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Amerant Bancorp (NASDAQ:AMTB)
Q3 2020 Earnings Call
Oct 29, 2020, 3:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Amerant Third Quarter 2020 Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Laura Rossi, Investor Relations Officer at Amerant Banc. Thank you.

Laura Rossi -- Head of Investor Relations

Thank you, operator. Good morning to everyone on the call, and thank you for joining us to review Amerant Bancorp's Third Quarter 2020 Results. With me this morning are Millar Wilson, Chief Executive Officer; Carlos Iafigliola, Chief Financial Officer; Miguel Palacios, Chief Business Officer; and Thiel Fischer, Credit Risk Manager. Before we begin, note that the company's press release, comments made on today's call and responses to your questions contain forward-looking statements. The company'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, 2019, and quarterly reports on Form 10-Q for the quarters ended March 31, 2020, and June 30, 2020, as well as to subsequent filings with the SEC. You can access these filings on the SEC's website.

Please note that 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, expect as required by law -- except as required by law. You should 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. Please refer to Appendix one of the company's earnings presentation for a reconciliation of each non-GAAP financial measure to its most comparable GAAP financial measure.

I will now turn the call over to Mr. Wilson.

Millar Wilson -- Vice-Chairman Chief Executive Officer

Good morning, and thank you for joining Amerant's Third Quarter 2020 Earnings Call. As I did in the past few quarters, I will begin by discussing how Amerant continues to navigate the current environment, including an update around initiatives to put in place to mitigate the impact of the COVID-19 pandemic and our third quarter highlights. Carlos will then review our financial performance for the quarter in further detail. After our prepared remarks, Carlos, Miguel, Thiel and I will discuss questions. On slide three. We continue to support our employees, customers and communities throughout the third quarter as we executed against our business continuity plan. On the operational side, we began to roll out a new phase of reintroducing an increased number of employees back to the office, excluding those who face challenges related to the pandemic that would prevent them from returning.

To support these efforts, we have ramped up safety protocols, including implementing staggered schedules in an abundance of caution to protect the health and safety of our employees. Amerant banking centers continue to operate on a regular schedule under strict federal, state and local government safety guidelines. Additionally, we continued many of the liquidity and risk management practices implemented earlier this year as a result of the pandemic, including proactive, careful and frequent credit quality assessment of all portfolios. We particularly focused on loans in the most vulnerable industries that have been hardest hit by the pandemic and tightened our underwriting practices to enhance risk mitigation against the challenging market backdrop. While we continued waiving fees in the third quarter with the exception of late payment fees on loans, we continue to offer loan payment relief options to customers. As of the close of the third quarter, Amerant has only received a limited number of requests for additional payment extensions, which our team is carefully evaluating.

Notably, loans under deferral or -- and/or forbearance decreased significantly to $71.8 million or just 1.2% of total loans as of October 23 from $654.4 million at the end of the second quarter and $1.1 billion at the beginning of the program in April. Most importantly, 99.9% of loans out of forbearance have resumed regular payments, and 94% of the loans that remain under deferral and/or forbearance are backed by real estate collateral. Impressively, Amerant no longer has any deferrals or forbearance on our hotel loan portfolio, which is one of the most impacted industries by this pandemic. This represents a significant improvement to the outlook of our credit quality for future quarters. As we head into the fourth quarter, we will continue to focus on monitoring the performance of all segments of the loan portfolio while providing relief to customers in our communities. We also plan to leverage our small -- our new small business relationships as a result of our PPP participation to execute on cross-selling opportunities and drive profitability.

Please turn to our third quarter highlights on slide four. I would like to start off by discussing the third section on the slide, credit quality because I would like to emphasize our success in managing this aspect of our business despite the current macroeconomic environment. During the quarter, we continued to assess for forbearance status and general credit conditions on a daily basis for the entirety of our portfolio, closely examining loans in vulnerable industries as well as the COVID-19 pandemic. Our efforts were fruitful. In the third quarter, our allowance for loan losses was 1.97%, down from 2.04% in the second quarter, primarily driven by the partial charge-off of the loan to Miami-based U.S. coffee trader, which we refer to as the Coffee Trader, mentioned in our two most recent earnings calls. Additionally, we recorded a provision for loan losses of $18 million, which included $5.8 million related to the Coffee Trader. This compares to the $48.6 million provision in the second quarter.

Equally as important, our ratio of allowance to nonperforming loans decreased to 1.4 times in the third quarter from 1.5 times in the third -- in the second quarter. Moving to other highlights. In the third quarter, we recorded net income of $1.7 million compared to a net loss of $15.3 million in the second quarter. I would also note that our noninterest income increased by 2.7% compared to the second quarter, driven by gains on debt security sales. At the same time, our noninterest expenses increased 23.8% quarter-over-quarter, largely due to higher salaries and employee benefit expenses, which Carlos will explain in more detail. Regarding our balance sheet, total loans were $5.8 billion $5.9 billion, up slightly quarter-over-quarter, mainly driven by solid consumer appetite and increased demand for real estate loans. Total deposits were $5.9 billion, down 2.4% from $6.0 billion in the previous quarter, mainly driven by a reduction of brokered and customer CDs, which declined $101.2 million or 17.2% and $78.9 million or 4.3%, respectively, during the third quarter.

