Amerant Bancorp Inc. Q3 FY2021 Earnings Call

Good day, and thank you for standing by. Welcome to the Amerant Bancorp's Third Quarter twenty twenty one Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Laura Rossi, Head of Investor Relations. Please go ahead.

Thank you, Victor. Good morning, everyone, and thank you for joining us to review Amerant Bancorp's third quarter twenty twenty one results. Also on today's call are Jerry Plush, our Vice Chairman, President and Chief Executive Officer; and Carlos Iafigliola, our 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, 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 thirty first, twenty twenty, in our quarterly report on Form 10-Q for the quarter ended June thirty, twenty twenty one, 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 two and Appendix one 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 our CEO, Jerry Plush.

Thank you, Laura, and good morning, everyone, and thank you for joining Amerant's third quarter twenty twenty one earnings call. I'm pleased to be here today to report on our results for the quarter and the progress our team has made focusing on the key priorities we set out during our first quarter twenty twenty one earnings call. I will also comment later on some significant initiatives that we have underway to further improve our future results and set the company up for growth in the coming years. But before going through the results, I want to first thank all of my Amerant colleagues for their dedication and effort again this quarter and for their continued support in the pursuit of even better results in the future. So, I will now provide a brief overview of our performance in the third quarter, and then Carlos will go over the details. So let's turn to slide three. Here you can see a summary of our third quarter highlights. We're pleased to report further improvement in our results compared to the second quarter. Of note, net income attributable to the company of seventeen million dollars is up six point seven percent quarter-over-quarter, primarily driven by higher net interest income and lower non-interest expense. Our total loans were five point five billion dollars and total deposits were five point six billion dollars. They are both down slightly from last quarter. Nonetheless, we are happy to report continued improvement in the deposit mix, as core deposits increased. We had solid growth in non-interest bearing deposits this quarter. Our capital levels continue to remain very strong. We recently announced our intention to effect a clean-up merger in order to have one class of common stock going forward, and we are looking forward to having our shareholders approve this in mid-November. In addition, our Board has approved a new repurchase program for up to fifty million dollars, which we expect will commence here in the fourth quarter. So let's move to the core PPNR slide number four. We're pleased to show continued growth in core PPNR of eighteen point three million dollars, an eight percent increase compared to the sixteen point nine million dollars reported last quarter. We believe this reconciliation is essential to show the true net revenue growth of the company. We want all of our investors to easily see our results, excluding any one-time gains or losses or severance or other restructuring charges, so they can see what is really happening regarding core earnings power. If we turn now to slide five, our key actions. Here we list them out through what has taken place during the third quarter. You will note that a number of these strategic measures were focused on driving lower future funding costs and operating expenses, as well as setting the stage for future growth. Our non-performing classified and special mention loans decreased thirty one point seven percent, thirty one point three percent and sixteen point four percent compared to last quarter, respectively. We are diligently working on further reductions here in the fourth quarter. We have instituted weekly sessions of key personnel to focus on driving to resolution on as many credits as possible to get the non-earning assets off of our books and the proceeds reinvested into earning assets. We continued downward repricing of customer time deposits, further lowering the cost of such funding by approximately seven basis points, which translates into annualized savings of approximately two point two million dollars, and we prioritize core deposit growth, which totaled one hundred forty one point seven million dollars in the quarter. We closed one branch located in Wellington, Florida, as of October fifteen, twenty twenty one and we've announced a new downtown Miami branch that we anticipate opening late in twenty twenty two. The comment period regarding this branch expires next week. We also significantly reduced our future space needs, as illustrated by our announcement regarding our new fifty six thousand square foot operation center in Miramar, Florida, that will take occupancy in the fourth quarter of twenty twenty two. This will reduce our operations center by over forty thousand square feet and our annual rental expense by nearly one million dollars. We continue to build out our treasury management team and have completed adding team members to both sales and service in Florida, as well as in Texas. We recently completed the business transformation initiatives with a well-known third party to improve customer experience and drive additional efficiency. We're finalizing the next steps, and we expect to announce this outcome in the very near future. As we continue our digital transformation and efficiency efforts, we're excited about our recent announcements regarding leading technology platforms, Alloy and ClickSWITCH. Alloy's leading identity decision platform will allow us to automate the identity verification process when onboarding deposit accounts for both business and individual customers. ClickSWITCH, on the other hand, will improve the customer experience by simplifying the conversion of consumer and small business accounts as they transition direct deposits and automatic payments to Amerant. We're confident that these new platforms can help improve our customer experience overall and grow stronger banking relationships. We also launched our new brand awareness campaign based on the tagline "Imagine a Bank" via billboard and social media, and also announced a new branding partnership with the Florida Panthers in the NHL for the twenty twenty one, twenty twenty two season. Our soon to be released investor deck this quarter will provide examples of the brand and marketing campaigns for your information. Lastly, we recently appointed our Chief Diversity and Inclusion Officer in September, as just one more step in demonstrating our commitment to ESG. I'll have some more comments on this initiative in a few minutes. If we turn to slide six, here we've outlined our key performance metrics, which show improvement across the board this quarter. These results are reflective of our continued focus on core deposit growth and improving the net interest margin, which helps drive higher operating profitability. We also maintained a robust capital position and very strong credit coverage, which, while it's lower than the prior quarter, is at a very healthy one point five nine percent of total loans. Slide seven is new this quarter. We wanted to add this to focus solely on Amerant Mortgage outlining the growth in people, applications and show the increasing revenue quarter-over-quarter. As a reminder, we started taking applications in late May of this year, and we've recently been focused on adding additional sales personnel to the team. We are currently in the process of onboarding an even greater number of experienced personnel this quarter to drive future results. With all that said, I'll now turn it over to Carlos, who will walk through the results for the quarter in more detail.

