AMTB - NASDAQ

Good day and thank you for standing by. Welcome to Amerant Bancorp Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand over conference over to your speaker today, Laura Rossi, Head of Investor Relations and Sustainability at Amerant Bancorp. Please go ahead.

Thank you, Gigi. Good morning, everyone and thank you for joining us to review Amerant Bancorp's second quarter 2023 results. On today's call are Jerry Plush, our Chairman and Chief Executive Officer; and Sharymar Calderon, our Executive Vice President and Chief Financial Officer. As we begin, please note that discussions on today's call contain forward-looking statements within the meaning of the Securities Exchange Act. In addition, references will also be made to non-GAAP financial measures. Please refer to the company's earnings release for a statement regarding forward-looking statements as well as for information and reconciliation of non-GAAP financial measures to GAAP measures. I will now turn over to our Chairman and CEO, Jerry Plush.

Thank you, Laura, and good morning, everyone, and thank you for joining Amerant's second quarter 2023 earnings call. I'd like to first welcome Shary who as our new Chief Financial Officer is on her first earnings call with us today and to also thank Carlos Lafigliola for his tenure as our CFO. As recently announced, Carlos became our new Chief Operating Officer in June. I believe having both of them as part of our executive team makes us a much stronger organization. Next, I think it's important to address upfront that while this was an outstanding quarter in many ways, the results are clearly overshadowed by the provision expense reflected in the 2Q results. The substantial increase from last quarter was driven by a legacy New York City commercial real estate loan originated in 2016 and from increased negative economic factors used in the CECL calculation. In her section, Shary will provide additional details of the provision recorded this quarter. The outstanding deposit growth in 2Q and year-to-date that we will review in the presentation reflects our goal of being able to rely on ourselves for organic deposit growth and we believe this clearly sets us apart from the competition. We've been talking about how essential it is to be a deposits first relationship-based bank and it is showing in our 2Q and year-to-date performance. We've provided more granular information on the sources and types of deposits in today's earnings presentation and I will go into it in detail shortly. In addition, this quarter we are reporting on reflects the achievement of the highest core pre-provision net revenue for any quarter in the history of the company as a public company, primarily driven from a higher average balance overall coupled with a strong net interest margin. So as a result of higher NII and lower core expenses, we were right at 60% in core efficiency. So as we go through the slides today, you will see that we have changed the presentation order and we've added some additional slides that we believe will be helpful and add further transparency. So I'm going to cover key highlights and actions taken in 2Q along with deposits, liquidity and capital and then Shary is going to cover other balance sheet items and our performance for the quarter in detail. So now we'll turn to Slide 3 and here we provide a summary of our second quarter highlights. Net income attributable to the company was $7.3 million compared to $20.2 million in 1Q '23. This decrease was primarily driven by the higher provision for credit losses in the period. The net interest margin was 3.83% compared to the 3.9% we reported last quarter, but in line with our previous guidance for the quarter of a 10 basis point margin reduction from 1Q levels. Our assets increased $24 million compared to 1Q '23. Total gross loans were $7.22 billion compared to $7.12 billion last quarter, an increase of $102 million and total deposits were $7.58 billion, up $293 million compared to the $7.29 billion last quarter. The company's capital levels continue to be strong and well in excess of minimum regulatory requirements to be considered well capitalized at June 30, 2023. Our tangible common equity ratio remained strong at 7.34% as of June 30, 2023. As we classify the vast majority of our investment portfolio as available for sale, the mark to market on the portfolio is deducted from TCE. In an upcoming slide, we'll also show TCE if you deducted the market value adjustment related to the held to maturity portfolio, which would result in TCE of 7.16%. Lastly, during the quarter, we also paid out the previously announced cash quarterly dividend of $0.09 per share on May 31. So now we'll turn to Slide 4 and here you can see the core PPNR was $39.2 million compared to the $37.1 million reported in the previous quarter. We recorded a total of $13.4 million in non-routine non-interest expense, mostly offset by total non-routine non-interest income of $12.4 million, which includes $13.4 million in gains on early extinguishment of federal home loan bank advances. Non-routine non-interest expense items recorded in 2Q are listed here in detail and substantially all of these were previously furnished in the Form-8K we filed in mid-June in conjunction with our virtual non-deal roadshow. The impact of these non-routine items overall was a net negative of $1 million. We'll turn now to Slide 5 and cover key actions taken during the second quarter. So again, loans we reported growth year-to-date of $297 million or 4.3% and $102 million or 1.4% in 2Q. Regarding deposits, we've had growth year-to-date of $535 million or 7.6% and $293 million or 4% in 2Q. Our loan to deposit ratio is now 95.2% compared to the 97.6% for 1Q and 98.2% for 4Q of '22. As noted earlier, we're focused on organic deposit growth and reducing reliance on other funding sources, except for asset liability needs. We're also working on improving the deposit mix to generate even more core deposits. More on that shortly. Next, our banking center rationalization continues. We've listed here details regarding additions. Our key to Florida location opened in June as planned and we already have over $16 million in deposits. Our downtown Miami, Tampa and Fort Lauderdale locations are still in process to open by year end and new in 2Q '23. We're under LOI for a private banking location in the River Oaks section of Houston, Texas and the agreement is in final stages. Approval has already been received from the OCC. On the consolidation side, we closed our FM-1960 location in Houston, Texas and merged it into our Champions Banking Center and we intend to close our Edgewater location in Miami, Florida to coincide with the Downtown Miami opening. Turning now to the stock repurchase program. We have a $25 million Class A common stock share repurchase program in place and in May and June, we repurchased 95,262 shares for $1.7 million, so at an average price of $17.42 per share or at 0.8 price to book value. We are prudently balancing between cash on hand, capital levels and price levels. Availability remaining under this program was $22 million as of quarter end. Next regarding people, we finalized all the expected executive team moves and further optimized our org structure. We're delighted to have these changes behind us to welcome the new people on board and to be totally focused now on the business and I'm happy to say these changes are already having a significant impact on our results. Our new head of commercial banking and our new Houston market president were