Amerant Bancorp Inc. Q3 FY2022 Earnings Call

Good day and thank you for standing by. Welcome to the Amerant Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised, that today’s conference is being recorded. I would now like to hand the conference over to Laura Rossi, Head of Investor Relations. Please go ahead.

Thank you, Tanya. Good morning, everyone, and thank you for joining us to review Amerant Bancorp’s third quarter 2022 results. On today’s call are Jerry Plush, our Chairman and Chief Executive Officer; and Carlos Iafigliola, our Chief Financial Officer. As we begin, please note that discussions on today’s call contain forward-looking statements within the meaning of the Securities Exchange Act. In addition, reference will also be made to non-GAAP financial measures. Please refer to the company’s earnings release for a statement regarding forward-looking statements, as well as for information and reconciliation of non-GAAP financial measures to GAAP measures. I will now turn it over to our Chairman and CEO, Jerry Plush.

Thank you, Laura. Good morning, everyone. And thank you for joining Amerant’s third quarter 2022 earnings call. I am pleased to be here today to report on our results for the quarter. But before we do that, I’d like to acknowledge the impact Hurricane Ian had on Southwest Florida. Our thoughts and prayers go out to those most affected by the storm. At Amerant, we have been actively involved in several efforts to support impacted communities recover from this unfortunate event, and we look forward to seeing everyone affected back on their feet. From a business perspective, we are fortunate to report there have been no significant impacts identified in our Florida loan portfolio. Moving on to the remarks of the quarter, on October 19, 2022, our Board of Directors approved a $0.09 per share dividend payable on November 30th of this year. As I have shared in previous calls, paying dividends is an essential component of our plan to provide greater value to our shareholders. I will now provide a brief overview of our performance in the third quarter and outline the steps we took to best position ourselves for the balance of the year and beyond. And then I will hand it over to Carlos to get into the details. So if you turn to slide three. Here, you can see a summary of our third quarter highlights. Our net income attributable to the company was $20.9 million, up significantly quarter-over-quarter. This increase was primarily driven by higher net interest income in the third quarter as we recorded higher average yields and balances on loans, as well as on our investments. These were partially offset by the increase in higher average costs and balances on deposits and FHLB advances. But as a result, the net interest margin expanded to 3.61%, an increase of 33 basis points quarter-over-quarter. Our balance sheet also grew significantly during the third quarter, with total assets reaching a historic high point at $8.7 billion, compared to $8.2 billion as of the close of 2Q 2022. Total gross loans were $6.5 billion, compared to $5.85 billion in 2Q 2022, an increase of $656 million, and total deposits were $6.6 billion, up $385 million, compared to $6.2 billion in 2Q 2022. The company’s capital levels continue to be strong and well in excess of the minimum regulatory requirements to be considered well capitalized as of September 30th of this year. During the quarter, we also paid out the previously announced cash dividend of $0.09 per share on August 31st. We will turn now to slide four, and you can see that our core PPNR was $30.3 million, up nearly 56%, compared to the $19.4 million reported in the previous quarter. As we have consistently