Amerant Bancorp Inc. (AMTB) Earnings Call Transcript & Summary

Greetings, and welcome to the Amerant Bancorp Inc. strategic update and live webcast. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Laura Rossi, Senior Vice President and Head of Investor Relations. Thank you. You may begin.

Thank you, Camilla. Good evening, everyone, and thank you for joining us to discuss Amerant's announcement today regarding the strategic sale of our Houston franchise. On this call are Jerry Plush, Chairman and Chief Executive Officer; and Sharymar Calderon, Executive Vice President and 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, references may also be made to non-GAAP financial measures. Please refer to the company's investor presentation titled Strategic Sale of Houston Franchise dated April 17, 2024, 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 evening, everyone, and thank you for joining our conference call. Over the next 30 minutes, we plan to cover the details of the sale of Amerant's Houston-based branch network and in-footprint assets as we filed with the SEC today, and then we'll look to address any analyst questions at the end of our remarks. So following the previously-disclosed sale of $401 million in Houston-based multifamily loans in January of 2024, Amerant has reached an agreement to sell our Houston-based franchise to MidFirst Bank based in Oklahoma City. So as presented on Slide 3, the transaction encompasses $529 million in total loans, $576 million in deposits divested, which translates into a 92% loan-to-deposit ratio in the divested franchise, and the sale of our Houston branches, including 6 banking centers and a lease space assumed. The agreement capitalizes on a strong deposit premium multiple with a $13 million fixed net deposit premium at a 4.6% core deposit premium from the divestiture of the Houston franchise, and it positions this franchise for continued growth with a strong well-positioned bank in MidFirst. This strategic move improves Amerant's relative capital position, our balance sheet liquidity, and it also reduces CRE concentration. This provides for $12.1 million of after-tax impact to tangible common equity, inclusive of estimated after-tax ACL reversals and deal charges; approximately 120 basis points of CET1 improvement, inclusive of the $401 million multifamily loan sale closed in January of 2024; reduced pro forma regulatory CRE concentration ratio down to 220% and approximately 2% or $0.36 in accretion to tangible book value per share. Additionally, the transaction creates financial and operational flexibilities post closing. It enables us to pursue several accretive strategies such as additional organic growth, opportunistic M&A in Florida and/or share buybacks. So we'll turn now to Slide 4, and here, other transaction details are listed. The transaction is accretive as the marginal spread on this franchise is in the 2% or so area, well below our 3.50%-plus NIM for the entire company. When we layer in the operating expenses, the ROA of the Houston operation is also below the company's target rate. The Houston franchise has the infrastructure to likely double or triple in size and enhance profitability, but given the competitive dynamics in that market and all of the substantial opportunity here in our home state of Florida, we believe investing here in Florida is the best utilization of our capital. Our 45 full team members in Houston will be onboarded by MidFirst. This was extremely important to us. Note that these 45 people represent $4.9 million of annualized compensation expense. It's also important to note that MidFirst does not have a financing contingency and that this transaction is subject to customary regulatory approvals, and it's estimated to close during the second half of 2024. The initial after-tax proceeds from the sale are expected to be invested into short-term interest earning assets with the post-closing opportunities I just referenced as we intend to redeploy capital to replace assets and earnings. We'll turn now to Slide 5, and here, you can see how the divestiture of the Houston branch franchise represents Amerant's exit from Texas, as the only remaining operations from our Texas franchise post-closing will be $230 million in loans, which are primarily larger commercial customers. From this, approximately $82 million will mature during 2024 and this includes another $61 million in construction loans, and it also excludes $22 million in international deposits, which we can easily service from our Miami headquarters. Note that our intent is that core relationships will continue to be serviced and nonrelationship accounts will be wound down over time. We'll turn now to Slide 6, and here we show in further detail the deposit and loan composition of the divestiture. The $576 million in deposits includes $292 million or 51% in time deposits, $204 million or 35% in interest-bearing transactional deposits, and $79 million or 14% in noninterest-bearing deposits, and the average cost of this portfolio was 4.04%. The $529 million in loans includes $223 million or 42% in owner-occupied CRE and C&I, $112 million or 21% in nonowner-occupied CRE, $91 million or 17% in 1- to 4-family residential loans, $83 million or 16% in consumer loans, and $19 million or 4% in construction and land loans, and the yield on this portfolio was 6.57%. And you can see that our pro forma loss reserve coverage based on 4Q figures improves 5 basis points to 1.44%, up from 1.39%. So we'll turn now to Slide 7, where while loan-to-deposit ratio remains unchanged after our multifamily sale, here, you can see the material improvement on a pro forma basis and other financial metrics, whereby tangible common equity to total assets improved 60 basis points to 7.9% compared to fourth quarter '23. Our CET1 ratio improved 120 basis points to 11%, and again, our accretive total risk-based capital concentration declines from 235% to 220% during the same period. Since 2021, we've been laser-focused on being a deposits-first organization and bringing that loan-to-deposit ratio well under 100%, with our stated target of an average of around 95%. The multifamily sale and the Houston franchise exit more than accomplishes that. And most importantly, it gives us balance sheet flexibility to accelerate our growth in our Florida footprint. So we'll turn now to Slide 8, and we'll take a look at the pro forma balance sheet and compare our position relative to our peers. It's clear how this strategic move well positions us in all of these metrics, and with the CRE concentration in particular, even surpassing the median for the group. We'll now take a look at Slide 9, and I'd like to point out the value creation opportunity this divestiture provides. Our pro forma balance sheet ratios are very much in line or better than the peers. However, our stock currently trades at a discount to these institutions. We believe this divestiture has enhanced the quality of our balance sheet and presents a foundation for further shareholder value creation via better trading multiple. And as you can see, when compared -- hold on one second. And when compared to peer and regional banks, there's a tremendous opportunity for upside market performance as we complete this transaction and have the financial and operational flexibility to materially accelerate our Florida expansion strategy. So we'll turn now to Slide 10. We've included a chart that you may have seen recently in The Wall Street Journal, where Florida has 4 of the top best markets for labor market strength in the United States. And with that said, there's nothing holding us back when it comes to accelerating Amerant's expansion strategy in this market. Our Florida growth initiatives include entering into a letter of intent for a highly visible and accessible space in Palm Beach for regional office hub and for a Palm Beach-based branch. Following the recent announcement regarding opening our first retail location in Tampa and our new regional headquarters, we intend to open between 3 and 5 additional locations over the next 24 months in the surrounding area. In addition, we now have ample capacity with our new regional office to expand our workforce there. We opened our new Broward County regional offices in Plantation, Florida just this week, we've got an executive search underway for a Central Florida Market President, and we're actively recruiting for additional commercial relationship managers and private client bankers in Broward County and Palm Beach County in the Greater Tampa market. We will discuss these and other initiatives further during our earnings calls on April 25. So we'll turn now to our final slide. which is Slide 11, and let's recap on the key points of the transaction and what this strategic move means for Amerant. Divesting the Houston-based franchise monetizes a noncore asset, which is accretive to capital ratios and tangible book value per share; it strengthens our balance sheet liquidity and optionality for future capital deployment; it reallocates capital towards growth in Amerant's core Florida markets; and it allows for an acceleration of expansion efforts already underway in Tampa, Orlando, Broward County and Palm Beach County. So with that, I'll stop, and Shary and I will look to answer any questions you have. Operator, if you would, please open the line for Q&A.

