.

So if you turn to Slide 3. Here, you can see a summary of our third quarter highlights. Our net income attributable to the company was $20.9 million, up significantly quarter-over-quarter. This increase was primarily driven by higher net interest income in the third quarter as we recorded higher average yields and balances on loans as well as on our investments. These were partially offset by the increase in higher average costs and balances on deposits and FHLB advances.

But as a result, the net interest margin expanded to 3.61%, an increase 33 basis points quarter-over-quarter. Our balance sheet also grew significantly during the third quarter, with total assets reaching a historic high point at $8.7 billion, compared to $8.2 billion as of the close of 2Q '22. Total gross loans were $6.5 billion compared to $5.85 billion in 2Q '22, an increase of $656 million. And total deposits were $6.6 billion, up $385 million compared to $6.2 billion in 2Q '22.

The company's capital levels continue to be strong and well in access in the minimum regulatory requirements to be considered well capitalized as of September 30 of this year. During the quarter, we also paid out the previously announced cash dividend of $0.09 per share on August 31.

We'll turn now to Slide 4. And you can see that our core PPNR was $30.3 million, up nearly 56% compared to the $19.4 million reported in the previous quarter. As we've consistently stated, we believe this slide is essential to show the net revenue growth of the company, excluding provisions and nonroutine items. So you can clearly see Amerant's core earnings power. And as I noted in my remarks last quarter, there were significantly fewer nonrecurring items reported this quarter compared to 2Q '22.

We can turn now to the key items on Slide 5 and we can cover what happened during the third quarter. So we continue to work on reducing nonperforming loans as part of our commitment to increase our percentage of earning assets to total assets. As of Q3, NPL declined to $18.7 million compared to $25.2 million as of 2Q '22. We intend to continue to focus on driving down NPLs in future periods.

We're also pleased to report that the sale of the New York City-based real estate-owned property closed this month, so in the month of October. So coupled with the drop in NPLs, this significantly reduces or on our level of nonperforming assets.

As I've stated when discussing our retail network, we continue to look for expansion into new key markets while continuously looking for opportunities to consolidate and others. So during the third quarter, we opened our new highly a Florida location. We received OCC approval for a new location in Kevin, Florida, a market we're very excited to do business in and look to be open in by the end of the first quarter of next year.

We closed our Pembroke Pines, Florida location as announced last quarter. Additionally, our new university place location in Houston will open October 31, while the location it replaces South Shepard will close the same day with our current customers moving over to the new location. And the opening of our downtown Miami location is now expected sometime in early 2023.

Regarding our Tampa loan production office. We continue to add key business development personnel in Tampa, specifically in C&I and now have 14 team members with 4 more openings to fill. And we also added to our business development team here in South Florida and we plan to continue to look to expand in both Broward County and Palm Beach County.

We'll turn now to Slide 6. You can see here we've outlined key performance metrics and their change compared to last quarter. It's clear our operating profitability improved from higher outstandings and improved net interest margin. As I just mentioned, was 3.61%. Our efficiency ratio improved to 65.4% and compared to the 86.6% last quarter. Both ROA and ROE significantly improved, as you can see here from higher net income this quarter.

For consistency and transparency, we again show the 3 quarter metrics of ROA, ROE and operating efficiency, excluding any onetime nonroutine items in the footnotes, so you can more easily see the underlying performance for the quarter.

We'll turn now to Slide 7, which focuses on Amerant Mortgage. On a stand-alone basis, Amerant Mortgage had net income of $800,000, an increase of $400,000 or 88% compared to Q2, primarily as a result of mortgage banking income from transactions with the bank.

However, on a consolidated basis, we recorded a net loss of $1.4 million for the third quarter in connection with the operations of Amerant Mortgage.

Year-to-date, in 2022, the company has purchased approximately $298 million in loans through Amerant Mortgage, which includes loans originated and purchased from different channels. The current pipeline shows $51 million in process or 79 in applications as of October 12, in line with the headwinds currently in place for the mortgage business in general.

So 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, Gerry, and good morning, everyone. Turning to Slide 8. I'll begin by discussing our investment portfolio. Our third quarter investment securities balance was $1.3 billion, down compared to both previous quarter and the third quarter of 2021. When compared to prior year, the duration of the investment portfolio has extended to 5 years due to lower prepayment speeds recorded in our mortgage-backed securities portfolio in light of rising interest rates. The investment strategy has focused on achieving the right balance between yield and duration as current market conditions provide better reward on longer-duration assets. The floating portion of our investment portfolio increased to 16% compared to 11% in the previous year.

