Amerant Bancorp Inc. Q1 FY2022 Earnings Call

Thank you, Gigi. Good morning, everyone. And thank you for joining us to review Amerant Bancorp’s first quarter 2022 results. Also on today's call are Jerry Plush, our Chief Executive Officer; and Carlos Lafigliola, our 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 31, 2021 and in other filings with the SEC. You can access these filings on the SEC's website. Amerant has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations, except as required by law. Please also note that the company's press release, earnings presentation and today's call include references to certain adjusted financial measures, also known as non-GAAP financial measures. Exhibit 2 and Appendix 1 of the company's press release and earnings presentation, respectively, contain a reconciliation of each non-GAAP financial measure to its most comparable GAAP financial measure. I will now turn it over to our CEO, Jerry Plush.

Thank you, Laura. Good morning, everyone. And thank you for joining Amerant’s first quarter 2022 earnings call. I'm pleased to be here today to report on our results for the quarter and update everyone on steps taken this quarter as part of our transformation efforts to better position the company for success. We remain committed to continue to execute throughout 2022 to build an even better and stronger version of Amerant. We're also pleased to report that based on the company's first quarter results on April 13, 2022, our Board of Directors approved a $0.09 per share dividend payable on May 31, 2022. The payment of dividends is an essential part of our commitment to provide greater value to our shareholders. It has been one year since I became CEO and first shared our strategic priorities with all of you. During the course of this call, in addition to covering the results of the quarter, we'll provide an update on the progress we have made on our way to fully deliver on those priorities. I'll now provide a brief overview of our performance in the first quarter and then I'll hand it over to Carlos to get into the details. So if you turn to Slide 3, here you'll see a summary of our first quarter highlights. Net income attributable to the company was $16 million and that was down 75% quarter-over-quarter. This decline was primarily driven by the one-time gain on the sale of the headquarters building recorded in the fourth quarter of 2021. The first quarter saw higher average yields, higher balances on loans and lower average balances on customer CDs and broker time deposits, which were replaced by higher average balances and core deposits. Our total gross loans were $5.72 billion, up from the $5.57 billion last quarter even with the headwinds of $253 million in loan prepayments and the sale of $57.3 million from our former New York City loan production office that were classified as available for sale. Total deposits were $5.69 billion, and they were up $16.8 million compared to last quarter. And more importantly, core deposits increased by $150.4 million this quarter compared to the fourth quarter of 2021 as a result of our continued deposits-first focus. We'll now turn to Slide 4. You can see that the company's capital continued to be strong and well in excess of minimum regulatory requirements to be considered well capitalized as of March 31, 2022. During the quarter, we paid out the previously announced cash dividend of $0.09 per share. We also paid $34 million dividend from the bank to the holding company to increase our liquidity position. And after having completed the first buyback authorization, our board approved a new $50 million share repurchase program on January 31st. As of quarter end, a total of $32.7 million has been used under this new authorization. You can see that we've repurchased a total of 1.6 million shares and that our shares outstanding at quarter end totaled 34,350,822. Also in February of 2022, we launched our employee stock repurchase program with over one-third of our team members participating. We're delighted that so many of our team members want to participate in the ownership of the company. We'll turn now to Slide 5 to look at core PPNR. Our core PPNR was $17.9 million, down by 5.5% compared to the $18.9 million reported in the previous quarter. As we've noted before, it's essential to show the net revenue growth of the company, excluding one-time gains or losses, or other non-recurring items in order to show Amerant’s