Amerant Bancorp Inc (AMTB) 2021 Q2 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Amerant Second Quarter 2021 Earnings Conference Call. (Operator Instructions)

Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Ms. Laura Rossi, Head of Investor Relations. Thank you, and please go ahead.

Thank you, Myra. Good morning, everyone, and thank you for joining us to review Amerant Bancorp's Second Quarter 2021 results. Joining me this morning to lead today's call are Gerry Plush, Vice Chairman and Chief Executive Officer; and Carlos Iafigliola, Executive Vice President and Chief Financial Officer.

As we begin, please note that the company's press release, our discussion on today's call and our responses to your questions contain forward-looking statements. Amerant's business and operations are subject to a variety of risks and uncertainties, which -- 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 earnings release and presentation.

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, 2020 and in our other filings with the SEC. You can access these filings on the SEC's website. 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.

Please 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. Exhibit 2, an Appendix 1 of the company's press release and earnings presentation, respectively, contain a reconciliation of each non-GAAP financial measure to its most comparable GAAP financial measure.

I will now turn it over to Gerry.

Thank you, Laura, and good morning, everyone, and thank you for joining Amerant's Second Quarter 2021 Earnings Call. I'm pleased to report Amerant earnings for the second quarter and to provide you with an update on the progress we have made regarding the new strategic initiatives and objectives I shared in last quarter's earnings call.

I'm also happy to note that we recently implemented return-to-office plans where Amerant's team members either have a fully on-site or hybrid schedule, depending on their job function. I'd like to take this opportunity to thank the entire Amerant team for their dedication and effort during this past year and note that we are all looking forward to moving ahead and focusing on Amerant's profitable growth.

Let me now provide a brief overview of our performance in the second quarter, and then I'll hand it over to Carlos to get into the details. So turning to Slide 3. Here, you can see a summary of our second quarter highlights. We're pleased to report further improved results compared to Q1. Of note, net income attributable to the company of $16 million is up 10.4% quarter-over-quarter, and it's primarily driven by higher net interest income and noninterest income as well as a release of $5 million from the allowance of loan losses. Total loans were $5.6 billion and total deposits were $5.7 billion, both slightly down from last quarter.

Nonetheless, we're happy to report increased core deposits, including growth in noninterest-bearing deposits as a result of our efforts to prioritize this type of funding. Our progress on Class B share purchases continues, having repurchased over 565,000 shares for a total of $9.6 million as of July 20.

Turning now to the core PPNR, Slide 4. We're happy to report core PPNR of $17 million, an 8% increase compared to last quarter. We felt adding this slide would be helpful to show the core net revenue growth, excluding the onetime gains in nonrecurring charges, such as the FHLB prepayment penalties, the severance and other restructuring costs and show all of that for each quarter.

We'll turn now to Slide 5 and look at the key actions, which we've outlined here for the second quarter. You'll note that a number of these strategic measures were focused on driving lower future funding costs and lower operating expenses. We recorded a $3.8 million gain on the sale of $95.1 million in PPP loans. We've reduced the allowance for loan losses by $5 million given improved macroeconomic conditions and credit indicators in our markets. We launched operations at Amerant Mortgage at the end of May after acquiring a business, which enabled us to access the license to operate nationally.

We modified the rate on $285 million of FHLB advances and we paid off an additional $235 million, taking a $2.5 million charge in Q2. Both of these actions represent $3.6 million in annualized savings. We also continued strategic repricing of customer time deposits, further lowering the cost of funding by approximately 3 basis points, which translates into annualized savings of approximately $1.5 million. We outsourced the internal audit function, which we expect will result in savings of $1 million annually starting in 2022.

We proceeded with the closing of our loan production office in New York City recording $0.8 million in charges there. In addition to our former President and COO stepping down, we executed workforce reductions based on the spans and layers review and the closing of the New York City loan production office, while still making select additions in business development, primarily in Amerant Mortgage. And we launched a process improvement initiative with a well-known third party to improve customer experience and drive additional efficiency.

Additionally, we're excited about our recent partnerships with leading fintechs, numerated growth technologies and Marstone Inc. Numerated's award-winning platform will significantly improve the business loan account opening process, making it easier and faster for both bank employees and customers. It's clear that small businesses will need financing, and we're confident that our new partnership with Numerated will enable us to meet existing and new customer financing needs quickly and efficiently. Regarding Marstone, their online wealth management platform will help empower Amerant investment customers to fully understand their financial position, plans and outlooks, while benefiting from the high-touch relationship management Amerant is known for.

As part of the agreement, Amerant will leverage Marstone in 2 main capacities as a sub-adviser and as a technological partner. Through the sub-adviser offering, we'll be able to expand our reach in the mass affluent segment by offering a fully digital advisory experience with much lower minimums than we can do today. Through the technological partnership, Amerant Investments will be able to digitalize its existing advisory offering and leverage new tools to scale our business, and we're excited to be in a position to launch additional capabilities later in the year to bring financial planning and savings goal capabilities to all of our customers.

