Amerant Bancorp Inc. Q1 FY2021 Earnings Call

Thank you, Raquel. Good morning to everyone on the call, and thank you for joining us to review Amerant Bancorp's First Quarter 2021 Results. With me this morning are Jerry Plush, Chief Executive Officer; and Carlos Iafigliola, Chief Financial Officer. Before we begin, note that the company's press release, comments made on today's call and responses to your questions contain forward-looking statements. The company's business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control. And consequently, actual results may differ materially from those expressed or implied. Please refer to the cautionary notices regarding forward-looking statements in the company's earnings release and presentation. For a more complete description of these and other possible risks, please refer to the company's annual report on Form 10-K for the year ended December 31, 2020, and in other filings with the SEC. You can access these filings on the SEC's website. Please note that Amerant has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances, or changes in expectations, except as required by law. You should also note that the company's press release, earnings presentation and today's call include references to certain adjusted financial measures, also known as non-GAAP financial measures. Please refer to Appendix 1 of the company's earnings presentation for a reconciliation of each non-GAAP financial measure to its most comparable GAAP financial measure. I will now turn the call over to Jerry.

Thank you, Laura, and good morning, and thank you for joining Amerant's First Quarter 2021 Earnings Call. I'm pleased to join you today as Amerant's new CEO. Before I begin, I'd like to take a moment to recognize my predecessor, Millar Wilson. Over the course of his more than 40-year tenure, Millar oversaw Amerant's growth from $6 billion in assets to $8 billion and the expansion from 15 branches to 25. He spearheaded the spin-off and subsequent listing, and among other things, most recently navigated Amerant through the COVID pandemic. A well-deserved thank you to Millar for his time and service to the company. On another note, I'd like to announce that starting next quarter, we're planning to release earnings on the third Thursday of the following month. So the dates would be July 22, October 21 and January 20 for the balance of this year. We want to do this for several reasons, primarily to have more time each quarter to be focused on completing initiatives and generating growth and to also have the window open for insiders an additional week each quarter. So today, I'll be providing details about a number of new strategic initiatives and objectives that were referenced in our press release. We will share more detail about each one as these are essential to improving Amerant's performance and growth and achieving the growth objectives that we have. But first, I'd like to briefly talk about our performance in the first quarter, and then Carlos will provide some more details. So if you turn to Slide 3, you'll see our first quarter highlights. We're pleased to report improved results in the first quarter compared to the prior quarter. Our net income was up 70.7% quarter-over-quarter, primarily driven by higher noninterest income and lower expenses. In addition, there was no provision expense in the quarter, and the NIM improved slightly to 2.66%, driven primarily from lower average deposit costs. We also show our progress on Class B share repurchases since we announced the buyback program on March 10. Our total loans were $5.8 billion, and total deposits were $5.7 billion. They were both down slightly in the quarter. The decrease in loans was driven by higher prepayments, including $111 million in PPP loans, while the decrease in deposits was due to lower CDs and brokered deposits as we continue to pursue lower cost relationship-focused funding. So moving on to the next slide, you'll see several key performance metrics, which show improvement on all fronts this quarter, reflective of higher operating profitability, all while maintaining a robust capital position and solid credit coverage. These are just the first steps in the right direction. So while we know we have much more to do, it's good to be showing progress this quarter. And as I will get into later on the call, we'll outline a number of initiatives underway that are focused on driving continued improvement in operating results. So with that said, I'll turn the call over to Carlos to walk through our results for the quarter in more detail.

