Amerant Bancorp Inc. (then Mercantil Bank Holding Corporation) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are against December 31, 2018. The bank holding company provides banking, trust, brokerage and wealth-management services, primarily in Florida and Texas. It was rebranding as Amerant and planned to change its corporate name following shareholder approval in June 2019.
Financial performance and condition
- Earnings and revenue: Net income was $13.1 million, up 38.6% from $9.4 million in Q1 2018; diluted EPS was $0.30 versus $0.22. Pretax income was $16.6 million. Net interest income rose 5.3% to $55.4 million, while noninterest income declined 5.7% to $13.2 million. Combined net interest and noninterest income was $68.6 million, versus $66.6 million.
- Interest margins and efficiency: Net interest margin increased to 2.96% from 2.70%. The efficiency ratio improved to 75.7% from 83.6%; adjusted efficiency ratio was 74.4% versus 79.3%. Annualized ROA was 0.65% and ROE 6.87%, compared with 0.45% and 5.04%.
- Expenses and taxes: Noninterest expense fell 6.7% to $51.9 million, helped by lower professional fees and the absence of prior-year spin-off costs; Q1 2019 included $0.9 million of rebranding-related restructuring expense and $1.5 million of stock compensation. Income-tax expense was $3.6 million, with an effective rate of 21.49%, versus 13.76% in Q1 2018.
- Credit quality: No loan-loss provision was recorded. Net charge-offs were $1.44 million, compared with net recoveries of $0.12 million a year earlier. The allowance was $60.3 million, or 1.05% of gross loans, down from $61.8 million at year-end. Nonperforming assets were $20.5 million, or 0.26% of assets, versus $18.1 million, or 0.22%, at year-end.
- Cash flow: Operating activities provided $12.6 million and investing activities provided $230.6 million; financing activities used $239.2 million. Cash and cash equivalents increased $4.0 million to $89.7 million. Investing inflows included $152.2 million of loan-sale proceeds.
- Balance sheet and funding: Total assets were $7.90 billion, down 2.7% from year-end. Gross loans were $5.73 billion, down 3.1%; deposits were $5.89 billion, down 2.4%. FHLB advances and other borrowings totaled $1.07 billion, down from $1.17 billion; junior subordinated debentures were $118.1 million. Stockholders’ equity was $778.7 million.
- Liquidity and capital: The company reported $1.4 billion of available FHLB facilities and $62.0 million available on federal-funds lines. Company regulatory ratios included a 14.35% total capital ratio, 13.48% Tier 1 ratio, 10.83% Tier 1 leverage ratio and 11.79% CET1 ratio; each exceeded the stated well-capitalized minimum.
Material changes versus comparable periods
- Year-over-year earnings growth reflected higher asset yields and lower expenses, partly offset by higher funding costs and lower fee income. Interest expense increased 28.9% to $24.9 million; deposit expense rose as deposit rates and time-deposit balances increased.
- The loan portfolio contracted during the quarter, including a $145.5 million reduction from sales of non-relationship syndicated loans. Syndicated loans financing highly leveraged transactions fell to $90.4 million from $207.7 million at year-end.
- Deposits declined $144.5 million, including a $106.8 million decline in Venezuelan customer deposits. Venezuelan deposits stood at $2.59 billion at quarter-end; management attributed withdrawals to customers using U.S. dollar savings for living expenses amid worsening local conditions.
- Available-for-sale securities’ unrealized position improved, contributing to $16.0 million of other comprehensive income. Accumulated other comprehensive loss narrowed to $2.1 million from $18.2 million at year-end.
Outlook, risks and unusual items
- No specific earnings or financial guidance was provided. Management described continued efforts to grow domestic loans and deposits, reduce foreign-deposit reliance, and improve efficiency. It expected about $3.3 million of additional 2019 rebranding costs; some signage and software costs would be capitalized or amortized.
- In April 2019, the company began exiting its existing international credit-card program and closed about 8,000 accounts with $58.9 million in credit limits and $11.6 million in outstanding balances. It warned that discontinuation and repayment arrangements could initially increase credit losses and disrupt customer relationships; it expected lower interchange income. A new international charge-card arrangement was planned, with further details expected in June.
- Venezuela-related risks include continued deposit attrition, credit-card losses and regulatory/anti-money-laundering compliance exposure. The company also cited interest-rate, credit, liquidity, cybersecurity, competition and regulatory risks. It terminated cash-flow hedge swaps during the quarter and received approximately $8.9 million, to be amortized against interest expense over the contracts’ remaining lives.
- A pending lawsuit involving Amerant Trust alleges breaches of contract and fiduciary duty, among other claims. Mediation and settlement discussions were ongoing; the company said it could not reasonably estimate any potential loss or range of loss.
- The company raised approximately $29.7 million from a partial IPO over-allotment and private Class A placements, and used proceeds to repurchase 2.11 million Class B shares from its former parent for approximately $28.5 million. Adjusted earnings and efficiency measures exclude specified restructuring or prior-year spin-off costs and are non-GAAP.
Important facts for investors to verify
- Whether loan growth and net interest margin can be sustained as deposits reprice and funding costs rise.
- The pace and effect of Venezuelan deposit withdrawals, and the company’s progress in replacing them with domestic core deposits.
- Credit performance after the international card exit, including charge-offs, recoveries, nonperforming assets and allowance adequacy.
- Loan-sale impacts on future interest income and the changing composition of the loan portfolio.
- Execution costs and benefits of the Amerant rebranding, and the actual timing and economics of the replacement card program.
- Developments in the trust-related lawsuit and any resulting financial exposure.