Thank you, Jerry, and good morning, everyone. So turning to slide eight, I'll begin by discussing our investment portfolio. The third quarter investment securities balance was one point four billion dollars, slightly off from the one point three billion dollars in the previous quarter and flat compared to the third quarter of twenty twenty. The duration of the investment portfolio has extended to three point seven years due to lower expected repayments in light of higher long-term interest rates. We continue to select investments to mitigate the impact of a prepayment risk over the portfolio. The floating portion of our investment portfolio continued to decrease, representing eleven percent as of the end of the third quarter. Continuing on slide nine, let's talk about the loan portfolio. At the end of the third quarter, total gross loans were five point five billion dollars, down two point three percent compared to the end of the last quarter. The decline was primarily due to approximately three hundred twenty million dollars in prepayments received in both CRE and C&I, plus a portion of the C&I closings having been moved to the fourth quarter. Consumer loans as of September thirty were three hundred sixty million dollars, an increase of forty eight million dollars or fifteen percent quarter-over-quarter. During the third quarter of twenty twenty one, we purchased an additional eighty million dollars of higher-yielding indirect loans for a total of two hundred sixty three million dollars on that specific portfolio. Turning to slide ten, we'll provide updates on the New York loan portfolio. As we announced during the second quarter call, the New York City loan production office has officially been closed. At the close of the third quarter, thirty loans totaling two hundred twenty million dollars were classified as available for sale, and a little over four hundred million dollars still remains in the New York portfolio. We have elected to mark the position of this portfolio now classified as available for sale in order to shorten duration and significantly reduce the number of loans being serviced as we sell them. We have accepted a proposal to sub-lease our New York office and expect to start in the fourth quarter twenty twenty one. Turning to slide eleven, let's talk about the credit quality of our loan portfolio. Credit quality remains sound and reserve coverage is strong. The allowance for loan losses at the end of the third quarter was eighty three million dollars, down twenty percent from the one hundred and four million dollars at the close of the previous quarter. We released five million dollars from the allowance from the losses in the third quarter; in which the release of approximately two million dollars was a result of upgrades, payoffs and pay downs of non-performing loans and special mention loans. A release of the remaining three million dollars was due to the loan portfolio reduction and the classification of the loans as available for sale. Charge-offs for this quarter were seventeen million dollars, from which five point seven million dollars were in connection with the Coffee Trader relationship to account for delays, as allocation of liquidation proceeds has been subject to objection from certain lenders. We continue to monitor this process and have been in close contact with the liquidation agent regarding the collection process on prospective distribution. We will continue to report the development in this relationship as we move along through this process. Non-performing assets totaled ninety million dollars at the end of the third quarter of twenty twenty one, a decrease of almost thirty million dollars or twenty four percent compared to the second quarter of twenty twenty one, and an increase of six million dollars or seven percent compared to the third quarter of twenty twenty. The ratio of non-performing asset to total assets was one hundred twenty four basis points, down thirty seven basis points from the second quarter of twenty twenty one and up sixteen basis points from the third quarter of twenty twenty. In the third quarter of twenty twenty, the ratio of reserves to non-performing loans increased to one hundred and one percent from eighty six percent in the second quarter of twenty twenty one, and a decrease from one hundred thirty five percent at the close of the third quarter of twenty twenty. As we have done since the declaration of the COVID-nineteen pandemic, there is detailed information on the supplemental section of this deck regarding deferrals, forbearance portfolio under escalated monitoring. Given the continued credit quality improvements in our portfolio, we may discontinue some of this slide for future quarters to streamline the earnings deck. Continuing to slide twelve, total deposits at the end of the third quarter were five point six billion dollars, down zero point nine percent from the end of the second quarter. While domestic deposits were slightly down by fifty million dollars compared to the second quarter, international deposits went up slightly by one point four million dollars, showing continued evidence of stabilization in this portfolio. Deposits excluding customer CDs and broker deposits increased one hundred eighty five million dollars during the quarter. This increase partially offset an eleven percent reduction in customer CDs compared to the previous quarter as we continue to lower CD rates, focus on increasing core deposits and emphasize multi-product relationships instead of a single product high-cost CDs. We're encouraged to see our deposit mix continue to improve towards a higher percentage of core deposits. During the third quarter of this year, broker deposits decreased ninety eight million dollars or eighteen point five percent, out of which fifty five million dollars came from time and forty three million dollars from side deposits. The decrease in total customer CDs and brokered deposits were partially offset by an increase of one hundred and eighty five million dollars or five percent in customer transaction accounts. Core deposits, which