Amerant Bancorp Inc. (NASDAQ:AMTB) Q4 2022 Earnings Call Transcript

Amerant Bancorp Inc. (NASDAQ:AMTB) Q4 2022 Earnings Call Transcript January 20, 2023

Operator: Good day and thank you for standing by. Welcome to the Amerant fourth 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. To ask a question during this session, you will need to press star-one-one on your telephone. Please be advised today’s conference is being recorded. I would now like to hand the conference over to your host today, Laura Rossi, Head of Investor Relations at Amerant. Please go ahead.

Laura Rossi: Thank you Michelle. Good morning everyone and thank you for joining us to review Amerant Bancorp’s fourth quarter and full year 2022 results. On today’s call are Jerry Plush, our Chairman and Chief Executive Officer, and Carlos Iafigliola, our Senior Executive Vice President and Chief Financial Officer. As we begin, please note the discussions on today’s call contain forward-looking statements within the meaning of the Securities Exchange Act. In addition, references 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.

Jerry Plush: Thank you Laura. Good morning everyone and thank you for joining today. I am pleased to be here to report on our performance for the quarter and full year, but before we get into that, I would like to first acknowledge and thank all of my colleagues here at Amerant for their dedication and effort again this quarter. We have a great team and we’re excited about the strong additions to the Amerant family this quarter and throughout the year. They will play an essential role in our growth in 2023 and beyond. Moving onto the remarks for the quarter, I’m pleased to share that on January 18 of 2023, our board of directors approved a dividend of $0.09 per share payable on February 28 of 2023. The ability to pay dividends along with the ability to repurchase stock are essential parts of effective capital management and value creation for our shareholders.

More on this in a few minutes. I’ll now provide a brief overview of our performance for the fourth quarter and year, and then Carlos will go over the details. He will then turn it back to me for some observations regarding 2023 as part of my concluding remarks. Let’s turn to Slide 3 for a summary of our fourth quarter highlights. Net income attributable to the company was $18.8 million, down 10.3% quarter-over-quarter driven by the recording of a provision for credit losses of $20.9 million which includes a one-time $11.1 million provision expense in connection with the adoption of CECL, as well as some other items which Carlos will cover in further detail in the coming slides. Please note we will provide disaggregated CECL impacts for each quarter of 2022 in our upcoming 10-K report.

Our net interest margin expanded to 3.96%, an increase of 35 basis points quarter-over-quarter. Our balance sheet continued to grow, reaching a record high of $9.1 billion in total assets compared to $8.7 billion as of the close of 3Q22. Total gross loans were $6.9 billion, up $416 million from the $6.5 billion last quarter. Total deposits were $7 billion, up $456 million from the $6.6 billion last quarter. Core deposits also increased by $114 million this quarter compared to 3Q22. The company’s capital continued to be strong and in excess of minimum regulatory requirements to be considered well capitalized as of December 31, 2022, and during the quarter we paid out the previously announced cash dividend of $0.09 per share on November 30, 2022.

Regarding effective capital management, as I referenced earlier, on December 19 we announced that our board authorized a new $25 million share repurchase program which became effective on 1/1/2023, and this will remain active for the calendar year of 2023. At the time of this announcement, we stated we did not intend to use this new authorization before reporting the results today, and we did not use it. We do now intend to be opportunistic throughout the year to utilize this authorization where appropriate. Let’s look at core PPNR on Slide 4. Core PPNR increased to $37.8 million, up 24.8% compared to the $30.3 million reported in the previous quarter. As we’ve consistently stated, we believe it’s essential to show that net revenue growth of the company excluding provisions and non-routine items to show Amerant’s core earnings power.

Turning now to Slide 5, here is a list of several key actions taken during the fourth quarter. We continue to focus on actions that will drive profitability and improve our efficiency ratio. We also intend to continue investing in future growth, as you will see. We referenced last quarter a commercial property that moved into REO. This was disposed of in October at no additional loss. Regarding an update related to our banking centers, as we previously announced, we did close the Pembroke Pines, Florida location on 10/17/22 and we consolidated the existing customers into our newer Davie branch location. We opened in University Place in Houston at the end of October and closed the South Shepherd banking center. This is a far superior location for us as the Texas Medical Center, Rice University, Rice Village, and the NRG Center complex are all within a one-mile radius.