core earnings power. Higher marketing spend this quarter and lower fee income versus fourth quarter were key drivers that impacted 1Q ‘22 results. So let's cover some key actions that took place on Slide 6. So we announced the retirement of two longtime board of directors and the appointment of four new ones, all of whom are in footprint, three in South Florida and one in Houston. We completed a private placement of 30 million of 4.25% fixed to floating rate subordinated notes that are due in 2032. We also reduced headcount by 80 FTEs as part of our agreement with FIS, which resulted in a total of 677 total FTEs as of the end of the first quarter. Of this total, 598 FTEs are part of Amerant Bank and 79 are part of Amerant Mortgage. It's important to highlight this; as of quarter end 58% of our total FTEs are in the business-generating side of the company versus 42% in support functions. We initiated an internal process to reorganize lines of business and to have our focus on commercial and consumer banking done separately to drive performance in the geographies we serve. As a result of this reorganization of our teams, we've streamlined management layers in several areas during the month of April, which will positively impact personnel expenses going forward. We also joined the USDF Consortium; Amerant was the seventh bank to join the national association forum to provide a base source for banks' digital asset and blockchain strategies. We're pleased to announce that we hired a new head of retail banking who will drive a truly sales-focused culture in our branches. Regarding our new Tampa loan production office, we recruited our new market president and other new C&I team members have been identified. We'll have an official announcement on this shortly. We've already closed on a number of CRE and C&I transactions to date totaling $87 million through March 31st and over the next 120 days, we've got a strong CRE and C&I pipeline of over a $100 million with $36 million scheduled to close in early May. We also executed a multiyear agreement for an outsourcing white-label solution to provide equipment financing in all three markets that we serve. We're pleased to announce that we issued our first ESG report, demonstrating our commitment to sustainability and the company's main subsidiary Amerant Bank was named the official hometown bank of the University of Miami athletics, which further leverages local partnerships to support our community while driving brand awareness. We just received OCC approval for a new branch location in University Place in Houston, Texas. This is a significant upgrade over the branch it will replace. We project this office to open in 3Q ‘22. Construction is now underway for our new smaller operation center in Miramar, Florida. We also initiated the common book and field project we've spoken about previously at our market headquarters location in Houston. So let's cover key metrics on Slide 7. Here we've outlined key performance metrics. So in the first quarter, we improved our deposit base. Now with 23% of total deposits being non-interest-bearing deposits. And our operating profitability stayed on track as the margin was 3.18%, up a basis point from last quarter. And please note that 4 basis points of the 3.17% recorded last quarter were from prepayment fees. The allowance declined 1% of total loans reflective of charge-offs and the reversal of 10 million in the quarter based on credit quality trends. Our ALLL remains in excess of total nonperforming loans. We again show the three core metrics of ROA, ROE and operating efficiency, excluding the one-time non-recurring items in the footnotes to this slide to more clearly show the underlying performance for the quarter. We'll now turn the Slide 8, which focuses solely on Amerant Mortgage. In just the first quarter of 2022, we have received a total of 292 applications. We closed 157 loans for a total of $93.6 million. The current pipeline shows over $94 million in process or 166 applications. Amerant Mortgage solidified its wholesale team during the quarter and also launched its construction loan program to help drive future revenues. It's important to mention that as of March 31, 2022, the company has increased its ownership interest from 51% to 57.4% in order to meet Fannie Mae capital requirements. So with all that said, I'll turn things over to Carlos, who'll walk through our results for the quarter in more detail.