stated, we believe this slide is essential to show the net revenue growth of the company, excluding provisions and non-routine items. So you can clearly see Amerant’s core earnings power. And as I noted in my remarks last quarter, there were significantly fewer non-recurring items reported this quarter compared to 2Q 2022. We can turn now to the key items on slide five and we can cover what happened during the third quarter. So we continue to work on reducing non-performing loans as part of our commitment to increase our percentage of earning assets to total assets. As of Q3, NPLs declined to $18.7 million, compared to $25.2 million as of 2Q 2022. We intend to continue to focus on driving down NPLs in future periods. We are also pleased to report that the sale of the New York City-based real estate-owned property closed this month, in the month of October. So coupled with the drop in NPLs, this significantly reduces our level of non-performing assets. As I have stated when discussing our retail network, we continue to look for expansion into new key markets while continuously looking for opportunities to consolidate and others. So during the third quarter, we opened our new Hialeah, Florida location. We received OCC approval for a new location in Key Biscayne, Florida, a market we are very excited to do business in and look to be open in by the end of the first quarter of next year. We closed our Pembroke Pines, Florida location as announced last quarter. Additionally, our new University Place location in Houston will open October 31st, while the location it replaces, South Shepherd, will close the same day, with our current customers moving over to the new location. And the opening of our Downtown Miami location is now expected sometime in early 2023. Regarding our Tampa loan production office, we continue to add key business development personnel in Tampa, specifically in C&I, and now have 14 team members, with four more openings to fill. We also added to our business development team here in South Florida and we plan to continue to look to expand in both Broward County and Palm Beach County. We will turn now to slide six. You can see here we have outlined key performance metrics and their change compared to last quarter. It’s clear our operating profitability improved from higher outstandings and improved net interest margin, as I just mentioned was 3.61%. Our efficiency ratio improved to 65.4%, compared to the 86.6% last quarter. Both ROA and ROE significantly improved, as you can see here from higher net income this quarter. For consistency and transparency, we again show the three quarter metrics of ROA, ROE and operating efficiency, excluding any one-time non-routine items in the footnotes, so you can more easily see the underlying performance for the quarter. We will turn now to slide seven, which focuses on Amerant Mortgage. On a standalone basis, Amerant Mortgage had net income of $800,000, an increase of $400,000 or 88% compared to Q2, primarily as a result of mortgage banking income from transactions with the Bank. However, on a consolidated basis, we recorded a net loss of $1.4 million for the third quarter in connection with the operations of Amerant Mortgage. Year-to-date 2022, the company has purchased approximately $298 million in loans through Amerant Mortgage, which includes loans originated and purchased from different channels. The current pipeline shows $51 million in process, or $79 million in applications as of October 12th, in line with the headwinds currently in place for the Mortgage business in general. So, with that said, I will now turn things over to Carlos, who will walk through our results for the quarter in more detail.

