Amerant Bancorp (AMTB) Q2 2023: Provision Surge Drives 25% Reserve Increase as Deposit Growth Outpaces Loans
Amerant Bancorp’s Q2 was defined by a sharp 25% increase in credit loss reserves, driven by a legacy New York multifamily loan and macroeconomic adjustments, overshadowing record pre-provision net revenue. While deposit growth remained robust and capital levels strong, management signaled further net interest margin compression ahead and a full-spectrum review of costs to defend profitability. The bank’s focus on international, lower-cost deposits and full-banking relationships is now central to its strategy as competitive funding pressures intensify.
Summary
- Provision Shock: Credit loss reserves jumped as legacy New York CRE risk materialized.
- Deposit Mix Shift: International and time deposits are offsetting non-interest-bearing declines.
- Margin Compression Pressure: Leadership expects further NIM decline and is scrutinizing all expenses.
Business Overview
Amerant Bancorp is a community and commercial bank with operations centered in South Florida, Tampa, and Houston, focused on relationship-based lending and deposit gathering. The bank generates revenue primarily through net interest income from loans, deposits, and investment securities, complemented by non-interest income from mortgage banking, wealth management, and fee-based services. Its major business segments include commercial, specialty finance (such as equipment finance), single-family residential lending, private banking, and a growing international deposit business.
Performance Analysis
Q2 results were dominated by a substantial provision for credit losses, primarily linked to a legacy New York City multifamily loan and macroeconomic adjustments under CECL, driving a 25.6% increase in reserves. Net income fell sharply versus the prior quarter, despite the bank achieving its highest-ever core pre-provision net revenue as a public company, reflecting strong net interest income and disciplined core expenses.
Deposit growth was a standout, with total deposits rising 4% quarter-over-quarter and 7.6% year-to-date, helped by both domestic and international customer growth. Loan growth was more modest, up 1.4% for the quarter, with specialty finance and single-family residential lending leading origination. The loan-to-deposit ratio improved, reflecting management’s focus on organic funding and reduced reliance on higher-cost institutional sources.
- Credit Quality Deterioration: Non-performing loans and assets increased, led by the New York multifamily exposure, pushing NPLs to 65 basis points of total loans.
- Margin Squeeze: Net interest margin (NIM) declined to 3.83%, down seven basis points, as deposit costs rose and competitive pressures intensified.
- Expense Discipline: Core non-interest expenses remained controlled, but non-routine charges and severance related to restructuring weighed on the efficiency ratio.
Non-interest income rose due to lower securities losses and incremental wealth management gains, but this was partially offset by weaker mortgage banking and fee income. The bank’s capital ratios remain well above regulatory minimums, and tangible common equity was stable even after accounting for unrealized losses in the investment portfolio.
Executive Commentary
"While this was an outstanding quarter in many ways, the results are clearly overshadowed by the provision expense reflected in the 2Q results. The substantial increase from last quarter was driven by a legacy New York City commercial real estate loan originated in 2016 and from increased negative economic factors used in the CECL calculation."
Jerry Plush, Chairman and Chief Executive Officer
"Our asset-sensitive position enabled us to offset via repricing the incremental cost of deposits... However, we expect the margin to continue to be pressured given substantial market competition for domestic deposits and demand for higher rates."
Sherry, Chief Financial Officer
Strategic Positioning
1. Deposit-First, Relationship Banking
Management is prioritizing organic deposit growth, reducing dependence on institutional and brokered funding. The bank’s strategy now relies on deepening full-banking relationships, requiring new and renewed borrowers to bring deposits, with a focus on core operating and international accounts. International deposits, typically lower cost and more stable, are being actively targeted, especially across Latin America.
2. Margin Defense and Asset Sensitivity
Amerant’s asset-sensitive balance sheet—with over half of loans floating or repricing within a year—provides some buffer against rising funding costs. However, management expects further NIM compression due to competitive pricing for deposits and a shift toward higher-rate time deposits. The bank is attempting to offset this by repricing loans and emphasizing swap income on new production.
3. Credit Risk Management and Portfolio Diversification
Legacy credit exposures, especially in New York CRE, are being actively managed and run off. The specialty finance and single-family residential portfolios are now the main engines of loan growth, while consumer indirect loans are shrinking and expected to run off within two years, limiting forward credit risk. Commercial real estate underwriting remains conservative, with low LTVs and significant interest rate hedging by borrowers.
