Amerant Bancorp Inc. (NYSE:AMTB) is a bank holding company headquartered in Coral Gables, Florida, with its principal subsidiary being Amerant Bank, N.A. The company provides a comprehensive array of deposit, credit, investment, wealth management, retail banking, mortgage services, and fiduciary services to individuals and businesses in its U.S. markets and select international customers.
Business Overview
Amerant Bancorp operates primarily in South Florida, where it is headquartered and has 18 banking centers, as well as in Houston, Texas, where it has 6 banking centers, and Tampa, Florida, where it has 1 banking center. The company's business is diversified across commercial real estate, commercial and industrial, consumer, and wealth management segments.
In 2023, the company announced a multi-year outsourcing agreement with Fidelity National Information Services (FIS) to transition its core data processing platform, other applications, and in-house technology services to FIS. This transition was completed in the fourth quarter of 2023.
Financials
Amerant Bancorp reported annual net income of $32.49 million, annual revenue of $328.91 million, annual operating cash flow of $26.72 million, and annual free cash flow of $15.79 million in its most recent fiscal year. In the first quarter of 2024, the company reported net income of $10.57 million and revenue of $144.63 million.
Credit Quality Challenges
During the second quarter of 2024, Amerant Bancorp experienced an increase in non-performing loans and higher provision for credit losses. The company reported that five loans, totaling $46 million, were downgraded from special mention to substandard status based on updated financial information received from the borrowers. Two of these larger relationships, a $26.8 million C&I loan and a $28.2 million owner-occupied loan, were the primary drivers of the increase in non-performing loans.
The company booked an $8 million provision for the $26.8 million C&I loan, citing the need to run multiple scenarios to determine the appropriate reserve level. Management remains optimistic about a positive outcome on this credit in the next several months, given the private equity backing of the borrower. Regarding the $28.2 million owner-occupied loan, the company is in a strong collateral position with a loan-to-value ratio around 40%.
In total, the provision for credit losses was $19.2 million in the second quarter, up from $12.4 million in the prior quarter. Excluding the reserve for commitments, the provision was $17.7 million, comprised of $12.8 million to cover charge-offs, $12.7 million in new specific reserves for non-performing loans, and $1.8 million due to loan composition and growth. These increases were partially offset by a $5.3 million release related to credit quality and macroeconomic projection updates, as well as a $4.4 million release due to the Houston loan portfolio being classified as held-for-sale.
Net charge-offs in the second quarter were $19.3 million, of which $5.4 million were related to purchased consumer loans, $9.9 million related to a commercial Houston-based loan, and $4.9 million related to multiple retail and business banking loans. This was offset by $0.9 million in recoveries.
Management expects charge-offs to be in the range of 25-30 basis points, excluding the indirect consumer loan portfolio, which is expected to run off by the first quarter of 2025. Including the indirect consumer loans, charge-offs are expected to be around 70 basis points, gradually decreasing to the 30 basis point normalized level.
Loan Growth and Deposit Trends
Total loans increased by $316.5 million, or 4.5%, in the second quarter, driven by organic growth across the company's commercial and consumer loan portfolios. The loan pipeline for the third quarter remains strong, with approximately $80 million in new loans closed month-to-date in July and an additional $40 million expected by the end of the month.
Total deposits decreased by $62.2 million in the second quarter, as organic deposit growth was offset by reductions in higher-cost municipal deposits and two large commercial depositor relationships. Management remains focused on growing deposits in tandem with loans, targeting a loan-to-deposit ratio around 95%.
Amerant Bancorp's assets under management (AUM) increased by $94.2 million, or 4%, to $2.45 billion in the second quarter, driven by market valuations and net new assets.
Expansion in Florida
As part of its strategic growth initiatives, Amerant Bancorp continues to expand its presence in Florida. In the second quarter, the company officially opened a new banking center in downtown Miami and hired market presidents for the Palm Beach and Central Florida regions. Additionally, the company signed agreements to open a new banking center in Miami Beach and a regional office and banking center in Palm Beach, both of which are expected to open in the first quarter of 2025.
The company also plans to open five additional banking centers in the Greater Tampa market over the next 24 months, with the first location in downtown Tampa expected to be signed soon.
Financial Performance
Amerant Bancorp reported diluted earnings per share of $0.15 in the second quarter of 2024, compared to $0.31 in the prior quarter. The decrease was primarily due to the higher provision for credit losses during the quarter.
Net interest income was $79.4 million in the second quarter, up 1.8% from the prior quarter, driven by higher average balances and rates on total interest-earning assets, mainly loans and securities available for sale, as well as lower average balances and rates on transactional accounts and brokered time deposits.
The net interest margin increased to 3.56% in the second quarter, up from 3.51% in the prior quarter, primarily due to the higher-yielding loan production and lower deposit costs.
Non-interest income was $19.4 million in the second quarter, up 34% from the prior quarter, primarily driven by higher loan-level derivative income and the absence of a loss on the sale of the Houston CRE loan portfolio that was recorded in the first quarter.
Non-interest expenses were $73.3 million in the second quarter, up 10.1% from the prior quarter, primarily due to a $3.4 million valuation impairment charge related to the Houston branches deemed for sale, $1.3 million in losses on loans held for sale, and increases in advertising, legal, and personnel expenses.
Outlook
For the third quarter of 2024, management expects the net interest margin to be stable compared to the second quarter. Non-interest income is expected to be approximately $17 million, and operating expenses are expected to remain around $68 million, including costs associated with onboarding new team members as part of the company's growth initiatives.
The provision for credit losses is expected to be around $12 million in the third quarter, with approximately half of this amount related to loan growth. Management anticipates the sale of the Houston franchise to close in the fourth quarter of 2024, with the premium from the sale to be recognized as income, net of any final transaction expenses.
Amerant Bancorp remains focused on executing its strategic plan and achieving its target of a 1% return on assets and 12% return on equity. The company also aims to reach a 60% efficiency ratio, though this goal may slide to the first quarter of 2025 as it continues to invest in its growth initiatives.
Risks and Challenges
Amerant Bancorp faces several risks and challenges, including:
1. Credit quality: The company's recent increase in non-performing loans and higher provision for credit losses highlight the need for continued vigilance in its underwriting and portfolio management practices.
2. Interest rate risk: The company's asset sensitivity exposes it to potential margin compression if interest rates decline more than expected.
3. Execution of growth initiatives: The company's ambitious expansion plans in Florida, including the opening of new banking centers and hiring of additional personnel, carry execution risks.
4. Integration of technology outsourcing: The successful transition of the company's core systems and applications to the FIS platform will be critical to maintaining operational efficiency.
5. Regulatory and compliance risks: As a regulated financial institution, Amerant Bancorp is subject to various laws and regulations that could impact its operations and financial performance.
Conclusion
Amerant Bancorp is executing on its strategic initiatives to drive growth, particularly in its Florida markets, while navigating a challenging credit environment. The company's recent credit quality issues underscore the need for continued diligence in its underwriting and portfolio management practices. However, management remains optimistic about the resolution of the larger problem credits and the company's ability to achieve its financial targets, including a 1% return on assets and 12% return on equity. Investors will want to closely monitor the company's progress in managing credit risk, growing its loan and deposit portfolios, and executing on its expansion plans in Florida.