Lastly, we recently announced our partnership with Zimmerman Advertising as our new marketing agency of record. Zimmerman is one of the top agencies in the U.S., and they're going to help us elevate the Amerant brand and drive even greater business growth. As I noted previously, we've just begun that 8-week process with a well-known firm to drive additional efficiency and enhance the customer experience, all with the goal of making banking with us easier.

We're confident that these new partnerships and initiatives will help us drive greater brand recognition and profitable growth all with an eye toward improved, enhanced results in the coming quarters.

So we'll turn to the key metrics on Slide 6. Here, we've outlined key performance metrics, which show improvement across the board this quarter with the exception of the efficiency ratio. We attribute the increase in the efficiency ratio to the nonrecurring costs associated with all the key actions we just covered during this past quarter, such as severance in the New York loan production office and closure, among others. These results are reflective of our focus on core deposits and higher operating profitability while maintaining a robust capital position and credit coverage.

So with that said, I'll turn things over to Carlos, who will walk through the results for the quarter in more detail.

Thank you, Gerry, and thank you all of you to join us today. Turning to Slide 7, I'll begin by discussing our investment portfolio. Our second quarter investment securities balance was $1.3 billion, unchanged from the previous quarter and down from $1.6 billion in the second quarter of 2020. The duration of the investment portfolio continues to reflect changes due to drop in interest rates. During this quarter, we recorded a decrease in duration of 0.4 years as expected prepayment speeds increased. We continue to select investments to mitigate the impact of prepayment risk over the portfolio.

As of June 30, the floating portion of our investment portfolio represented only 14%.

Moving to Slide 8. We provide an overview of our loan portfolio. At the end of the second quarter, total loans were $5.6 billion, down 2.5% compared to the end of the last quarter. The decline was primarily due to prepayments received in both CRE and C&I loans. The sale of PPP loans in May and the processing of PPP loan forgiveness, all this while loan demand continues to recover, yet not able to offset prepayments and pricing competition intensified. Total PPP loans outstanding were $24 million down significantly compared to the $165 million of outstanding PPP loans as of the end of Q1. We processed $60 million in forgiveness applications and sold $95 million as I previously mentioned.

It's important to note that we continue to see strong performance in our consumer loan portfolio, which at the end of the second quarter, including $221 million of higher yielding indirect loans. During this quarter, we purchased an additional $62 million of these loans.

Turning to Slide 9. Let's take a closer look at the credit quality. Overall, credit quality remains sound and reserve coverage strong. The allowance for loan losses as of the end of the Q2 was $114 million, down 6% from the $111 million at the close of the last quarter. We released $5 million from the allowance for loan losses in Q2, primarily as a result of improving macroeconomic conditions and indicators, as Florida and Texas economies continue to recover.

Classified loans, $123 million at the end of the second quarter compared to $91 million in the first quarter of 2021. The quarter-over-quarter increase was primarily driven by the downgrade of 3 commercial real estate loans totaling $40 million, mainly in New York due to increased vacancies in retail spaces and one small commercial loan. These increases were partially offset by upgrades for $6.2 million.

Important to note that early this week, we were notified that a property guaranteeing a $12 million loan in New York, which was under nonperforming will be transferred to Orion. As a result, $2.7 million previously reserved will charge off in the third quarter of 2021. The year-over-year increase was primarily due to loans I just mentioned as well as the specific loan down rates closed in the previous quarter. These loans included $40 million of the coffee trader loans, out of which $19 million were charged off with an outstanding balance of $20 million as of now, as well as downgrades of $30 million loan to a food wholesaler credit exposure and 2 CRE multifamily loans totaling $10 million.

Regarding the coffee trader case, we have been in close contact with the liquidation agent regarding the collection process and prospective distribution. So far, cash collected by liquidation agent is approximately $95 million. Timing for distribution are pending to be defined as allocation of proceeds may be subject to objection from lenders. We will continue to monitor this process and report as needed. Nonperforming assets totaled $122 million as of the end of Q2, up 35% quarter-over-quarter and so change was attributed by the increases I just explained.

During the second quarter of 2021, the company obtained independent third-party collateral valuations on most of the nonperforming loans, which supported the level of our loan loss provision. Worth to mention that only 1% of the loans were still under forbearance during the second quarter of 2021, down from 1.1% as of the end of Q1 and significantly down from the almost 20% that -- when we started the pandemic and loan mitigation programs. As a reminder, 100% of the loans under deferral annual forbearance accommodations were real estate collateral loans.

As of now, all the loans that went out of forbearance have resumed payments regularly. Our team remains committed to closely monitor the performance of the remaining loans in deferral under the terms of the temporary release grant.

Continuing to Slide 10. Total deposits at the end of the second quarter were $5.7 billion, down 0.1% from the end of the first quarter, while domestic deposits were slightly down by $35 million compared to Q1, foreign deposits went up by $32 million, which is encouraging considering previous runoff rates of this portfolio. Deposits, excluding customer CDs and broker deposits, increased by $164 million during the quarter. This increase partially offset an 11% reduction in customer CDs compared to the prior quarter as we continue to lower CD rates and keep our focus on core deposits and emphasize multiproduct relationship instead of single product high-cost CDs.