As I did last quarter, I would like to take a minute to discuss the impact of interest rate increases on the valuation of debt securities available sale. As of the end of September, the market value this portfolio decreased $35 million after tax compared to the second quarter and $100 million year-to-date. These changes comments a direct result of increases in interest rates and are consistent with our interest rate sensitivity analysis.

The relative credit exposure of our investment portfolio is very limited, reason why there was no need to record any other than temporary perm. It is also important to comment that our tangible common equity ratio ended at 7.8% after considering the impact of changes in valuation of our AFS portfolio.

Continuing to Slide 9, let's talk about the loan portfolio. At the end of the third quarter, total gross loans were $6.5 billion, or up 11% compared to the $5.85 billion at the end of the last quarter. This growth was driven by loan origination efforts primarily on the CRE side and single-family residential mortgages.

Additionally, the production in Amerant Mortgage was complemented with loan purchases through third parties. Partially offsetting this increase were prepayments totaling $182 million, primarily in commercial loans. Also, during the third quarter, we had $22 million from loans originated with the level equipment financing solution that we announced last quarter. Loans held for sale as of the end of the quarter totaled $58 million compared to $121 million as of the second quarter 2022.

As of the third quarter, loans held for sale consisted of residential mortgages loans. We transferred the new CRE loans previously accounted as loans available for sale to investment category as we now have the intent and ability to hold this until maturity or retain.

Consumer loans as of September 30 were $577 million, an increase of $20 million or 3.5% quarter-over-quarter.

This includes approximately $497 million in higher yielding indirect loans, which continues to represent a tactical move for us to increase yields given higher cost funding costs. During the third quarter, we purchased $91 million of consumer loans under the indirect lending program.

We also launched a new Fintech-enabled program, which generated $6 million in consumer loans and is intended to progressively replace our indirect purchases.

Turning to Slide 10. Let's take a closer look to the credit quality. Our credit quality remains sound and reserve coverage is strong. The allowance for loan losses at the end of the third quarter was $54 million, an increase of 3.2% from the $52 million at the end of the previous quarter. There was a provision for loan losses of $3 million in the third quarter to account for the loan growth.

During the third quarter, the $2.7 million allowance associated with the COVID-19 pandemic was further reduced to $1.6 million now as a generic reserve. This generic reserve accounts for losses pending to be identified in our portfolio such as those that may result from (inaudible). At this time, we haven't identified any immediate significant impact to the collateral of our portfolio. Amerant's current exposure to [EM PA] is approximately $300 million. Our team members have been in contact with these borrowers and have been making site visits as well.

Net charge-offs during the third quarter totaled $1.3 million compared to the $4 million in the second quarter. During the third quarter of 2022, the company charged off $1.7 million related to multiple consumer loans and $0.2 million in connection with 2 commercial loans. Nonperforming assets totaled $25 million at the end of the third quarter, a decrease of $6.6 million or 21% compared to the second quarter and a decrease of $68 million or 73% compared to the third quarter of 2021. The ratio of nonperforming assets to total assets was 29 basis points, down 10 basis points from the second quarter of 2022 and down 95 basis points from the third quarter of 2021.

Our nonperforming loans to total loans are down to 0.29% compared to the 0.43% last quarter as a result of our commitment to increase earning assets to total assets. As Gerry mentioned, the nonperforming asset ratio was further decreased as a result of the sale of the New York OREO we closed this month of October. In the third quarter of 2022, the coverage ratio for -- compared to loan-loss reserve to nonperforming loans closed at 2.9x, up from the 2.1x at the end of the last quarter and from onetime that we recorded a year ago.

Continue to Slide 11. Total deposits at the end of the third quarter were $6.6 billion, up $385 million from the previous quarter. This growth was driven by customer transactional accounts, which were up $258 million or 5.3%, primarily from interest-bearing demand accounts. As the company obtained additional deposit sourced via large home providers during the period. We also elected to increase brokered and deposits, which were $143 million increase in order to lock lower interest rates in light of rising market rates.