onboarded during the quarter. We merged retail and business banking into one unit to gain synergies between the two lines of business under one leader resulting in significant go forward savings. We did the analysis to rationalize the organization in several other support areas, which will also result in future period efficiency and personnel expense savings. These changes also improve the ratio of customer facing to support positions to be close to 50/50 and we intend to further improve this ratio as we go ahead. And finally, we continue to selectively add key business development personnel in the three markets we serve including as I mentioned the hiring of the new private banking leader in Houston who starts in early August and we've added three new key commercial business development officers here in South Florida, all of whom start next week. So now we'll turn to Slide 6 and I'll provide an overview regarding deposits as of June 30. This is one of the new slides I referenced earlier. So again, total deposits at the end of the second quarter were $7.6 billion, up $293 million from the prior quarter. You can see here the increase was primarily in commercial, retail and private banking as well as international. Organic growth was even higher for the quarter than the $293 million we just referenced as we reduced institutional and broker deposits by $136 million and $52 million, respectively. We remain committed to maintaining our current ratio of loan to deposit with a target of 95% and the intent not to exceed 100%. So we'll turn now to Slide 7 and here you can see, we continue to have a well-diversified deposit mix composed of domestic and international customers. The growth this quarter was primarily driven by increased transaction and time deposits. Domestic deposits now account for 67% of total deposits totaling $5.1 billion as of the end of the quarter and that's up $222 million or 4.5% compared to the previous quarter. And international deposits which account for 33% of total deposits totaled $2.5 billion and that was up $71 million or 3% compared to the prior quarter. We intend to continue to emphasize international deposit gathering as a source of funds given favorable pricing, and to take advantage of our infrastructure and capabilities. We believe this is essential to do as it provides additional diversification to our funding base. Domestic deposits include over 50,000 accounts with an average size of $100,000, while international deposits include approximately 58,000 accounts with an average size of $45,000. Our core deposits defined as total deposits excluding all time were $5.5 billion as of the end of the second quarter, an increase of $141 million or 2.6% compared to the previous quarter. The $5.5 billion in core deposits included $2.8 billion in interest bearing deposits, up $284 million or 11.4% versus previous quarter, $1.4 billion in savings and money market which was down $76 million or 5% versus the prior quarter, and $1.3 million in non-interest bearing demand deposits, down $67 million or 4.9% versus the previous quarter. We'll now move to Slide 8 and here we've again included this table to provide additional data regarding deposit insurance coverage. 71% of our deposits are FDIC insured and additionally, we carry $275 million in qualified public deposits in the state of Florida as of the second quarter, which are subject to collateral requirements by the state of Florida. Reciprocal deposits which are 100% insured by the FDIC through the IntraFi network grew to $1 billion at over 200 accounts as of the end of Q2 '23. We are proactively marketing this to our customers and it's branded as AmerantProtect to existing as well as potential customers and we intend to continue to proactively promote this to protect our customers on an ongoing basis. Additionally, our large fund providers defined as those with balances above $20 million are approximately 15% of total funding as of the end of the second quarter. We'll move now to Slide 9 regarding liquidity risk management. We're going to provide some details not only on our practices, but on additional actions we've taken to strengthen our funding and capital position. So our standard liquidity management practice includes such things as regular testing of the lines of credit, daily monitoring of our federal reserve account as well as large fund providers, daily analysis of our lending and deposit gathering pipelines, limits on liquidity ratios, active collateral management and as shown here 79% of the $1.26 billion in the investment portfolio have direct or indirect U.S. government guarantees. So in terms of credit availability, total advances from the FHLB were $770 million as of June 30, '23. We have an additional $2.1 billion of remaining credit availability from this source. Based on current collateral availability, our open borrowing capacitor with the FHLB is $1.34 billion. Please note that no funds have been needed from emergency funding facilities or from the discount window from the Federal Reserve Bank. Regarding additional actions taken to increase our liquidity position, we have a strong cash position of $381 million at the Federal Reserve Bank. As we just mentioned, we're continuing to work with our large deposit clients to promote AmerantProtect to ensure all of their deposits are 100% FDIC insured. We increased volumes under this product by $454 million and added 127 accounts to coverage in 2Q and we continue to include deposit covenants with minimum balance requirements for any new financing relationship. So in terms of liquidity at the holding company, we carry $60.5 million in liquidity on hand, which covers approximately 4 times our annual OpEx and debt service as of 2Q '23. The dividend just declared by our board will use only $3.1 million of this cash on hand. We'll turn now to Slide 10. Here, we provide an update on share repurchases and shares outstanding. So after having elected to pause on repurchases in March given industry events, we began to prudently use our $25 million share repurchase program again during the quarter. We believe the current market price does not reflect the true valuation of our stock, so this presents an opportunity to repurchase. In 2Q, as I referenced before, we repurchased 95,262 shares of common stock and I've said this before and I'll say it again today when done right in a measured prudent way, there's nothing better than buying back part of your own business. It shows you believe in what you are doing and the value you can and will create. So we'll turn now to Slide 11 and we'll show our capital position relative to regulatory minimums. So at the end of 2Q '23, our total capital ratio ended at 12.41% and our CET1 was 10.02%. Our tangible common equity ratio which includes $87 million of AOCI resulting from the after tax change in valuation on the AFS investment portfolio was 7.34%. Regarding our tangible common equity ratio, here we show the impact of the $18.5 million in unrealized losses from our held to maturity investment portfolio and what that would have on our TCE, which results in an adjusted TCE ratio of 7.16%. Remember that this is not required, but we show this here to emphasize the relatively small impact this would have if included and our tangible book value per share also adjusted for the held to maturity valuation stood at $20.11 as of quarter end. S, with all that said, I'll turn things over to Shary now. She'll go over key metrics, other balance sheet items and the results for the quarter in more detail. Shary?