[Operator Instructions] Our first question comes from the line of Russell Gunther with Stephens.

Jerry, I wonder if you guys could address the opportunity set for redeploying the capital and refocusing on we're really doubling down on Florida in terms of organic opportunity, buybacks. The deck also referenced potential for a balance sheet repositioning. Just how are you weighing the options?

Yes. I think, Russell, we have, and we've stated this already, fairly aggressive expansion plans on the organic side. We believe the best thing we could do is continue to focus on relationship banking. We've got a lot of people that are excited and interested in joining our team in the markets that we -- I just outlined. And so I would tell you that, that's probably the #1 priority. But clearly, we do have an approved buyback plan. We'll look to see and be opportunistic depending on what happens with pricing. And I think for the first time, we'll be able to start to take a look at, are there any M&A opportunities in the footprint. So I would say that clearly, we're still very focused on doing it our way with organic growth, and we'll look at the other levers as opportunities present themselves.

And then, Jerry, just to follow-up in terms of the growth outlook. With last quarter's results, I think you put a pretty sizable target in terms of organic expectations. Does this transaction make you feel better about that loan growth target upside to it? Just how are you thinking -- or how should we be thinking about what the organic opportunity is?

Yes. We don't feel any change whatsoever in the targets that we had laid out earlier this year.

Okay. Great. And then, guys, just last one for me and I'll step back. But as we fold all of this together and you, again, lean on the organic side of things, how does this impact the overall time line to get to what I believe is a 1% ROA target?

Well, so what we're seeing is in terms of the ROA, when we adjust for this transaction, we do believe we're still in a good spot to make it to a 1% ROA by the end of the year. And to get to that 1%, a couple of things I would mention, right? So we have a reduction -- at the time of the closing of the transaction, we're going to see some reduction in the net interest income, but it's going to be offset by a reduction in operating expenses. And when we think about the asset level compared to that, we do believe that the ROA will make it to a 1% or over.

Our next question comes from the line of Michael Rose with Raymond James.