4. Operational Restructuring and Efficiency
Amerant is rationalizing its branch network and streamlining its organizational structure, merging retail and business banking, and focusing on customer-facing roles. This is expected to yield future efficiency gains and personnel cost savings. The delayed FIS core system conversion is a near-term drag but is expected to enable better customer experience and deposit-gathering capabilities post-implementation.
5. Capital Allocation and Shareholder Returns
Share repurchases resumed in Q2, with 95,262 shares bought back at 0.8x book value, reflecting management’s view of undervaluation. The board remains committed to balancing capital for growth, dividends, and opportunistic buybacks, but is being prudent given earnings pressure and regulatory capital requirements.
Key Considerations
Amerant’s Q2 results highlight both opportunity and risk as the bank navigates a period of rising funding costs and credit normalization. The leadership team is proactively managing through margin compression, focusing on deposit mix, expense discipline, and risk containment to protect long-term profitability.
Key Considerations:
- Deposit Growth Outpaces Loans: Strong deposit inflows are being used to pay down higher-cost institutional funding, improving the loan-to-deposit ratio.
- International Deposits as a Differentiator: The bank’s 33% international deposit base, averaging 70 basis points in cost, is a strategic advantage in a high-rate environment.
- Expense Scrutiny Intensifies: Management is reviewing every cost line, including real estate footprint and hybrid work, seeking incremental savings as easy cuts fade.
- Credit Quality Under Watch: Legacy CRE and consumer indirect portfolios are being run off, but new credit deterioration would pressure reserves and earnings.
- Core System Upgrade Delay: The FIS conversion is delayed to November, temporarily limiting digital and operational enhancements but expected to unlock deposit growth and efficiency post-launch.
Risks
Margin compression remains the central risk, as competitive deposit pricing and rising funding costs outpace asset yield repricing. Further credit losses in legacy portfolios or broader economic deterioration could force additional provision expense. The delay in the FIS system conversion could hinder deposit growth and operational improvements in the near term. Regulatory, competitive, and macroeconomic headwinds persist, particularly if rate volatility or commercial real estate stress intensifies.
Forward Outlook
For Q3, Amerant guided to:
- Stronger loan growth, in line with a 10% annualized pace, supported by solid pipelines.
- Deposit growth to remain robust, with excess used to pay down high-cost institutional funding.
- Net interest margin to decline by 18 to 20 basis points due to funding cost pressures.
- Non-interest income expected in the $15–16 million range, aided by wealth management and mortgage activity.
- Core non-interest expenses to remain around $60 million; provision expense to normalize to ~$10 million.
Management highlighted that all expense lines are under review, and that further deposit mix improvements and post-conversion digital capabilities will be crucial for margin stabilization and growth.
- Continued focus on growing international and non-interest-bearing deposits.
- Active credit risk management and runoff of legacy exposures.
Takeaways
Amerant is navigating a challenging backdrop of margin compression and credit normalization with a disciplined focus on deposit growth, expense control, and risk management.
- Provision-Driven Volatility: The quarter’s results highlight the impact of legacy credit risk and macroeconomic factors on earnings, with credit normalization now a central theme.
- Deposit-Led Strategy: The pivot to organic, relationship-driven deposit growth, especially internationally, is a key differentiator and margin defense lever in a high-rate, competitive landscape.
- Efficiency and Execution: Investors should watch for further margin compression, progress on cost initiatives, and the successful FIS conversion as critical drivers of future profitability and growth.
Conclusion
Amerant’s Q2 underscored the tension between strong core operating performance and the drag from credit provisioning and margin pressure. The bank’s strategic focus on deposit mix, expense discipline, and risk runoff positions it to weather near-term headwinds, but execution on digital and operational initiatives will be key to restoring earnings momentum as rate and credit cycles evolve.
Industry Read-Through
Amerant’s experience this quarter is emblematic of broader regional bank challenges, where rising deposit costs, competitive funding markets, and legacy credit risk are pressuring margins and earnings. The pivot toward international, lower-cost deposits and full relationship banking is increasingly important across the sector, especially as regulatory scrutiny and digital expectations rise. The delayed core system upgrade highlights the operational complexities many banks face as they seek to modernize for long-term competitiveness. For peers, the message is clear: margin defense and credit vigilance are essential, and banks with diversified, sticky funding and disciplined expense management will be best positioned to navigate the current environment.