Thank you, Jerry, and good morning, everyone. Happy to be here to share more color on our financial position and performance. So turning to Slide 12. I'll begin by discussing our key performance metrics and their changes compared to last quarter. Non-interest bearing deposits to total deposits decreased to 17.1% in 2Q compared to 18.7% in the previous quarter. This comes as no surprise as interest for DDAs is reduced and customers continue to seek higher interest rates on their deposits given market competition. We continue to be keenly focused on increasing this ratio through the different initiatives Jerry mentioned. Our efficiency ratio was 65.6% compared to 63.7% last quarter and ROA and ROE were lower this quarter at 0.31% and 3.92%, respectively, as a result of the higher provision and non-routine charges we discussed. For consistency and transparency, we show the three core metrics of ROA, ROE and operating efficiency excluding one-time non-routine items, so you can more easily see underlying performance for the quarter. As an example, core efficiency is 60.3% versus the 65.6%, which includes non-routine charges. Lastly, the coverage of the allowance for credit losses to total loans increased to 1.48% compared to 1.2% in 1Q as a result of the increased provision associated with the New York City legacy loan and consumer loan charge-off as well as updates to the economic outlook. Continuing to Slide 13, I'll discuss our investment portfolio. Our second quarter investment securities balance was at $1.3 billion, which remains unchanged compared to the previous quarter. When compared to the prior quarter, the duration of the investment portfolio has extended to 5.1 years as the model anticipates longer duration due to recent higher mortgage rates and therefore slower prepayments. As we 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 for sale. As of the end of June, the market value of this portfolio decreased $13.5 million after tax compared to an increase of $3.9 million in the first quarter. The change quarter-over-quarter was driven by rising rates during the second quarter. Our available for sale portfolio represents 78% of the total investment portfolio, while health and maturity securities represent 18% and the remaining balance is Federal Reserve and FHLB stocks. Continuing on to Slide 14, let's talk about the loan portfolio. At the end of the second quarter, total growth loans were $7.2 billion, up slightly 1.4% compared to $7.12 billion at the end of the first quarter. This growth was driven by loan origination efforts, primarily in specialty finance and single family residential mortgage. Partially offsetting this increase were prepayments of approximately $183 million, primarily in commercial and consumer loans. Specialty finance loans increased to $625 million compared to $557 million in 1Q. The single family residential portfolio was $1.33 billion, an increase of $93 million compare to $1.16 billion in 1Q '23. This amount includes $113 million in loans originated and purchased around our mortgage during the quarter, primarily done with private banking customers and other strategic relationships. Consumer loans as of 2Q.23 were $503 million, a decrease of $47 million or 8.5% quarter-over-quarter. This includes approximately $312 million in higher yielding indirect loans, which had represented a tactical move for us to increase yields. As we mentioned last quarter, we are focusing on organic growth and are no longer buying any new production since the end of 2022. We estimate that at the current prepayment speed, these will pay off over the next two years. Also, we continue our run-off strategy of the New York City CRE portfolio. The balance remaining is $292 million consisting of 24 properties. Loans held for sale which are all in connection with Amerant Mortgage totaled $50 million as of Q2 '23 compared to $65 million as of the previous quarter. In line with our business focus in Tampa, we will continue to include this market to show our progress as a percentage of the total portfolio, which was almost 4% as of the end of the quarter. Tampa represents a significant source of growth opportunity for us for full banking relationships. Of note this quarter, we successfully completed our transition from LIBOR to SOFR to ensure existing contracts have a robust fallback language that includes a clearly defined alternative reference rate. We converted approximately 390 loans with a total loan balance of approximately $1.1 billion. Turning to Slide 15, let's take a closer look at credit quality. Our credit quality remains sound and reserve coverage is strong. The allowance for credit losses at the end of the second quarter was $106 million, an increase of 25.6% from $84.4 million at the close of the previous quarter. We recorded a provision for credit losses of $29.1 million in the second quarter, which includes $15.7 million in additional reserve requirements for credit quality and charge-offs, $1.4 million to account for loan growth in the quarter and $12 million to reflect updated economic factors. It is important to mention that the quarterly 2022 provision for credit losses now reflects the desegregated impact of CECL implementation for those specific periods. During the second quarter of 2023, there were net charges of $7.5 million in which $7.6 million related to indirect consumer loans and $1.5 million related to multiple commercial loans. This was offset by $1.6 million in recoveries. Our non-performing loans to total loans are up to 65 basis points compared to 31 basis points last quarter. This is primarily due to the further downgrade from a special mention of a New York City theory loan for $24.3 million and a commercial loan for $1.5 million. Non-performing assets totaled $67.4 million at the end of the second quarter, an increase of $18.7 million compared to 1Q '23. This includes the increase in NPLs and a $6.4 million decrease in other repossessed assets related to the sale of transportation equipment repossessed and disclosed last quarter. The ratio of non-performing assets to total assets was 71 basis points, up 20 basis points from the first quarter of 2023. In the second quarter of 2023, the coverage ratio of loan loss reserves to non-performing loans closed at 2.2 times, down from 3.8 times at the end of the last quarter and from 2.8 times at the close of the second quarter of last year. Now on Slide 16, we discuss our CRE portfolio in further detail. We have a conservative weighted average loan to value of 59% and debt service coverage of 1.4 times as well as strong sponsorship tiered profile based on AUM, net worth and years of experience for each sponsor. As of the end of 2Q '23, we had 31% of our CRE portfolio in top tier borrowers. We have no significant tenant concentration in our CRE retail loan portfolio as the top 15 tenants represent 22% of the total. Major tenants include recognized national and regional grocery stores, food and clothing among others. Our underwriting methodology for CRE includes sensitivity analysis for a variety of key risk factors like interest rates and their impact over debt service coverage ratio, vacancy and tenant retention. Please note that over 45% of our CRE portfolio has been hedged by the borrowers via interest rate caps or swaps, which in turn protects them against rising rate environments. Next, I'll