These declines are due to our continued focus on increasing lower cost sources of funds and aggressively lowering CD rates. In the quarter, our cash position remained strong, maintaining a substantial borrowing capacity with the Federal Home Loan Bank and an increase in a large investment securities portfolio that could be used as collateral for borrowings. Turning to slide five. As I mentioned before, in the quarter, we had net income of $1.7 million compared to a net loss of $15.3 million in the second quarter, primarily driven to lower provision for loan losses in the third quarter, offset by higher noninterest expenses and lower net interest income. Our return on assets was 0.08% or 0.16% on an as-adjusted basis, and our earnings per share was $0.04 or $0.08 as an on adjusted basis.

Stockholders' equity was $829.5 million as of September 30, 2020, decreasing by $0.7 million or 0.1% from the prior quarter, mainly due to the lower net unrealized gains on debt securities available for sale, driven by the sale of debt securities in the quarter, which was partially offset by net income recorded in the same period. Before I let Carlos take you through the quarter in more detail, I want to note that following the close of the third quarter, we announced the voluntary early retirement program and an involuntary service severance plan to better align our operating structure and resources with our business environment. Both plans are to be completed by year-end and result in meaningful future cost savings.

I will now hand the call over to Carlos.

Carlos Iafigliola -- Executive Vice-President Chief Financial Officer

Thank you, Millar, and good morning, everyone. Turning to slide number six. I will first discuss our investment portfolio. Our third quarter investment securities balance was $1.4 billion, down from the $1.6 billion reported last quarter and year-over-year. As of the end of the third quarter, floating rate investments represented 13% of our portfolio, in line with the 13.6% in the year ago period. Similarly to the last quarter, we continue to purchase higher-yielding corporate securities, particularly financial institutions subordinated debt. Notably, in the third quarter, corporate debt securities comprised 24% of the available-for-sale portfolio, up from the 16% year-over-year. In addition, this quarter, we realized a net gain of $8.6 million on the sale of debt securities. Turning to slide number seven. We provide an overview of our loan portfolio. At the end of the third quarter, total loans were $5.9 billion, slightly up by $52 million or 0.9% compared to the end of the second quarter.

The decline in economic activity and more stringent credit underwriting standards associated with the pandemic continue to impact our loan production. That said, we saw strong consumer loan activity, which this asset class increased by $59 million or 45% quarter-over-quarter, primarily driven by our participation in indirect lending. We have also seen consumers taking advantage of low interest rate environment via home equity lines of credit. Additionally, real estate loans increased $43 million or 1% quarter-over-quarter, mainly used land development and construction multifamily residential loans. Turning to slide eight. I would like to provide some color on Amerant's credit quality, which Millar highlighted before. Carefully managing our credit quality continues to be a top priority, particularly in the current macroeconomic environment. And in the third quarter, our efforts were successful.

First, our allowance for loan losses reached $117 million at the close of the third quarter compared to $120 million at the end of the second quarter. In the third quarter, we recorded a provision for loan losses of $18 million, the lowest recorded in any quarter of 2020, down 63% compared to the second quarter. This was largely driven by a significant decline of COVID-19 reserve requirements and the lower reserve requirement on the Coffee Trader. Also, during the quarter, we charged off $19.3 million related to the Coffee Trader, which, as we noted last quarter, unexpectedly announced its liquidation plans. Based on the information obtained during the third quarter, we increased Amerant specific reserves for these loans by an additional $5.8 million. As of September 30, Amerant loan loss reserve for this specific Coffee Trader was $6.5 million compared to the $20 million as of the end of the second quarter. We continue to monitor the liquidation process very closely.

Nonperforming assets increased $9.2 million quarter-over-quarter and $54 million compared to the year ago period, totaling $86.5 million at the end of the third quarter of 2020. The ratio of nonperforming assets to total assets was 108 basis points, up 13 basis points from the second quarter and up 66 basis points year-over-year. As we said, while forecasting the impact of the pandemic on our credit quality is challenging, we're being proactive and diligent in monitoring the situation. We benefit from these efforts in the third quarter with sound credit quality and strong reserve coverage and will continue to do so moving forward. Turning to slide number nine. You can see that our loan yield decreased 13 basis points compared to the second quarter. This was largely due to the increase in the nonperforming loans and lower market rates on variable rate loans. Our investment yield also declined largely due to repricing of floating securities, prepayment acceleration and reinvestment at lower market rates.