Thank you, Jerry, and good morning, everyone. Turning to Slide 9, I'll begin by discussing our investment portfolio. Our first quarter investment securities balance was $1.3 billion, stable compared to both the previous quarter and first quarter 2021. When compared to the prior year, the duration of investment portfolio has extended to four years due to lower prepayment fees recorded and expected in our mortgage-backed securities portfolio in light of rising interest rates. The floating portion of our investment portfolio increased to 14% compared to 11% in the previous period. We continue to focus our investment strategy on assets with lower duration and better repricing profile in anticipation of interest rate hikes this year. I would like to take a minute to discuss the impact of interest rate hikes on the market value of debt securities available for sale. As of the end of March, the valuation of securities under AFS designation have dropped almost $40 million after tax as a result of more than 180 basis points increase in the long-term interest rate recorded in the last quarter. Loan portfolio highlights in Slide 10 will show a total loan growth of $5.7 billion in total, up 3% compared to the last quarter. The increase in total loans was primarily due to higher loan balances, which resulted from an increase in loan production complemented by indirect loan purchases. Despite having received $253 million in prepayments, which came primarily from CRE and C&I loans and having sold $57 million in the New York portfolio, this net growth represents a great accomplishment for all teams involved in the loan origination efforts. Consumer loans as of the end of March were $486 million, an increase of $62 million or 15% quarter-over-quarter. Purchases under higher yield in indirect consumer loans continue to represent a tactical move to increase yields. Loans held for sale totaled $86 million as of the end of March, which included $69 million in loans from the New York LPO and $17 million in the residential mortgage loans in connection with Amerant Mortgage activities. Going to Slide 11, we provide an update on the New York loan portfolio. Total loans outstanding from our former LPO have declined to $373 million in the first quarter of 2022 from $491 million in the fourth quarter of 2021. During the first quarter, we completed the sale of $57 million in loans held for sale at par. We expected this portfolio to continue to trend down as several prepayments are expected to occur during the rest of the year. Going to Slide 12, we will take a closer look at the credit quality. For the first quarter, our credit quality remained sound and reserve coverage is strong. The allowance for loan losses at the end of this quarter was $56 million, almost 20% down from the $70 million at the close of the previous quarter. We released $10 million from the allowance for loan losses compared to a release of $6.5 million in the previous quarter. The release was primarily driven by improved macroeconomic conditions, loan upgrades and decreases in our non-performing and special mention loans. These were partially offset by additional reserve requirements and charge-off for long growth and loans downgraded to non-performing during the period. During the first quarter of 2022, the loan loss provision associated with the COVID-19 pandemic was released. However, new reserves of almost $5 million were generated to account for the new risks associated with potential macroeconomic deterioration related to inflationary pressures, supply chain disruptions, among other factors. Net charge-offs for the quarter were $3.8 million compared to $7 million in the fourth quarter. Charge-offs at the end of the year were primarily driven by $3.3 million into commercial loans, $1 million in consumer loans, offset by $0.5 million in recoveries. Non-performing assets totaled $56.7 million at the end of the first quarter of 2022, a decrease of $2.8 million or 4.7% compared to the fourth quarter and a decrease of $33 million or 37% compared to the first quarter of 2021. Our non-performing loans declined 0.82% or $47 million compared to 0.89% or $49.8 million last quarter. Most recently, non-performing loans further decreased to $41 million as the sale of $6 million CRE loan was completed at par during April. The ratio of non-performing assets to total assets was 73 basis points, down 5 basis points from the fourth quarter of 2021 and down 43 basis points from the first quarter of 2021. In the first quarter of 2022, the coverage ratio of loan loss reserve to non-performing loans closed at 1.19 times, down from 1.4 times at the end of the last quarter and down from the 1.24 times at the close of the first quarter last year. Going to Slide 13, we show some details on the deposits. Total deposits at the end of the first quarter were $5.7 billion, up $61 million from the previous quarter. Domestic deposits, which account for 56% of the deposits totaled $3.2 billion, up $43 million or 1.4% compared to the previous quarter. Foreign deposits, which account for 44% of the deposit totaled $2.5 billion and they were slightly up by $18 million over the quarter. Though it was just small in magnitude, this change is still reflective of our efforts to increase share of wallet from our international customers. Core deposits, which consist of total deposits excluding all the time deposits, were $4.4 billion as of the end of the first quarter, an increase of $150 million or 3.5% compared to the previous quarter. This amount includes interest-bearing deposits of $1.5 billion, savings and money market deposits of $1.6 billion and non-interest-bearing deposits went to $1.3 billion compared to the $1.2 billion in the previous quarter, which reflects our execution to prioritize this type of funding. Offsetting the increase in deposits was a reduction of $90 million or 6.7% in time deposits. Customer CDs compared to the prior quarter decreased $97 million or almost 9.3% as the company continues to focus on increasing core deposits and emphasizing multi-product relationships versus single product high-cost CDs. Broker time deposits increased a little bit to $8 million or 2.7% compared to the previous quarter as we took the opportunity to extend duration on this funding