Thank you, Jerry, and thank you, everyone, for joining us today. Turning to Slide 5, I'll begin by discussing our investment portfolio. Our first quarter investment securities balance was $1.3 billion, unchanged from the previous quarter and down from the $1.7 billion in the first quarter of 2020. For this quarter, we continued our strategy to insulate the investment portfolio from prepayment risk. The floating portion represents only 14%, and recomposition towards high duration and the natural extension of the mortgage portfolio has increased the overall duration for the end of Q1 to 3.4 years. Moving on to Slide 6. We would like to provide an overview of our loan portfolio. At the end of the first quarter, total loans were $5.8 billion, slightly down by $88 million compared to the end of the fourth quarter. The decline was primarily driven due to prepayments across our commercial loan portfolio, inclusive of those from PPP loans, coupled with challenged loan production due to the continuous depressed economic activity as a result of the pandemic. In the first quarter, approximately half of prepayments were related to PPP loan forgiveness. We remain committed to our communities by originating over $80 million in PPP loans during the first quarter. Additionally, we received $111 million principal forgiven by the SBA. After all this, we have $165 million less outstanding on PPP loans as of the end of the first quarter. Before I move on, I wanted to talk about some positive signals we see in our loan portfolio this quarter. We continue to see strong performance across our owner-occupied and consumer loan portfolios. Specifically, consumer loans increased approximately $32 million quarter-over-quarter, primarily driven by our participation in indirect lending. We expect to continue purchasing these high-yield indirect loans in efforts to mitigate NIM pressures in the future quarters. Turning to Slide 7, I would like to provide some more details on Amerant credit risk. In the first quarter, we maintained strong credit risk coverage. The ratio of allowance for loan losses to total loans was 1.93%, higher than the previous quarter. The absence of loan loss provision expenses for this quarter was driven by lower loan production during the quarter. Nonperforming assets ended at $90 million, which represented an increase of $1.8 million quarter-over-quarter and a $57 million compared to a year ago. Nonperforming assets to total assets increased to 1.16%, up 3 basis points from the prior quarter and 75 basis points versus a year ago. This increase was due to the downgrades across our commercial and CRE portfolios. As a highlight, only 1.1% of our loan portfolio remained under deferral or forbearance in the first quarter, down from almost 20% in the same period last year. Almost the entirety of this portfolio is backed by real estate collateral. All of the loans out of forbearance have resumed regular payments. I would like to mention that we no longer have any hotels under forbearance, and we have seen a healthy increase in the efficacy of the properties in that portfolio, which is a great improvement versus 2020. Our team remains focused on proactively managing the status of our loans to ensure strong credit quality and strong reserve coverage. Moving to Slide 8. Total deposits were $5.7 billion, down 0.9% quarter-over-quarter and down 2.8% year-over-year. The quarter-over-quarter decrease was primarily driven by a $159 million combined reduction in customer CDs and brokered deposits, partially offset by an increase of $188 million in customer transaction accounts. The decline in Amerant's customer CD was due to our continued efforts to aggressively lower CD rates as we focus on increasing lower-cost deposits and multi-product relationships. As a result, our cost of interest-bearing deposits was down 10 basis points in this first quarter compared to the previous one. As of March 31, PPP-related deposits reached $173 million compared to $95 million as of the end of the previous quarter. Foreign deposits decreased $26 million compared to the prior quarter, representing an annualized decay of 4%, compared to the 6% we had on the quarter ago. We are encouraged to see a slowdown in foreign deposit decay given the contribution this deposit provides to our cost of funds. Foreign deposits cost of funds is 0.16% versus domestic at 0.95%. Having said this, international customers continue to use their savings to fund their day-to-day expenses. We continue our efforts to engage and cross-sell with customers, strengthen relationships with our international deposits, and gain a bigger share of wallet. Turning to Slide 9. The first quarter 2021 net interest income was $48 million, down 2% from the fourth quarter of 2020 and down 3% year-over-year. The decrease in net interest income compared to the fourth quarter was primarily due to two factors: First, lower loan volumes as a result of a continuous lower-than-normal loan production and customer prepayments; second, due to lower average balances on interest securities, primarily due to prepayments. These factors in the quarter were partially offset by lower overall deposit costs and average balances on customer CDs. With regards to the margin, first quarter NIM was 2.66%, up 5 basis points quarter-over-quarter, primarily due to lower costs of funds and customer CD balances and essentially flat year-over-year. Actions to alleviate pressures on margin included repricing of customer time deposits and relationship money markets; implementing floor rates to our new loan production and repricing; seeking additional interest-earning opportunities in high-yield lending programs. Moving to Slide 10. Noninterest income in the first quarter was $14 million, up 23% quarter-over-quarter and down 35% year-over-year. Over the quarter, the increase in noninterest income was primarily due to the absence of the loss on the sale of our operations center. Beyond this, a $2.6 million total net gain on securities and increased fees from brokerage and advisory activities also contributed to our higher noninterest income this quarter. As an offset to this increase, we didn't have fees related to the Main Street Lending Program and had lower derivative income and wire transfer fees. Amerant's assets under management reached $2 billion as of the end of March, up 2% year-over-year and up 28% year-over-year. Net new assets contributed approximately $89 million year-over-year as our teams continue to deepen share of wallet and attract new relationships. Turning to Slide 11. First quarter noninterest expenses were $44 million, down 60% quarter-over-quarter and down 3% year-over-year. The drivers of the quarter-over-quarter and the year-over-year decreases in noninterest expenses were largely the same. This is primarily driven by the separation plans implemented in the last quarter, which lowered salary and benefit expenses as well as the absence of severance expenses in connection with these plans. Other contributing factors included lower one-time expenses following the closure of two branches. Since the implementation of these severance plans, we have reduced our staff by 76 FTEs or 9%. However, we saw an increase in FTEs in the first quarter, driven by a number of strategic hirings, primarily in frontline personnel. Of note, we have resumed normal levels of bonus compensation and adopted a new long-term equity incentive compensation program. As of March 2021, Amerant continues to look for opportunities to create efficiencies and improve our cost structure.