The downtown Miami location is now expected for 3Q23. This will be a flagship location for us in the heart of the city with private banking, wealth management and commercial banking all having business development officers located there. We received OCC approval to open a new full service banking center in Key Biscayne, Florida. Permits are expected sometime this quarter and opening is expected for the second quarter. We’re excited to be opening there and we’ve already attracted a well respected team to drive growth. We also received OCC approval for a new location on Las Olas Boulevard in Fort Lauderdale, Florida. This office is expected to open in 3Q23 and will bolster our consumer bank growth, especially in private banking there. We continue to add key business development personnel in domestic retail, private commercial banking, as well as wealth management.

Our board appointed Ms. Erin Dolan Knight as a member of the board of directors effective on December 15 of 2022. Erin is well known and respected here in the Miami marketplace and her knowledge and banking experience make her an excellent addition to our board. As previously referenced, the board authorized a new share repurchase program for up to $25 million of Amerant shares of Class A common stock. On the partnership front, we announced an expanded multi-year partnership with the Florida Panthers, making Amerant the official bank of the Florida Panthers and FLA Live Arena. We’re excited to not only be able to say we’re the official bank of the Panthers but to also have them as one of our newest customers, and the same goes for our partnership with the Miami Heat.

Banking with us is an essential part of these partnerships. We’ll talk more about this in our concluding remarks. Then finishing up this slide, we became a large accelerated filer and adopted the current expected credit loss accounting standard, which Carlos will go into detail shortly. Now we’ll turn to Slide 6. Here are select key performance metrics and their change compared to last quarter. Our net interest margin improved to 3.96% compared to the 3.61% in the previous quarter, and our efficiency ratio improved to 58.4% compared to 65.4% last quarter. Please note that the core efficiency ratio for 4/2/22 was 61.3%, so for consistency and transparency, we included the three core metrics of ROA, ROE and efficiency excluding any one-time or non-routine items in the footnotes in the slide so you can easily see the underlying performance for the quarter.

We’ll turn now to Slide 7, which focused on Amerant Mortgage. On a standalone basis, Amerant Mortgage had net income of $0.9 million, an increase of $100,000 or 13.9% compared to Q3, primarily the result of mortgage banking income from transactions with the bank. On a consolidated basis, we recorded a net loss of $1.5 million for the fourth quarter in connection with the operations of Amerant Mortgage. Year to date 2022, the company has purchased approximately $413 million in loans through Amerant Mortgage, which includes loans originated and purchased from different channels. The current pipeline shows $64 million in process or 88 applications as of January 12, 2023. With that said, I’ll now turn things over to Carlos, who will walk through our results for the quarter in more detail.

Carlos Iafigliola: Thank you Jerry, and good morning everyone. Turning to Slide 8, I’ll begin the discussion with our investment portfolio. Our fourth quarter investment securities closed at $1.3 billion. We also had a strong cash position of $290 million for the end of the quarter. When compared to the prior year, the duration of the investment portfolio extended to 4.9 years due to higher market rates and lower pre-payment speeds recorded in our mortgage-backed securities. As I shared last quarter, our investment strategy has focused on achieving the right balance between yield and duration while maintaining high credit quality in the portfolio. The floating portion of our investment portfolio increased to 13% compared to 11% in the previous year.

As I have done in the previous quarters, I would like to reference the impact of the interest rate increases on the valuation of the debt securities available for sale. As of the end of the fourth quarter, the market value of this portfolio had increased by $3.9 million after tax compared to a decrease of $35 million in the third quarter. The quarter-over-quarter increase was driven by mortgage bond spreads contracting during the performance of the quarter. We had an after-tax decrease of $97.2 million in the valuation of our AFS portfolio during 2022 which was a direct result of increases in interest rates and is consistent with our interest rate sensitivity analysis for a 300 basis point shock. Note that 73% of our AFS portfolio is guaranteed by the government while the remaining portion is investment grade.

It is also important to comment that our tangible common equity ratio ended at 7.5% after considering the impact of changes in valuation of our AFS portfolio. Continuing to Slide No. 9, let’s talk about the loan portfolio. At the end of the fourth quarter, total gross loans were $6.9 billion, up 6.4% compared to the end of the last quarter. The increase in total loans was primarily driven by higher C&I loan balances and residential loan purchases during the quarter, despite having received approximately $163 million in prepayments from both CRE and C&I portfolios. Consumer loans as of the end of the fourth quarter were $605 million, an increase of $28 million or 4.8% quarter-over-quarter. This includes $433 million of higher yielding indirect consumer loans compared to $487 million in the previous quarter.