source and lock in lower cost given the expectation of higher interest rates in the upcoming quarters. Going to the net interest income, Slide 14, we will show the performance of our net interest income and financial margin. Net interest income for the first quarter was $55.6 million almost unchanged quarter-over-quarter and up 17% year-over-year. In light of the rising rate environment, we're actively managing the duration of our liabilities. During the first quarter of 2022, we repaid $180 million in short-term advances from the FHLB and borrowed $350 million in long-term advance and extended duration of this portfolio and fixed them at a lower cost than previously borrowed funds. The timing of the execution allows us to effectively lower attractive long-term rates at a discount of almost 100 basis points versus current market rates. In terms of our deposits, we have adjusted only certain large commercial relationships given the rate sensitivity. However, most of the rates of the transaction deposits remain unchanged for the quarter. Understanding the behavior that each product will show, we're getting a blended beta of 0.28, which will help us to navigate the new interest rate environment and reflect the value of our deposit composition. Moving to net interest margin. Q1 NIM was 3.18%, slightly up 1 basis point quarter-over-quarter and up 52 basis points year-over-year. The change in net interest income and net interest margin was primarily driven by the increases in the yield of our loan portfolio, which is now 4.16%, an increase of 6 basis points versus fourth quarter. Though the change in NIM was not large, it reflects our efforts on the asset side while managing to keep cost of funds down while hedging against interest rate increases. Going to Slide 15, we provide a more detailed analysis on interest rate sensitivity. You will notice that we have provided additional color compared to the previous quarter. As you can see, our balance sheet continues to be asset-sensitive with half of our loans either floating or maturing within one year. Taking into consideration the changes in the composition of liabilities, our continuous production in floating rate loans and new purchases in floating rate securities, our net sensitivity profile has improved versus last quarter. We're now showing a potential increase of approximately 8% in net interest income versus 4.3% last quarter, under a plus 100 basis points scenario. We also show an improved profile in the plus 200 basis points scenario. We will continue to actively manage our balance sheet to best position our bank for the expected rise in interest rates. Going to Slide 16, we show a detail on the non-interest income. Non-interest income in the first quarter was $14 million, down $63 million or 82% from the $77 million we recorded in the fourth quarter. The decrease during the first quarter was driven by the absence of the $62 million gain from the sale of our company headquarters recorded in the fourth quarter 2021. Net losses on the early extinguishment of FHLB advances were almost $700,000, lower income from brokerage and advisory activities, net and realized losses on the valuation of the derivatives and decrease in mortgage banking income. Of note, we recorded high derivative client income this quarter as well as net securities gains, which partially offset the decrease in non-interest income quarter-over-quarter. Amerant’s assets under management totaled $2.1 billion as of the end of the first quarter, down $92 million or 4.1% from the end of the fourth quarter, which was primarily driven by lower market valuations. The decrease was offset by an increase of $12 million in net new assets as we continue to execute our relationship-focused strategy and increase share of wallet. Turning to slide 17, first quarter non-interest expenses was $61 million, up $5.7 million or 10.4% from the fourth quarter and up $17.2 million year-over-year. Note that we consider $6.6 million of our non-interest expenses as non-recurring items. Excluding these items, core non-interest expenses was $54.2 million in the first quarter of 2022. The quarter-over-quarter increase was primarily due to higher non-interest expenses primarily in connection with the estimated contract terminations resulting from the company's transition to a new technology provider, though this was partially offset via savings for an FTE reduction; evaluation expense recorded in the change in the fair value of new year loans available for sale; rent expenses related to the leasing of the company's headquarters building, though this mostly offset by the income received from the sub-leasing of the property; increasing marketing expenses in connection with the company's efforts to increase brand awareness; severance expenses in connection with restructuring of the business line; and last, we had increased commission bonus payments primarily related to residential mortgage loan origination. Now the increase in non-interest expenses was partially offset by lower salaries and variable compensation costs, which were driven by a lower number of FTEs in the first quarter, as we mentioned before, resulting from the agreement with FIS; decreasing legal fees, primarily due to the absence of additional expenses incurred in the fourth quarter of 2021 related to the cleanup merger and other special transactions; and lower depreciation and amortization expenses resulting from the sale of the company's headquarters. The efficiency ratio was 87.3% in the first quarter of 2022 compared to 41.4% in the previous quarter and 70.67% in the first quarter last year. The quarter-over-quarter increase in the efficiency ratio was primarily driven by the absence of the gain of the company's headquarters building recorded in the fourth quarter. The year-over-year increase in the efficiency ratio was primarily driven due to higher non-interest expenses. Core efficiency ratio was at 76.4 in the first quarter of 2022 compared to 75 in the fourth quarter of 2021 and 73.4 last year. The quarter-over-quarter increase was primarily driven by higher rent expenses, advertising expenses and commissions paid as previously described. Now I will turn back to Jerry to talk about Amerant's progress on near and long-term initiatives.