Thank you, Carlos. I'd like to address how we are positioning Amerant for immediate and long-term success and walk through some of the specific initiatives we are focusing on. As you can see on Slide 13, there are a handful of initiatives that serve as the foundation for our long-term growth strategy. Our goal is simple: Improve our performance and drive sustainable, profitable growth. Importantly, we want to do this with the best interest of our investors, team members, customers, and the communities in which we operate. So first, it's clear to me from experience and from peer comparisons that Amerant needs to become, and will become, a deposits-first-focused bank. Core deposits are the lifeblood of a strong banking franchise, and growing core deposits is critical to our near- and long-term success and profitability. We have opportunities in the markets we serve to increase our share in consumer and small business and commercial to achieve a lower cost of funds, reduce the reliance on brokered funds and other high-cost sources. We've identified a number of ways to better target and attract these core deposits, including implementing and enhancing a digital onboarding platform; the build-out of our treasury management sales force and adding additional treasury management capabilities; focusing our marketing to drive additional digital and in-branch traffic; and gathering other sources of deposits, such as municipal accounts and private banking. So with these efforts, we're targeting a reduced reliance on brokered deposits so that we target not to exceed 5% of total deposits, and increasing our core deposits to make up over 20% of total deposits within the next 6 quarters. But please know, our goal will be to exceed that target and keep going. Additionally, we're focused on achieving a target loan-to-deposit ratio of 95%. All of which means to achieve these targets, we will all be very focused on gathering core deposit accounts. We are also going to accelerate our digital transformation. Over the past several quarters, we ramped up our digital efforts with the rollout of nCino and Salesforce across the organization and with the introduction of Amerant Investments Mobile. We've been focusing on evaluating digital solutions in a number of areas, including deposit account acquisition, small business lending, and wealth management, and we expect to be able to update everyone on our progress with these soon. Another area of immediate focus is dramatically improving Amerant's brand awareness. So in the communities we serve, building brand awareness is key for both growing our presence in these markets as well as laying a strong foundation for future expansion. We have a number of efforts currently underway that we will continue to pursue in the coming quarters to grow the awareness of the Amerant brand, from improved signage and promotions to evaluating affinity relationships and greater community involvement. Much of this can happen from us just being outward-focused and proactive as well. I consider us South Florida's best-kept secret, and we need to break through that. Additionally, we are diligently looking at rationalizing our lines of business and geographies. We plan to expand our treasury management, wealth management, private banking, and specialty finance capabilities in order to grow the bank's revenue streams and fee opportunities. At the same time, we are curtailing future originations in New York City. Our New York City location is a commercial real estate loan production office with minimal deposit relationships. And as we evaluate our alternatives there, we will be focusing on growing in our core markets. We intend to look for opportunities to grow in the continuous markets as well. Please note that over half the New York portfolio will pay off in the next 12 to 18 months, and we believe there are solid opportunities to replace that. So more to come as we evaluate our next steps there. We are also evaluating new ways to drive cost efficiencies across the business as part of our margin improvement plan. We've set a target goal to improve our efficiency ratio to 60% within the next 6 quarters. This will require looking at everything: pricing, balance sheet composition, and, of course, what we are spending and why. There is ample opportunity for us to improve in a number of areas. We also intend to optimize our capital structure and to look for ways to lower Amerant's cost of capital. The recent tender offer and now the Class B share buyback program authorized in Q1 that's currently underway are just first steps in continuously evaluating how much capital we need and what are the ways in which we can support our valuation. We need to be constantly exploring and evaluating new ways to optimize the structure, while continuing to drive profitable growth to appropriately utilize the capital that we have. A lower cost of capital can come from optimizing capital composition, and we intend to explore that as well. Finally, a quick comment regarding ESG and corporate responsibility. Many companies are now just facing the reality that ESG is becoming a business imperative. Major institutional investors, the SEC, and communities we serve as well as existing and potential customers and vendors are all looking to see what steps banks like us are taking. Please note, we're in the very early stages of developing our program, but I am confident that doing so will differentiate us from our competitors and drive business our way. More to come as we complete our evaluation and determine what steps we will actually take. So in conclusion, as all of you know, I joined the team here on February 15 and became CEO when we filed our 10-K on March 19. In the 70-or-so days since coming on board, I think it's clear that we have much work underway. There isn't anything we won't consider to make banking with us easier and to drive better results for our shareholders. So whether it's pricing, restructuring, adding complementary lines of business or products, staffing levels, facilities, tech, process improvement, among others, we are going to explore every option to drive better performance and returns for our shareholders while providing great customer service and a great experience and also being well-known and community-oriented. We're very committed to increasing transparency, and we look forward to providing you with more detail as we advance our strategy. And I promise we'll be sharing more detail on upcoming calls. So Raquel, with that, would you please open the line? We'd be happy to take questions.