The increase in total deposits was offset by a slight decrease in customer time by $11 million or 1.2% which reflects our retention efforts in this interest rate environment.

Important to highlight that domestic deposits now account for 63% of our total deposits, totaling $4.2 billion as of the end of the third quarter, up $444 million or 12% compared to the previous quarter. Foreign deposits, which account for 37% of the total deposits totaled $2.4 billion, slightly down by $59 million or 2.4% compared to the previous quarter. Our core deposits, which consists of total deposits, excluding all time deposits were $5.2 billion as of the end of the third quarter, an increase of $253 million or 5.1% compared to the previous quarter. The $5.2 billion in core deposits included $2.1 billion in interest-bearing deposits which increased $127 million versus the previous quarter, $1.7 billion in savings and money market accounts, which increased more than $100 million versus the second quarter, $1.3 billion in noninterest-bearing demand deposits, which were up $20 million versus the previous Q.

Next, I will discuss the net interest income and the net interest margin on Slide 12. Net interest income for this reporting period was $70 million, up $11 million or 19% quarter-over-quarter. This increase was driven by higher average yields on loans and investments resulting from a total increase of 300 basis points in short-term interest rates. Higher average balances in floating commercial real estate and single-family residential loans as well as changes in deposit rates being handled via specific allowances to manage the pressure of our cost of funds.

As rates continue to increase, we are disciplined in managing the increases in our product rates. As we explained last quarter, we adjust certain interest rate sensitive products and relationships to partially reflect the increases in market rates. There is a lot of value to leverage the product mix to differentiate pricing and control deposit betas.

During the third quarter, we based on the current deposit mix, we observed a beta of approximately 30 basis points, which help us to navigate the interest rate increases we saw during the period.

Moving to the net interest margin. As Gerry mentioned, the third quarter NIM was 3.61%, up by 33 basis points quarter-over-quarter. The change in the net interest income and the NIM was primarily driven by the increase in the yield of our loan portfolio, which is now at 5.1%, an increase of 68 basis points versus the previous quarter. As I said in Q2, the improvement in NIM is a reflection of our asset sensitivity position.

Moving to Slide 13. You can see our balance sheet continues to be asset sensitive with about half of our loans having floating rate structures, and 58% reprice within the year. Our NIM sensitivity profile to interest rate office scenarios has decreased compared to the last quarter in light of updated data assumptions on interest-bearing deposits. These changes are consistent with a more competitive environment for deposit gathering.

This quarter, we are showing a potential increase of approximately 6% net interest income in the up 100 scenarios and 9% for the 2 months. We will continue to actively manage our balance sheet to best position our bank for the expected rise in interest rates for the remaining portion of 2022.

Moving to Slide 14. Noninterest income in the third quarter was $16 million, up $3 million versus the previous quarter and 23% from the $13 million in the second quarter. The increase was driven by positive valuation on marketable securities holdings of $1.5 million in the third quarter compared to a negative valuation of 2.6% in the second quarter, an increase of $1.8 million in fee income from client derivatives and an increase of $0.2 million in total brokerage and advisory fees, primarily driven by higher securities trading coming from the fixed income side from our customers' portfolio. The increase was partially offset by lower mortgage banking income of $2.3 million, the absence of net unrealized gain on derivatives valuation of 0.9% in the second quarter.

Amerant's asset under management totaled $1.8 billion as of the end of the third quarter, down $57 million or 3% from the end of the second quarter, which comes as no surprise given the lower market valuations in equity and fixed income markets.

Turning to Slide 16. Third quarter noninterest expenses was $56 million, down $6 million or 10% from the second quarter. As we announced on our previous earnings call, there was a significant reduction in onetime expenses. We considered $2 million as a nonroutine items. Excluding these items, core noninterest expenses were $54 million in the third quarter of 2022. The quarter-over-quarter decrease was primarily driven by the absence $3.2 million related to OREO valuation in New York, $1.6 million impairment charge related to the closing of a banking center as well as lower expenses in connection with the upcoming transition to FIS by $2.5 million, lower advertising expenses by $1.2 million and severance and other compensation expenses by $0.8 million.

The decrease in noninterest expenses was partially offset primarily by higher salaries or $0.7 million, resulting from new hires and $1 million of consulting fees in the third quarter in connection with the engagement with FIS.