We partially offset this impact by purchasing higher-yielding corporate bonds, mostly financial institutions sub debt. Moving to slide number 10. Total deposits at the end of the third quarter were $5.9 billion, down 2.4% quarter-over-quarter. This decrease was primarily driven by a 7.4% combined reduction in broker and customer time deposits. This decline was aligned with our strategy to improve profitability across our businesses. In the third quarter, we continue to target lower cost funding by aggressively lowering our CD rates and repricing relationship money market deposits. As a result, our cost of interest-bearing deposits was down 15 basis points in the third quarter of 2020 compared to the second quarter. Additionally, we have observed an increase in the utilization on deposits of PPP loans. We expect a similar trend in the upcoming quarters as the small business customers continue using these funds.

Foreign deposits decreased $25 million or 0.9% compared to the prior quarter, representing an annualized decay of 3.8% compared to an annualized growth of 0.5% during the second quarter of 2020. In the third quarter, Amerant saw an increase in the economic activity in Venezuela, our largest international deposit base as the local government relax COVID-related restrictions. So while deposits were still modestly down quarter-over-quarter, I'm encouraged by the slower pace of decline as the third quarter 2020 annualized decay rate was only 3.8% in foreign deposits and compares favorably to the annualized rate of 16% we saw in the same period last year. Importantly to note, with continue improvements reflects the hard work from our team to improve engagement with customers, cross-selling products and services and strengthen relationships with our international depositors.

I also want to note Amerant begun to capture interest-bearing deposits from selected broker-dealers this quarter. These deposits reached $22 million by quarter end and represent a less expensive funding source than broker CDs. I want to highlight Amerant's continued execution against our relationship-driven and customer-centric strategy. In the third quarter, we focused our deepening existing relationships with customers to grow our share of wallet and deploy new strategies to increase profitability, such as cross-selling the bank's treasury management products and reviewing fees being charged.

We also continue to drive customer engagement through targeted calls and ramp up our daily customer contact. As a result of these efforts, we have begun to see a positive results materialize. First, Amerant investment captured new assets of approximately $30 million this quarter, made possible by the strong customer engagement of our team members. Second, Amerant's participation in the PPP program opened the door to a number of new prospective lending and deposit opportunities, which we're aggressively pursuing. Finally, we are pleased to announce that more than 80% of our sales teams are now using Salesforce, a great milestone in our digital transformation strategy. We expect to continue all these efforts to drive our strategy and increase customer share of wallet in the fourth quarter. Moving into slide 11. I'd like to provide some color around Amerant's wholesale funding strategy. As you may recall, in order to manage the low interest rate environment, we modified maturities on $420 million fixed rate FHLB advances during the second quarter 2020, which resulted in a $2.4 million cost savings for the rest of the 2020.

For the remainder of the year and into 2021, we will continue to actively leverage opportunities in the wholesale market to decrease funding cost. Turning to slide 12, our P&L items. On slide 12, the third quarter 2020 net interest income was $45 million, down 2.1% from the second quarter of 2020 and down 14% from the third quarter of 2019. The modest quarter-over-quarter decrease was driven by the lower market rates on repriced variable rate loans and lower average balances and yields on securities available for sale as we reprice and reinvested at a lower market rate. This quarter, we also experienced the full quarter impact of interest costs associated with the senior notes we issued back in June, partially offsetting this decline were lower overall cost in deposits and balance of broker deposits and time deposits, as we explained before, and higher CRE and consumer loan volumes. We were able to save $1 million in interest expense with an average rate drop of about 26 basis points from the second quarter of 2020.

This was driven by Amerant's continuing efforts to proactively reprice customer time deposits and money market deposits at a lower rate. We also choose not to renew expensive maturing customer CDs. As of the end of the quarter, we held approximately $800 million time deposits to mature in the next six months, which we expect to reprice at a much lower rate. As a result, we expect average cost of CDs to decline approximately 50 basis points, helping us to mitigate margin headwinds. Now turning to the year-over-year decrease in net interest income, which was largely driven by factors discussed in the prior quarters, this quarter's decline was again primarily due to the meaningful yield decline in interest-earning assets as a result of the Federal Reserve's to emergency rate cuts this past March. This was partially offset by lower cost of deposits and wholesale borrowings, redemptions of our trust preferred and higher average loan volume.

During this quarter, we have seen our NIM almost reach an inflection point, dropping only five basis points to 2.39% in the third quarter from 2.44% in the second quarter. As we approach the end of the year, we continue to implement several actions to offset the impacts of the low interest rate, including: first, minimizing cost of funds, including strategically and proactively cutting rates on time deposits and relationship money market accounts as well as pursuing lower-cost funding opportunities. Second, actively implementing and managing floor rates in our credit portfolio and increased spreads during extensions and renewals to optimize yields. This strategy produced an improved trend in the third quarter, evidenced by higher spreads in C&I in our Florida market. And third, continue to optimize the yield of our investment portfolio and manage balance sheet sensitivity to mitigate the impact on NIM via duration.