consist of total deposits excluding all time deposits were four point two billion dollars, as of the end of the third quarter, an increase of one hundred and forty two million dollars or three point five percent compared to the previous quarter. This amount includes non-interest bearing of one point two billion dollars or twenty one point five percent of deposits as of the end of the third quarter, which also include an increase from one hundred and seven billion dollars or nineteen percent from the previous quarter. Now, I will discuss the net interest income, slide thirteen; our net interest margin. During the third quarter, net interest income was fifty two million dollars, up three point seven percent quarter-over-quarter and fourteen percent year-over-year. The quarter-over-quarter increase can be primarily attributed to the following key factors: first, lower overall cost of deposits resulting from decline in average CD balances, downward repricing of CDs, and increasing the average non-interest bearing deposit balances. Second, higher average loan and investment yields with the loan yield increase due to a higher amount of consumer loans. Third, higher investment portfolio average balance due to the company's redeployment of excess cash and cash equivalents. Fourth, lower cost and average balances on FHLB advances and other borrowings following the company's repayment and rate modifications of FHLB done during May twenty twenty one. Lower loan balances during the quarter were due to higher prepayment activity in both CRE and C&I, while loans closing some delays at the quarter end did not offset the prepayment activity. Moving on to margin, the third quarter interest margin was two point nine four percent, up thirteen basis points quarter-over-quarter and up fifty five basis points year-over-year. As in the previous quarter, we continued to focus on offsetting ongoing NIM pressure by decreasing the cost of funds through strategic repricing of customer time and commercial relationship money market, as well as proactively seeking to increase spreads in loan origination. Continue to noninterest income, slide fourteen. The third quarter was thirteen point four million dollars, down fourteen point six percent from the second quarter. The decrease during the third quarter was primarily the result of non-recurring items recorded in the second quarter, such as three point eight million dollars in net gain in connection with the sale of ninety five million dollars in PPP loans, two point five million dollars net loss on early extinguishment of FHLB advances and one point three million dollars net gain on sale of securities. Also contributing to the lower noninterest income was a decrease of zero point eight million dollars in customer derivative income in the third quarter of twenty twenty one. The decrease in noninterest income was partially offset by an increase in zero point two million dollars in fees from brokerage, advisory and other fiduciary activities and mortgage banking income from zero point seven million dollars. Amerant's assets under management totaled two point two billion dollars as of the end of the third quarter, up fifty six million dollars or two point six percent from the end of the second quarter, predominantly from an increase in net new assets. Our team remains focused in growing assets under management, both domestically and internationally. In addition, we are excited to announce as of quarter end, we are up and live with the new digital wealth platform powered by Marstone. Turning to slide fifteen, third quarter noninterest expense was forty eight point four million dollars, down two point seven million dollars or five point three percent from the second quarter and up two point nine million dollars year-over-year. The quarter-over-quarter decrease was primarily driven by lower salaries and employee benefit expenses, resulting from the second quarter, including the non-recurring three point three million dollars in severance expenses we did last quarter. We also had lower occupancy and equipment expenses resulting from the non-recurring zero point eight million dollars lease impairment charge in connection with the closing of the New York LPO last quarter. Lastly, there were lower consulting legal and other professional fees, as well as various other noninterest expenses. The efficiency ratio was seventy four point two percent in the third quarter of twenty twenty one, compared to almost seventy eight percent in the previous quarter and sixty nine point three percent in the third quarter of last year. The quarter-over-quarter decrease was driven by the significantly lower severance expenses incurred during the third quarter of twenty twenty one. The year-over-year increase in efficiency ratio was primarily attributed to higher salaries and employee benefits in connection with the mortgage business. Core efficiency ratio would adjust for non-recurring items was seventy three percent in the third quarter of twenty twenty one compared to seventy four point five percent in the second quarter of twenty twenty one and seventy six point five percent last year. Lastly, as we previously announced, we have closed the Wellington branch as of October fifteen this month, with the goal of optimizing our branch network performance and better aligning our desired footprint with strategic objectives. We have announced an addition of a new branch in downtown Miami, which we anticipate would open in late twenty twenty two. Moving onto interest rate sensitivity on slide sixteen, our balance sheet continues to be asset sensitive. As of the end of September, over half of our loans are either floating rate structures or mature within a year. To manage the sensitivity and mitigate the impact on our financial margin, we continue to actively manage our loan and investment portfolio. This includes implementation of floor rates on our loans and capitalizing on higher yielding securities and longer durations. I will now turn it back to Jerry to talk about Amerant progress on the near and long-term initiatives.