Thank you, Jerry, and good morning, everyone. Turning to slide eight, I will begin by discussing our investment portfolio. Our third quarter investment securities balance was $1.3 billion, down compared to both the previous quarter and the third quarter of 2021. When compared to the prior year, the duration of the investment portfolio has extended to five years due to lower prepayment speeds recorded in our mortgage-backed securities portfolio in light of rising interest rates. The investment strategy has focused on achieving the right balance between yield and duration, as current market conditions provide better reward on longer duration assets. The floating portion of our investment portfolio increased to 16%, compared to 11% in the previous year. As I did last quarter, I would like to take a minute to discuss the impact of interest rate increases on the valuation of debt securities available for sale. As of the end of September, the market value of this portfolio decreased by $35 million after tax compared to the second quarter and $100 million year-to-date. These changes come at a direct result of increases in interest rates and are consistent with our interest rate sensitivity analysis. The relative credit exposure of our investment portfolio is very limited, which is why there was no need to record any other than temporary burden. It is also important to comment that our tangible common equity ratio ended at 7.8% after considering the impact of changes in the valuation of our AFS portfolio. Continuing to slide nine, let’s talk about the loan portfolio. At the end of the third quarter, total gross loans were $6.5 billion, or up 11%, compared to the $5.85 billion at the end of the last quarter. This growth was driven by loan origination efforts primarily on the CRE side and single-family residential mortgages. Additionally, the production in Amerant Mortgage was complemented with loan purchases through third parties. Partially offsetting this increase were prepayments totaling $182 million, primarily in commercial loans. Also, during the third quarter, we had $22 million from loans originated with the white-label equipment financing solution that we announced last quarter. Loans held for sale as of the end of the quarter totaled $58 million, compared to $121 million as of the second quarter of 2022. As of the third quarter, loans held for sale consisted of residential mortgage loans. We transferred the new CRE loans previously accounted as loans available for sale to investment category, as we now have the intent and ability to hold this until maturity or retain. Consumer loans as of September 30th were $577 million, an increase of $20 million or 3.5% quarter-over-quarter. This includes approximately $497 million in higher yielding indirect loans, which continues to represent a tactical move for us to increase yields given higher funding costs. During the third quarter, we purchased $91 million of consumer loans under the indirect lending program. We also launched a new fintech-enabled program, which generated $6 million in consumer loans and is intended to progressively replace our indirect purchases. Turning to slide 10, let’s take a closer look at the credit quality. Our credit quality remains sound and reserve coverage is strong. The allowance for loan losses at the end of the third quarter was $54 million, an increase of 3.2% from the $52 million at the end of the previous quarter. There was a provision for loan losses of $3 million in the third quarter to account for the loan growth. During the third quarter, the $2.7 million allowance associated with the COVID-19 pandemic was further reduced to $1.6 million, now as a generic reserve. This generic reserve accounts for losses pending to be identified in our portfolio, such as those that may result from Hurricane Ian. At this time, we haven’t identified any immediate significant impact on the collateral of our portfolio. Amerant’s current exposure to Ian’s impact is approximately $300 million. Our team members have been in contact with these borrowers and have been making site visits as well. Net charge-offs during the third quarter totaled $1.3 million, compared to the $4 million in the second quarter. During the third quarter of 2022, the company charged off $1.7 million related to multiple consumer loans and $0.2 million in connection with two commercial loans. Non-performing assets totaled $25 million at the end of the third quarter, a decrease of $6.6 million or 21% compared to the second quarter and a decrease of $68 million or 73% compared to the third quarter of 2021. The ratio of non-performing assets to total assets was 29 basis points, down 10 basis points from the second quarter of 2022 and down 95 basis points from the third quarter of 2021. Our non-performing loans to total loans are down to 0.29%, compared to the 0.43% last quarter as a result of our commitment to increase earning assets to total assets. As Jerry mentioned, the non-performing asset ratio was further decreased as a result of the sale of the New York OREO we closed this month of October. In the third quarter of 2022, the coverage ratio for loan loss reserves to non-performing loans closed at 2.9 times, up from the 2.1 times at the end of the last quarter and from 1 time that we recorded a year ago. Continue to slide 11. Total deposits at the end of the third quarter were $6.6 billion, up $385 million from the previous quarter. This growth was driven by customer transactional accounts, which were up $258 million or 5.3%, primarily from interest-bearing demand accounts, as the company obtained additional deposits sourced via large home providers during the period. We also elected to increase brokered time deposits, which were $143 million increased in order to lock lower interest rates in light of rising market rates. The increase