During the second quarter of this year, broker deposits decreased $22 million or 4% and broker and time interest-bearing accounts decreased by $146 million on a combined basis. These figures were offset by a $124 million increase in brokered money market deposits. Broker interest-bearing deposits are included in our core deposit definition. Core deposits, which consists of total deposits, excluding all-time deposits were $4 billion as of the end of the second quarter, an increase of $246 million or 7% compared to the prior quarter. This amount includes noninterest-bearing deposits of $1 billion or 19% of total deposits as of the end of the second quarter, which also increased from the 17% recorded on the previous one.

Next, I will discuss on Slide 11, the net interest margin. 2021 second quarter net interest income was $50 million, up 5% quarter-over-quarter and 8% year-over-year. The quarter-over-quarter increase can be primarily attributed to the following key factors: improved composition between time and core deposits, favoring noninterest-bearing accounts and lower time deposits and broker CDs; higher average loan yields as a result of lower amortization of net deferred loan origination costs due to PPP loans and an increase in higher-yielding consumer loans; lower cost and average balances on FHLB advances as part of the repayment and modifications previously discussed.

Moving our attention to margin. Q2 net interest margin was 2.81%, up 15 basis points quarter-over-quarter and up 37 basis points year-over-year. As in previous quarters, we continue to focus on offsetting ongoing NIM pressures by improving our deposit composition and proactively increasing the spreads in loan origination.

Continuing to Slide 12, noninterest income in the second quarter was $16 million, up 11% from Q1. The increase during Q2 was primarily driven by $3.8 million in other income resulting from the sale of the $95 million of the PPP loans and $1.3 million in derivative income. The increase was partially offset by a $2.5 million net loss in early extinguishment of FHLB advances as we repaid $235 million of this borrowing and a $1.2 million decrease in securities sold compared to Q1. Amerant's asset under management totaled $2.1 billion as of the end of June, up $114 million or 6% from the end of the last quarter, predominantly due to an increase in market value. We remain firmly focused on growing assets under management, both domestically and internationally.

In an effort to expand our company's fee-driven business and further build up its franchise, during the second quarter of 2021, Amerant partnered with leading digital wealth management technology firm, Marstone, as previously announced by Gerry and will cover in more detail shortly.

Turning to Slide 13. Second quarter noninterest expense was $58 million -- $52 million up $8 million or 18% from the first quarter and up $50 million year-over-year. The quarter-over-quarter increase was primarily driven by higher salaries and employee benefit costs, mostly as a result of escalated severance expenses incurred in Q2 in connection with restructuring activities and events that Gerry previously covered.

Additionally, during the second quarter, we had increased recruitment fees, the majority of which were growing business lines, like Amerant Mortgage and greater advertising expenses, primarily in connection with our HELOC campaign and support brand awareness initiative for future profitability.

Core noninterest expenses, which adjust for the $4.2 million of nonrecurring items, was $47 million in the second quarter of 2021, up $4 million or 8% from the $43 million we reported in the first quarter of 2021 and up $12 million or 33% from the $35 million that we reported in the second quarter of 2020. Efficiency ratio was 77.8% in the second quarter of 2021, up from 71% in the previous quarter and up from the $55.6 million in the second quarter of last year.

The quarter-over-quarter increase was driven by severence expenses incurred in Q2 in connection with restructuring activities and events I just mentioned previously. The year-over-year increase in the efficiency ratio can be primarily attributed by higher salaries and employee compensation due to the absence of a $7.8 million in deferred expenses directly related to the origination of the PPP loans that we originated in the second quarter of 2020.

Core efficiency ratios with adjust for nonrecurring items was 74.5% in the second quarter compared to 73% in the first quarter of 2021 and 61% in the second quarter of 2020. Lastly, we announced the closure of our banking center in Wellington, Florida, to be completed in the third quarter with the goal of optimizing our branch network and better align our desired footprint with strategic objectives. We are currently evaluating other locations to open banking centers with access to untapped customer base in our markets.

Moving into interest rate sensitivity on Slide 14. Our business continues to be asset sensitive. And as of the end of June, over half of our loans either have floating rate structure or mature within a year. To manage this sensitivity and mitigate the impact of our -- in our financial margin, we continue to actively manage our loan and investment portfolios. This includes implementation of floor rates on our loans and capitalizing higher-yielding securities and longer durations.

Turning it back to Gerry to talk about Amerant progress on the near and long-term activities.

Thank you, Carlos. Now I'd like to provide a brief update regarding some of the specific initiatives we outlined in Q1. We've included them here on Slide 15 for ease of reference. As a reminder, our goal is simple: improve profitability and drive sustainable, profitable growth and do this responsibly with the best interest of our investors, employees, customers and the communities in which we operate.

So first, regarding deposits first. As previously noted, we have opportunities in the markets we serve to increase our share of consumer, small business and commercial core deposits and to achieve a lower cost of funds, reduce our reliance on other sources, like brokered funds and Federal Home Loan Bank advances. We've continued work on implementing and enhancing a completely digital onboarding platform, we've added talent to our treasury management sales force and support team, and we've added additional treasury management capabilities, and we've seen improvement in the quarter in all 3 key measures when compared Q2 to Q1. Our loan-to-deposit ratio is now 98.8% versus 101.4% last quarter. Please recall, we set a target of 95%.