discuss net interest income and net interest margin on Slide 17. Net interest income for the second quarter was $83.9 million, up $1.5 million or 1.9% compared to the previous quarter. Our asset sensitive position enabled us to offset via repricing the incremental cost of deposits we recorded during 2Q due to higher market rates and balances as well as the cost of borrowing, which also increased via rates despite lower balances. The increase was primarily driven by higher rates on total interest earning assets, primarily loans and interest earning deposits with banks in line with the 25 basis point increase in the Fed's benchmark rate in 2Q, increased loan balances, primarily commercial and single family residential and to a lesser extent theory and owner occupied loans and decreased balances on FHLB advances, savings and money market deposits. As rates continued to increase during the quarter, we experienced higher betas via the combined effect of rate increases and money market deposits as well as repricing of time deposits that had not repriced at current market rates. As you can see in the graph, we observed a beta of approximately 40 basis points on a cumulative basis since the beginning of the interest rate up cycle, but over 90 basis points quarter-over-quarter. As we indicated last quarter, a large portion of our time deposits have repriced at current market rates and a reduced balance is left to reprice limiting the impact in our interest expense in coming quarters. Moving on to the net interest margin. As Jerry mentioned, NIM for the second quarter was 3.83%, down by 7 basis points quarter-over-quarter. As I said, our ability to offset funding costs and contain a further decrease in NIM is a reflection of our asset sensitive position. However, we expect the margin to continue to be pressured given substantial market competition for domestic deposits and demand for higher rates. I'll provide some additional color on NIM forecast in my final remarks. Moving on to interest rate sensitivity on Slide 18. You can see the asset sensitivity of our balance sheet with 51% of our loans having floating rate structures and 54% repricing within a year. As we have said in previous calls, we continue to position our portfolio for a change in rate cycle by incorporating rate floors when originating adjustable loans. We currently have over 50% of our adjustable loan portfolio with floor rates. Additionally, you can see here the transition to SOFR rates with 30% of our portfolio net index to this rate. Our NIM sensitivity profile remains stable compared to the previous quarter. We include the sensitivity of our available for sale portfolio to showcase our ability to withstand additional negative valuation changes. I would like to remark the organic improvement in AOCI by $12 million due to the expected maturities of the investment portfolio and expectations of rate reductions during 2024. We will continue to actively manage our balance sheet to best position our bank for the remainder of 2023. Continuing to Slide 19, non-interest income in the second quarter was $26.6 million, up by $7.3 million or 37.6% from $19.3 million in the first quarter of 2023. As referenced earlier, $13.4 million of non-interest income were non-routine items. The increase was primarily driven by lower losses on the sale of available for sale securities compared to the previous quarter. This increase in non-interest income was partially offset by lower fee income from customer derivatives and by lower mortgage banking income. Amerant assets under management totaled $2.1 billion as of the end of the second quarter, up $40 million or 1.9% from the first quarter. This increase was driven by approximately $11 million in net new assets as we continued to execute on our relationship-focused strategy as well as approximately $16 million from increased market valuation. Turning now to Slide 20. Second quarter non-interest expenses were $72.5 million, up $7.8 million or 12% from the first quarter. As Jerry covered earlier, we considered $13.4 million of our expenses this quarter as non-routine expense items. Excluding these items, core non-interest expenses were $59.1 million in the second quarter of 2023. The quarter-over-quarter increase was primarily driven by $2.6 million loss on the sale of reprocessed assets in connection with our equipment financing activities, $2 million in impairment charges related to an investment carried at cost in connection with a specific fintech investment given current investment round, $2 million in higher severance expenses in connection with the organizational rationalization mentioned by Jerry, which provided for an improved ratio of customer phasing versus support function, $1.7 million in additional advertising expenses in connection with our partnership with professional sports teams given both teams advanced the championship round, $1.6 million in additional expenses in connection with the termination of contracts with third-party vendor resulting from our upcoming engagement with FIS, $1.4 million in additional telecommunication and data processing expenses due to the run write-off of an in-development software and $1.1 million of additional branch closure expenses and related charges as a result of our decision to close the Edgewater location in Miami, Florida. The increase in non-interest expenses was partially offset primarily by lower loan level derivative expenses due to the absence of additional expenses in 1Q related to the transition of interest rate swap and cap contracts with clients from LIBOR to a new replacement index, lower salaries and lower professional fees. In terms of our team, we ended the quarter with 710 FTEs, slightly lower from 722 we had in 1Q. Out of the 710 team members, 617 are employed by the bank and 93 by Amerant Mortgage. On that note, let's turn to Slide 21, which focuses on Amerant Mortgage. On a standalone basis, Amerant Mortgage had a negative of PPNR of $1 million in 2Q '23, which was consistent with 1Q '23 results. Our efficiency ratio excluding the activities from Amerant Mortgage improved from 65.6% to 63.7%. During the second quarter, the company originated and purchased approximately $113 million in loans to Amerant Mortgage and it's noted on the slide related to bank customers. The current pipeline shows $95 million in process or $294 in applications as of July 7, 2023 with $121 million in rates lost. Now before I turn it back to Jerry, I would like to provide you with some color on our expectations for next quarter. Regarding growth, we expect stronger loan growth in the third quarter given the current pipeline in line with the 10% annualized growth communicated earlier. Deposit growth continues to be strong, but note that any excess over loan growth will be used to further reduce high cost institutional deposits. Given rate environment, we expect margin to reflect rising deposit costs due to competitive pricing. Our expectation is a reduction in NIM in the next quarters of 18 to 20 basis points. For non-interest income, we expect a range of $15 million to $16 million next quarter. Regarding operating expenses, we estimate core non-interest expense to remain in the $60 million range and we expect provision for credit losses to normalize and be in or around $10 million next quarter. I'll pass it over to Jerry for his closing remarks.