in total deposits was offset by a slight decrease in customer time deposits by $11 million or 1.2%, which reflects our retention efforts in this interest rate environment. It is important to highlight that domestic deposits now account for 63% of our total deposits, totaling $4.2 billion as of the end of the third quarter, up $444 million or 12% compared to the previous quarter. Foreign deposits, which account for 37% of the total deposits, totaled $2.4 billion, slightly down by $59 million or 2.4% compared to the previous quarter. Our core deposits, which consist of total deposits excluding all time deposits, were $5.2 billion as of the end of the third quarter, an increase of $253 million or 5.1% compared to the previous quarter. The $5.2 billion in core deposits included $2.1 billion in interest-bearing deposits, which increased by $127 million versus the previous quarter, $1.7 billion in savings and money market accounts, which increased by more than $100 million versus the second quarter, and $1.3 billion in non-interest-bearing demand deposits, which were up $20 million versus the previous quarter. Next, I will discuss the net interest income and the net interest margin on slide 12. Net interest income for this reporting period was $70 million, up $11 million or 19% quarter-over-quarter. This increase was driven by higher average yields on loans and investments resulting from a total increase of 300 basis points in short-term interest rates, higher average balances in floating commercial real estate and single-family residential loans, as well as changes in deposit rates being handled via specific allowances to manage the pressure of our cost of funds. As rates continue to increase, we are disciplined in managing the increases in our product rates. As we explained last quarter, we adjust certain interest rate-sensitive products and relationships to partially reflect the increases in market rates. There is a lot of value to leverage the product mix to differentiate pricing and control deposit betas. During the third quarter, based on the current deposit mix, we observed a beta of approximately 30 basis points, which helped us to navigate the interest rate increases we saw during the period. Moving to the net interest margin, as Jerry mentioned, the third quarter NIM was 3.61%, up by 33 basis points quarter-over-quarter. The change in the net interest income and the NIM was primarily driven by the increase in the yield of our loan portfolio, which is now at 5.1%, an increase of 68 basis points versus the previous quarter. As I said in Q2, the improvement in NIM is a reflection of our asset sensitivity position. Moving to slide 13, you can see our balance sheet continues to be asset sensitive, with about half of our loans having floating rate structures and 58% re-pricing within the year. Our NIM sensitivity profile to interest rate office scenarios has decreased compared to the last quarter in light of updated beta assumptions on interest-bearing deposits. These changes are consistent with a more competitive environment for deposit gathering. This quarter, we are showing a potential increase of approximately 6% net interest income in the up 100 scenarios and 9% for the two months. We will continue to actively manage our balance sheet to best position our bank for the expected rise in interest rates for the remaining portion of 2022. Moving to slide 14, non-interest income in the third quarter was $16 million, up $3 million versus the previous quarter and 23% from the $13 million in the second quarter. The increase was driven by positive valuation on marketable securities holdings of $1.5 million in the third quarter, compared to a negative valuation of $2.6 million in the second quarter; an increase of $1.8 million in fee income from client derivatives; an increase of $0.2 million in total brokerage and advisory fees, primarily driven by higher securities trading coming from the fixed income side from our customers' portfolio. The increase was partially offset by lower mortgage banking income of $2.3 million, the absence of net unrealized gain on derivatives valuation of 0.9% in the second quarter. Amerant’s assets under management totaled $1.8 billion as of the end of the third quarter, down $57 million or 3% from the end of the second quarter, which comes as no surprise given the lower market valuations in equity and fixed income markets. Turning to slide 16. Third quarter non-interest expenses was $56 million, down $6 million or 10% from the second quarter. As we announced on our previous earnings call, there was a significant reduction in one-time expenses. We considered $2 million as a non-routine item. Excluding these items, core non-interest expenses were $54 million in the third quarter of 2022. The quarter-over-quarter decrease was primarily driven by the absence of $3.2 million related to an OREO valuation in New York, $1.6 million impairment charge related to the closing of a banking center, as well as lower expenses in connection with the upcoming transition to FIS by $2.5 million, lower advertising expenses by $1.2 million, and severance and other compensation expenses by $0.8 million. The decrease in non-interest expenses was partially offset primarily by higher salaries of $0.7 million, resulting from new hires and $1 million of consulting fees in the third quarter in connection with the engagement with FIS. The efficiency ratio was 65.4% in the third quarter of 2022, compared to 86.6% in the previous quarter and 74.2% in the third quarter of last year. The core efficiency ratio decreased to 64.1% in the third quarter of 2022, compared to 73.7% in the second quarter of 2022. The improvement was driven by higher net interest income, as well as lower expenses during the third quarter. I will now turn the call back to Jerry for closing remarks.