Loans held for sale totaled approximately $62 million as of the end of December, all in connection with the activities of Amerant Mortgage. Turning to Slide No. 10, let’s take a closer look at credit quality. Overall credit quality remains sound and reserve coverage improved over the quarter despite charge-offs recorded during the same period. The allowance for credit losses at the end of the fourth quarter was $83.5 million compared to $53.7 million at the close of the previous quarter. The change was primarily due to CECL. We elected not to apply the three-year transition provision to our capital calculations. In the fourth quarter, we recorded a one-time day one $18.7 million adjustment to retained earnings with a corresponding after-tax cumulative effect of $13.9 million to account for the CECL impact as of January 1, 2022, and a day two $11.1 million adjustment to provisions to account for the CECL impact for the year ended December 31, 2022, including loan growth and changes in macroeconomic conditions during the year.

Photo by rupixen.com on Unsplash

The provision for credit losses in the fourth quarter under CECL excluding the retroactive effect corresponding to the first, second and third quarters of 2022 is approximately $7 million. The provision also included $9.8 million in additional reserve requirements for charge-offs. The total provision recorded for the quarter was $20.9 million compared to a $3 million provision in the previous quarter. Net charge-offs of $9.8 million in the fourth quarter compared to $0.7 million in the third quarter. Charge-offs during the period were primarily due to $5.5 million related to consumer loans, of which $3.4 million resulted from a change in the consumer credit charge-off policy from 120 days to 90 days past due, $3.9 million in connection with a New York-based CRE retail loan, and $1.1 million in business loans.

This was offset by $0.6 million in recoveries. The CRE retail loan is expected to transition into REO during the first quarter of 2023 with no additional changes in valuation once we finalize updating ownership. Non-performing assets totaled $37.6 million at the end of the fourth quarter of 2022, an increase of $12.5 million compared to the third quarter and a decrease of $22 million compared to the fourth quarter of 2021. The increase this quarter was primarily due to the New York property I previously mentioned and primarily offset by the disposition of a $6.3 million OREO the previous quarter. The ratio of non-performing assets to total assets was 41 basis points, up 12 basis points from the third quarter of 2022 and down 37 basis points from the fourth quarter of 2021.

In the fourth quarter of 2022, the coverage ratio of loan loss reserve to non-performing loans decreased to 2.2 times from 2.9 times in the third quarter, an increase from 1.4 times at the close of the fourth quarter of 2021. Continuing to Slide 11, total deposits at the end of the fourth quarter were $7 billion, up $456 million from the end of the third quarter. This growth was driven by time deposits which totaled $1.7 billion, up $342 million compared to the previous quarter. Note that domestic deposits account for 66% of our total deposits, totaling $4.6 billion as of the end of the third quarter, up $455 million or 11% compared to the previous quarter. Foreign deposits, which account for 34% of total deposits, totaled $2.4 billion, slightly up by $1.5 million compared to the previous quarter.

Our core deposits, which consist of total deposits excluding all time deposits were $5.3 billion as of the end of the fourth quarter, an increase of $114 million or 2.2% compared to previous quarter. The increase in core deposits was primarily driven by commercial deposits inclusive of new funds from our sports partnerships and additional funds from municipalities. The $5.3 billion in core deposits includes $2.3 billion in interest-bearing deposits, which increased $154 million versus the previous quarter, $1.6 billion in savings and money market deposits, which decreased $88 million versus previous quarter as opportunity cost of customers increases with interest rates, and $1.4 billion in non-interest bearing demand deposits, up $49 million versus previous quarter.

Next I will discuss the net interest income and net interest margin on Slide 12. Fourth quarter 2022 net interest income was $82.3 million, up 18% quarter-over-quarter and up 47% year-over-year. The quarter-over-quarter increase was primarily attributed to higher rates in total interest-earning assets, primarily loans, driven by the combined effect of a 125 basis point increase in the Federal Reserve benchmark during the fourth quarter and a 75 basis point increase at the end of the third quarter. We observed a beta of approximately 55 basis points in our loan portfolio during the third quarter and a beta of 41 basis points for the full year, which helped to drive our margin. Also contributing to the increase in the net interest income was higher average balances in loans.