Thanks, Shary. Let me cover a few items in closing. First, our FIS conversion has been delayed from this quarter to early November. We want to have everything right as do the folks at FIS and we agreed after three rounds of readiness testing to push the timing back to ensure everything is just right, no workarounds. So while we were certainly planning on being converted by now, it is absolutely the right thing to do to make sure everything works as it should systemically to ensure a great experience for our customers and our people. Next, in light of the inevitable further margin compression that Shary just referenced, we're evaluating everything, so from expenses, margin enhancement strategies, growth strategies among others. I think in light of the pressure on earnings that is coming from higher funding costs, we must look at absolutely everything and we have already begun to do this and we'll continue to do so. And finally, we expect and intend to continue to grow organically. We are open for business. There are ample opportunities in the markets we serve and we welcome existing and new customers willing to have full banking relationships to grow with us. So with that, I'll stop. Shary and I will look to answer any questions you have. So Gigi, if you would, please open the line for Q&A.

[Operator Instructions] Our first question comes from the line of Michael Rose from Raymond James.

Maybe we could just start on deposits understanding that the NIB mix dropped like everybody else. You guys are at 17%. I know you have a lot of initiatives in place. You have a very sticky and lower cost foreign deposit element, which is clearly very unique and I think a very positive thing in this type of environment. Here on the margin guide just trying to get a sense for are we kind of nearing after this quarter's kind of expected compression. Are we nearing a bottom just given some of the efforts that you're going to undertake? And any deposit growth obviously paying down some of the higher cost stuff, just trying to get a sense for are we at or near a bottom for NIM after this quarter? Thanks.

Michael, great question. And certainly one we want to see happen as well. The answer which is look, we feel there's clearly going to be a drop. Competitive pressures, whether you're raising money in money market and/or the different maturities that are out there, returns on CDs, right? And let's just clarify, customers have clearly expressed strong preference to be actively managing their money and so you're seeing that in terms of what's getting -- the real growth is really coming. Well, again, in core, you're seeing equal if not bigger growth happening in time deposit. So in our case, we actually grew non-interest bearing, but to your point, as a percentage, it's declined because again it's been overshadowed by the greater growth in the other categories. Our view is that I think it's probably a little too early to tell, but we certainly believe that our goal is to not have consistent quarters of margin compression going forward. We'd like to think that we can proactively manage this. And again, depending on the rate increases, we'd obviously see an increase in yields out of the loan portfolio given the higher percentage of variable to fix that we've got there. So I think where we are right now is we do believe that it's going to come in that solid 18 to 20 lower. We are going to grow. I mean, the view is we've got great pipelines on both sides of the balance sheet. But it is important to recognize that the key for us to keep our costs down is clearly to focus on non-interest bearing, so getting more relationship core operating accounts. And it's also to continue the growth and to really ramp up the growth in the international side because we see -- obviously, the advantage there is we can attract a lower cost and a very sticky deposit.

Very helpful. And that kind of leads into a follow-up question, you kind of mentioned pipelines being solid. I think growth this -- loan growth this quarter was like 7%, annualized you talked about it being stronger in the third quarter. I just wanted to get a sense how much of that is from maybe some of the newer markets like into Tampa and some of the hiring efforts in Houston or is it really just that the markets in South Florida are just really that strong and there's a lot of demand out there? Is it more kind of just growth in some of these new markets and market share gain versus maybe some competitors? Trying to get a better sense for where the growth is coming from. Thanks.

Yes, we actually see growth potential in all three markets. So if you consider in South Florida to break it up, right, the three counties, across the three counties in addition to the greater Tampa Bay area as well as in Houston, we are definitely seeing solid demand in all three. I don't think it's overweight in one versus the other. Tampa, the team has been building. Jason's been there now a little over a year. We're at a team of 20 plus when you count in some of the mortgage personnel that work out of that office and it's really beginning to show in the momentum that they've got in their pipeline. Caroline joined us obviously in the past quarter. I think she's doing a very nice job of getting her hands around things there and proactively out and meeting with customers and meeting new customers. So as I said, we're open for business. The thing that we are requiring with any new customer and certainly any customer that wishes to renew, expand relationships is we want a fuller relationship with all our customers. And that's where a fair bit of this deposit growth is coming from. We are mining so to speak our own customer base in addition to requiring as we said we put deposit covenants in place. And there's got to be very, very good reasons if there isn't to meet a certain standard that there are other opportunities with that customer to eventually get there. So we're excited. And I think it's important, Michael, just real quick. We not only hold what I'll call the classic credit committee review the pipelines talk about that on the loan side. Every week, we hold a weekly roundtable on deposit pipeline. And so every business leader in the organization, every region in the organization is represented and we go over deposit opportunities. So I think again that's shown in our numbers and we fully intend to just continue to press our efforts in both sides.

And Jerry, to complement that to when we're thinking about our overall growth strategy in each of our markets, I think it's also important to mention our focus or our -- we are looking into our international deposits with the lower cost that they come through. So I think it's built within our strategy for Houston, Tampa and here South Florida.

I appreciate the color. And maybe just finally for me, Jerry you mentioned everything's kind of on the table on the expense side just given the revenue challenges that are out there. You guys have chopped a lot of wood since the IPO in that regard. From here, it seems like it's probably -- gets a little bit more difficult. Just trying to size up where the opportunities could be to kind of cut around the edges just assuming that the home runs are gone and you're going to be looking for more singles and doubles types of expense reduction efforts. Thanks.