Thank you, Carlos. In closing, I just want to state that we are seeing the benefits of the decisions we have made in recent quarters, as well as from the efforts of our team members, resulting in higher net income, solid net interest margin expansion, strong loan and deposit growth, a significant reduction in non-performing loans and a further reduction to non-performing assets just post quarter end, along with continued strong capital ratios. In summary, while we recognize there are clearly headwinds given the continued economic stress in the environment, we remain focused on prudently executing on our strategic initiatives and continuing to build our team in gaining additional market share. Our commitment to finishing our transformation and becoming the Bank of choice in the markets we serve is unwavering. With that, I will stop and Carlos and I will look to answer any questions you have. Tanya, please open the line for Q&A.

Certainly. And our first question will come from Brady Gailey of KBW. Your line is open.

Hey. Thanks. Good morning, guys.

Good morning, Brady.

Good morning.

So roughly $298 million of mortgages repurchased. I think you said year-to-date, what was the amount repurchased just in the third quarter?

In the third quarter, it was probably close to the $150 million that we bought from production coming from mortgage plus additional sources that we had on the quarter. There’s an asset class right now that has a very good balance between deal and duration, the way that we see it now.

Yeah. So even if you back that out, I mean, loan growth was incredibly robust. So can you talk a little bit about where you are seeing the loan growth and what the outlook is for loan growth as we head into 2023?

Yeah. Brady, it’s Jerry. I think on the call for the second quarter, we referenced that with the additions that we have had in the build-out of Tampa and the continued strong performance of the business development teams, both in Texas and here in South Florida, we have a pretty good pipeline headed into this quarter. I think you saw strong loan growth in commercial real estate. I think we gave some information about the changes that have happened in the different geographies. But I’d also note that we continue to see C&I even with high repayment activity. We had a very strong pipeline there as well and a good quarter of production. And I think we continue to do what we said we were going to do in the past. The white-label program was really going to start to kick in on equipment finance. You can see that we just started the white-label fintech solution that Carlos referenced as a replacement for indirect production. So I think all of these contributed to the growth overall during the quarter. Second…

And you made…

Apologies, Brady. You asked the second question which is, the pipeline continues to look very strong in all the different lines of business. I think the biggest comment I’d make about that is what we will record in loan growth needs to be funded by deposit growth. We have got a strong commitment as a deposits-first organization to really emphasize that as a way to continue to grow the balance sheet. So while we may have several hundred million dollars that we could possibly grow in the quarter, we need to also grow the deposits at the same point in time.

Yeah. Okay. And maybe just an update on the 1% ROA and 60% efficiency ratio targets, you basically hit on ROA in 3Q. So do you think you can keep it there? And then just an update on timing? I know you have kind of targeted a 60% efficiency ratio at some point. It doesn’t feel like that will happen in the next couple of quarters, so maybe an update on timing on how you are thinking about that?

I believe we can maintain a return on assets around 1% moving forward. Given the strength of our balance sheet, we anticipate some margin expansion in the fourth quarter despite rising deposit costs, which will be beneficial. The main challenge lies in growth, and we need to be cautious with our capital use. We achieved an over 11% return on equity, but we want to carefully monitor our tangible common equity ratio to ensure that any additions will be advantageous for future returns. Regarding the 60% efficiency ratio, I previously decided to continue hiring for business development roles, and I believe there are ongoing opportunities to bring in quality talent. We have openings in Tampa and are looking to expand in Palm and Broward. Additionally, we are adding new personnel in our wealth management division and seeking private bankers. This will lead to an increase in core expenses, particularly in personnel. However, these steps are essential for building long-term value for our franchise. While I aim to reach the 60% efficiency ratio next quarter, I expect we will remain in the low 60% range with the goal of achieving it in 2023.

Okay. And then, finally for me, just on the buyback. It doesn’t appear you guys were active in the quarter. I know TCE has run a little under where it has been historically for you guys at a little under 8%. So should we expect buybacks from here or is that not in the mix?

Yeah. Brady, I think we have been pretty consistent in saying, the way we think about capital is, we need to prudently use it or we need to return it. I think right now, our focus is, we have got opportunities to use it and I think that the one other item in return is the consistency of paying out a dividend. I think we completed two very successful buyback programs. When you look back at what we did in the fourth quarter of last year going into the first quarter and then another completed by the end of the first quarter. Right now we have not asked for authorization to do more. We think that the right thing to do is grow into that base, which is what we just did here in the third quarter and continue to evaluate what we will pay out from a dividend standpoint going forward.

Okay. Great. Thanks guys.

Yeah. Thank you.

Thank you.

One moment. And our next question will come from Michael Rose of Raymond James. Michael, your line is open.