Thank you, Carlos. In this quarter, we have detailed our six key priorities on slides seventeen and eighteen. Instead of a lengthy discussion during the call as in previous quarters, we felt these slides would provide helpful insights. What we’ve shown here confirms our ongoing progress on all key initiatives. Regarding deposits, we’re getting closer to our target and, as previously mentioned, have added important personnel in treasury management while focusing on increasing low-cost deposits across all business areas. As for brand awareness, our new Chief Marketing Officer and Zimmerman Advertising are diligently working on creative and branding strategies, which include our recent out-of-home advertising using the new tagline "Imagine a Bank" and a limited-time checking campaign. We're also thrilled about our partnership with the Florida Panthers, who have been excellent collaborators. As we work on rationalizing our business lines and geographies, we continue to seek out new fintech partnerships. We’ve announced new deals with Alloy and ClickSWITCH and have applied for approval for a new location in downtown Miami. In terms of achieving a sixty percent efficiency ratio, we are focusing on repricing, managing maturing time deposits, and increasing core deposits while lowering funding costs. We are not replacing maturing brokered time deposits and are resizing certain support areas. I will provide further details on the business transformation initiative shortly. Now, pertaining to capital optimization, we’ve announced a clean-up merger to convert our existing Class B shares to Class A shares to streamline our capital structure. This is on track and will be voted on at a special shareholders meeting on November fifteenth. Our Board has also approved a buyback program for fifty million dollars worth of common stock. Regarding ESG, we have appointed a Chief Diversity Officer, developed a new governance structure, and are working on our corporate social responsibility report, with plans to release our first ESG report in early twenty twenty-two. Before moving to Q&A, I’d like to share a few comments on several significant items we are working on or expect to complete in the fourth quarter. We are building for the future and aim to bolster our business banking team in South Florida and Houston, hiring six additional bankers in South Florida and seeking three more in Houston. We’ll update you on our progress next quarter. In mid-November, we will also add six private bankers in South Florida to take advantage of the opportunities in serving mass affluent and high-net-worth customers. This complements the three individuals we added this quarter in Houston, who have already positively influenced deposit growth. Additionally, we signed a sub-lease in Tampa, Florida, where our first team member is already generating leads. We plan to expand our commercial personnel in twenty twenty-two. In summary, we are continually looking to enhance our business development talent. This quarter, we've seen a reduction in non-performing loans, due in part to write-downs against existing reserves and other resolutions. We are committed to resolving the remaining non-performing loans promptly to reinvest cash into performing credits. In line with this, we are discussing the potential sale and leaseback of our corporate headquarters, exploring this opportunity to generate cash for reinvestment rather than retaining a fixed asset long-term, or using proceeds towards stock buybacks. We aim to complete this transaction by the end of the fourth quarter and announce the results then. Lastly, we are wrapping up the final stage of our business transformation initiative, and we plan to announce the results by mid-November. As you can see, the progress we’re making and the results we’re reporting are promising, and we look forward to updating everyone on further developments soon. It’s an exciting time at Amerant as we work hard to enhance our future results in upcoming quarters. With that, we will now take your questions. Victor, please open the line for Q&A.