Yes. Michael, I'll give you a good example, something as simple as total square footage in the organization. We're reassessing means we're certainly looking and I've told a lot of folks in the organization already, even the potential with a number of folks that we have sort of in a hybrid work situation, whether we could eventually go to more of a hoteling scenario. So when I say everything is on the table, we're basically looking at every single expense line item that you see in our sort of the consolidated level I'll call it our summary level in the P&L and breaking down every single GL that feeds those and reassessing everything that's there. So I'm excited because I think we have come up with a few things. I think the really important thing to share with you, Shary and I have lots of opportunities just given the number of investors conferences that are coming up here in the third quarter to bring updates on all our progress on all of that, so in August and in September. So the way I look at is we've got three 8K filings with documents to give you updates as we fully uncover things and move things forward. So nothing today to share. Obviously, we would have done that, but my view is lots of work in process and we do think that there are opportunities.

Our next question comes in the line of Graham Dick from PSC.

So I just wanted to start on the buyback. I saw you guys use a little bit of this quarter. Just wanted to get your sense for your appetite on that going forward. I know you said the shares are attractive here and there's no better investment in your own stock. And the bank seems pretty well capitalized with common equity Tier 1 over 10%. So just trying to get a sense for what you guys might do on that front and how active you might be. It seems like there's a lot left in the authorization relative to what you guys have used so far.

Yes, Graham, good question. We've been slow and steady with it. I think we've been very consistent. That represents we're not going out at any given day and doing a big slug. We are consistently evaluating opportunities and I think that that's the way we'll continue. What I -- Shary and I and we've chatted obviously very openly with our Board of Directors about this. You have to be incredibly prudent when you look at this, right, because it's a balancing act. We've got to grow our capital to grow our balance sheet. We want to continue to pay dividends. So we're looking at all of the different moving pieces and -- but we think it's incredibly important to make sure people know. We have an active program. We intend to continue to pursue where there are opportunities. And whether we take up a lot of that rest of that between now and next quarter or we have new expectations of price that put us in a place where we feel comfortable that we don't necessarily have to, we're going to be opportunistic. And so I would just kind of sum it up that we have it in place. It's something that we balance. We look at our cash needs at the holdco. We look at the capital levels, but we also obviously have a clear eye towards -- this is a really important tool in terms of the way we manage the company to have a program out there and to be actively using it.

Okay. Understood. And then I just wanted to flip to credit quickly and just kind of drill down a little bit I guess more on the New York portfolio and I guess the office book and the multifamily book in particular. But just on the office book, I know it's relatively small like $38 million, but wanted to get your sense for how that book is performing and how you might think it plays out over the next couple of years? I saw our debt service coverage ratio is 1.1 times or whatever. Are you seeing any trends on that front in terms of your borrowers being able to generate rent growth or the otherwise?

Yes. Look, I think at this time, we don't have certainly any immediate issues on anything within office. It's two loans. I will tell you that our new Head of Commercial Banking, Juan Esterripa has been very, very active in being out meeting with customers. He's been to New York. He's done the full KYC, visited all of the properties with other team members from the organization. And the one unfortunately that we've circled this quarter really seems to be the singular problematic one. They're really at this point based on those reviews, I don't really see that there's anything else material like that on the horizon.

Right. And just to add a little bit color on the office space in New York, we have loan to value at an average of 70% and a debt service of 1.2.

Okay. That's helpful. And then lastly, I just wanted to hit on the NIM quickly. I guess, your NIM guide of down 18 to 20 basis points, what sort of -- do you guys have any update on where you guys think the total deposit beta might shake out maybe by the end of the year if we get Fed pause?

When we look into how the beta has behaved in Q1 and Q2, I think it's fair to say that at least for Q3, we expect that beta to be somewhere in between the results for both quarters. We -- even considering a stable rate from the Fed, right? So it may shift to somehow a decrease going forward. I think we've captured some of that already in our historical results these past two quarters, but I think it would be a good estimate to say between Q1 and Q2 results.

Yes. I do want to also comment on the NIM compression. One of the first things and I think one of the big accomplishments this quarter was the pay down of institutional and one of the reasons we wanted to break that out and it's really not to -- other than to highlight that tends to be the highest costing funding that we have on the liability side. And so that's an area of focus for us. So when we can exceed deposit growth and be able to continue to maintain our loan to deposit ratio where we were, our intent is to drive costs down, so back to the NIM itself. If we believe we can generate more international, obviously, that's a very favorable beta. We can as one of the earlier questions was continue to ramp up on non-interest bearing and I will tell everyone the -- we believe we have a lot of opportunity once this conversion is complete because we really like the platform capabilities that we will have. We've already moved all our customers over to a remote deposit capture. We will obviously be introducing them to a very comprehensive platform that we just think will really give us a competitive advantage going out. And that's opportunity for us to get more lower cost, better beta deposits in the organization. So just for what it's worth, I recognize that the drive up in beta is clearly directly linked into what we're seeing as it relates to the higher costing deposits we've been putting on.

Right. And when we think about the repricing that's upcoming, we do see that there -- we do have part of our portfolio up for repricing. But when we look at the gap of the rate, we're expecting that most of our deposits already capture that increased rate. So we do have some coming up in repricing, but that already is capturing the higher rate. So that's how it's offsetting the -- or getting us to a slightly decrease there.

Our next question comes from the line of Brady Gailey from KBW.

So I just wanted a little more color on what is happening with this $24 million multifamily loan in New York that I think was the one moved into non-performers this quarter. Could you just give us a little more color on what happened there?

Sure. I mean, as I've emphasized, it's a legacy credit. It was originated in 2016. It's a multifamily property that's a conversion. Our belief -- we're working with the borrower proactively and we believed that since the loan matured during the quarter and clearly did not pay off, we needed to classify it as a substandard loan and put up the reserve that we did. I don't think just given the ongoing negotiations that I can go much further than that, Brady, but clearly, this is one that's being very, very proactively managed.