Thank you, Carlos. Let me share what has been done in connection with each of the key initiatives during the first quarter, as summarized on Slide 18. So starting with deposits first. Account opening campaigns and different marketing efforts were launched during the quarter to drive and increase digital and branch traffic, which resulted in increased consumer account acquisition. Our treasury management and private banking teams' efforts have resulted in higher deposit levels as evidenced this quarter. As for superior customer experience, our FIS, Numerated, Marstone, Alloy, and ClickSWITCH implementations are all underway. We are now actively marketing small business lending and Amerant Smart Investing. Regarding rationalizing existing and evaluating new lines of business, as I previously mentioned, business organization changes were announced. We split the organization on the business side between the consumer bank and the commercial bank. This was essential as we need to laser focus on executing growth strategies on both sides of the bank. Our branch rationalization continues. We were just approved by the OCC for a new, more highly visible office location at University Place in Houston, which will replace one we'll be leaving later this year, and planning and permitting is underway on our new Downtown Miami location. With our new head of retail banking now on board, we will be evaluating opportunities as well as all current locations. The consumer shift to digital certainly is weighing in on the need for strategically located centers versus density. Regarding the Tampa loan production office, as I mentioned, we recruited our new market president and other new C&I team members have been identified, so we'll be officially announcing all of this soon. We've already closed on a number of CRE and C&I transactions totaling $87 million. We've got a strong CRE and C&I pipeline of over $100 million, with $35 million scheduled to close in early May. We've also begun to onboard depository relationships as well. Other lines of business like equipment are now underway. We announced our new multi-year agreement and we'll be adding sales personnel in each of the three markets we served. Regarding operational efficiency, the FIS rebatch took place, ADFTE were moved as of January 1, and other HR efficiencies were implemented during the quarter. Regarding brand awareness, we continue leveraging local partnerships and impactful campaigns, including our partnership with the NHL's best Florida Panthers through our out-of-home advertising efforts, our social media efforts and our public relations efforts. Recently, we announced a broad-based strategic partnership with the University of Miami, making Amerant Bank the official hometown partner of the Miami Hurricanes. This partnership provides Amerant with a robust presence across all University of Miami athletics programs. And finally, regarding attracting, retaining, developing, and rewarding our team members, we launched an enhanced internship program. We developed a new executive leadership program and we launched our employee stock purchase plan. We're also pleased to announce the issuance of our first ESG report, which you can find in the Investor Relations section of our website. We've also begun implementing our diversity inclusion program to improve and maintain an authentic inclusive culture, which is an essential part of our ESG efforts. So I just have a few closing remarks before we go to Q&A. A year ago, we launched our transformation journey with clear priorities. And while we've accomplished a lot since then, there is still more to do. But our commitment remains unchanged. We need to continue to grow while doing all of this. They are not mutually exclusive. Growth and continued focus on transformation are key. So if there is one key takeaway from Q1 ‘22 results, it is that we in fact did just that, we grew. And we added capabilities, and there were more strong additions to our team, but we know we need to do it again every quarter. I just want to openly acknowledge we know the task ahead, and we are all very focused on getting there. I want to, again, thank my teammates for all that they do to make Amerant the up-and-coming bank of choice in the markets we serve. We are working hard to build something very special here, and we appreciate the support and confidence that our board, our investors, and our customers have in us while we do all of this. So with that, I'll stop. And Carlos and I will look to answer any questions you have. Gigi, please open the line for Q&A.

