Amerant Bancorp Inc. — 2019 Q2 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; balance-sheet comparisons are against December 31, 2018. Amounts are U.S. dollars; financial statement amounts below are in millions unless noted. Amerant is a Florida bank holding company operating primarily in South Florida and Texas, with select international customers. In Q2, it shifted to managing the business as one consolidated segment, reflecting its community-banking focus and reduced international lending.
Financial performance and condition
| Metric | Q2 2019 | Comparable period / change |
|---|---|---|
| Net income | $12.9 million; $0.30 diluted EPS | Up 23.4% from $10.4 million; diluted EPS was $0.25 |
| Net interest income | $53.8 million | Down 0.4% from $54.0 million |
| Net interest margin | 2.92% | Up from 2.77% |
| Noninterest income | $14.1 million | Down 5.6% from $15.0 million |
| Noninterest expense | $52.9 million | Up 0.5% from $52.6 million |
First half: Net income was $25.9 million, up 30.6% year over year; diluted EPS was $0.60 versus $0.47. Net interest income increased 2.4% to $109.2 million, and NIM rose to 2.94% from 2.72%. Noninterest income declined 5.6% to $27.3 million, while noninterest expense fell 3.2% to $104.9 million. The six-month effective tax rate was 21.5%, compared with 26.8%.
Management’s non-GAAP adjusted net income was $15.0 million for Q2 and $28.8 million for the first half, excluding restructuring costs in 2019 and spin-off costs in 2018. Adjusted measures are not GAAP results.
| Balance-sheet / capital metric | June 30, 2019 | Change from Dec. 31, 2018 |
|---|---|---|
| Total assets | $7.93 billion | Down 2.4% |
| Gross loans | $5.81 billion | Down 1.8% |
| Net loans | $5.76 billion | Down $103.1 million |
| Total deposits | $5.82 billion | Down 3.5% |
| FHLB advances and other borrowings | $1.13 billion | Down $41.0 million |
| Stockholders’ equity | $806.4 million | Up 7.9% |
Cash and cash equivalents were $90.3 million, up $4.6 million from year-end. For the first half, operating cash flow was $33.5 million, investing cash flow was positive $224.1 million, and financing cash flow was negative $253.0 million. Investing inflows included $214.4 million of loan-sale proceeds; financing outflows included deposit runoff, debt repayments and a $28.5 million Class B share repurchase. The filing does not provide a single conventional debt-to-equity measure.
Regulatory capital ratios improved year over year: the Company reported a 14.70% total capital ratio, 13.85% Tier 1 capital ratio, 11.32% Tier 1 leverage ratio and 12.14% CET1 ratio. Each exceeded the stated well-capitalized minimum. Approximately $1.2 billion of additional FHLB capacity was available, and federal funds lines provided $72.0 million of availability.
Material changes and drivers
- Q2 earnings growth reflected a $1.35 million reversal of loan-loss provision and a lower tax rate versus Q2 2018. These benefits were partly offset by lower noninterest income, higher restructuring costs and restricted-stock compensation.
- For the first half, higher asset yields and a changed loan mix lifted interest income, while deposit funding costs increased. Deposit interest expense rose 35.8% year over year for the six months, principally from higher rates paid.
- Loans declined as the company reduced international exposure and sold non-relationship syndicated loans; international loans fell 28.3% from year-end. Domestic CRE and owner-occupied lending increased in some categories.
- Deposits fell $213.3 million, principally reflecting a $229.0 million reduction in Venezuela-domiciled deposits. Domestic deposits increased $12.9 million. Core deposits were $4.5 billion, or 76.7% of total deposits; brokered deposits were $618.6 million, or 10.6% of deposits.
- Equity increased primarily from first-half net income and a $29.3 million after-tax improvement in accumulated other comprehensive income, largely from higher available-for-sale securities valuations.
- The allowance for loan losses was $57.4 million, 0.99% of gross loans, versus $61.8 million and 1.04% at year-end. Nonperforming assets were $32.8 million, or 0.41% of assets; the ratio matched June 2018 but was higher than year-end 2018.
Outlook, risks and unusual items
- Management expected net interest income and NIM to remain pressured if market rates declined. It described actions including loan-rate floors, deposit repricing and a focus on relationship deposits. No specific full-year earnings or revenue guidance was provided.
- Management expected approximately $1.8 million of additional rebranding expense and $1.2 million of related capital expenditures in the second half of 2019. Rebranding was expected to be substantially completed in Q4.
- In July 2019, Amerant announced redemption of $25 million of legacy trust preferred securities and related junior subordinated debt. The filing estimated annual pretax interest savings of about $2.6 million, a Q3 premium charge of $0.3 million, and a $23.5 million reduction in Tier 1 equity capital. The company expected capital ratios to remain above well-capitalized minimums.
- A South Florida borrower relationship totaling $11.6 million was downgraded to substandard and placed on nonaccrual in Q2. On July 30, the company agreed to restructure $9.4 million of the relationship; residential loans totaling $2.2 million were not modified. Management considered related reserves adequate and said it would closely monitor performance.
- Credit-card exposure was being wound down: receivables declined to $26.1 million and the allowance was $6.5 million. Most cardholders were foreign, largely Venezuelan. Management warned that ending charging privileges and requiring repayment could initially increase losses and could affect customer relationships.
- Venezuelan deposit runoff and difficult economic conditions remain risks. Other cited risks include interest-rate and securities valuation sensitivity, credit deterioration, regulatory and operational risks, cybersecurity, and the effects of changing customer and market conditions.
- The company disclosed an unresolved trust-related lawsuit; it could not reasonably estimate a possible loss or range. Management said other ordinary-course litigation was not expected to materially affect the company, while noting outcomes remain uncertain.
Important facts for investors to verify
- Whether Venezuela-related deposit runoff continues, and how the company replaces those balances with core domestic funding.
- Subsequent performance, reserve adequacy and collection outcomes for the $11.6 million impaired borrower relationship and the credit-card portfolio runoff.
- Whether the announced trust-preferred redemptions were completed as planned, and their realized effects on interest expense, capital and liquidity.
- Whether declining rates compress NIM beyond management’s expectations, given higher deposit costs and the company’s asset-sensitive profile.
- Execution and total costs of rebranding and staff realignment, and whether expected efficiency improvements materialize.
- Developments in the unresolved litigation and any changes to the company’s loss estimates or reserves.