We remain focused on implementing these actions and evaluating order to help us to navigate through the current market environment and build momentum as we enter into 2021. Moving into slide number 13. Noninterest income in the third quarter was $20 million or up 3% quarter-over-quarter and 47% year-over-year. The quarter-over-quarter increase in noninterest income was largely driven by a higher net gain on sale of securities. We recognized $8.6 million net gain compared to a $7.5 million net gain in the second quarter as we continue to sell off -- sell securities opportunistically in order to buffer the impact of low interest rates on our NIM. Notably, we have recorded $25.4 million in net gains on the sale of securities so far this year. Additionally, deposit and other service fees were higher this quarter, driven by an increase in wire transfer fee due to a search in transaction volumes as well as higher foreign wire transfer rebates. Partially offsetting this increase was a decline in derivative income and the normalization of brokerage fees that were elevated in the second quarter in connection with the company's bond issuance in the month of June.

Moving on to slide -- moving on the year-over-year, 47% increase in noninterest income was recorded. This meaningful improvement was primarily due to the net gains on the sale of debt securities and additional brokerage and advisory fees. Amerant's assets under management and custody increased $47 million to $1.8 billion in the third quarter of 2020. This increase is mainly due to $30 million in new assets as we execute against our relationship-driven and customer-centric strategy by increasing the share of wallet and acquiring new customer base. We remain committed to growing our domestic and international AUM base going forward. Moving into slide 14. Third quarter noninterest expense was $46 million, up 24% quarter-over-quarter and down 14% year-over-year. This quarter-over-quarter increase is largely due to higher salaries and employee benefits and other operating expenses resulting from the absence of the deferred direct cost associated with the origination of the PPP loans, which consisted of $7.8 million of salaries and other employee benefits and $0.7 million of other operating expenses.

Additionally, we incurred higher FDIC expenses as well as marketing costs from resume efforts following slow activity due to COVID in the second quarter. Partially offsetting this increase were declines across professional and other services fees, insurance, tax expenses and deferred stock compensation expenses. The year-over-year decline was largely explained by significantly lower salaries and employee benefit expenses as we realign Amerant's compensation programs due to the impacts of COVID-19. We also have reduced marketing expenses, legal and accounting fees and other noninterest expenses, which were related to our transformation efforts. Partially offsetting these declines were higher FDIC assessment and insurance costs as well as increased consulting fees in connection with our ongoing digital transformation efforts. Looking ahead, we remain committed with our efficiency improvements. While providing the bank journey for all our customers ahead.

In particularly, we will focus on our digital transformation and expect to continue achieving milestones in the near term. This includes finalizing the rollout of Salesforce across all business lines as well as nCino for commercial use by the end of the fourth quarter. We nCino retail used to be rolled out next year. I would like to emphasize the importance of Salesforce as a key element in the onboarding and servicing of customers. Salesforce will help us to integrate marketing campaigns and streamline the cross-selling process. On the loan origination side, nCino will fully integrate it with Salesforce and will generate significant efficiencies in the origination, underwriting and portfolio management stages.

Also, as previously announced, effective tomorrow, two retail banking centers will be closed. We will continue to analyze and optimize retail banking centers as part of our efficiency efforts. In line with Millar's earlier remarks, Amerant's Board approved a voluntary early retirement plan as well as an involuntary severance plan early this month. For the voluntary plan, eligible employees have 45 days to confirm their participation. So we will get an idea of the overall impact of these initiatives later this year. On the other hand, we expect the voluntary severance plan to impact approximately 37 employees and result in approximately $1.9 million in onetime termination costs in the fourth quarter with over $5.8 million of annual cost savings starting in 2021. These plans are expected to be completed by year-end, and we will provide an update during the fourth quarter earnings call in a few months. I would like to take a moment to look back on our efficiency efforts since the time of our IPO.

As of the third quarter 2018, we had a total of 948 FTEs. We continue our efforts. And as of the end of 2020, we have reached 807 FTEs, which represent a 15% decline. If we take into account the two separation plans I just described and assume a similar acceptance rate for the voluntary plan as the one experienced in 2019, we expect to reach approximately 750 FTEs, which would represent a drop of 21% compared to the third quarter of 2018. In reference to the adjusted metrics, noninterest expenses was $44 million, up 23% quarter-over-quarter and down 15% year-over-year. We had restructuring expenses of $1.8 million this quarter compared to $1.3 million last quarter. This quarter cost includes $1.2 million in digital transformation expenses and $0.6 million of the staff reduction costs. Restructuring expenses decreased increased 46.2% year-over-year in the third quarter due to the absence of rebranding costs incur related and transformation efforts in the prior year. Moving on to slide 15. We continue to have an asset-sensitive position and in order to mitigate the impact on the NIM from lower interest rate, we actively manage our investment portfolio.