The increase in net interest income was partially offset by higher rates in interest-bearing deposits, broker fees, and FHLB advances. As we mentioned in the past quarter, we continue to be very disciplined managing an increase in our product rates during this interest rate cycle. We adjusted certain interest rate-sensitive products and relationships to partially reflect the increases in the market rate. As a result, we observed a beta of interest-bearing accounts of approximately 49 basis points during the third quarter and 28 basis points for the full year. Moving to the net interest margin, as Jerry mentioned, NIM was 3.96%, up 35 basis points quarter-over-quarter. The change in the net interest income on the net interest margin was primarily driven by the increase in the yield of our loan portfolio, which is now at 5.85%, an increase of 79 basis points compared to the previous quarter.

As I said in the last quarters, the improvement in the NIM is a reflection of our asset-sensitive position. Moving to Slide 13, we’ll show the interest rate sensitivity analysis. As you can see, our balance sheet continues to be asset-sensitive with about half of our loans having floating rate structures and 59% re-pricing within a year. Our NIM sensitivity profile to interest rate up scenarios has decreased compared to the last quarter due to increased amount in time deposits. These changes are consistent with a more competitive environment for deposit gathering. This quarter, we are showing a potential increase of approximately 5% in net interest income under an up 100 day scenario and 8% for an up to 100 day scenario. We will continue to actively manage our balance sheet to best position our bank for expected remaining increases in interest rates as the Federal Reserve continues its efforts to dampen inflation in 2023.

Continuing to Slide 14, non-interest income in the fourth quarter was $24.4 million, an increase of $8.4 million from the third quarter. This was primarily due to a recorded net gain of $11.4 million on prepayment of approximately $175 million of FHLB advances as we took advantage of what we consider was their peak evaluation; second, an increase of $0.6 million in fee income from client derivatives; and third, higher market valuations under instruments. Offsetting this increase in non-interest income was higher losses due to the sale of an investment that was downgraded below investment grade. We consider $9.1 million of our non-interest income as a non-recurring item, an increase compared to the $1.4 million in third quarter 2022. This was primarily driven by the net gain in prepayment of advances that was previously discussed.

Core non-interest income was $15.3 million in the fourth quarter compared to $14.5 million in the previous one. Amerant assets under management and custody totaled $2 billion as of the end of the quarter, up $184 million or 10% from the end of the third quarter, primarily driven by an increase of $127 million in net new assets as we continue to execute on our relationship-focused strategy, as well as $67 million from an increased market valuation. Turning to Slide 15, fourth quarter non-interest expenses were $62.2 million, up $6.1 million or 11% from the third quarter and up $7.2 million year-over-year. The quarter-over-quarter increase was primarily due to the following: accrued for severance expenses as well as higher bonus variable compensation in connection with recent performance, higher loan level derivative expenses related to the client derivative transactions, higher expenses in connection with our brand positioning efforts such as out-of-home billboards and sports partnerships, higher professional and other services fees in connection with the adoption of CECL, as well as consulting and legal fees and additional projects, and additional depreciation expenses in connection with the closing of a banking center.

These increases were partially offset by lower technology expenses, as well as the absence of an OREO valuation that we had during the previous quarter. We consider $2.4 million of our non-interest expenses as a non-recurring item, an increase compared to the $2 million in the third quarter of 2022 primarily driven by severance-related expenses, as I mentioned before, and also due to conversion expenses. Core non-interest expenses were $59.8 million for the fourth quarter compared to $54.2 million in the third quarter. The efficiency ratio closed at 58.4% in the fourth quarter compared to 65.4% in the previous one and 41.4% in the fourth quarter of last year. The quarter-over-quarter decrease was driven by higher net interest income while the year-over-year increase was primarily due to the absence of the gain on the sale of the company’s headquarter building that was recorded in the last quarter of 2021.

Core efficiency ratio, which adjusts for non-recurring items, was 61.3% in the fourth quarter of 2022 compared to 64.1% in the third quarter of 2022 and 75% in the fourth quarter of 2021. Now I will turn back to Jerry for closing remarks.