We increased the percentage of noninterest-bearing deposits to total deposits of 18.8% versus 17.2% last quarter. Here, as a reminder, we set a target of 25% and a reduced level of brokered deposits to total deposits of 9.4% to 9.7% to prior quarter, our target is 5%. We will seek further improvement over the second half of the year as CDs and brokered CDs continue to mature and we add new customer relationships. And as a result, we should continue to see NIM expansion.

Regarding digital transformation, we announced several key partnerships this quarter that we outlined earlier in the call. With numerated to automate our small business lending and deliver a superior experience for our customers and with Marstone Inc. to power our digital wealth platform, we expect full implementation for both by Q4. There are more opportunities to work with fintechs in other areas of the bank, such as BSA/AML, and we expect to announce additional partnerships in the coming quarters.

Regarding brand awareness, on our Q1 call, we noted the importance of dramatically improving Amerant's brand awareness. Many improvements have taken place or are underway: easy-to-implement items such as improved branch and ATM signage, branding items and significantly increased public relations and media relations. Most importantly, we just announced the recent hire of our new Chief Marketing Officer, and just after that, the engagement of Zimmerman Advertising as our new marketing agency of record. We're excited about what was accomplished over the past 90 days, and we're seeing the -- and seeing the upside from all of these efforts translating into incremental business opportunities for us.

Regarding rationalizing the lines of business and geographies. In addition to closing the New York City loan production office, as Carlos referenced, we did a branch assessment, and we will be closing one branch this October and we've determined 9 others that need to be refreshed and another relocated to a higher profile location. We're going to be doing all this over the next 24 to 36 months to achieve a common look and feel across all locations.

As I noted, our treasury management buildout is underway. We've added team members to the sales and service teams in both Florida and Texas. Amerant Mortgage commenced operations in May and they continue to build out the team there, which now is at 38 members. We continue to believe that adding to our specialty finance capabilities make sense, and we're actively looking at opportunities to do so. I'm excited to see the build in our loan pipeline in both Florida and Texas and the outlook for the second half of 2021 and beyond.

Regarding the path to 60% efficiency, on the last call, we stated we've been evaluating new ways to drive cost efficiencies across the business with a target goal to improve Amerant's efficiency ratio to 60% within the next 6 quarters. So here's what was accomplished during the quarter. We significantly improved the margin from restructuring Federal Mill Bank Advances, paying down advances and continued reductions in time deposit pricing. On the expense side, we outsourced our internal audit function, the transition is in process and annual savings of $1 million are expected starting in 2022.

Personnel reductions in Q2, including the decision to not replace the COO position, the reduction in the New York City staff, certain risks and other roles, estimated annual savings of approximately $5 million will result. We just kicked off an 8-week process improvement initiative with a well-known firm, all designed to improve customer experience. We will be launching a procurement initiative in Q3 2021 to drive even more annual savings from the expense base review.

As part of the New York City office closing, we're looking to sublease the space, and we've engaged a commercial real estate firm to actively market. We announced the Wellington branch closure by mid-October as part of the branch rationalization assessment I previously referenced. We've established a business transformation continuous improvement function. This is something critical that we need. People continuously focused on finding ways to make banking with us easier, and there will be more to come in the next call as we continue to work through a number of additional reviews.

Regarding the optimization of capital structure, we continue to repurchase shares as part of our Class B share buyback program. And as I noted, 565,000 shares and $9.6 billion (sic) [$9.6 million] as of July 20, 2021. We're going to continue to evaluate alternatives regarding our capital structure. I note that our Board voted yesterday to dividend $40 million up to the holding company, giving us more capacity and flexibility there.

And finally, a brief update regarding ESG and corporate responsibility. We've been working diligently to develop an ESG strategy and program, and yesterday, our Board approved the framework we will use going forward. We look forward to formally sharing the material tenets of the program and the progress we are making in each area as part of an annual corporate social responsibility report going forward.

As I stated last quarter, there isn't anything we won't consider to make banking with us easier and to drive better results for our shareholders. And that's our commitment to all of you: our investors, our customers, the communities we serve and to our team members as well. We hope you can clearly see that we are providing the increased transparency we said we would provide, and we look forward to continuing to update you as we execute on our strategy. And I look forward to continuing to share our progress on upcoming calls.

So with that, we'll be happy to take your questions. Myra, please open the line for Q&A.

(Operator Instructions) We have our first question comes from the line of Will Jones from KBW.

So I just wanted to start on the credit front. I know you guys called out the $40 million of CRE loans in New York moved to the classified bucket this quarter. Just hoping to get a little more context around those loans, just in terms of LCDs, collateral and whether or not you guys have any specific reserves set aside for those loans at this time?