Our first question comes from Michael Rose with Raymond James.

Jerry, how are you? So maybe we could start with just a little bit more on the specifics of maybe what you plan to do on the expense side. So obviously, there have been a few voluntary and involuntary retirement programs. You talked about adding some FTEs this quarter. Would you expect to be able to fund some of the investments that you're going to need to be able to grow the revenue piece of the business with further trimming and expense cuts? Just trying to get a sense for basically, at this expense level that we saw in the first quarter, which had some benefits from those voluntary and involuntary retirement programs, should we expect that to remain relatively stable as some of those investments are funded by additional attrition and cost cuts in other areas?

Yes. Look, I think great question. The timing on that is going to really be probably the bigger issue, which you could see, and I would say, Carlos will give more perspective on this around guidance, but our expenses, as he referenced, will go up in the second quarter, just from adding the staff that we made, plus we're bringing more folks on at Amerant Mortgage as well. As I referenced in my remarks, we're looking for additional treasury sales folks; we also are looking for additions in the wealth area. One thing we will be doing, anyone who's customer-facing that can add profitable growth to our organization, we're going to evaluate those additions along the way. Now how do we pay for it? That's absolutely one of the things that we will do is look at each and every area, again, from a span and layer perspective from how many of those functions we think we need to continue to do the way we are today. And really making sure that we rationalize the number of folks in every given area. That's not an issue as it relates to, look, we're going to do another executive retirement plan, but what it is, is that we're looking to make sure that we get as many people on a customer-facing, revenue-producing basis as possible. And so we'll look at every single expense line as ways to offset that.