Jerry Plush: Thank you Carlos. As I referenced earlier, I’d like to make a few comments on initiatives we have underway. I thought this would be helpful to provide. For most of 2022 and now for the first four and a half months of 2023, our team has been and will continue to work diligently behind the scenes preparing for the conversion of our core systems. Slated to take place on May 8, we believe this will be a significant step forward for us to be able to provide more up-to-date, highly integrated technology which post-conversion will result in making banking with us easier for our customers, as well as our team members. Regarding our digital transformation efforts, another team led by our Chief Digital Office is working in parallel during this conversion timeline to be ready to greatly enhance our information and data evaluation capabilities.

Called Harmony, it reflects our goal of having far more information readily available when interacting with our customers and potential clients, as well as for management purposes. I’d like to comment next on expansion. We have filed an application with the OCC to open a single location in Tampa to support our growing business opportunities there. We intend to only have one branch there on the first floor of our new regional office location, which we will be announcing soon. This single branch is ideally situated, like the others I referenced earlier in my remarks and the key action slide, to support deposit market share growth aligned with our goal of continued expansion in private banking and commercial banking. In conclusion, the benefits from the decisions we made throughout 2022 and from the efforts of our team members are clear, as evidenced by a higher core PPNR, significant net interest margin expansion, another quarter of solid loan and deposit growth, and strong capital ratios.

As we enter 2023, please know that we, like others, absolutely recognize the challenges that we will all face given uncertain economic conditions. We like the markets we are in and believe they are showing more resilience than other areas of the country, which is a key differentiator for us, but obviously we recognize that even the best markets will likely experience some impacts. We intend, though, to continue to remain focused on executing on our strategic initiatives, as we have in past quarters, as our commitment to be the bank of choice in the markets we serve is unwavering. With that, Carlos and I will look to answer any questions you have. Michelle, please open the line for Q&A.

See also 10 Value Stocks with Big Buybacks and 25 Wealthiest Countries in the World by GDP per capita.

Q&A Session

Operator: Thank you. Our first question comes from the line of Matt Olney with Stephens. Your line is open. Please go ahead.

Matt Olney: Hey, thanks. Good morning everybody.

Jerry Plush: Good morning Matt.

Matt Olney: Start with the loan growth – impressive results in the fourth quarter. I’d be curious about the moving parts of loan growth in fourth quarter within each category, and then, I guess, the outlook for the growth in ’23, and in particular curious about the appetite to add additional mortgage loans from here and also some additional consumer loans.

Carlos Iafigliola: Okay, thank you for the question. The changes in the loan portfolio primarily came from the commercial side. CRE was not the biggest component of the growth this time around, it was probably about $40 million. C&I on the opposite side came with about 120, and specialty finance also came with about 70, so they were probably the biggest drivers this quarter. Then consumer came with about $100 million coming primarily from the different sources that we have. Those were the primary drivers for the quarter, Matt.

Matt Olney: And then the expectations for ’23 within some of those categories you mentioned, Carlos, I’d be curious what your thoughts are there.

Jerry Plush: Yes, hey Matt, it’s Jerry. I think it’s probably safe to say, if you think about our expectations for the year, we still think with the strong pipelines we have, and I think it’s safe to say that you’ll continue to see a fairly similar distribution. Obviously it was a lower quarter, as Carlos mentioned, in CRE, but I do think you’ll see us look to have a pretty balanced distribution product-wise. We’ve hired folks in all of these categories and retained the team that we had in CRE, that we’ve had throughout 2022. We do expect to continue to look for C&I bankers, particularly as we continue to expand here in South Florida and also in Tampa and in Houston, so. I do think over time, you’ll continue–you’ll see us beginning to build more and more C&I business-related–it will start to become a greater proportion of the growth.

Matt Olney: Okay, well, and I guess I’m trying to drill down and appreciate lots of these loan categories were ramping in ’22 for various drivers, various reasons. I’m trying to appreciate if we should expect a similar level of ramp in ’23, or if it would slow down given some of the economic uncertainties.

Jerry Plush: Yes, look – I think we’re going to–obviously this is all dependent on market conditions, but our view is we’ve added a lot of quality people and you would say that every addition adds incremental volume to the organization, right, and so from the perspective of we’re going to continue to be prudent in our credit decision-making. I will tell you that we’re being very diligent about looking for full relationships with anyone who wants to borrow money from us. We’re looking for the full banking relationship with each and every one of them, but I do think it’s fair to say that we had an outsized growth for 2022 and I think that’s why we gave you guidance that the number would probably look a little bit more like the 10%, maybe 12% range, tops, compared to where we are.