Amerant Bancorp Inc. — Q3 2019 Form 10-Q
Business context and period. Amerant is a Florida-based bank holding company serving South Florida, the Houston area, and select markets and international customers. This unaudited filing covers the quarter and nine months ended September 30, 2019; balance-sheet comparisons are to December 31, 2018. Beginning in Q2 2019, management reports the business as one consolidated operating segment, reflecting a strategic shift toward community banking and reduced international lending.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $52.6 million | $55.6 million | $161.8 million | $162.3 million |
| Net income | $11.9 million | $11.6 million | $37.9 million | $31.4 million |
| Diluted EPS | $0.28 | $0.27 | $0.88 | $0.74 |
| Net interest margin | 2.80% | 2.83% | 2.89% | 2.74% |
| Noninterest income | $13.8 million | $13.0 million | $41.1 million | $41.9 million |
| Noninterest expense | $52.7 million | $52.0 million | $157.6 million | $160.3 million |
Q3 pretax income was $15.2 million, up 1.7% year over year; nine-month pretax income was $48.2 million, up 14.7%. Nine-month effective tax rate was 21.50%, versus 25.34% in 2018. Management’s adjusted, non-GAAP figures were Q3 net income of $12.9 million and nine-month net income of $41.7 million; adjustments primarily exclude restructuring costs in 2019 and spin-off costs in 2018.
Balance sheet, liquidity and capital
- At September 30, total assets were $7.86 billion, down 3.2% from year-end; gross loans were $5.75 billion, down 2.8%, and deposits were $5.69 billion, down 5.6%.
- Cash and cash equivalents were $101.3 million, compared with $85.7 million at December 31, 2018. Nine-month operating cash flow was $75.9 million; investing activities provided $300.2 million, while financing activities used $360.4 million.
- FHLB advances and other borrowings totaled $1.17 billion, approximately unchanged from year-end. The company reported $1.2 billion of additional FHLB availability and $72.0 million available under federal funds lines.
- Consolidated regulatory capital ratios were 14.77% total capital, 13.93% Tier 1, 11.15% Tier 1 leverage and 12.57% CET1, all above the stated well-capitalized thresholds. Stockholders’ equity was $825.8 million, up 10.5% since year-end, supported by earnings and improved securities valuations.
- Book value per common share was $19.11 and tangible book value per share was $18.63. The filing reports no dividend declared in 2019; the 2018 comparison includes a one-time $40 million dividend to the former parent.
Material changes and management commentary
- Earnings and margin: Q3 net interest income fell 5.5% year over year, mainly because of higher deposit costs, a shift from lower-cost international deposits to domestic funding, and lower average earning assets. Nine-month NIM nevertheless improved to 2.89% from 2.74%, as asset yields rose and the loan mix shifted toward higher-yielding domestic relationship loans.
- Funding and deposits: Deposits from Venezuelan-domiciled customers declined $348.8 million, or 12.9%, to $2.35 billion since year-end. Total foreign deposits fell 11.2%; management attributed the trend largely to difficult Venezuelan economic conditions and expects runoff to continue over the next few quarters. Core deposits were $4.4 billion, 77.1% of total deposits; brokered deposits were $566.4 million, or 9.9% of deposits.
- Loan mix and credit: International loans declined $97.9 million, or 32.6%, since year-end, as part of the planned reduction in international lending. Nonperforming assets rose to $32.8 million from $18.1 million at year-end, including a $11.7 million South Florida borrower relationship placed on nonaccrual and partly restructured. The allowance was $53.6 million, 0.93% of loans, versus $61.8 million and 1.04% at year-end. The company recorded a $1.5 million Q3 allowance release and a $2.9 million release for the nine months.
- Credit card exit: The company curtailed charging privileges for its remaining cardholders in October and required repayment by January 2020. Outstanding balances were $20.8 million at September 30; the allowance associated with the product was $3.6 million. Management entered referral arrangements with U.S.-based issuers to serve customers without retaining card credit risk, but warned that repayments may produce higher losses and the change could affect customer relationships.
- Costs and one-time items: Nine-month restructuring expenses were $4.9 million, including $3.6 million of rebranding and $1.4 million of staff realignment costs. Management expected about $0.9 million in additional rebranding expense by year-end and expected the rebrand to be substantially complete in Q4. Q3 also included a $0.3 million charge related to redeeming $25 million of high-cost trust preferred securities and related debt. Those redemptions reduced annual pretax interest expense by an estimated $2.6 million, while lowering Tier 1 equity capital by a net $23.5 million.
- Other income and outlook: Q3 noninterest income benefited from a $0.9 million securities-sale gain and derivative-related income, while brokerage and advisory fees were pressured by restrictions on trading Venezuelan securities. Management said lower market rates could reduce deposit costs and loan income, with deposit repricing potentially lagging asset repricing; it also cited continued pressure from international deposit runoff and possible loan and securities prepayments. The filing provides no formal earnings or revenue guidance.
Risks, contingencies and reporting matters
- Key disclosed risks include Venezuelan deposit and credit exposure, interest-rate and securities valuation changes, loan quality and reserve estimates, competition, regulatory and sanctions compliance, cybersecurity and technology disruption, and execution of the strategic plan.
- The company disclosed an unresolved lawsuit involving Amerant Trust and Kunde Management. Mediation and settlement discussions were ongoing; the company could not reasonably estimate a possible loss or range of losses. Management stated that other ordinary-course legal matters were not expected to have a material effect, while noting litigation outcomes remain uncertain.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
- The company planned to adopt revenue-recognition and financial-instrument accounting guidance in Q4 2019 and lease guidance in the first half of 2020; it expected the lease-related asset and liability to be less than 1% of total assets.
Important facts for investors to verify
- Whether Venezuelan deposit runoff continues at the disclosed pace and how the bank replaces those balances without further pressuring funding costs or liquidity.
- Performance and recoveries on the $20.8 million of remaining credit-card balances, including whether actual losses exceed the $3.6 million associated allowance.
- Developments in the $11.7 million impaired borrower relationship, other nonperforming loans, and the adequacy of the allowance as loan balances and credit mix change.
- Whether core domestic deposit growth, reduced brokered funding and planned loan-mix changes offset the decline in total assets and net interest income.
- Final rebranding and restructuring costs, benefits from the trust-preferred redemptions, and the effect of lower interest rates on margins and deposit repricing.
- Updates on the unresolved lawsuit, regulatory capital after debt redemptions, and any material effects from new accounting standards or regulatory capital rules.