Just following up on the last question as it relates to profitability. I appreciate that, but how quickly do you intend to deploy the capital from the sale? And I certainly understand that there's some charts in here that kind of point out your capital levels, which are a little bit lower than the peer set that you provided here. How should we think about what your targeted capital ratios would be after the sale and the reduced CRE concentration?

Yes. Well, Michael, you have to take into account that we're going to be at this size and scale for some time depending on what the timing is around regulatory approvals and the final closing of the transaction. Again, we wish we could pin down a specific day, like I'm sure everyone who's done a deal wishes they could do. But our view is that we like running in and around the range that we've been from a TCE perspective. We want to make sure that we stay at 10% or better in CET1, obviously. And we know that we need to keep at least these type of capital levels in place. It's just prudent, along with continuing to maintain a healthy ACL. So I would tell you that it's really going to be dependent on the growth of how all our earnings come through, right? And I think that's the way we're going to look at it. When Shary gave the perspective on the growth over the course of the year, remember that we're bringing on all these new people, so the growth accelerates 90 to 120 days after they've come on board. And so we expect very strong growth in the second half of the year, which would be in time to offset this dropping -- this coming off our balance sheet.

Okay. Great. And it's pretty clear that the multifamily loans are separate from this, but in the first quarter, I know you had some migration from some of the Houston credits. I think you had 2 nonaccrual commercial Texas loans and then I think some special mention migration as well. Are those loans included as part of the sale?

No, that, we specifically excluded as part of the transaction. And they weren't -- and Michael, they were not CRE loans.

Yes, I said commercial loans. Yes, sorry about that. Not C&I.

No, no worries. I just wanted to make sure.

All right. And then, I guess, finally, for me, this has been a very busy time since you stepped in the [ feed ], Jerry. I would hope that at this point, excluding organic growth measures, that we're going to see significantly less noise. I know you talked about kind of the return to the 1% ROA, but is there anything else strategically, just broadly speaking, maybe outside of sports partnerships, that is on the docket for Amerant as we move forward?

Yes. Look, no, I think it's a very fair question. And we've talked about transformation, migrating to execution, and we're certainly demonstrating some of the things we talked about at the close of the year. We've had good progress on a number of fronts. And so our expectation is that, that momentum is going to continue throughout 2024. One of the things that we're not stating is that the resiliency of the markets in which we operate has been fantastic. And so I think that we certainly have not been without some pressure from, as you mentioned, a couple of credits, but there's no question in our mind that we've got some of the best economies in the country, some of the strongest labor markets in which to operate, and so that just presents really nice opportunities for us on a go-forward basis.

Great. Maybe just one last quick one. Was this an auction? Or was this solely negotiated transaction?

There were multiple parties.

Our next question comes from the line of Woody Lay with KBW.

Just one follow-up on my end. So with the multifamily sale and then the branch sale combined, your CRE to total risk-based capital ratio has come down a good bit. Does this change how you view the forward loan growth? Does it allow you to be more opportunistic on the CRE front? Or is it your intention to sort of keep the CRE ratio at this lower level?

No, I think it gives us the flexibility to be opportunistic. I think that, again, in the geographic dispersion that we've talked about in these multiple markets, we're seeing strength in all of those. And so depending on opportunities, there could be a clear expectation of that increasing in comparison with where it's down to at this point. But again, remember, the transaction has to settle through, right, to get down to that pro forma 220%. So we'll be closely monitoring this and showing everything on a natural versus pro forma basis, assuming the settlement on the transaction in the quarters to come until it actually closes.

Our next question comes from the line of Feddie Strickland with Janney Montgomery Scott.

I saw something in the deck about Central Florida Market President. I think I heard Jerry say something about Orlando. Just wondered if you could expand on your thoughts on Central Florida. I would imagine this transaction gives you a little bit more opportunity to think about maybe some geographies you weren't thinking about as much before.

Yes. Feddie, we've actually been doing a number of transactions on the I-4 corridor. And so whether it's been in commercial real estate, whether -- or whether it's been in equipment finance, we view that obviously as an equally strong market. And right now, we're having that managed out of Tampa. So we're starting to look more towards that Tampa/Orlando as a central Florida marketplace for us. And so our view is we want someone that really understands both as much as possible, and we think that, that's a real positive if we can find someone, and also with the team, to help boost our efforts in that market. The intent, just to be clear, is to grow our presence, our physical presence in Tampa. We love the market. We think it's a great market for us. We are very excited about the new regional hub, the caliber of people we've been able to attract to the organization, the new branch location, everything going in a really great direction for us there. And so we like to think that this will just augment that -- all the efforts that have already taken place.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Mr. Jerry Plush for any closing comments.

Thank you, everyone, for joining the call, and for your continued support and interest in Amerant. Have a great night.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.