Now I will hand it back to Millar for the concluded remarks.

Millar Wilson -- Vice-Chairman Chief Executive Officer

Thank you, Carlos. Moving on to our last slide. You will see that our goals have not changed. And in the third quarter, we remain focused on these goals. As I said earlier, we are particularly pleased with our proactive approach to manage credit risk, our unwavering commitment to assessing forbearance status, general credit conditions and loans in vulnerable industries on a daily basis paid off as we recorded the lowest loan loss provision so far this year. In the quarter, we also remain focused on generating profitability and growing loans. We saw a significant quarter-over-quarter increase in net income in addition to strong consumer and real estate loan activity. Looking forward, we will continue to execute on our goals to drive shareholder value.

We also remain focused on aligning our operating structure and resources with our business activities. Our steadfast commitment to profitability, credit quality and core deposit and loan growth is more important now than ever. With our goals at the forefront of everything we do at Amerant, we are confident that we will continue to successfully navigate the current economic environment.

With that, we will happily take your questions. Operator, please open the line for Q&A.

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from Michael Young from Truist.

Michael Young -- Truist -- Analyst

Thank you, thanks for taking the question.I wanted to start just with kind of spread income. I heard the comment that maybe we're reaching an inflection point there and some of the proactive measures you're taking. But just on a go-forward basis, is it better to think of sort of NII dollars from here and moving higher and maybe the margin kind of -- could have a few puts and takes, but overall, we're seeing spread income growth?

Carlos Iafigliola -- Executive Vice-President Chief Financial Officer

Yes, there is -- definitely, if you look at the quarter, despite of the fact of having five basis points of a drop in the NIM, particularly the month of September, we actually saw a bounce back on the NIM on a relative basis. It actually increased 2.47%. So our expectation is that we'll keep working on the cost of funds of the time deposits. As we said, there is an opportunity there to reprice a large portion of the portfolio that is coming due within the next six months. So that would definitely create a room for the cost of funds. So yes, the answer is it feels like it's decompressing, and we reach an inflection point.

Michael Young -- Truist -- Analyst

Okay. And then just maybe in terms of kind of thinking of the size of the balance sheet on a go-forward basis, are you guys expect to see kind of a troughing of balance sheet and/or net loan growth kind of picking back up here over the near term? Or do you think that's going to take a little bit of time and then I guess another question would just be on the securities book. You've taken a lot of gains kind of offset the lower interest rate environment. Are there more of those that will be taken in the future?

Carlos Iafigliola -- Executive Vice-President Chief Financial Officer

Well, as we have always expressed, the investment portfolio serves as a tool to manage the overall duration of the balance sheet. So -- and we have had that impact on the realized gains for three consecutive quarters. So it has been used on a progressive basis as to manage the overall duration and hedge the low levels of the NIM. So yes, so it's been actively used answering that part of the question. In terms of the size of the balance sheet, we may expect a sort of a stabilization of the total size of the balance sheet, we may have sort of -- and I know that it's a challenge when you sell some securities to reinvest particularly at this point in time. And we're always looking for opportunities, and that's why the corporate side of the investment portfolio has been increasing a little bit more. So I would expect the balance sheet to see a stabilization during the fourth quarter, close to the $8 billion more or less. We haven't seen a lot of prepayments coming our way anyways. But as things started to get better and the opportunities for certain borrowers started to come across, we will probably be looking to refi and so on. So that will create a little bit more pressure on the total size of the loan portfolio.

Millar Wilson -- Vice-Chairman Chief Executive Officer

And on to positive. Michael, it's Millar here. We have these CDs that are repricing. And of course, that has a significant impact on our customers. It's because you're dropping the rate significantly. And when they are single-product-type customers, we are not afraid to let them go. And when we believe that there's 0 opportunity to cross-sell to them. Frankly, if it means that they go because we're dropping the rates, so be it, and that may cause -- the total deposits don't grow or don't grow significantly in the next quarters because of that situation, we prefer to have the impact on the cost go down rather than keep a single-product customer with no potential for becoming a relationship.

Carlos Iafigliola -- Executive Vice-President Chief Financial Officer

And it looks this time around based on the liquidity levels that we currently face in the market, even though we may face runoffs from that perspective, our transactional products have actually come up and have offset somehow the drop on the time deposits. So I believe there is opportunity with the level of liquidity that we have to continue to reprice aggressively the time deposits and keep improving profitability.

Michael Young -- Truist -- Analyst

Okay. And then the last one for me. Obviously, the 1% ROA target you guys kind of backed off of that, a lot of volatility now. So it's kind of hard to see a path forward. But is there sort of a metric or anything that you're managing to as we kind of move through this time period? Is it efficiency ratio or something else that we should be thinking of as we just kind of look forward?