Sure. Our first question comes from the line of Michael Rose from Raymond James. You may begin.

Hey, good morning, and thanks for taking my questions.

Hey, Michael.

Let me just start on the loan side, appreciate the color on the New York wind down and moving some of those loans to held for sale, so it's either contractual maturities, that's super helpful. But is the plan to do a best effort sale for each of those loans? And if you can just remind us how big that portfolio's number of loans at this point. Just trying to get a sense for when we could see an inflection in the loan balance now that PPP is just about gone, and you're quickly accelerating some of those efforts to wind down New York? Thanks.

Thank you for your question, Michael. It's Jerry here. Carlos and I will address this together. First, I want to mention that we classified about half of the credit with the intention of reducing it, mainly focusing on longer-term credits, which have maturities in 2023 and beyond. We selected roughly half the number of credits to concentrate our efforts. We plan to announce progress on several of these in the fourth quarter. Regarding the portfolio, it's no surprise that once we announced the wind down of New York operations, we proceeded to sub-let the office space, and now we have our key person managing this wind down process. It’s expected that our customers will be actively seeking refinance options, and we are beginning to see movement in that regard. Carlos will provide more details about the loan portfolio, but we are currently down to approximately six hundred loans.

Correct.

Slightly above six hundred million dollars in current receivables. I think the number is six hundred twenty seven million dollars.

It's approximately six hundred thirty million dollars, and we have classified this two twenty as available for sale, as we plan to actively market this segment of the portfolio. The goal was to reduce the loan count as much as possible because we will begin servicing those loans from Miami. That was one of the reasons, along with maturity considerations.

Yes. And Michael, I would like to add that the progress in the sublet is great news for us. It's encouraging to see the analyst and investor community recognizing our efforts to bring clarity to this situation so that we can move forward. We have strong growth opportunities in our other markets, and as we've mentioned before, we are looking to add more business and customer-facing personnel in both areas. We are excited about the work we are doing on the replacement, and our pipeline is quite robust at this time, both in the CRE and C&I sectors.

Okay. That's helpful. And then, Jerry, you've outlined some targets to get to an efficiency and ROA and ROE target by the end of next year. It seems like you're making really good progress on that. Any thoughts on maybe achieving that sooner than the fourth quarter of next year just with some additional moves that you announced, including potential sale of the headquarters, things like that, that could potentially get you there a little bit sooner? Thanks.

Sure. Great question. What I would say is, we're continuing to build the operating income side, as you can see. We just had a slight decrease this quarter over quarter on the fee side, but very strong net interest income growth, and we expect that to continue. So clearly on that trajectory, the ROA, ROE will continue to improve assuming we continue to execute the way we believe we will. The issue is, can we do something with the transformation project that we just referenced that could help us potentially get there sooner or certainly help assure getting there by the stated date that we had of getting to sixty percent no later than the fourth quarter of next year? So more to come on that. But I would say that we feel confident that getting closer to the ROA and ROE targets in the interim certainly appears more likely; the efficiency is still something that's a work in progress.