Hey. Good morning, guys. Thanks for taking my questions.

Good morning.

Good morning.

Obviously, credit quality continues to be a really good story here, but the reserve ratio did come down kind of a little bit. Can you just give us kind of your general overarching thoughts on credit and maybe how some of your markets in Florida and Texas might do a little bit better, maybe just what gives you confidence, because we have seen others definitely begin to build reserves this quarter? Thanks.

Sure. Thank you, Michael. This is Jerry. Regarding our perspective on the reserve process, the improvements in both non-performing loans and non-performing assets provide us with some confidence. We did increase our reserves, although I should mention that half of the provision recorded was offset by charge-offs during the quarter. We noticed a slight increase, particularly in the consumer and direct portfolio, which we are monitoring closely. However, the rest of the portfolio continues to perform well. It's important to mention that we will be adopting the Current Expected Credit Loss (CECL) model, and as a result of various economic factors in these calculations, we anticipate an adjustment as of January 1. This adjustment will affect equity, along with a profit and loss adjustment for all the production booked throughout the year. Therefore, I expect our reserve ratios to increase in the fourth quarter due to the implementation of CECL, while we will also keep a close watch on the portfolio.

There will be a disclosure about the CECL range for day one implementation, which you will find has decreased compared to the previous quarter as we progress on the implementation. So now it’s a $15 million to $20 million incremental reserves due to day one implementation. And as Jerry mentioned, there will be other adjustments based on the production that we have recorded over the year.

Perfect. That was going to be one of my follow-ups. Maybe just switching gears to deposits. Obviously, deposit costs are up like they are for everyone. Do you have the number for interest-bearing costs at the end of September? More broadly, given that you have a decent chunk of international deposits, can you talk about any updates or changes to your deposit strategies as you navigate through a higher interest rate cycle? Thanks.

Let me address the second question first. It's important to highlight that the deposit growth this quarter came from every line of business, particularly the private banking side, which saw significant growth of nearly $75 million in that segment alone. Given the current environment with multiple rate hikes, many competitors are offering attractive rates. We're navigating through a time where both national and local players are presenting high-rate offers. We're also looking at attracting funds likely in the 12-month CD range, balancing the need to secure funds while maintaining flexibility. We aim to avoid long-term commitments as we rebuild our time deposit portfolio, which, as you know, we previously transitioned in 2021 from time deposits to non-interest-bearing and interest-bearing alternatives like money market accounts. Carlos will provide further insights on costs, but it's clear that deposit costs are increasing for us, just as they are for everyone else.

Yeah. I guess it’s important to comment that on the first stages of these interest rate increases, at least that was our case and we believe it’s the case for other institutions. There have been allowances being provided to the different business lines to increase interest rates on certain deposits, the ones that are more interest rate sensitive. We believe that from now on, there will be changes or adjustments on the deposit rates on the tables that they are being published. Therefore, there would be a more steep increase in the cost of funds. Our beta, as we discussed on the call, was 0.30% quarter-over-quarter, and we expect that in the fourth quarter, we will be probably on the 0.40%-ish beta. So you should expect an incremental cost of funds. In the case of the international side, they continue to be as a blended close to the 11 basis points. However, we are starting to see some pressures from certain private banking customers on the international side that they are aware of the rates that they are paying in the local markets, and they are experiencing pressure as well. So I would say, you see the interest-bearing deposits went from 0.62% to 1.05%. That is reflective of about 0.30% beta. Domestic we are the ones driving most of the change. International were very stable for the most part. But we are starting to see signs of increases.

Very proper answer. Thanks for taking my questions.

Thank you. Jerry Plush: Thank you, sir. Have a great day.

I will now turn the conference back to Mr. Plush for closing remarks. Thank you, Tanya, and thank you everyone for joining our third quarter earnings call. We appreciate your interest in Amerant and your continued support. Have a great day, everyone.

This concludes today’s conference. Thank you all for participating. You may now disconnect.