Millar Wilson -- Vice-Chairman Chief Executive Officer

Well, it seems like we confirmed by having put in the ROA walk that we constantly get referred to. The -- we measure ourselves against numerous metrics, and we have objective in those targets. I would tell you that given the current environment, it's very difficult to say with precision where we expect to be in the next quarters. We are currently working on our budget and our 3-year plan. And at that time, we will be more able to express where our targets are. At the moment, it's really in flux at the moment.

Carlos Iafigliola -- Executive Vice-President Chief Financial Officer

To complement, I guess, we keep an eye. And as you can see on the last actions that we took on the efficiency ratio. That's an area that we really want it, and we give a very good view on the presentation, on the change on the FTEs. So we're definitely giving a lot of weight to that metric internally.

Operator

And our next question comes from Michael Rose from Raymond James.

Michael Rose -- Raymond James -- Analyst

So obviously, a very busy quarter. A lot of activity going on. I just wanted to drill a little bit to kind of the expenses. How should we think about -- I understand that the voluntary retirement program. And I understand the example that you gave around potentially getting down to 750 FTEs. How should we think about some of the offsets in terms of reinvestment? I assume there's still some more with nCino and some other efforts that you guys have. But just trying to get a sense for where you think the expense base will be if we start the year. I know it's a tough question to answer, but would just love to hear kind of the puts and takes and where you think we might end up?

Carlos Iafigliola -- Executive Vice-President Chief Financial Officer

Okay. So pretty much the -- for the fourth quarter, we -- what we have so far, it's an estimated cost of the separation plans, which it may range between $6 million to $8 million depending on the acceptance level, what we could potentially foresee or estimate at this point is that based on the levels of acceptance that we receive in our previous plans that we put together in 2018. If we were to happen or we were to have the same type of acceptance that we had back then, we may experience roughly $8 million of savings a year in the benefits and salaries for employees, which will give you more or less between $45 million to $46 million a quarter of run rate on the noninterest expenses. That's kind of the general picture of the impact of those plans. And again, the run rate that I just said includes the digital transformation effort. So it's a net between all of those impacts.

Michael Rose -- Raymond James -- Analyst

Okay. So it sounds like...

Millar Wilson -- Vice-Chairman Chief Executive Officer

I was going to say, Michael, we get a better figure toward the end of this quarter because the candidates for the voluntary retirement have a mandatory 45 days to give their decisions.

Michael Rose -- Raymond James -- Analyst

Understood. I'm just trying to understand that it does include some reinvestment in digital transformation efforts. I assume it also includes the two branch closures, et cetera. Just trying to frame it out. Okay. That's very helpful. And then -- so I noticed on the loan growth front, you guys actually purchased some consumer loans. Can you just give us some color there on exactly what you're buying and what the appetite is for additional purchases as we move forward?

Carlos Iafigliola -- Executive Vice-President Chief Financial Officer

Yes. We have created sort of a partnership with SoFi. We started early this year. As you recall, our consumer exposure in the loan portfolio is little to nothing. So we thought that it would be a good idea to diversify away and increase the yield of the portfolio by adding more of this type of credits. So we started our partnership in early this year. We started with some purchases. And then, by the way, these are consumer loans. They are not student loans. They're just on the consumer side. So we started to purchase. We had a pause during the month of March due to the COVID situation and so on. We wanted to understand what changes in the underwriting criteria, et cetera, were applied, et cetera. And then we resume, we are closely monitoring that portfolio on a frequently basis, looking into the delinquencies, looking into all the possible metrics. And as of now, we are close to the $130 million. So it's -- so far, it has been a good experience, and it provides a diversification for our portfolio. And at the same time, it helps with the yield of the portfolio.

Michael Rose -- Raymond James -- Analyst

Okay. So it sounds like maybe your near and near-term peak with that. And back to the previous question, just about the size of the balance sheet, we'll obviously get some PPP forgiveness. A little bit this quarter, probably the bulk of it in the first quarter of next year. As we think about the size of the balance sheet and some of these loan growth efforts, including the SoFi loans that you just mentioned, you've added the securities book a little bit through -- there's some financial sub debt. It appears. Does it -- do you get the sense that you can actually net grow the balance sheet ex the PPP runoff as we move through 2021?

Carlos Iafigliola -- Executive Vice-President Chief Financial Officer

Yes. We are actually in the process of evaluating the size that we want to give to this portfolio. We definitely like the fact that it's a very granular portfolio. Average size, it's very little. And credit quality has been so far, very good, great average FICO scores, close to 742. So we definitely -- we would like to replace some of our other PPP or other asset class by this type of lending. But we're trying to frame it on the right size for the overall portfolio. That's kind of the general idea. So I guess, as you have seen the progression of events, it's an asset class that we like it, and we feel that we need it in our loan portfolio.

Operator

And our next question comes from Stephen Scouten from Piper Sandler.