Very helpful. Maybe just two quick ones before I wrap up. Just on the Amerant Mortgage. When would you expect that to hit profitability? And then separately, I noticed that on the foreign deposits, while Venezuela continues to decline, the other deposits have actually increased pretty nicely over the past few quarters. So if you could just give us some color on what's driving that? Thanks.

Yes. Let's talk about the deposit side first, and then we'll go back. On the international deposits, we see great opportunity. We're in two markets that there is a significant potential for international business, and so both out of Miami, as in South Florida, in general, as well as in Houston, it's definitely going to be an area where we will see opportunity to grow. We feel comfortable in this space, and we'll continue to look for opportunities to expand there. In terms of the original core base, I think one comment Carlos has made in the past that I think is really important to note is, that is really stabilized in comparison to prior periods, where we saw a more significant decline. We think the fact that those customers now have the opportunity to utilize Zelle has been a real game changer in terms of how useful the account is for paying in dollars. We think that we will continue to see that start to level off more and more over time.

Yes. And there is another important trend that we have been seeing is on the commercial international side, since we implemented also the Zelle for commercial; we have also seen an improved traction on the commercial accounts on the international side. As you said, there is also the increase in other countries due to our operations in Houston that we have been gathering deposits from other countries.

Hey, Michael, and forgive me, what was the first part of your question.

Amerant Mortgage.

I apologize for getting carried away with the deposit question. Regarding Amerant Mortgage, we have decided to take an opportunistic approach. The team has identified individuals who can significantly enhance our future earnings. When I mentioned adding a team, the plan is to onboard over twenty-two people in the fourth quarter, with eight already in place and a total of twenty-two expected. Therefore, the fourth quarter will involve continued investment to make 2022 the starting point for breaking even and eventually contributing to profitability. We're enthusiastic about the progress made so far, even though we launched later than expected in late May. Overall, we are very optimistic about the infrastructure development and aim to remain opportunistic in effectively and efficiently expanding this area for the future.

Yeah. That's right.

Appreciate all the colors.

The next question comes from the line of Stephen Scouten from Piper Sandler. You may begin.

Hi, good morning, everyone.

Hey, Stephen.

I wanted to follow up maybe on kind of loan growth trends, I know you noted some of those CRE and C&I payoffs. I'm just kind of curious if you have any data around what those payoffs have been in previous quarters to kind of give us a feel for that on a relative basis, as well as maybe any data on quarter-over-quarter pipeline trends, I know you noted particular strength in your pipeline.

The quarter saw a significant amount of prepayments, exceeding three hundred million dollars. However, the pipeline is quite promising. We experienced numerous closings before the end of the quarter, but some orders were postponed until October and November. We are currently finalizing additional loans that were initially part of the pipeline, indicating a generally strong outlook.

Hey, Stephen, I would just add to that, that one of the things the team here is doing, and I'm proud to say is, we're staying pretty disciplined on our pricing, as well as on structure. We are not increasing LTVs in CRE. We're not matching some of the low pricing that we're seeing competitively. We are looking for folks that want to bank with us and want a relationship with us. I think that there's a lot of competition out there, which is why I think you're seeing some pop in the prepayments. But that doesn't mean, I would say though that our team is not generating significant growth quarter-over-quarter in the pipe. Our feeling is, look, we've got the headwinds of New York, right? And a little bit on this prepayment side, but that's why we're doing the investment we're doing in new personnel. We're going to continue to look to add basically in all our verticals where we can find good people that can help us.

A lot of the work has been focused on restructuring, rightsizing, and transformation as we build the company for future success. The investment we're making in frontline personnel and in select areas aims to enhance our customer service experience, which represents the next steps in our transformation at Amerant.

Got it. Okay. And do you have any data to frame up that kind of three hundred million dollars plus in prepayments. I'm just trying to figure out if that was double what you've seen in previous quarters and that was really the driver of the loan decline or if it was a mix of somewhat elevated prepayments and somewhat lower production levels?

No, it was a mix in general, originating from the commercial real estate and commercial and industrial sectors, but mostly from commercial real estate. Additionally, part of the three hundred million dollars was due to a couple of New York prepayments, which were not intended to be renewed. This also contributed to the decline in production.