And I think that also Jerry to complement that being this within the multifamily space, I think it speaks us to being a specific item, not something pervasive in the portfolio.

Is it a rent controlled property?

Yes.

Okay. Right. And then...

No further detail, Brady, thank you.

And then the purchase indirect consumer loans that drove the -- I think was like $7.5 million of net charge offs. Can you give a little more color on what those were? Do you expect any sort of forward noise from that?

Yes. This is a shrinking portfolio. Our view is in particular the hotspot. We've talked about the two parties we bought this from. We terminated the programs at the end of last year. It appears the '21 vintage is the one that's running the hottest for credit loss. And we've now had consecutive quarters at these levels. As Shary referenced, we believe this is a portfolio that at the current payment speeds will be gone in under two years. Our view on the loss side is and she gave loss guidance is that we've got a view on the loss content projected forward and believe we've captured that. So you won't see the replenishment into the portfolio. I mean, there could be a couple million here or there, but it's not at the level that the replacements that there have been in the last two quarters.

Right. And the 2021 vintage that Jerry was mentioning, when we think about the life or the term, we're believer in the peak of the loss and that any expected losses are already covered through our allowance.

Okay. And who are the two parties, can you just remind us? Are these like student loans or home improvement loans?

No, this is debt consolidation loans nationally generated. We had no input. This is over the I'll call it the 48 contiguous. So that was intended to be sort of the geographic protection that you would have. I think it's safe to say the first one was SoFi, right, was the biggest part of the portfolio. When I think in terms of states, the highest concentrations are around 10% in any one state, so inclusive of California.

Okay. And so in NPAs, you have the $24 million New York multifamily. Then I think you have another $20 million New York based commercial real estate loan as well in there, right?

Yes, we do. We have one additional relationship within that. It's an Oreo property actually in the NPAs in New York.

And can you give us a little more color on that property and what happened there?

For the commercial property in New York of the Oreo?

Yes, the other $20 million property, yes.

Yes. We feel we're in a good position on that one, Brady. Frankly, I don't see additional concern there at all. It's actually improving. We've got new leases signed. I think the best way to describe that is it's in process on its way to -- our belief is it will be very marketable. It's in a very good location, densely populated, high demand in the area. And I think that one is going to be a positive. But again, we need to continue to make sure we get it fully leased up and then we'll be in good shape. But we really like the partner that we're working with. We think the folks have done an excellent job in helping us. So I think the outlook on that one is nothing at all like the issues we just reported obviously on the repossessed equipment.

And sorry if I missed it, but that one that's in Oreo, what type of CRE is that?

It's retail.

It's retail, okay. All right. And maybe just a bigger picture question. I know the ROA has come under pressure here just with the higher provision. But I mean, you did -- on a core basis, you did almost a one ROA last year. So how do you think about hitting -- getting back up to that one ROA level?

Yes. Look, I think it's clearly more challenging with the NIM considering you're going to have some NIM compression. And obviously, the last two quarters we've booked some healthy provision expense. If you get the provision expense to go back to the $10 billion and under range, then that coupled with our ability I believe to generate on both sides of the balance sheet, I think we'd be in a really good spot. We've put -- Brady, I think everyone that's followed our story is we've been building our organization sort of for the long-term. This is not a -- we're trying to just make a few changes and improve results. We're trying to come up with something that can be very consistent on a go forward basis. Obviously, we've had some challenges based on some legacy things that have popped up here. But I think we have the right team, the right infrastructure. Once we get this conversion past us, I think we'll be highly efficient on the back office side as well as on the customer, the ease of customer to use the systems we have. I think it's been a growth strategy. And our belief is we're in good markets that we can continue to grow. They are not in some of the spots in the rest of the country that are having the stress levels. And our sense is that we are in three of the best markets in the country to be doing business and all three from the visits that I'm making in all three are very vibrant. So we feel that it's -- for us. It's going to continue to -- and we've talked about this openly. We were not shy about going through $10 billion. We know there are implications to going through $10 billion, but you can't sit at just in and around the $10 billion and avoid growing Otherwise, then it's going to be a cost cutting exercise and that's not what we want to do. We've put some real muscle on the infrastructure here. And now we've got to grow the organization. So our belief is there's good business to be had. That's why I made the comments in closing that we think that there's a real opportunity for us. We're open for business. We just want customers that want to use us as a -- we're a full service bank and that's what we want in our customer relationships.

Okay. Great. Thanks.

I believe we can get there on growth, so okay.

Our next question comes in the line of Feddie Strickland from Janney Montgomery Scott Research Division.

Just clarification on that NIM guide. Was that 18 basis points to 20 basis points in the third quarter or is that over the course of the next two quarters?

That's in the third quarter.

In the third quarter, okay. And then along that same line of reasoning and Jerry, I think you touched on this a little bit earlier. But if we see the Fed stop hiking in 2023, could we potentially see the margin come back up some in 2024 as earning asset repricing starts to overtake some of the funding costs?

Yes, because I think you're going to see pressure on -- that's happening. First of all, it's stepping back, Feddie, super competitive environment for -- in the CD marketplace and in some of the money market campaigns. And we're seeing it from the largest banks in the country, not just locally from the competition that's headquartered here. And so we need to -- with that in mind that's why the international, that's why the push on more core with our corporate customers as well as with our private banking and other lines of business is really essential for us. So yes, I mean, we think it can normalize out and that's where to the question that was just asked earlier, if you're adding profitable growth, that's what's going to drive your PPNR on a go forward basis.

Understood. That makes sense. And then just on the international deposits, I mean, it sounds like you feel like you can continue to grow those. Can you remind us what the average rate is on those? Just curious, I know they're usually lower cost.

It's around 70 basis points in average for the portfolio.

Yes. And I think, Feddie, to give some color, the growth that we're -- this is not focused back on our history. This is a broader look at Latin America and the opportunities that we're seeing in several countries. And there'll be more to come on that over the next couple of quarters as we'll start to talk more and more about where all the growth is coming from.