Yes. Yes, we'll give you some color on those loans. So there were 4 in total that were added into the nonperforming leases. The 2 from New York are -- they are commercial real estate. They had -- we had a recent appraisal on them, and the recent appraisal that we obtained confirmed the level of loan loss provision that we had already. So it's on -- combining those 2 loans, there is about $30 million that were added, and we have close to the $10 million loan loss provision between those 2 loans. There were -- there are great properties in very good location. One of them is the one that I mentioned that it will be transferred to OREO for about $12 million in book value -- and that -- on that specific one, we have close to the $3 million loan loss provision already baked in. So all the values that we obtained were consistent with the level of provisions that we already have. So we feel like they are very well provisioned as of now.

Okay. Great. It's very helpful. And then maybe just on the topic of credit. Are there any other credits that you could see come up on horizon or maybe specifically credits in that New York market that give you guys any concern at this time? Or do you feel like you kind of really mix the bucket with all the moves that were made this quarter?

We keep analyzing the portfolio all the time and checking on the performance on each individual case and looking into the health of the different projects or properties. And as of now, there is no particular concern on the portfolio, in general. We feel like our level of loan loss provision is significant and level of COVID-related loan loss provision, which we keep at $15 million, which is on the institutional side, are still sufficient to cover any potential issue.

Also, we keep monitoring the level of activity of the city, primarily New York, and we started to see very good positive signs in the interest on the new tenants, et cetera. So signs are positive as of now.

Okay. Awesome. That's great. And then just kind of switching gears, taking on the buyback. It's really good to see you guys start working through that Class B share program. And I just wanted to confirm that the plan is to continue chipping away at that program. Your appetite hasn't really changed there. And I was just curious if you guys could give us an update on how many B shares are still outstanding?

Yes. There are about $8.6 million of -- 8.6 million shares on the B side that are still outstanding. As Gerry mentioned, we bought 565,000 so far, roughly $9.6 million already executed. It's very liquid, as you could imagine. And if you look into the time series of your Bloomberg, it's very -- it trades almost by a appointment. It's very liquid. So we keep the program alive so far until now, and that's pretty much it. So it's -- we keep going.

Yes. Will, it's Gerry. I think as Carlos is referencing, there's a liquidity issue, I think, with those shares more so. And though we've been chipping away typically, the purchases have only been a couple of thousand shares here and there, and then there's the occasional block. But I think as he referenced, it's really going to be just a function of the progress that we've made to date. We're actually pleased it wasn't something where we were out trying and get everything immediately, just because we knew there wasn't going to be that, the liquidity that there is, obviously, in our A class versus the B.

Yes. No, no, no, that's totally understandable. I totally get that. And then maybe just thinking about that whole steer class longer term. I realize it could take a while, fully working your way through the authorization you have out there. But I mean longer term, would you consider just collapsing the B share structure as a whole, maybe as you continue to wind down some of the outstanding thus far?

Yes. Well, again, it's Gerry. I think we're looking at everything we can do in optimizing the capital stack and also providing additional clarity. Certainly, that's something that we will be evaluating and have been evaluating, I should say.

We have our next question comes from the line of Michael Rose from Raymond James.

I just wanted to start on the expense side. So clearly, you guys are doing a lot of things here. You've really come in and announced a lot of initiatives here to begin with. So just -- obviously, I think we're all trying to figure out the timing as to when you think you can get to that 60% efficiency ratio. But I guess in the nearer term, can you just walk through some of the puts and takes as we think about the expense base over the next couple of quarters just based on maybe some onetime costs that might come through, things that are going to come out of the run rate, things that might come into the run rate? Can you just give us a sense for what a nice or what a good base to start off would be?

Yes, Michael, it's Gerry. Let me take first crack at that one. I think it's fair to say that over the last 2 quarters, we've been investing in Amerant Mortgage, for sure. And you can see that in the headcount number, which is up substantially quarter-over-quarter. And the expectation, and I believe Carlos commented on this in the last call, is that there will be additions -- continued additions to that team, and we'd probably be somewhere in the $50 million to $60 million headcount range by the end of the year. So you can expect that we'll continue to invest there heavily as we really believe in the team and what we're looking to generate on a fee revenue perspective going into 2022.

I think you're also -- probably you can tell that we're investing in areas like our treasury management team. We've added people in the sales force. We've added people on the support side. I've given Miguel and his team the green light to continuously look for top quality folks to add to what I think is already a top quality team here. And when we can make smart additions, whether that's in the Houston marketplace or here in the Florida market, we're absolutely going to do it. So I think one of the things you hear with the reductions that we've been doing is we've been taking out back office and support and we're trying to put more of the dollars going towards a business generation. And I think it's just the continuation sort of transformation-wise.

I know that the quarter had a lot of puts and takes. Hopefully, you can pick that out of the -- out of what we said was going to be add this into the 2022, add this in -- we'll start to see some immediate results. Most of the actions that we've taken, right, around the NIM, you can see is reflected immediately. The actions we're taking around people, I think you're going to see some ins and outs because I think in this third quarter, you're going to continue to see as we go through finishing up the reviews that we've been doing on all of our areas and the way we look at things from a process improvement standpoint, I would expect there will be additional changes.