Okay. That's really helpful. And then just on the balance sheet, I heard the commentary about bringing the loan-to-deposit ratio down to the mid-90s. As I look at the securities portfolio, we've seen many other banks begin to grow that. Your duration is around 3.5 years. With the expectation, as you grow the deposit base from here, would be to increase the size of the investment portfolio, perhaps taking some of that rate sensitivity off the table just given a lower-for-longer environment, assuming that's what's going to be in the card? Just trying to get a sense for the size of the balance sheet as we move forward and what you could do on the security side.

Yes. First and foremost, while I mentioned that we prioritize deposits, we are equally committed to generating loans. As I have noted, this effort extends beyond our immediate area, and much of it hinges on brand awareness. We have excellent team members, and we need to enhance the support around them. Raising awareness of our active presence has already sparked significant interest from potential clients. I anticipate strong loan growth, not just in commercial real estate, but also in commercial and industrial lending. This is something to consider. Regarding the securities portfolio, it serves as a great tool for managing interest rate risk and is important for asset liability management. However, our primary focus remains on organic loan and deposit growth, supplemented by areas that help manage our asset liability mix and interest rate risk. Whether or not we specifically grow that portfolio at this point, it is already substantial. We will continuously seek ways to restructure that portfolio, including some optimization efforts that produced gains in the first quarter, and we are exploring further ways to improve the portfolio's positioning.

It should be to complement. It should be fairly stable. As we gather more deposits, there should be a way to potentially increase a little bit. But in the long-term, it's pretty sizable for the size of the balance sheet. So in the long term, it should be dropping.

Okay. Very helpful. And maybe finally for me, just on the credit front. You guys have a really stout reserve. I think I calculate, almost 2% ex PPP loans at the end of the quarter, no provision 2 quarters in a row. Any reason to think based on kind of line of sight and what you see, would you expect to have really any material provisions as we kind of move over the next couple of quarters? It doesn't seem like you would just given that reserve coverage and where you stand today.

Yes, that's a great question. It will primarily depend on our loan production and its composition regarding whether we need to increase our allowance or if we find opportunities to reduce parts of it in the upcoming quarters, which will be balanced by the production we plan to have on our books. Regarding large provisioning, we are very confident about our current allowance level. Over the next several quarters, we anticipate significant growth that will absorb any excess we currently have, and if growth doesn't occur, it could present a challenge. I want to emphasize that this will likely be addressed through growth rather than any release of reserves. We expect there will be chances to adjust the reserves needed for certain areas of our portfolio, which could be offset by the anticipated growth in the coming months.

Michael, also important to mention that we keep out of the total reserve about $10 million that is related to COVID that we created in the institutional side of the loan loss provision. So taking into account Jerry's comments, that should be helpful for any potential growth. It could be reallocated to potential growth and so on.

Our next question comes from the line of Brady Gailey with KBW.

So I wanted to start with the 60% efficiency ratio goal. I mean, bigger picture, there are two ways to get there. You can cut expenses or you can grow revenue. And I'm sure you'll be looking at both. But is there one side of that equation that you think is the real opportunity to get that efficiency ratio down?

Yes, thanks for the question, Brady. I believe we have chances to improve our net interest margin and increase fees as well. As you consider our future, the mortgage venture at Amerant Mortgage will start making an impact in the third and fourth quarters. I also anticipate that our deposit initiatives will contribute to enhancing the net interest margin. Additionally, growth in our portfolio will be beneficial. However, it's crucial that we optimize our expense structure and ensure that every dollar spent has a clear return on investment. We aim to optimize so that we can reinvest more into growth. It's important to understand that while we will undertake significant cost rationalization, we also plan to invest more to drive revenue. We are committed to exploring all options and will provide more details in the upcoming quarters.

All right. And then I think we all understand your plan for New York. But I wanted to ask about the Houston market. I mean, that's also a market that is obviously not core Florida. So any thoughts on your presence in Houston, Texas?