The efficiency ratio was 65.4% in the third quarter of 2022 compared to 86.6% in the previous quarter and 74.2% in the third quarter last year. Core efficiency ratio decreased to 64.1% in the third quarter of 2022 compared to 73.7% in the second quarter of 2022. The improvement was driven by higher net interest income as well as lower expenses during the third quarter.

I will now turn the call back to Gerry for closing remarks.

Thank you, Carlos. In closing, I just want to state that we are seeing the benefits of the decisions we've made in recent quarters as well as from the efforts of our team members, and that's resulted in higher net income, solid net interest margin expansion, strong loan and deposit growth, a significant reduction in nonperforming loans and a further reduction to nonperforming assets just post quarter end, and continued strong capital ratios.

In summary, while we recognize there are clearly headwinds given the continued economic stress in the environment, we remain focused on prudently executing on our strategic initiatives and continuing to build our team in gaining additional market share. Our commitment to finishing our transformation and becoming the bank of choice in the markets we serve is unwavering.

With that, I'll stop, and Carlos and I will look to answer any questions you have. Tanya, please open the line for Q&A.

(Operator Instructions) And our first question will come from Brady Gailey of KBW.

So roughly $298 million of mortgages repurchased. I think you said year-to-date, what was the amount repurchased just in the third quarter?

In the third quarter, it was probably close to the $150 million that we bought from production coming from mortgage plus additional sources that we had on the quarter. That was -- it's an asset class right now that has a very good balance between deal and duration, the way that we see it now.

Yes. So even if you back that out, I mean, loan growth was incredibly robust. So can you talk a little bit about where you're seeing the loan growth and what the outlook is for loan growth as we head into 2023?

Yes, Brady, it's Gerry. I think on the call for the second quarter, we referenced that with the additions that we've had in the build out of Tampa and the continued strong performance of the business development teams, both in Texas and in here in South Florida, we have a pretty good pipeline headed into this quarter. I think you saw strong loan growth in commercial real estate.

I think we gave some information about the changes that have happened in the different geographies. But I'd also note that we continue to see C&I even with high repayment activity.

We had a very strong pipeline there as well and a good quarter of production. And I think we continue to do what we said we were going to do in the past. The white label program was really going to start to kick in on equipment finance. You can see that we just started the white label fintech solution that Carlos referenced as a replacement for indirect production. So I think all of these contributed to the growth overall during the quarter.

And second, apologies, Great. You asked the second question, which is the pipeline continues to look very strong in all the different lines of business I think the biggest comment I'd make about that is what we will record in loan growth needs to be funded by deposit growth. We've got a strong commitment as deposits first organization to really emphasize that as a way to continue to grow the balance sheet. So while we may have several hundred million dollars that we could possibly grow in the quarter, we need to also grow the deposits at the same point in time.

Yes. Okay. And maybe just an update on the 1% ROA and 60% efficiency ratio targets. I mean you basically hit on ROA in 3Q. So do you think you can keep it there? And then just an update on timing. I know you've kind of targeted a 60% efficiency ratio at some point. It doesn't feel like that will happen in the next couple of quarters. So maybe an update on timing on how you're thinking about that.

Yes. No, I think we can continue to be in and around the 1% return on assets on a go forward. I think the strength of the balance sheet, we expect that we should see some expansion in the margin again here in the fourth quarter, even with rising deposit costs. And so that's going to help.

I think in terms of what happens with growth, I think, is really the biggest question, right? Because we want to be prudent in terms of the use of the capital. We achieved an 11-plus percent ROE but at some point, we want to keep a sharp eye out on our tangible common equity ratio and make sure that what we add is going to be beneficial for future returns, right? So I kind of think your -- the 60%, we talked a while back that I made the conscious decision to continue to add to the business development personnel. And I think heard me say it again that we continue to see opportunities to add quality people.

We have some openings in Tampa. We want to continue the expansion in Palm and Broward, we're bringing on some new personnel as it relates in our wealth business, continue to look for private bankers. So there's going to be some uptick on the core expense line, specifically in personnel expense, too. But I think these are all the right things to be doing to build the long-term value for the franchise. And so as much as I'd love to hit the 60% next quarter, I think we'll continue to be in the low 60s with the goal of getting there in 2023.