Stephen Scouten -- Piper Sandler -- Analyst

So I guess maybe I'll start with the exposure to kind of these COVID vulnerable industries, 45%. I mean, obviously, I think that's a lot higher than most other banks are quoting. So I'm kind of wondering if you can frame that up any further in terms of how you're classifying those from an LTV perspective in terms of what's falling in those categories. And then just how you think you can convince investors to feel differently about your credit profile? Because obviously, where the stock is trading, there doesn't seem to be buying there. So I'm just wondering what you feel like the investment community is missing there in terms of your credit quality?

Carlos Iafigliola -- Executive Vice-President Chief Financial Officer

Steve, thank you so much for joining us today. Great having you. It was a very good having you. So I'm going to give you a little bit of a flavor on this, and then I'm going to have Thiel Fischer from our credit risk team to give you more color. The percentage is pretty much related to the portfolio that we use as a reference to assign COVID-19 loan loss provision. We do our analysis in terms of which industries were immediately affected and progressively affected by COVID. So that part of the portfolio is the one that gave rise to the, I guess, institutional or generic reserves that we set aside for COVID. And now I'm going to have Thiel to give you more color on this.

Thiel Fischer -- Credit Risk Manager

So basically, what we have been doing during this time is to segregate and identify those industries that are -- that we are escalating their monitoring that we believe are the highly impacted industries. And so those are the ones that we're providing that supplemental information, the CRE, retail; the hotel, CRE also is two of the industries that we believe are impacted and as well as some of -- in the [commercial real estate] portfolios, some of the industries that we have mentioned before, but -- such as entertainment, restaurants and some other wholesalers that sell -- that have related sales to industries that are having impact. So that's what we classified as potential or have impacted industries. And we have a grading, so we have high-impacted and medium-impacted industries to try to segregate what is behind it. And what we try to segregate there is, for example, in retail, we're trying to see what portfolio is -- has loan to values above 60%, and those are -- we consider to be the highly most vulnerable than the ones that have lower loan to values.

Same as for hotels and office space. In terms of -- so that's how we segregate and that's what you see the 45% because we are trying to give you a perspective -- I mean the COVID has impacted many industries. It's not just one industry, individually. So that's what we segregate our portfolio. And so what we have been doing is we do monitoring every week of the portfolio, the high exposures of the ones are around the forbearance that you have seen how we have been having a great success in the forbearance side by reducing that to what we had initially of $1.2 billion, which was almost 20% of our portfolio. And right now, it's only 1.7%. So I think that's -- and as we review the portfolio, we have been making the decisions to classify our loans that you have seen the migration of classified loans that we have had.

Stephen Scouten -- Piper Sandler -- Analyst

Okay. Got it. Got it. And like you said, the deferral trends were positive this quarter. And really encouraging to me, I guess, was that you said there's no deferrals within your hotel book. I'm wondering specifically there, what you're seeing with your New York City and Miami hotel exposure in terms of occupancy rates. I know you had a bit of exposure that was over 80% LTV. So just kind of any detail on how you're thinking about that hotel exposure there?

Thiel Fischer -- Credit Risk Manager

Sure. What we have seen is -- and we have seen a steady trend of what we reported last quarter. We have seen that in the high-yield travel area -- or the destination travel areas, such as Miami Beach. We have seen steady occupancy levels around the 60%, 60-something percent occupancy. And where we have seen the issues or not as great recovery as it's been in the corporate type of travel. Those are in town, not in the travel destination areas. Those are the ones who are around the 40% sort of level. But what we have seen is that the sponsors that we have put a great effort and keeping these loans up to date, and they believe that the increase in occupancy is going to take them to the next level as we go through the travel season this time around.

Stephen Scouten -- Piper Sandler -- Analyst

Okay. Super. Very helpful. And then I guess last thing for me. I'm curious, you guys have a pretty strong loan loss reserve here, north of 2%. You have what appears to me to be a lot of capital and a stock that's trading below 50% of tangible book. So I'm wondering how you're thinking about share buybacks today? And if that's something that could be on the near-term horizon once we get maybe some additional clarity on the path of the buyers?

Millar Wilson -- Vice-Chairman Chief Executive Officer

Well, we look at our capital on a frequent basis. We look at the options that we have for usage of that capital. We are currently working on a most recent review of that. And yes, there's certainly would appear to be a lot of options at the moment for using our capital. So we don't have anything particular that we could say at the moment on that.

Operator

And our next question comes from Brady Gailey from KBW.

Brady Gailey -- KBW -- Analyst

So I wanted to follow up on the buyback question. Do you all have a buyback authorization that's out there? And if so, what's the remaining capacity there?

Millar Wilson -- Vice-Chairman Chief Executive Officer

No. We don't have a buyback authorization.

Brady Gailey -- KBW -- Analyst

Okay. So why wouldn't you have a buyback in place?

Millar Wilson -- Vice-Chairman Chief Executive Officer

We're certainly exploring that as one of the options. But up 'til now, it's not -- we've never had a buyback function approved by the Board. We have done some privately negotiated buybacks as we announced. But certainly, it's a discussion that we have with the Board.