So that might not be as granular an answer as you'd love, but I would tell you directionally, the goal for us is to end the noise. I think that we've had certainly this quarter and a little bit last quarter and be able to transition into what we showed as core PPNR growth, continue that growth through NIM expansion continue through net -- through noninterest income expansion.

But I would say, for right now, you have to think about the expenses that we're actually investing in the business. And so that's -- this is a long answer to what you asked, which is you're going to continue to see a couple of million dollars being spent quarter-over-quarter because of marketing, right, as we push for brand and we go out and actively market, which we did not do in Q1 and we started to do in Q2. And you'll see us continue to add to where we know that we can put revenue producers on our books, we're absolutely going to do that. And we'll continue to optimize the infrastructure side of the company. So I would expect that, that work is all completed through this third quarter, and you'll be able to see a much clearer picture going into Q4.

Gerry, that's really helpful color. I guess that begs a question. Is there any more large-scale initiatives that you see on the horizon, whether it's tech investments, process improvement in terms of what would drive those dollars materially higher? Because I think, again, outside of the efficiency ratio, I think what we're all trying to figure out is, is 2023 of the year where you can get to those minimum return targets that you talked about, a plus 1% ROA and plus 10% ROTCE? Obviously, the shape of the yield curve is going to impact that. But is that the way we should just broadly and holistically be thinking about the measurable progress as we move forward?

Yes. Mike, that's a great question. I think when I gave the initial guidance of give us the, I'd call it, the 6-quarter horizon to get to 60% is really -- that's a really important sort of goal of ours. I think the 1 in the 10%, we're going to be much closer to the attainment of those in a shorter period of time. Our expectations are that we should have continued improvement in the NIM, as I said, continued improvement in noninterest income. And we're looking for -- you saw all the initiatives we've laid out. I would expect that absent our ability to maintain our asset size or even if we grow it, my expectation is that we'll have greater revenue growth going into these next couple of quarters. And that's really what we've been working toward is making the right investments, making the right adjustments in the base here, people-wise, systems-wise, et cetera.

I do think it's important to note on the review that's going on from a process improvement side. That project literally just kicked off. And I think the same thing about the procurement initiative, that project is just going to kick off here towards the end of Q3 and full force in Q4. So you'll start to see the results of that -- of those initiatives probably coming through later in the year, but more likely 2022.

Okay. And maybe just last one for me. So looks like you guys obviously have a very strong capital profile at this point, and it looks like that's going to continue to build just as the balance sheet goes through restructure with the New York loans coming off and growing other parts of the portfolio. That will impact the ROTCE. So I guess my question is, would you consider other capital deployment options like a dividend? I know which is important to some investors, and then any strategic acquisitions, nonbank, obviously, that you would look to deploy some of that excess capital?

Yes. No, absolutely. I think that kind of goes into everything is on the table. We're going to look to different ways to deploy that capital. Obviously, the reference that I made of the Board, approving the dividend from the bank up to the holding company is to give us that kind of optionality and make sure that we have plenty of liquidity there to be able to execute a few things.

I think at this stage, doing deals, if we could find something that made sense for us in the specialty finance area, add to our, I'll call it, our arsenal, our capabilities, we're absolutely actively looking at those right now.

We have our next question comes from the line of Feddie Strickland from Janney Montgomery.

So it's great to see all the positive dynamics with respect to the margin this quarter, especially the rising loan yields. Just kind of a clarification point, I think I've heard in the prepared remarks, that's a result of the reduction in PPP and indirect consumer loans purchased, right? Or is there some more new loans coming on the books that you guys are getting at a higher yield organically?

Yes, that's a good question. So the -- if you recall, there was a weak carries PPP into the balance sheet in the first quarter of 2021 that were originated in 2020. So we had deferral of the expenses from the origination of these loans being amortized. And as you'll probably recall from the previous year, we defer about $7.8 million on those loans origination. In some cases, there was a mismatch between the fee and the origination costs. So all those or the majority of them were under forgiveness during the first quarter of the year. So pretty much the Q2 story has the cleanup of all those loans that we no longer carry into the balance sheet. So that's one of the reasons of increase.

The second one is that we have been very -- we keep the discipline in the origination of C&I and CRE at a very attractive spread compared to other transactions that we have been seeing in the market, also adding floors to floating transactions, and the fact that we now have $220 million indirect lending at a very attractive yield compared to the rest of the portfolio. So those have been pretty much a critical items to explain the increase in the yield of the loan portfolio for the quarter.

Got it. And kind of along that same line, is the path to further expansion more from the asset side, the liability side, or is it kind of a mix of both?

So liability has contributed a lot to the NIM this quarter. If you got to break it down between the impact of the assets and the liabilities, the liabilities definitely were a key factor this quarter. The drop in the cost of funds help us significantly to reduce the interest expenses. That was one of the biggest items. So it was -- think this way, it was coming from time deposits coming down, and at the same time, we were increasing transactional accounts. So when that event happens, your blended cost of funds improved by about 10 basis points quarter-over-quarter, which is significantly an improved the overall performance of the balance sheet.