Okay. And then finally for me, just on the buyback. It doesn't appear you guys were active in the quarter. I know has run a little under where it has been historically for you guys at a little under 8%. So should we expect buybacks from here? Or is that not in the mix?

Yes. Brady, I think we've been pretty consistent in saying the way we think about capital is we need to prudently use it or we need to return it. I think right now, our focus is we've got opportunities to use it. And I think that the 1 other item in return is the consistency of paying out a dividend. I think we completed 2 very successful buyback programs.

When you look back at what we did in the fourth quarter of last year going into the first quarter and then another completed by the end of the first quarter, right now, we have not asked for authorization to do more. We think that the right thing to do is grow into that base, which is what we just did here in the third quarter and continue to evaluate what we'll pay out in from a dividend standpoint going forward.

And our next question will come from Michael Rose of Raymond James.

Obviously, credit quality continues to be a really good story here, but the reserve ratio did come down kind of a little bit. Can you just give us kind of your general kind of overarching thoughts on credit and maybe how some of your markets in Florida and Texas might do a little bit better, maybe just what gives you confidence because we've seen others definitely begin to build reserves this quarter?

Yes, sure. Thanks, Michael. It's Gerry. In terms of how we feel on the reserve process, I guess, first and foremost, with all the improvements that we've seen, right, in the NPL and now the NPA totals, that gives us some confidence. We did add to the reserve. I would say that half the provision that we did record was eaten up by charge-offs in the quarter. There was definitely a little bit of an uptick, and we're keeping an eye on that, on that consumer and direct portfolio.

But in terms of the rest of the portfolio, we're continuing to see pretty solid performance across. I think it's really important to note, we haven't talked about that yet on this call, but we will be adopting CECL. And I think, again, you'll see that just naturally because of the economic factors that go into those calculations, you're going to see that we'll obviously have an adjustment as the Jan 1 date, right, that comes out of equity, plus there will also be a P&L adjustment that will take place for all the production we booked during the course of the year. So I would expect, and I think everyone should expect that our reserve ratios are going to go up in the fourth quarter just because of CECL implementation. But in addition, we're going to obviously continue to closely monitor the portfolio.

There will be, Mike, on the thank you a disclosure about the T cell range for day 1 implementation, which would -- you will find that it has decreased the range versus the previous quarter as we progress on the implementation. So now it's a $15 million to $20 million incremental reserves due to day 1 implementation. And as Gerry mentioned, there will be other different adjustments based on the production that we have recorded over the year.

Perfect. That was going to be 1 of my follow-ups. Maybe just switching gears to deposits. Obviously, deposit costs up like everybody, you have with the number for interest-bearing costs were at the end of September? And then just more broadly, just given the fact that you guys have a decent chunk of international deposits. Can you just talk about any updates or changes to your deposit strategies and move through higher interest rate cycle?

Yes. Let me answer the second 1 first. I think it's really important to note that the deposit growth from the quarter really, we had contributions from every line of business, a particular note. This reflects the build that we've been doing in the private bank side. We saw that grow very, very nicely in the quarter. It's up close to, I believe, it was $75 million in growth just in that segment alone.

And so people are obviously very focused with all these rate hikes. There's lots of competitors that have -- are offering some pretty strong rates out there. And so we're navigating through an environment right now, right, or a period of time where you've got national players as well as local players trying to run offers at fairly high rates to be candid.

And we will as well look for money probably around the 12-month CD range because I think we want to be somewhat cautious to, a, on the 1 side, locked money in, but at the same point in time, give ourselves some flexibility given where we don't want to go too long term and build back up that time deposit book, which I know you're very aware of. We had a lot of work in 2021, where we basically had a lot of that shift from time deposits over to either noninterest-bearing or interest-bearing alternatives such as money market.

So Carlos will give you some comments on the cost, which clearly, I think it's safe to say, deposit costs are going up for us, just like they're going up for everyone else.

Yes. I guess it's important to comment that on the first stages of this interest rate increases, at least that was our case, and we believe it's the case for other institutions. There has been allowances being provided to the different business lines to increase interest rates on certain deposits, the ones that are more interest rate sensitive. We believe that from now on, there will be changes or adjustments on the deposit rates on the tables that they are being published. Therefore, there would be a more steep increase in the cost of funds.