Got it. And just one last one for me. You mentioned that $15 million to $16 million guide on non-interest income for the third quarter. It seems like a pretty solid linked quarter jump. Can you talk through some of the drivers there, what's driving non-interest income higher?

Sure. So we -- as you can see, we have an increase in AUMs. We have an increase in valuation of those. We believe that's part of it. Also, we are looking into fee income and also some of the mortgage activity we believe will get us to that range.

That makes sense. Thanks for taking my questions.

Thanks, Feddie. Have a good one.

Our next question comes in the line of Matt Olney from Stephens.

Thanks. Good morning. Just looking for a few clarifications on the credit front of that provision expense, the $29 million. I think the slide says $16 million comes from additional reserve requirements from credit quality. Was this the mark you took on the non-accrual downgrade or any more color on kind of what that $16 million is?

Yes. Look, I think if you dissect the provision, there's obviously the two largest pieces I think that were referenced related to the specific credit in New York, right? And there was also a replenishment on charge-offs. But the other piece that's sort of I'll call the biggest of them all was related to what we refer to as the macroeconomic factors we put into the CECL model. I think we basically evaluated and felt that we took, I won't call it either aggressive or conservative, I think an appropriate look and said we're going to reflect those in the -- and again that's based on the spread of the business that we have, right? And so you get that from a third party, it's highly reputable, evaluated and you put that into your models. So our view is we don't expect that level to continue in future quarters. And I think when you look at the overall reserve, we're nearly at a 1.5% allowance. And so we think at this stage given the portfolio particularly the secured positions that we've got that, that kind of more -- that's adequately covering what we think is and the risk there. I think the charge-off number, Matt, was the replenishment. A big part of that was the replenishment from those indirect consumer. And as I referenced in an earlier point, there's -- we believe we've got that lost content. I mean, that could be give or take in future quarters $1 million or $2 million here or there, but we think we've got that recognized.

Okay. I appreciate that. And following up on your last point, Jerry, on that consumer indirect piece. I think you disclosed that the 2021 vintage is kind of the hottest in terms of charge-offs. I guess, based off the historical data, how long do those losses need before they peak out and start to decline?

Yes. I think we're in decline on that now, Matt. I think that's why given the prepay speeds, I think when I -- remember when we did the update, you sort of look at this portfolio as probably on a run rate of being able to pay off around $80 million to $100 million every six months and that's the run rate that it's on. So a combination of I'll call it payoffs and write-offs, right, gets you that number. And that's why we said we believe we'll have this behind us in the two year horizon, completely behind us.

Okay. That's helpful, Jerry. And then I guess switching a little bit over to the loan growth front, I think you said one of the loan categories driving the growth at least in 2Q was specialty lending portfolio. Just remind me kind of what this is again and does it come with any kind of deposit or funding relationships?

Yes. So we have a group like so if you think of our typical commercial, what fits in that is I'll call it your classic corporate middle market asset-based lending falls under that. Anything else, we put in what we'll call the specialty category. That's where we have our equipment finance activity as an example. We'll call it sort of typical. The non-traditional bank is what we'll call specialty. But when we a year almost I guess about 1.5 years ago launched into -- in a bigger way in equipment finance that was really a big part of that division.

I guess, just help me strategically -- appreciate kind of the growing that portfolio at this point given some of the funding headwinds. Presumably that portfolio doesn't come with much in the way of funding by itself.

Yes. Actually, I have to tell you that's one of the unique things is that we're putting the same. If you want to bank with us, you got to deposit with us. Not necessarily in all those cases are we getting the core deposit, meaning that we're the primary bank, but we certainly are pushing for our share. We're not interested in doing it. So I think a good way to think about us because I agree with you that's not a traditional way, typically equipment finance as an example, right? Even in some respects other corporate activities, it tends to be like obviously commercial real estate. They tend to be fund users, not fund providers. In our case, we're emphasizing that every relationship needs to come with some level of deposits. And we also look at it, Matt, more broadly because we're going after the principles in these relationships on the private banking side. So we're very, very transparent. I can tell you that anyone that comes to visit, anyone I go see, they automatically know that when they ask me a question, if there's anything they can do for us and I immediately respond more deposits. We're that laser focused on ensuring that you're not coming to Amerant to just do financing activity. You're coming to Amerant and we're looking for you to think of us as your bank. And so that's beginning to really take hold and shape. And I have said this in prior calls, I'm really proud of our commercial real estate team for the energy and effort they've put into deposit gathering, because I've not seen that in my career in other organizations the way our team's been able to do it. But we're pushing that similarly on EF.

Any more color on the loan yields that you're seeing today on the incremental loan growth? I think it's especially finance tickets and then the single family residential loans. Any color on just kind of what the yields are on some of those products?

Yes, I think there's the occasional in the 7s these days, but I think you're seeing an A plus on the vast majority of the production that we're booking, which obviously and of course is we're being and I do think there's a real opportunity for us in this production going forward that we've got an opportunity to put more swap income on our books in 3Q, 4Q, because the customers that are coming in, right, that are pegged to an index are clearly wanting to swap floating for fixed.

Okay. And then -

Yes. The overhang is still there, Matt, by the way. I mean, all the uncertainty in rates, which way things are going to go, is the Fed going to continue to move or not. I mean, I know there's lots of speculation because we had a better inflation number, but I do think that there's still a lot -- people want certainty right now. I think it's one of the reasons why you see the success rate that we're certainly having. I'm not going to comment on others of people want certainty of term and that's why you clearly see the inflow that's happening on time deposits, right? So they want it on both sides.

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

Okay. I want to thank everyone for joining our second quarter earnings call. We genuinely appreciate your interest in our company and everyone thank you for all of your continued support. Have a great day.