Yes. Feddie, it's Gerry. Let me just add. I think the opportunity that's apparent here is the maturing brokered CDs, the maturing time deposits and the ability to either not renew in the case, obviously, the broker but to try and retain those customers at much lower cost is pretty critical for us. And the nice part is, you'll see the balance shift that we were talking about, right, for much greater focused on noninterest-bearing acquisition, much greater focus on us trying to, as a company, look at that, not just on the consumer side but also the small business and the corporate side of things.

I think it's fair to say, you will continue to see very nice NIM expansion for us, all things being equal in Q3 and Q4. And it's -- a lot of it is going to be driven from the liability side. That's where there is just great opportunity for us.

Yes. And if you want to break it down between what was the impact of the assets for the liability specifically for the quarter, the improvement in the NIM about 1/3 came from the asset and 2/3 came from the liability. That would be a good explanation of the quarter-over-quarter NIM improvement.

Got it. Appreciate all the color guys. And just one more from me. I was just curious kind of with the reopening, return to normalcy, what you're hearing from some of your hotel and retail customers, more in your core Florida footprint as well as kind of the Texas footprint out there?

Yes. I think it's safe to say that we're seeing increased occupancy across the board, notwithstanding like this slight spike that we're seeing all across slight -- I mean the spike that we're seeing in COVID cases, but both of the markets that we operate in have been very open. And so we're seeing, I'll call it, 75-plus kind of occupancy numbers and even closer to 80% in that range across the portfolio.

We have our next question comes from the line of Brody Preston from Stephens.

I just wanted to follow up maybe on a couple of Bill's questions from earlier, real quick. I appreciate the detail you gave on those New York City loans regarding the specific reserves. But I wanted to ask just a point of clarification, Gerry. Were those the 2 retail loans that got called out on Slide 22, were those included in the $40 million that got the updated appraisals?

Yes. Those are -- yes, those are included in the list of updated appraisals. That's right.

And Carlos, do you happen to know what the percentage change in the newly appraised value was relative to the previously appraised value?

So pretty much they were in the 60%, 65% LTV approximately, and they went up to 145% or something like that.

Okay. All right. And then, Gerry, just on -- I guess on the capital deployment, just given how strong the capital ratios are and understanding that the Class B shares are a little bit illiquid, how do you weigh -- in your mind, how do you weigh kind of deploying that capital via another kind of Dutch tender or something like that to maybe drive EPS upside versus kind of saving that dry powder to make more meaningful investments in the business and drive actual bottom line improvements? Sort of, how do you think about the trade-offs between those 2?

No, it's a great question. And I would tell you that that's exactly what we're working on right now. I think that the one thing we're obviously need to focus on is we either need to deploy it or we need to return it, right? And I think that that's literally the conversation we had yesterday during our Board meeting. And I would say, stay tuned to see. I do think there's an opportunity for us, as we referenced strategically to add, I think I called it, add to the arsenal, that's really add to our capabilities and deploy some there. But I think all other options are on the table for us. And I hope to be able to come back here in Q3 with a definitive strategy on what we're going to do around capital.

Awesome. I appreciate that. And then -- just was looking for some more color on the prepayment activity in the CRE portfolio, particularly as it relates Florida and Texas within the multifamily buckets. I think there were some prepayments. Was there anything specific that drove that? Or is that just kind of consistent with what we've been seeing across the industry?

There were in the -- during the quarter, we have almost $330 million in prepayments, and they came pretty much from all the sectors. There was a significant competition, in general. So there has been deals that we have been taking a look at the refi that came in front of us from the customer and spreads were just at a size that we wouldn't be able to play. There has been spreads. I will give you a couple of examples like LIBOR closed at 150, 160 basis points that have been refi in front of us, and we just pretty much cannot participate as of now.

Okay. And then just I have a modeling question. At what point in the quarter did you pay off those FHLB advances? I think it was $235 million.

They were done during the...

It was mid-quarter.

Yes. Yes, around May. You will see the complete effect of the savings in the third quarter, that would be a clean picture from the interest expense perspective.

Okay. Great. And then the last one for me is just could you give some details on how the build-out of Amerant Mortgage is going? I know you made hires, but -- just want to get a sense for how quickly you'll be able to more effectively ramp on the revenue side? And then secondly, how is the operation structured? Is it going to -- I guess are the revenues and expenses going to flow through the fee income and expense line items for you all? Or is it kind of a below those items through a minority interest? Just trying to get a sense for the model.

Yes, good question. So the -- we started taking applications on May 24. The infrastructure of the company, it's ready to go. It's set up. We had the core engine of the company being installed at a very fast pace because it was a de novo company. So it came up very, very swiftly and at very good pace. So as of now, we have received approximately 60 applications for mortgage, and it has been a very good experience so far. They have close to 40 people already hired. So when you see our headcount, and we did a breakdown on one of the slides, you see that there is a combination between Amerant Mortgage and on the bank itself.

So our expectation is towards the end of the third quarter and the full fourth quarter, we will be in breakeven and positive territory for the company. As you can imagine, this first 2 quarters were formation phase. There was a lot of hiring. There was a lot of systems, et cetera. So the infrastructure buildup was definitely the driver of the cost.

