Amerant Bancorp Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; balance-sheet comparisons are with December 31, 2019 unless otherwise noted. Amerant is a Florida bank holding company operating primarily in South Florida, greater Houston and the New York City area.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net interest income | $46.3 million | $53.8 million | $95.6 million | $109.2 million |
| Provision for (reversal of) loan losses | $48.6 million | $(1.4) million | $70.6 million | $(1.4) million |
| Noninterest income | $19.8 million | $14.1 million | $41.7 million | $27.3 million |
| Noninterest expense | $36.7 million | $52.9 million | $81.6 million | $104.9 million |
| Net income (loss) | $(15.3) million | $12.9 million | $(11.9) million | $25.9 million |
| Diluted earnings (loss) per share | $(0.37) | $0.30 | $(0.28) | $0.60 |
| Net interest margin | 2.44% | 2.92% | 2.55% | 2.94% |
Q2 noninterest income benefited from $7.5 million of net securities gains, principally on 30-year Treasury sales. Lower reported expenses reflected earlier staff reductions, lower stock compensation, absent rebranding costs and deferral of $7.8 million of PPP loan-origination costs. The efficiency ratio was 55.6% (53.6% excluding restructuring costs), versus 77.9% (73.8% adjusted) a year earlier. These non-GAAP adjusted figures are supplemental, not substitutes for GAAP results.
Financial position, cash flow and capital
- At June 30, assets were $8.13 billion; gross loans $5.87 billion; deposits $6.02 billion; and stockholders’ equity $830.2 million.
- Cash and cash equivalents were $217.3 million, up $96.0 million from year-end. For the first half, operating cash flow was $27.0 million, investing cash outflow was $28.5 million and financing cash inflow was $97.6 million.
- Deposits increased 4.6% from year-end, mainly reflecting domestic deposit growth, reciprocal deposits and PPP-related customer funds. Domestic deposits excluding brokered deposits rose 16.6%; Venezuelan-domiciled deposits declined 3.0% to $2.20 billion. Brokered deposits were $587.9 million, or 9.8% of deposits.
- FHLB advances and other borrowings were $1.05 billion, down from $1.24 billion at year-end. The company had an additional $1.4 billion available under FHLB facilities and $65 million available under federal funds lines. It issued $60 million of unsecured senior notes at 5.75%, due 2025; net proceeds were $58.4 million.
- Regulatory capital ratios at June 30: company total capital 14.34%, Tier 1 13.08%, leverage 10.39% and CET1 12.13%; bank total capital 13.39%, Tier 1 12.13%, leverage 9.64% and CET1 12.13%. Each exceeded the filing’s “well-capitalized” minimum.
- First-half net charge-offs were $3.2 million, or 0.11% of average loans. The allowance for loan losses rose to $119.7 million, 2.04% of loans, from $52.2 million at year-end. Nonperforming assets were $77.3 million (0.95% of assets), versus $33.0 million at year-end.
Material changes and unusual items
- The $70.6 million first-half loan-loss provision included $40.0 million for estimated COVID-19-related macroeconomic deterioration and $28.2 million for specific reserve requirements and loan downgrades. Q2 provision included a $20.0 million reserve against a $39.8 million South Florida commercial borrower relationship placed on nonaccrual; after information received July 22, management increased the reserve by $3.1 million. Management said the reserve could change as liquidation information develops.
- COVID-19 payment-relief modifications totaled $1.1 billion at June 30; $504.7 million had reached the end of its interest-only or forbearance period, and $8.4 million of payments had been collected by that date. The filing’s July 31 update reported $308.9 million remaining in the listed relief programs and approximately $452.1 million collected on payments due on expired relief loans. Eligible temporary modifications were not classified as TDRs.
- PPP lending totaled $214.1 million across more than 2,000 loans at June 30; over 90% were below $350,000. PPP-related deposit balances not yet used by customers were $132.7 million.
- In April, Amerant restructured $420 million of fixed-rate FHLB advances, extending maturities from 2021 to 2023 at lower rates. A $17.0 million loss was incorporated into the new rates over the remaining maturities; management estimated $2.4 million of savings for the remainder of 2020.
- In January, the company redeemed $26.8 million of 8.90% trust preferred securities and related debentures, reducing annual pretax interest expense by an estimated $2.4 million. Book value per common share was $19.69, versus $19.35 at year-end; tangible book value was $19.18, versus $18.84.
Outlook, commentary and risks
The filing provides no specific earnings or financial guidance. Management said the duration and severity of the pandemic, its economic effects and resulting credit losses could not be reliably predicted. Amerant identified 42% of its loan portfolio as potentially more vulnerable to pandemic effects at June 30, up from 30% at March 31; approximately 67% of those loans were secured by real estate. Commercial real estate represented 50.2% of total loans. Management described reserve coverage as strong but said it was closely monitoring borrowers, particularly in affected sectors.
Management noted that lower interest rates were pressuring net interest income and margin. Amerant was repricing deposits, managing loan floors, using lower-cost wholesale funding and adjusting its investment and hedging positions. The company remained asset-sensitive in its modeling, but said it was taking steps to reduce rate sensitivity. Other identified risks include further deterioration in credit quality or collateral values, continued runoff of Venezuelan deposits, funding and debt-service capacity, PPP litigation or SBA guarantee disputes, and potential operational or cybersecurity risks from remote work. The company reported no goodwill impairment at June 30, but said future adverse conditions could trigger impairment. One Florida and one Texas banking center were expected to close by year-end 2020. A shareholder-related trust lawsuit was dismissed with prejudice on July 6; its settlement did not materially affect financial condition or results.
Key facts for investors to verify
- Subsequent credit performance and recoveries on the $39.8 million commercial relationship, including whether its reserve proves adequate.
- Repayment and migration of COVID-modified loans, especially the loans whose relief periods expired and the July 31 collections update.
- Whether additional COVID-related provisions, charge-offs or collateral impairments are needed as economic conditions evolve.
- PPP loan forgiveness, SBA guarantee compliance and any outcomes from PPP-related litigation.
- Deposit stability and concentration, including the large Venezuelan-domiciled balance, brokered funding and the cost and availability of wholesale funding.
- Sustainability of net interest income, the benefit of the FHLB restructuring, and the effects of rate changes on margins and securities values.