Look, I think the big difference is that Texas is a deposit-gathering franchise for us. We actually see opportunities there. Yes, it's highly competitive. But I would tell you that right now, what we're more focused on is the opportunities, as we just said, to redeploy resources and focus on the core market here. We think there's enormous opportunity. So I would consider that sort of our first step. But please know, we do see that in the Houston marketplace, that there's a lot of opportunity to expand both on the deposit and loan side. And we're actually evaluating opportunities there even to expand more on the wealth side.

To complement your answer, Jerry, it's important to mention that Texas is not by any means New York. It's a more balanced vehicle or jurisdiction with almost $1 billion in the loan portfolio and $600 million on the depository side. So it's more balanced.

All right. And then you might not want to answer this next question yet, Jerry. But when you look at the profitability of Amerant, outside of last year with COVID, where things were all over the place. But Amerant had been running kind of a 65 to 70 basis point ROA. You have a lot of initiatives here, which is great to hear about. But any idea, longer term, what you think the profitability profile could look like at Amerant in terms of ROA or ROE or however you want to look at it?

Yes. I would respond by saying we need to be at 1% or greater on ROA and 10% or greater on ROE. Our objective is to be a top performer. We have to build that brick by brick, so to speak. But I clearly am focused on getting to those type of numbers with this organization. And I think with the team that we have here, we can achieve that.

Okay. Great. It's great to hear about your plan here.

Thank you. Appreciate the questions.

Your next question comes from the line of Stephen Scouten with Piper Sandler.

I'm curious to how you're thinking about loan growth maybe over the next 12 to 18 months, if you talked about that New York City book repricing or maturing over that same duration of time? And kind of if you could remind us what the size of that loan book in New York City is today, I think the case, there was about 24% of CRE loans. So just trying to think about the size of potential runoff there.

Yes. It's approximately a $730 million prebook with around $35 million in associated deposits. As we consider the 12 to 18-month timeline, we expect half of the portfolio to mature, which indicates its current state of maturity. There's significant competition as others may solicit some of those customers, which is likely to occur. Nevertheless, we see opportunities for continued growth in our markets, particularly in Houston. If we keep adding the revenue producers we're currently discussing, I believe we'll be well-positioned to easily offset any runoff that may happen in New York.

Okay. Great. Thinking about the consumer loan growth briefly, you mentioned that the long-term maximum could be around 10%. Can you update us on any new partnerships? I know that SoFi is the primary relationship, but are you close to adding another one? Also, what do you expect the average yield to be on this new production?

On that end, Stephen, how's it going? It has primarily been SoFi. We have about $200 million in that portfolio. Contractually, it's around a 10% yield, give or take. Effectively, it usually hovers closer to 7.5%, give or take. At this point, we are exploring other sources, but this has been the strongest performer so far. So it's primarily SoFi.

Good. Along with that, are you able to provide a blended yield for your total production and how it compares to your average yields?

So this one is not the biggest portion of the production. The blended rate for the U.S. is coming between 3.5% to 4.25% more or less on a marginal basis.

Great. Okay. And then maybe just one last thing from me. Jerry, you mentioned optimizing capital. What does that look like for you in the near term? Is there a target capital ratio? I know you also discussed competition and lowering the cost of capital. I'm curious if you could share more details on what that might look like in the next 6 to 12 months.

Yes, Stephen, we are definitely focused on executing our buyback program as much as possible. As we grow and evaluate the best opportunities, we'll continue to assess whether additional buybacks make sense or if we should consider replacing them with more cost-effective capital sources. Currently, market conditions are favorable, and we believe that as we improve our profitability, we will have the opportunity to take advantage of these lower-cost options that others are currently accessing, as evidenced by the daily announcements. That's our intention moving forward.

Okay. Great. Great. And congrats on the initiatives and the progress you've made.

Thank you. Appreciate the questions.

There are no further questions. Mr. Plush, the floor is yours for any closing remarks.

Thank you, Raquel. I just want to say thank you to everyone for joining our first quarter earnings conference call. We're really excited about the future here at Amerant. And we look forward to updating you on our progress toward becoming a higher-performing bank. Hope everyone has a great day. Take care.

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.