Amerant Bancorp Inc. annual report, FY2018

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Business context and reporting period

Mercantil Bank Holding Corporation, which was rebranding its banking operations as Amerant, filed this 10-K for the fiscal year ended December 31, 2018. It operates a community bank through 23 banking centers in South Florida and greater Houston, plus loan production offices in New York and Dallas. The company serves domestic and selected international customers through banking, trust, brokerage and wealth-management businesses. It completed its separation from former parent Mercantil Servicios Financieros (MSF) in August 2018 and an IPO in December 2018.

Financial results and condition

  • Full-year earnings: Net income was $45.8 million, up 6.5% from $43.1 million; diluted EPS was $1.08 versus $1.01. Management’s non-GAAP adjusted net income was $57.9 million ($1.36 per share), excluding specified spin-off and restructuring costs and other items.
  • Revenue and margins: Net interest income rose 4.5% to $219.0 million, and net interest margin improved to 2.78% from 2.63%. Noninterest income fell 24.6% to $53.9 million, principally reflecting the absence of the prior-year $10.5 million New York building sale gain and lower brokerage, advisory and fiduciary income. Pre-tax income declined 25.3% to $57.6 million; lower taxes helped lift net income.
  • Expenses: Noninterest expense rose 3.5% to $215.0 million. It included $6.7 million in spin-off costs and $6.4 million in restructuring costs. Adjusted noninterest expense was $201.9 million, slightly below 2017’s $202.4 million.
  • Fourth quarter: Q4 net income was $14.4 million versus $8.8 million in Q4 2017; net interest income was $56.8 million versus $54.9 million. Q4 included a $1.4 million reversal of loan-loss provision, compared with a $12.4 million reversal in the prior-year quarter.
  • Loans and credit: Gross loans were $5.92 billion, down 2.4%; domestic loans grew 5.8%, while international loans fell 60.3%. CRE loans were $3.05 billion, 51.4% of total loans. Nonperforming loans were $17.8 million, or 0.30% of loans, versus $26.9 million, or 0.44%, a year earlier. The allowance was $61.8 million, or 1.04% of loans. Net charge-offs increased to 0.18% of average loans from 0.11%.
  • Deposits and funding: Deposits declined 4.6% to $6.03 billion. Domestic deposits grew 6.3%, but Venezuelan deposits fell 14.4% to $2.69 billion, 44.7% of total deposits. Brokered deposits were $642.1 million, or 10.6% of deposits. FHLB advances and other borrowings totaled $1.17 billion; junior subordinated debentures were $118.1 million.
  • Liquidity and cash flow: Cash and cash equivalents fell to $85.7 million from $153.4 million. Operating cash flow was $62.2 million; investing activities provided $206.5 million and financing activities used $336.4 million. The company reported $1.4 billion of additional FHLB borrowing capacity and $35.5 million of uncommitted credit lines.
  • Capital and equity: Shareholders’ equity was $747.4 million. Company regulatory ratios included a 13.54% total capital ratio, 12.69% Tier 1 ratio, 10.34% Tier 1 leverage ratio and 11.07% CET1 ratio; the Bank also exceeded well-capitalized thresholds. Available-for-sale securities had $33.1 million of gross unrealized losses at year-end.

Material changes versus the prior period

  • The balance sheet contracted: assets declined 3.7% to $8.12 billion, loans declined 2.4%, and deposits declined 4.6%.
  • The portfolio continued its shift toward domestic lending: domestic loans and deposits grew while international loans and deposits declined, including the substantial reduction in Corporate LATAM lending.
  • Net interest margin improved, but funding costs increased: total interest expense rose 42.0%, with higher deposit and FHLB borrowing costs.
  • Credit quality indicators improved overall, though 2018 charge-offs rose, including a $5.8 million charge-off tied to a troubled CRE loan that was partially charged off and sold.
  • Reported earnings comparisons were affected by one-time items: 2017 included the building-sale gain and $9.6 million tax expense from remeasuring deferred tax assets; 2018 included spin-off and restructuring costs. The $40 million special dividend was paid to MSF before the spin-off, not to public shareholders.

Outlook, management commentary, risks and contingencies

  • Management’s strategy centers on domestic core-deposit and loan growth, cross-selling and fee income, lower costs, technology and process improvements, and expansion of four South Florida banking centers through 2020. It planned $10–$15 million of technology investments over 2019–2021 and estimated $6–$7 million of 2019 rebranding costs.
  • The company’s profitability plan assumed two 25-basis-point short-term rate increases through 2020, but noted that the Federal Reserve had paused rate increases in early 2019. Management described the balance sheet as asset-sensitive; falling rates or a flattening/inverted yield curve could pressure earnings.
  • Key exposures include CRE concentration, Venezuelan deposit dependence and related compliance risks, competition, deposit-cost pressure, securities valuation and interest-rate risk, cyber/operational risks, and the possible effects of LIBOR’s anticipated discontinuance. CECL adoption timing is described differently in portions of the filing; management was evaluating the impact.
  • The company planned to acquire the Cayman Bank from an MSF subsidiary for an estimated $13.4–$14.4 million based on its December 2018 balance sheet, plus a stated premium, subject to a definitive agreement and regulatory approvals. Completion was anticipated after approvals; it was not yet completed at filing.
  • A fiduciary-duty and related lawsuit involving Amerant Trust and Kunde Management remained in mediation. The company said it could not reasonably estimate any potential loss; it reported approximately $372,000 in defense fees through March 28, 2019 and expected reimbursement under governing documents.
  • The company did not anticipate common-stock dividends for the foreseeable future, intending to retain earnings for growth and capital needs. The filing also reported no material weakness in internal controls, but, as a newly public company, it was not yet required to provide management’s internal-control assessment or auditor attestation in this 10-K.

Important facts for investors to verify

  1. Whether domestic deposit growth can offset continued Venezuelan deposit runoff and reduce concentration without materially increasing funding costs.
  2. CRE portfolio performance, especially across Florida, Houston and New York, and the adequacy of reserves after the troubled-loan charge-off.
  3. Underlying earnings and expense trends after adjusting for the disclosed non-GAAP items, and whether planned cost savings and technology investments deliver results.
  4. Liquidity and capital metrics, including reliance on brokered deposits and FHLB funding, securities unrealized losses, and capacity for growth or further capital actions.
  5. Status and final terms of the proposed Cayman Bank acquisition, the unresolved lawsuit, and execution of the Amerant rebranding and strategic plan.