Our beta, as we discussed on the call, was 0.30 quarter-over-quarter. And we expect that in the fourth quarter, we'll be probably on the 40-ish beta. So you should expect an incremental cost of funds.

In the case of the international side, they continue to be as a blended, close to the 11 basis points. However, we're starting also to see some pressures from certain private banking customers on the international side that they are aware of the rates that they're paying in the local markets, and they are having pressure as well. So I would say the -- you see the interest-bearing deposits went from [0.62% to $105 million]. That is reflective of about 30 beta. Domestic we're the ones driving most of the change. International were very stable for the most part. But we're starting to see signs of increases.

Our next question will come from Matthew sorry, Matthew Olney of Stephens.

I guess more of a big picture question, thinking about the local markets there, South Florida, Tampa, I think we all read headlines about dark labs across the country economically. Anything stand out in Florida that you see it could be somewhat different? Or is it a similar or same dark clouds that we read about for most other metro markets across the country?

No. Matt, great question. We still see really strong demand for housing. We've got the continued inflow to the state and particularly in the 2 markets in which we operate. So South Florida and Tampa, particularly here in South Florida, I think sales have continued. There's still a scarcity of inventory. I think the biggest headwind that we face, which is no different than the rest of the country is just what's happening with the cost of living, right? We're seeing higher costs pretty much across the board.

And I think that, in particular, we were always a little higher cost to begin with. So there's definitely pressure there.

But in terms of real slowdown, I mean, we're going right into the season, which is very positive for hospitality. We're seeing full restaurants, we're seeing -- I can assure you there's still lots of traffic. So we're still pretty bullish about these markets. And I can also tell you, Carlos and I had recently visited in Houston and continue to see that it look pretty strong there as well. So I do think we're very fortunate because we are in high-growth desirable markets, I think that will play pretty well for us.

Okay. I appreciate that. And then I guess on the quarter as far as the noninterest income on an adjusted basis, it looks like we were pretty flattish in the third quarter. I think last quarter, you talked about a potential rebound in the 3Q. So curious about kind of what you saw in the third quarter? And then as you look into the fourth quarter, what are the some of the puts and takes around the fees?

Sure. So those we have this particular quarter, the change on the derivatives income coming from customer that was the guidance that we provided in the last quarter. So that continued to help during this quarter. We believe that, that demand was probably -- will be probably not the same coming into the next quarter. We always offer the solution to customers in order to hedge interest rate risk. But we've seen the demand may be lower.

Also remember that there was a record quarter in loan production. So that also helps with that type of instrument. In the case of the there was a surge, but was related from the brokerage activity on the fixed income side, customers, as you can see, the level of interest rates, they have now multiple options on the fixed income space to go and invest. So that also created fee income this quarter around.

And we believe in Q4, that would be very active as well. And in the case of Amerant Mortgage, which is the other source, I just described in the 3 items that created most of the changes quarter-over-quarter. The rest are pretty stable. In the case of Amerant's Mortgage is the fact that refi activity has decreased a lot, and production is lower. So we should expect fee income that is similar to the 1 that we have on the third quarter of this year. Speaking about the quarter.

And then also earlier on the call, you mentioned we should expect another step up on NII and the margin in the fourth quarter, and that makes sense given kind of balance sheet growth and interest rate sensitivity. Any more color on the degree of step-up that we could see in the fourth quarter? And I guess in the third quarter, it looks like that the NII improved $11 million sequentially and the margin stepped up 33 bps. My assumption would be the step up in the fourth curve would be more moderate than that. But any color you can give us for forecasting purposes?

Yes. No, that's completely the case. It wouldn't be as steep as on the third quarter. As you can see, deposits are starting to catch up faster and we anticipated something in the $3.75 to $3.80 financial margin for the fourth quarter. That includes a more aggressive betas on the net interest in con simulation process.

Okay. That's helpful. And then, I guess, just lastly, going back to the loan growth discussion from earlier. And looking at the slides, it looks like part of the growth was in Texas. Any more color on that growth? Was this the multifamily growth or the single family? Just any color at all?

Yes. No, you just hit it. It's a big part of it is multifamily growth, which we think we've got good spreads and obviously, with the -- it's a more secured and with the demand, right, particularly for these type of units. We thought it was a smart play for us to make those kind of loans this quarter.

And they are floating rate.

Yes, exactly.

