Amerant Bancorp Inc. — Q1 2020 Form 10-Q
Business context and reporting period. Amerant is a Florida bank holding company serving customers primarily in South Florida, the greater Houston area and select international markets. This unaudited report covers the three months ended March 31, 2020; comparable results are for Q1 2019. Amounts below are in U.S. dollars unless stated otherwise.
Key financial results and condition
- Earnings: Net income was $3.4 million, down 74.1% year over year; diluted EPS was $0.08 versus $0.30. The $22.0 million loan-loss provision, recorded mainly for estimated COVID-19 effects, and lower net interest income drove the decline. Management’s non-GAAP operating income was $16.7 million, essentially flat year over year; adjusted net income was $3.7 million.
- Revenue and margins: Net interest income fell 11.2% to $49.2 million. Net interest margin declined to 2.65% from 2.96%, reflecting lower asset yields, reduced average loan balances and higher average time-deposit costs, partly offset by lower borrowing and transactional deposit costs. Noninterest income rose 66.5% to $21.9 million, primarily due to $9.2 million in net securities gains. Noninterest expense declined 13.6% to $44.9 million, mainly from lower compensation and the absence of prior-year rebranding costs. The efficiency ratio improved to 63.1% from 75.7%.
- Credit: The allowance for loan losses rose to $72.9 million from $52.2 million at year-end; it equaled 1.29% of gross loans versus 0.91% at December 31, 2019. Net charge-offs were $1.3 million; nonperforming assets were $33.4 million, or 0.41% of assets. Gross loans declined 1.3% from year-end to $5.67 billion. Commercial real estate loans totaled $2.93 billion.
- Balance sheet and liquidity: Total assets were $8.10 billion, up 1.4% from year-end. Cash and cash equivalents increased to $271.1 million from $121.3 million. Deposits rose 1.5% to $5.84 billion; FHLB advances and other borrowings were $1.27 billion. Stockholders’ equity was $841.1 million. The company reported total capital, Tier 1 capital, Tier 1 leverage and CET1 ratios of 14.54%, 13.38%, 10.82% and 12.42%, respectively.
- Cash flow: Operating activities provided $3.2 million; investing activities provided $74.8 million and financing activities provided $71.8 million. Cash and cash equivalents increased $149.7 million during the quarter.
Material changes versus comparable periods
- Q1 net income fell from $13.1 million in 2019, while the provision for loan losses increased from zero to $22.0 million.
- Net interest income declined by $6.2 million; noninterest income increased by $8.8 million, largely because of securities-sale gains. These gains are market- and transaction-dependent and should not be assumed to recur.
- Compared with December 31, 2019, deposits increased $85.1 million, while gross loans decreased $76.0 million. Domestic deposits grew, partly offsetting continued foreign deposit runoff.
- The company redeemed $26.8 million of 8.90% trust preferred securities and related debt in January. In February it repurchased 932,459 Class B shares for approximately $15.2 million and subsequently cancelled treasury shares.
Outlook, risks and unusual items
- COVID-19 and credit exposure: Management said the pandemic’s ultimate effects were highly uncertain and could not be accurately predicted. It identified approximately 30% of the March 31 loan portfolio as potentially more vulnerable to pandemic impacts or collateral-value pressure. As of May 1, 2020, customers had $1.119 billion in loans under temporary payment-relief programs; the filing says these temporary modifications were not treated as TDRs under applicable guidance.
- PPP: As of May 1, the Bank had approval for 1,493 PPP applications totaling $197.8 million and had funded $137.9 million. The company warned of potential litigation and SBA-guarantee risks if loans were found deficient in origination, funding or servicing.
- Management outlook: No specific earnings or full-year numerical guidance was provided. Management expected net interest income and margin to remain pressured as assets reprice in a low-rate environment and lower-cost international deposits run off. It described deposit repricing, higher-yield investment opportunities, lower-cost wholesale funding and steps to reduce asset sensitivity.
- Funding and concentrations: Venezuelan-domiciled deposits were $2.22 billion, about 38% of total deposits, and declined 2.1% from year-end. Brokered deposits were $646.9 million, or 11.1% of deposits. CRE concentration, wholesale funding needs and continuing international deposit runoff are material items to monitor.
- Subsequent debt modification: In early April, the company restructured $420 million of fixed-rate FHLB advances, extending maturities from 2021 to 2023 at lower rates. A $17 million loss was incorporated into the new rates; management cited 26 basis points of annual savings and $2.4 million of savings for the remainder of 2020.
- Contingencies and operations: A pending lawsuit involving Amerant Trust has an unspecified potential loss that the company said it could not reasonably estimate. Management did not expect other ordinary-course legal matters to be material. The company reported effective disclosure controls and no material change in internal control over financial reporting. It did not currently intend to pay common-stock dividends.
Important facts for investors to verify
- How the pandemic, customer payment relief and sector exposures affect subsequent delinquencies, criticized loans, charge-offs and allowance adequacy.
- Whether the $1.119 billion in relief-program loans resume scheduled payments, and how much PPP lending is ultimately funded, forgiven and reimbursed by the SBA.
- Whether Venezuelan and other international deposits continue to run off, and the resulting cost and availability of replacement funding, including brokered deposits and FHLB advances.
- Whether net interest margin and earnings stabilize after rate cuts and the April FHLB restructuring; assess the recurring contribution of securities gains separately from core operating results.
- Developments in the unresolved Amerant Trust lawsuit and any PPP-related claims or SBA guarantee disputes.