Our first question comes from Michael Rose at Raymond James.

So the loan growth this quarter, obviously really, really good. I think last quarter you talked about growth in the single-digit range. But clearly, if I annualize that and I take out the New York City wind down and the consumer loans, you're tracking a lot higher than that. So can we just get any updates on loan growth expectations? Because it does seem like you have a lot of tailwinds at your back.

We're pleased, you know I've been saying over the last several quarters, we continue to add talented members on the business development side to drive growth. And I think you're seeing the fruition of having not only the folks that are on board but folks that we're chatting with and hoping to add to the team. So our expectations are clearly going to be for higher than what we had previously projected. I think we'll be certainly more in the double-digit range on a go-forward basis.

What’s interesting to see Michael over the quarter the increase in the C&I, which accounted for almost $130 million that was accretive to the yield and the overall performance of the loan portfolio. CRE was also a portfolio that defended very well, because we had significant prepayments on the New York across the sale and other prepayments also in Florida. So the creation of new CRE was also very good. So yes, and definitely we're starting to see a very good pipeline and very vibrant amount of transactions.

So like others, you had AOCI hit this quarter brought down tangible capital. You're still pretty active with buybacks. And I don't think you transferred any to HTM. Can we just get kind of the rationale there, and then does that lower kind of TCE give you any pause for share purchases? Stock is still pretty attractive here. Just wanted to get some thoughts on capital and the outlook?

So in terms of the OCI, there was definitely a shock that was very rapidly absorbed during the quarter. If we compare quarter-over-quarter, I believe it was probably in the 120 basis points in the five-year rate, which definitely impacted the valuation. Nevertheless, all is related to interest rate shock for the most part. We believe that long-term rates may have a little bit more of an extra room for increases, but we believe that most of the shock was absorbed already in the long-term section of the yield curve. And speaking about the repurchases, I guess one of the topics this quarter will be that we'll be very tactical on our repurchase program. So I guess one of the goals is to preserve liquidity at the holding level. We just issued the $30 million subordinate debt, which boosted liquidity, and another $34 million were paid from the bank to the holding company. So I guess at this point we'll be very selective when we wanted to get in and buying stocks.

Michael, I think Carlos is absolutely correct. We have clearly been very aggressive with our buybacks, which I believe is a positive approach. We must be careful and strategic regarding the remaining authorization as we decide on our opportunities. As always, our decisions will depend on the stock's performance and whether we continue to see value in repurchasing.

Maybe just one final question for me. So Jerry, it's been a pretty active year for you since you stepped into the role. Where do you feel the company stands in terms of the transformation effort? Are we still at the beginning, in the middle, or nearing the end? Obviously, there are many moving parts as to what you are doing. I'm just curious to get a sense of your perspective on our current position. Also, regarding the targets you set for ROA and ROE, do you expect to adjust those at some point this year?

I believe we are in a stage where we are making significant progress. At the outset, we established our goals for the end of 2022, and we are very close to achieving many of them. For instance, our targets regarding deposits and our strategy to prioritize organic deposits over brokered ones are starting to reflect positively in the numbers. The same applies to our loan activities. The reorganization has given us a clear focus on each of our business lines, and the leaders are now fully supported in pursuing growth within their segments. We are currently enhancing our equipment finance team and strengthening our CRE capabilities. Our expectations for growth in both loans and deposits are very high, which aligns with our self-expectations. That is why, in my closing remarks, I emphasized the necessity for us to demonstrate consistent, strong growth each quarter while also completing our transformation initiatives. Achieving this will involve driving revenue and maintaining tight control on expenses. We are fully committed to expanding our personnel dedicated to business growth, and our marketing expenditure has significantly increased. We view this as crucial for our organization, as enhancing our brand awareness is a key factor. This includes our marketing efforts beyond traditional advertising, such as public relations and partnerships. Overall, we are progressing through the transformation, and the focus is gradually shifting towards driving top-line growth.

Our next question comes from the line of Stephen Scouten from Piper Sandler.

I would like to follow up on the line of questioning from Michael regarding the need to possibly revise any of our targets. I understand, Jerry, that everyone is focused and aware of what needs to be done. However, we are still quite a distance from achieving that sub-60% target. I'm curious if we should consider adjusting that target, if we should exclude mortgages from our considerations, or if there are any factors we might not be aware of yet that could help us reach that goal.

We're still committed to driving for the 60% for the fourth quarter is what we said initially. It's what we're still committed to driving to do. The combination of how to get there is we're not going to cost-cut our way to greatness. We are growing this company. We're investing, and I'm looking at this as things we need to do to build a better organization that's going to be very sustainable, consistent, repeatable about our ability to grow quarter in and quarter out. And so that's why I said in my response to Michael is that I think we're in the middle innings. But the biggest issue for us right now is this reorganization and how we are pushing both our commercial and consumer efforts. All along, we knew we had to grow the top line. And that's the result you can see it coming through in the numbers. And I think as we look ahead to what we project to be NIM expansion, NII growth, growth on the fee side, they're going to be major contributors to getting to what we have to achieve in the fourth quarter.

And maybe if I think about mortgage, in particular, obviously, with rates moving like they have, I'm sure that business hasn't completely maybe panned out as you would have hoped. But in the near term, what's the timeline for potential breakeven in that business, I guess moving forward from here?