Going to your second question, we're doing line-by-line consolidation. We own 51% of the company. So you will see impact on the noninterest income and noninterest expense from the company. And then you will see the impact of the minority interest flowing towards the bottom line with the portion that doesn't belong to the bank, that's the accounting treatment that we have selected for the company. So you will see when we speak about the run rate of the expenses and the run rate of the order income, the assumptions of the mortgage company will be baked in into those numbers.

We have our last question. It comes from the line of Michael Young from Truist Securities.

I wanted to maybe just start with kind of balance sheet size and dynamics moving forward. Obviously, you've got kind of the profitability targets out there. but you can kind of shrink to achieve those or grow and scale to achieve those. I'm sure the latter would be the preference. But can you maybe just talk about given kind of the pandemic and everything that's been going on, the internal kind of shifts in personnel, et cetera, just kind of how you see that playing out relative to balance sheet growth and deposit growth, especially on the hills of this marketing campaign?

Yes. I think it's Important to note that as we begin sort of this transition to do more business banking to focus more on treasury management to look to expand equipment finance, as an example, capabilities, you're going to see a big composition change start to take place, right, over the next couple of quarters. We're really focused more on trying to really offset as New York begins to pay down to be in position with new production in our current markets coupled with these additional capabilities offsetting that.

So if I were to think about balance sheet size over the next couple of quarters, I would say trying to stay in that 7.5% to 7.75% quarters sort of range is probably where we would be targeting. If we have opportunities to expand that, we're certainly going to do that. But I -- back to the question of having plenty of capital to support that. But I think right now, we're really in a transformation, transition phase because in New York and what's happening with the portfolio there. Because I think we hadn't seen any significant payoffs in that portfolio in this past quarter, and we'll begin to see that taking place in this quarter, for sure, and in the fourth quarter.

Okay. And maybe you guys had higher kind of CRE payoffs. We've seen the 10-year treasury rate dropped down again pretty significantly here over the last week. Could you just talk about outside of New York, maybe additional CRE payoffs that you kind of see in pipeline? And then how that compares to maybe the production outlook with Texas and Florida pretty fully reopened, et cetera? Are you seeing increased demand at this point?

Yes. As I mentioned on a previous question, there was a lot of competition, in particularly Florida and Texas. As you know, they -- we actually haven't been closed completely. It was just 2 months of last year that we had the most of the restrictions. So for the rest of the year, there has been economic activity going on, which creates further incentives to lenders to go into these areas. So we have had a significant competition. We -- as I mentioned before, we have seen deals coming in front of us for pricing that we wouldn't be able to participate given the low spread. And we foresee that we may have more prepayments coming our way.

However, we are working a lot on the C&I side and more granular loans to try to offset those type of impacts in the future. So our pipeline looks fine from that perspective. It looks like we will be able to offset potential prepayments. And the question mark will be pretty much New York and how does that evolve over time and how fast those loans may ended up prepaying.

Yes. I think it's important to note that things have really opened up for us, I think, in terms of the size of the opportunities that are entering the pipeline that were twice what we were just a quarter ago. And so I think that reflects the efforts of the team and the opportunities that are out there in the market. So again, I think with the comments Carlos made, New York is really the X factor as it relates to where our loan portfolio size will be at a point in time. But I feel good that we see very strong demand both in the Houston and in the South Florida marketplace.

Okay. And my last question, maybe just on the deposit side. Obviously, you've still got some runoff of higher CDs and the international deposits. But generally, I guess, domestically, the industry kind of writ large has been a wash in deposits and everyone's got up plenty and they're growing them fairly quickly. So is there any desire to go ahead and get out in front of loan growth and kind of move the pivot on the deposit side along while obviously, deposits are just very cheap and readily available?

Yes. No, that's actually the focus for us here in the second half of the year. So with the new CMO, the new marketing agency, the turn of the teams focus on having a deposits-first sort of mentality, it's -- I think you'll continue to see not just the benefit of downward repricing as time deposits broker CDs run off. But from us, making a very concerted effort that in every customer interaction, we want the full relationship from as many customers as possible. What's running away from us were single-product customers. And we want people that want a broader relationship with the organization. And I think that's just a shift in focus from the past to where we're going to head as a company.

To complement that point, Gerry, it's important also to mention that from the balance sheet composition perspective, the relative size of liquidity for us have been very low compared to other institutions and compared with the general liquidity situation on the market is -- I believe it's remarkable that we just carry less than $100 million of the Federal Reserve with such a level of liquidity available in the market. I believe that the opportunity that we have to do recomposition was great over the past few quarters, and that allow us to improve the overall composition of deposits.

There are no phone questions at this time. I'll turn the call over to our CEO, Gerry Plush.

Thank you, Myra. We appreciate that. I would like to just thank everyone for joining the second quarter earnings call. We're very excited about the bright future ahead for Amerant. I hope all of you are too, and that you have a great day.

This concludes today's conference call. Thank you all for participating. You may now disconnect. Have a great day.