Amerant Bancorp Inc. (then Mercantil Bank Holding Corporation) — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions. The company spun off from Mercantil Servicios Financieros and began trading as a separate public company in August 2018. It announced the Amerant rebrand in October 2018.
Business context and financial performance
The Florida-based bank holding company provides retail and commercial banking, lending, trust, brokerage and wealth-management services. Its primary markets are South Florida and greater Houston, with a New York loan-production office; it also serves selected international customers. Management said its new strategy emphasizes U.S. domestic lending and core deposits while reducing Corporate LATAM lending.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $55.6m | $55.1m | $162.3m | $154.9m |
| Provision for loan losses | $1.6m | $1.2m | $1.8m | $8.9m |
| Noninterest income | $13.0m | $24.1m | $41.9m | $56.1m |
| Noninterest expense | $52.0m | $52.2m | $160.3m | $152.0m |
| Net income | $11.6m | $17.3m | $31.4m | $34.2m |
| Basic and diluted EPS | $0.27 | $0.41 | $0.74 | $0.81 |
| Net interest margin | 2.83% | 2.78% | 2.74% | 2.60% |
Q3 net income fell 33.4% year over year; nine-month net income fell 8.3%. Comparisons were significantly affected by a $10.5m pretax gain on the sale of the New York building in Q3 2017. Excluding that gain and 2018 spin-off costs, management’s non-GAAP adjusted net income was $12.0m for Q3 2018 versus $10.2m a year earlier, and $37.8m for the first nine months versus $27.1m. The adjusted figures are company-defined and are not GAAP results.
Higher asset yields supported net interest income and margin, while funding costs rose: nine-month interest expense increased to $65.2m from $46.3m, driven mainly by time-deposit growth and higher rates. The nine-month efficiency ratio was 78.54% versus 72.08%; adjusted for the prior-year property gain and 2018 spin-off costs, it was 75.45% versus 75.84%.
Financial position, cash flow, debt and asset quality
- Balance sheet: Total assets were $8.44bn at September 30, essentially unchanged from year-end 2017. Gross loans rose 1.5% to $6.16bn; deposits declined 2.1% to $6.19bn. Domestic loans grew $286.6m, while international loans declined $193.5m.
- Liquidity and funding: Cash and cash equivalents were $103.6m, down from $153.4m at year-end. Nine-month operating cash flow was $40.7m, investing cash outflow $82.1m, and financing cash outflow $8.5m; cash decreased $49.9m. FHLB advances and other borrowings totaled $1.338bn, up from $1.173bn; junior subordinated debentures were $118.1m. The company reported $1.2bn of available FHLB capacity and $60.5m available on federal-funds lines.
- Deposit trends: Deposits from Venezuelan customers declined $350.2m to $2.8bn during the nine months, partly offset by $213.5m growth in domestic balances. Brokered deposits were $643.1m, or 10.39% of deposits; core deposits were 77.92% of deposits.
- Credit quality: Nonperforming assets were $29.7m, or 0.35% of assets, versus $27.3m at year-end; nonperforming loans were 0.48% of loans. The $69.5m allowance was 1.13% of loans and 233.89% of nonperforming loans. Nine-month net charge-offs were $4.3m. A restructured $10.2m CRE loan received a $5.7m specific reserve after a newer appraisal indicated collateral net realizable value of about $4.5m.
- Capital and equity: Company regulatory ratios were 12.81% total capital, 11.88% Tier 1, 9.95% Tier 1 leverage and 10.34% CET1, above the stated well-capitalized thresholds. Stockholders’ equity was $727.7m, down 3.4% since year-end, reflecting a $40m special dividend to the former parent and $17.2m of other comprehensive loss, partly offset by net income.
Material changes, outlook and risks
- Management cited higher yields, domestic loan growth and improved credit trends, while noting sharply higher deposit and borrowing costs. It plans to replace about $300m of low-yielding Corporate LATAM loans as they mature through Q1 2019 with higher-margin domestic loans.
- The strategy targets greater domestic core-deposit generation, cross-selling, fee income, efficiency and a smaller, more automated branch footprint. Plans include four new South Florida “banking centers of the future” through 2020 and $10m–$15m of technology investment over three years. No specific earnings or revenue guidance was provided.
- Management expected $6m–$7m of rebranding costs in 2018 and 2019. It estimated $400,000–$600,000 of fourth-quarter 2018 costs for an involuntary plan affecting about 25 positions, with expected annual savings of $2.7m–$3.5m beginning in 2019; voluntary-plan participation and costs were not yet known.
- Management’s stated plan assumptions include five 25-basis-point short-term rate increases through 2020. Risks include failure to achieve those rate assumptions or replace foreign funding with domestic deposits, execution costs and delays in technology and strategic changes, competition, credit deterioration, and regulatory, cybersecurity and operational risks. The company also highlighted Venezuela-related customer, deposit and compliance exposure.
- Unusual items include $6.3m of nine-month spin-off costs, the $10.5m prior-year building-sale gain, a $40m special dividend paid before the spin-off, and $7.5m of proceeds from selling G200 Leasing LLC. The company reported ordinary-course litigation and contingencies; management did not expect pending matters to have a material effect, while noting outcomes are uncertain.
- Subsequent events: the company completed a 1-for-3 reverse stock split on October 23, 2018 and began trading under AMTB and AMTBB on October 24, alongside its Amerant rebranding announcement. Financial per-share figures were retrospectively adjusted for the split.
Important facts for investors to verify
- Whether domestic loan growth and deposit gathering can offset continuing declines in Venezuelan and other international relationships, and at what funding cost.
- Performance and collateral recovery prospects for the impaired $10.2m CRE loan, alongside trends in nonperforming and potential problem loans.
- Whether higher interest rates improve net interest income after accounting for faster deposit repricing, borrowings and securities valuation changes.
- Actual spin-off, rebranding, public-company and restructuring costs versus management’s estimates, and whether projected savings materialize.
- Ongoing capital, liquidity and dividend plans; management stated it did not intend to pay common-stock dividends for the foreseeable future.