No. I think it's fair to say we were hoping for stronger contributions from the mortgage division. We made an additional capital injection, so we are not backing down from our expectations for this team. They are highly talented, and we are committed to this area. The mortgage team is a significant differentiator, especially alongside our private banking efforts. From a technology and process standpoint, everything is in place, and now it's about driving the top line. There is still strong demand for financing new home purchases. However, the dynamics of the mortgage market have changed; the refinancing boom is over compared to 90 or 120 days ago. We view this business as a contributor to our other products and services. We are focusing on adding key personnel in the markets we serve. It's clear we want to be transparent about the path to breakeven, and I believe we will be much closer to that in the second quarter due to the efforts of the team and the increasing sales volumes.

I want to add to Jerry's answer that the mortgage company has enhanced the bank's total assets. The opportunities for cross-selling with our private banking teams and current customers indicate that the residential loans from the mortgage company's origination are nearing $100 million. We consider this interest income to be a strong asset class due to its favorable yield. Additionally, the duration isn't excessively long since there is a private banking element involved. This aspect is also beneficial, even if it's not reflected in the slides showcasing the mortgage company's performance, as it gets consolidated with our financial margin. However, there is a contribution that isn't specifically highlighted due to this consolidation. The business is still in development and, as Jerry stated, it serves as a valuable complement. We believe that the second quarter will be crucial for them to reach breakeven.

And Stephen, just to be really clear, we're keenly aware that this is a higher efficiency ratio business, very much like bankers looking across their lines of business. Two of the businesses that are typically going to be higher efficiency ratio businesses are the mortgage banking, just in general and/or wealth. And so we're keenly aware that we've got to outperform to help offset that as well. And so certainly front and center in our minds.

And maybe just last one for me. The move in asset sensitivity you guys laid out in Slide 16, very meaningful and great to see, obviously, in this rate environment. And I know you noted the $350 million longer-term FHLB borrowings that help some of that. What other drivers were there within that change? Was there any change to your assumptions around deposit betas? And then how much of that securities book is variable that you mentioned?

So in the case of the FHLB, that was probably one of the drivers of the financial margin being stable throughout the quarter because we increased the weighted average cost of financial liabilities because of the FHLB being longer. But they are in the three to five years duration, those new additions that we did on the $350 million. And as I mentioned in the comments, those were taken 100 basis points ago. So they were very good in terms of creating the sensitivity and the low cost of funds, given the prospective environment. So that is on that end. In the case of the beta, that's the beta that we started to see based on the moves that we would like to produce in our deposit cost. Remember that the presence of $2 billion or $2.4 billion in the case of the total international deposit portfolio helps us to delay some of the increases in interest rates. We believe that banks would allow to decompress financial margin, at least in Q2, and that's exactly what we have been doing. So as you can see, we grew deposits even though we didn't increase significantly our rates with just a specific large relationships that show some interest rate sensitivity, the ones that we transmitted some of the change. But 0.28, as I mentioned in my notes, is very good based on the deposit composition. So we feel that, that should keep throughout the second quarter, and that would allow for margin expansion given the upcoming or expected interest rate increases. In the case of the investment portfolio, about 15% is floating. We keep adding some floating rate exposure, which will expand nicely with increases in SWAP and LIBOR rates.

Our next question comes from the line of Michael Young from Truist Securities.

I wanted to follow up kind of on the asset sensitivity discussion. Jerry heard your comments, very good to hear about the loan growth upside that's potentially on the come here, but also the loan-to-deposit ratio is kind of above 100% right now. So moving into just a higher funding rate environment. Kind of what's the outlook there? And could we have some, I guess, even though you project really high asset sensitivity, maybe some of that gets given back just to fund growth?

I think it's incredibly important to note that all of our different lines of business are focused on generating non-interest bearing deposit relationships that we're looking to be the bank of choice with our customers. And so yes, in certain cases, customers are coming to us and opening deposit relationships at money market rates, for example. But the vast majority, we are looking for them to be us as their bank. So that's their receipts and disbursements account. And so I think that's why it's really important to note that the growth is broad-based. It's not just coming out of consumer. It's coming out of business banking. It's coming out of private banking. We actually see opportunities, frankly, that if we want to continue to expand on the international side, there's more opportunity there. So I would say that, again, remember, we're a deposits-first organization. Our business development officers, our treasury management team, all know that it's critical for us to generate low-cost funding to continue to see not only the organic loan growth but also the NIM expansion that we'd expect as we go throughout the year.