And our next question will come from Feddie Strickland of Janney Montgomery Scott.

Just going back to deposits. It sounds like you guys think you can continue to grow core deposits. Do you think you'll be able to stay below 100% on the loan-to-deposit ratio going forward? Or do you think you'll have to take down a little bit of additional FHLB funding down the road?

Hey, Feddie. It's Gerry. I think we've said we wanted to stay in and around the 95% range. We obviously are a little higher than that at 98% and change. My sense is -- and I think our team -- my team is just hears this come out of my mouth every single day, every interaction I have. But it's all about deposits first. I really like the momentum in the lines of business and the diversity of the growth that we talked about in the quarter. So I feel good that we've got a great opportunity here to continue to grow.

I think the momentum of these new additions to the teams and basically in all of the teams is really going to help us a lot. We've got to stick to funding our loan growth with deposit growth. And so the way to do that is to emphasize that we've got to get the deposits in order to hit the loan targets we want. So I made that comment about the pipeline earlier. I really want us to push ourselves hard in order to try and do that. That said, if we live above or stay below, I mean, we could continue to see us staying in this kind of range. But I think we trying to stay between 95% to 100% is obviously our target.

Got it. And then I guess along that same line, it sounds like you should be able to get some good deposit growth in the Wealth Management Division. Do you think there's some good additional opportunity there for that to grow further?

Yes. I think our private banking team has done an excellent job, continue to do so. We've actually continue to look to add to the team. That was the reference I was making about the growth in the counties. We're also looking to add our first private banker in the Tampa marketplace as well. And we do have someone that started with us a while back and is adding value in the Houston marketplace.

So I think that, coupled with -- we had an excellent change on our leadership side in retail, and I think that's also making a really big shift to much more of a sales culture coming through the retail system. And I think that, that's a really positive contribution that those teams are making.

We've also -- and I think I added this in prior quarters, we've really excided the build in treasury management, and I think that team is just doing an outstanding job, and we're seeing more and more new business every day. So I think, again, that was kind of the comment I made about the investments and the decisions that we've made in the past quarters paying off. I think we're really starting to see that show in the numbers. And I do feel good about what the team is going to be capable of doing.

All that said, I do want to just reiterate, there are some very aggressive offers. I'd expect that the banks that are also looking for building out their deposit book to be super competitive rate-wise. And so that's why I had referenced before, there's going to be pressure on deposit costs. There's no question about it. But at the same point in time, given the mix of the balance sheet on the loan side and the investment side, we're going to benefit from continued benefit from the higher rate environment.

Got it. No, that all makes sense. And then just 1 final modeling question. I think you mentioned earlier, core expenses are likely to come up some in the fourth quarter. Just as far as the magnitude, should we expect something closer to $55 million is the run rate there? Or is it higher than that? I was just kind of curious what the magnitude of that increase would be.

Yes. Look, I think there's a couple of components that can have that tick up in the quarter. One is going to be how well we do with the quarter itself because there's obviously going to be incentive comp and recognize, again, we are continuing to add personnel. So there's going to also be some pressure on the personnel expenses. So our expectation is you're going to see in the core expense a slight tick up there in that $55 million to $56 million right?

$56.5 million.

I mean I just think you have to be probably thinking along those lines. We're also looking to be very -- continuing to add to people, right? And so we're not going to add and also we're going to be prudent with the decisions we make there. But I mean, I do think it's something you always have to take into account that I think we're a little bit in the -- we've got to continue to invest to support the growth ambitions that we've got.

And that guidance, just to be clear, is on the core side of the expenses, there may be $1 million or so related to the transformation of technology that we're making that will come as a combined total expense.

Yes. I think it's a great point, Carlos. I think it's safe to say for everyone that we are going to have some continued, we'll call it, non-routine items that relate in transformation. So as much as we love the report that we're not going to have some nonroutine, I think you'll continue to see us report both core and pointing out where we have the one-timers and what they're from.

Definitely, it's more..

It's much smaller. Made all that noise that you saw a couple of quarters in the past.

And I would now like to turn the conference back to Mr. Plush for closing remarks.

Thank you, Tanya, and thank you, everyone, for joining our third quarter earnings call. We appreciate your interest in Amerant and your continued support. Have a great day everyone.

This concludes today's conference. Thank you all for participating. You may now disconnect.