Okay. And Jerry, you kind of answered this question, I think to a degree just a second ago. But I'm curious how you guys think about this kind of push pull of investing in the future growth of the franchise, but still trying to hit this kind of sub sixty percent efficiency ratio target you've set out. I guess, my question is really would you guys be fine with maybe missing that target in the near term if there were really good opportunities to hire new talent and invest in the long-term success of the franchise?

Yes, I completely agree. Investing in the long-term value of the franchise is crucial. That being said, we are very focused on our current goals. In the next couple of weeks, you'll have more information about our business transformation and its implications for our efficiency and effectiveness moving forward. We're committed to investing in the right personnel to ensure that we become a higher growth company. Our priority remains on improving our return on assets and return on equity, even if our efficiency might take some time to improve. We've set our efficiency targets for the end of 2022, fully aware that progress will take time. We plan to report gradual improvements each quarter, so you’ll see our progress as we move forward.

Definitely. Definitely. Okay. That's great color. Thank you guys for the time. I appreciate it.

Absolutely. Take care.

Our next question comes from the line of Feddie Strickland from Janney Montgomery. You may begin.

Hey, good morning.

Good morning, Feddie.

I was just curious, it was great to see some of the reduction in classified and special mention. Did the Coffee Trader relationship drive a decent portion of that or was that kind of just a general improvement across the board maybe some other credits?

No, we took a charge in the quarter. We had a specific reserve related to that relationship, which we believe reflects the most likely outcome for us. The issue is that this situation is part of a bank group, and coordinating distribution among everyone is essential. We've previously mentioned a two hundred million dollars exposure, and we have almost one hundred million dollars in cash available. We're all eagerly waiting to see how much of these distributions can be realized in various phases. While we were hopeful that more would come in Q3 and Q4, it seems like it might be delayed until 2022. We decided to take the write-down now on the specific reserve, and we feel confident about our position for receiving payment on that.

Hey, Feddie, those fourteen million dollars include six point five million dollars in specific reserves.

Got it. So that's why I think I remember you discussing that. The improvement in classified and special mention was separate from the Coffee relationship, which you've mentioned you set aside every year, is that correct?

Yes, you got it. Yes.

And you know, Feddie, one of the things that I referenced in my comment was, I think as a team, we're laser focused. This is why I think the comment, when you think about the sale leaseback. This is a the fixed asset investment that we've got here in our corporate headquarters, you sort of look at that, you look at all the non-earning assets that are sitting on the books, we gotta get those numbers driven down back to some of the earlier questions about how do we continue to improve the efficiency ratio. It's all of these little things that are critically important to execute on that are going to add earnings back into the organization going forward. The more we can get deployed to maintain adequate liquidity, but also to get as much possible into earning asset categories, that's critically important for getting to that sixty percent.

Got it. I apologize if you've already discussed this, I was experiencing some technical difficulties. Are you observing any of the same wage inflation issues we've been hearing about, particularly from the larger banks more than the smaller ones? Are you noticing anything in your frontline, back office, or when hiring lenders?

That's a great question. There is a lot of competition in the market for quality talent. This time of year tends to make it more challenging to bring in new people, as many are focused on their current jobs unless they are receiving quarterly bonuses. Consequently, hiring can become more expensive at this time. We are in two of the hottest markets in the country, where the demand for talent is high. The good news for Amerant is that people recognize our streamlined processes. Our business development team can confirm that we are making credit decisions much faster when they align with our policies. Additionally, as a company of our size, we benefit from fewer management layers and oversight compared to larger institutions. We aim to be known for our quick decision-making, which is attractive to potential employees. There are definitely positives, as evidenced by the talented individuals eager to join us. While the competition for talent is fierce, we continue to successfully attract great candidates.

To add to that, I believe cost of living is definitely affecting our area, as you can see from the general behavior of residents. The housing market has been on the rise, while affordability continues to decline in our regions. This is an important observation related to your question.

Got it. Thanks for the color, guys, and appreciate the time.

Sure. Thank you.

Thank you. And I'm not showing any further questions in the queue at this moment.

Okay. Well, thank you everyone for joining our third quarter earnings call. We're very excited to be able to share our progress today and about the bright future ahead for Amerant. Hope you have a great day. Thank you again for your continued support and interest in our organization.

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