Carlos Iafigliola -- Executive Vice-President Chief Financial Officer

Yes. And then docs said half of tangible book value. And TCE, as you know, is over 10%, it seems like that would be a great idea.

Brady Gailey -- KBW -- Analyst

My next question is on the employee count. With the actions that you've recently announced, you said it's going to go down to 750 employees. I think that's from a peak of around 950. So you're down 200.

Millar Wilson -- Vice-Chairman Chief Executive Officer

We were actually over 1,000 just before the IPO.

Brady Gailey -- KBW -- Analyst

Okay. So you're down 250 employees. I mean, at 750, I mean, is that the bottom? Or do you think that over time, there's more work to be done there?

Carlos Iafigliola -- Executive Vice-President Chief Financial Officer

Well, there is a -- Brady, there is -- it's a work in process. As we mentioned, we are implementing the new technology. There is simplification on the way that we perform processes, simplification and structures. Remember that we came from a different type of organization with more international flavor somehow. So we progressively are changing, and this is part of the changes that we need to go through. So we're constantly evaluating, looking at the branches, looking at physical space, looking at pretty much everything that is included in the noninterest expense. So it's -- what I can say, it's a work in process.

Brady Gailey -- KBW -- Analyst

Okay. And then I think you just answered my last question, but I was going to ask on the branch front. I mean you closed two branches. Is there more opportunity there as well? I think it's -- Hi. It's Miguel, Brady. Like Carlos mentioned, we are constantly analyzing our footprint. We have anchor branches that are very important, but we have a profitability process in each and every location. And we are working aligned with the maturity of the leases and possible relocation and consolidation, and that's an ongoing concern. We want to be efficient and profitable in the area of our locations. I know when we went through the IPO process, you were talking about opening some branches, are there any additional branches or planned openings that are out there?

Miguel Palacios -- Executive Vice-President Chief Business Officer

Not today. [Operator Instructions] And our next question comes from Christopher Marinac from Janney Montgomery Scott LLC.

Christopher Marinac -- Janney Montgomery Scott -- Analyst

So I had a similar question as Stephen and Brady, as it relates to the buyback. I mean if you think about the use of your capital and just balance sheet, I mean, is there a better return than buying your stock back at 49% of book? And I'm just curious if this could have a priority as you think about allocating dollars in the next couple of quarters.

Millar Wilson -- Vice-Chairman Chief Executive Officer

Yes. You guys keep pressing us. The answer is we look at all options with regard to our capital. We have had discussions recently with our Board on these options. And we expect to be very active with regards to our capital.

Christopher Marinac -- Janney Montgomery Scott -- Analyst

Great. Thanks for the additional feedback on that. And then just back to the third-party deposit initiative that was outlined this morning. How does deposit mix kind of look 6, nine months from now? Is it going to be different from what we see? Or is kind of the 9/30 deposit mix probably going to be the same?

Millar Wilson -- Vice-Chairman Chief Executive Officer

Well, I think that as you see in a lot of banks, the trend away from CDs is going to continue. I think customers, when they see that the differential between a money market rate and a CD rate is next to nothing, they're going to go more short-term into a money market accounts. And -- but that also fits into our strategy, where we are -- as I said earlier, we are focusing on, as we've expressed in several calls on relationships. We are not particularly interested in having customers who just have CD money with us and have no interest in extending that relationship with us. And so our expectation over time is that we are going to grow our core deposit base. It may include some CDs, but it's a relationship. It's not just individual CD customers.

Christopher Marinac -- Janney Montgomery Scott -- Analyst

Got you. And I guess your relative cost of deposits is going to continue to improve as a result of this, too, right?

Millar Wilson -- Vice-Chairman Chief Executive Officer

Well, yes. We expect there's significant maturities over the next three to five months in CDs. We expect them all to reprice significantly lower.

Operator

And I'm showing no further questions. I would now like to turn the call back to Mr. Wilson. You may proceed, sir.

Millar Wilson -- Vice-Chairman Chief Executive Officer

Well, thank you for joining our third quarter earnings call. Every day, we continue to make progress against our customer-centric strategy and our goals that we have said. We look forward to providing another update on our next call at the end of the quarter. Thank you again for your time today. We will now disconnect.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Laura Rossi -- Head of Investor Relations

Millar Wilson -- Vice-Chairman Chief Executive Officer

Carlos Iafigliola -- Executive Vice-President Chief Financial Officer

Thiel Fischer -- Credit Risk Manager

Miguel Palacios -- Executive Vice-President Chief Business Officer

Michael Young -- Truist -- Analyst

Michael Rose -- Raymond James -- Analyst

Stephen Scouten -- Piper Sandler -- Analyst

Brady Gailey -- KBW -- Analyst

Christopher Marinac -- Janney Montgomery Scott -- Analyst

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