No, that's exactly the case. So just to give you perspective, Mike, the increase in the deposit relationship is great. Just to give you a quick reference, the private banking team that we added last year has brought over more than $50 million in deposit relationships in multiple accounts. So that angle of being a relationship bank is definitely paying off, and it's paying off in the type of accounts that we wanted. So either non-interest-bearing accounts or low cost checking accounts that are incredibly accretive for the cost of funds and the NIM expansion. So as you can see, we have completely changed the deposit composition, being particularly high-cost, time deposit-oriented financial institutions. Last year, we dropped about $500 million in time deposits, now an extra $97 million. So you can see the progression of the change in the composition of the deposit towards a better mix that would allow us to expand financial margins.

So just as a follow-up. So at a 100% loan-to-deposit ratio today, is that kind of where we should expect you guys to remain with just funding kind of matching growth going forward?

We've stated a goal that we'd like to be in that 95% to 100% range. And I think trying to maintain us somewhere in that range. The ultimate goal would be to certainly be closer to 95% than 100%, but we're comfortable with being at the higher side of that.

And then last one for me, just on expenses. I think the core expense run rate this quarter is about $54 million. I'm not sure if you had the full headcount reduction at the beginning or kind of year-end, so I'm not sure how much of that's reflected in Q1. And then Jerry, you mentioned some of the reorganization and some of the benefits coming through, it sounds like maybe in Q2. So maybe just a little bit of a perspective on kind of how expenses are going to trend through the year?

So we haven't reflected all the organizational changes in our non-interest expenses. So there would be an impact on the FTEs and the business reorganization that we will absorb in Q2, either from some of the bonus accruals or the salaries being paid. So there will be reductions recorded in Q2. So run rate for our total cost or non-interest expenses will be probably in the $52 million to $53 million now. So $54 million core that we reported this quarter is considerably higher compared with the run rate that we will face from now on.

Our next question comes from the line of Samuel Varga from Stephens, Inc.

I wanted to ask a couple of questions on the deposit side quick. We noticed just a very slight pickup in the money market costs, and so I wanted to ask what drove that. And just more broadly, have you had any sort of deposit or rate changes on the pricing side so far?

So there have been some specific adjustments done to large relationships that tend to be tied to fed funds. Those so far have been the changes that we have produced. They are not widely generated for massively to all customers. This is just specific adjustments that we did to certain large relationships, but there is no massive increase across the board.

And then my final question is just around the consumer indirect portfolio. I wanted to get some detail, if you could provide some color on the breakdown of what part of that portfolio is student loans versus some other loans? And maybe if you could just provide some color on the credit expectations tied to that portfolio?

Just to clarify, nothing in student lending, it is all debt consolidation. So more of people financing debt out of a credit card into an amortizing loan. And so I think the key to think about is there is it's just a continuation of the programs that we've had, particularly we've highlighted with SoFi in the past. We're just continuing on that path. It's important to note that we're in the process of developing our own opportunities in that marketplace, which could be very advantageous for us in the second half of the year. But typically, that is nothing more than, I'll call it, debt consolidation loan.

When you look closely at the details, there is debt consolidation and some improvement. Regarding your question about expected losses, we value the underwriting process based on free cash flow, as it helps us understand the performance of those originations. So far, losses have been aligned with or even below expectations for effective yield, including those losses close to 7%. Overall, it's been a positive journey, and we are pleased with the quality being presented.

If I could just sneak one last one in. Back on the FHLB borrowings, the new ones that you put on. Could you provide some color on the yields that you get on that?

They were approximately in the range of 1.5% to 1.75%. They were definitely very beneficial compared to the current market. The blended average yield for the entire portfolio was 1.10%, including those items. There will be further adjustments as we move through the quarter, as we aimed to secure long-term funding as much as possible. The quarter concluded with excess liquidity, and our plan is to not stay in that position but to additionally restructure the FHLB advances as well.

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Mr. Plush for closing remarks.

Thank you, Gigi. First of all, I just want to say thank you to everyone for joining the call today. We greatly appreciate your interest in Amerant, and we hope that all of you have a great day. Take care.

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