|Shares Out. (in M):||43||P/E||0||0|
|Market Cap (in $M):||719||P/FCF||0||0|
|Net Debt (in $M):||0||EBIT||0||0|
|TEV (in $M):||719||TEV/EBIT||0||0|
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Amerant Bancorp Inc. (“Amerant”) - September 6, 2019
Amerant Bancorp Inc. (“Amerant”) is a $719MM market cap southeast Florida focused bank that trades at 0.92x TBV, earns a normalized 10.4% adj. RoTE (8.2% adj. LTM RoTE) and trades at 8.8x adj. P/E (11.2x adj. LTM P/E) presenting 50-90% upside, inclusive of the RoTE, if it rerates to a peer regional bank multiple of 13.0x P/E and 100+% upside in an upside case of a sale to an acquirer at recent Florida regional bank acquisition multiples of ~1.80x TBV and ~22x P/E.
We believe that Amerant trades at a very low multiple of tangible book value and earnings, that Amerant’s asset portfolio is a simple, underwritable, and conservative book of commercial real estate (“CRE”) and commercial loans mostly in the Miami area, and that Amerant’s return on tangible equity (“RoTE”) will improve from current levels as it reduces overhead costs, redeems its expensive trust preferred securities (“TruPS”), redeploys its low-yielding foreign loans, securities portfolio, and excess capital, and normalizes its domestic deposit cost structure. The opportunity exists because of the market’s misunderstanding of Amerant’s exposure to Venezuela, the risk to earnings from a shift in funding mix, and the probability of success of Amerant’s strategic plan. Additionally, Amerant has been a forced seller of stock even at a discount to tangible book based on its obligation to repurchase shares from its former parent company, the Venezuelan bank Mercantil Servicios Financieros (“MSF”). The US bank Amerant IPO’ed on the Nasdaq in December 2018 after MSF distributed 80% of Amerant shares to its shareholders and retained 20% in August 2018. Amerant was forced to repurchase MSF’s remaining 20% stake by the Federal Reserve with proceeds from its IPO and a February 2019 private offering.
The primary investment risk is Amerant’s ability to economically replace the declining low- or non-interest-bearing deposits from Venezuelan nationals who are living in the US, have businesses in the US, or want to keep money outside of Venezuela. Venezuelan deposits were 74% of total deposits in 2013 and are 45% of deposits today. As the situation in Venezuela has deteriorated these deposits have been declining at a rate of ~13% YoY. The company has already proven its ability to replace Venezuelan deposits with US time and demand deposits and we believe it will continue to be able to do so. Eventually, even accounting for several years of declines in Venezuelan deposits, we believe that as the bank executes on its strategic plan and normalizes its RoTE it will trade in line with market multiples or in an upside case sell itself to an acquirer at an above-market multiple.
Business Overview and History
Amerant is a southeast Florida focused bank with a market cap of $719M, $7.9B in assets, 9.9% tangible common equity / tangible assets, and 12.1% CET1 Ratio that was founded in 1979 and 100% acquired by Mercantil Servicios Financieros (“MSF”), a Venezuelan bank, in 1987. At the time of the purchase, Amerant had ~$50M of assets and it has grown organically through a significant inflow of deposits from Venezuelan citizens. Today, Amerant operates 23 branches comprising 15 in South Florida and 8 in Houston, as well as loan production offices in Dallas and New York City. The company is headquartered in Coral Gables, Florida.
Given the recent turmoil in Venezuela, MSF put Amerant Bank (the US entity) into a Florida trust called the “Distribution Trust” in March 2018 and spun off 80% of its stake to shareholders in August 2018. Amerant IPO’ed in December 2018 to buy out the remaining 20% of MSF’s stake. Amerant has two share classes: Class A shares with 1 vote (AMTB) and Class B (AMTBB) shares with 0 votes. Both have the same economic interest and 67% of shares outstanding are Class A and 33% are Class B.
Amerant’s ownership has active and/or concentrated owners, including three Venezuelan families who own 27.7% of Amerant’s stock and a banks-focused private equity fund, Patriot Financial Partners, who owns 4.6% and has a board seat. These shareholders are likely to push for an aggressive implementation of the strategic plan outlined below and to potentially sell the business in the future to realize shareholder value.
Loan Book and Geographic Focus
Amerant’s loan book is predominantly commerical loans (87.9% of gross loans), which are composed of commercial real estate (51.4% of gross loans) and commercial and industrial loans (36.4% of gross loans). Within CRE loans, 35.5% are retail loans at ~60% LTV with most of the exposure to open air, central business district (“CBD”), infill, retail “lifestyle” centers with no big box / mall exposure. Overall, NPLs are very low at 0.31% of gross loans giving us comfort in addition to our macro and Amerant-specific diligence that the company are conservative lenders. Full detail of asset exposure and NPLs are below.
In terms of geographic focus, Amerant’s CRE book is 54.8% south Florida, 22.3% New York City, and 18.0% Houston. The company has a loan production office in New York City and has also recently opened a loan production office in Dallas to expand into that market.
High Quality Assets
The asset book at Amerant is simple and reasonably high quality and we are comfortable with the lending risk they take.
Amerant’s assets are mostly residential and commercial real estate loans in the greater Miami area. 51.4% of total assets are Commercial Real Estate (“CRE”) which is a higher concentration than many banks nationally. The four-year average loss rate at Amerant is 13bps vs. peers at 20bps and current NPLs as a percent of gross loans is 31bps vs. peers at 55bps. The LTVs of the loans which average ~60%, our third-party calls on Amerant’s underwriting standards, and our property-level review based on public lien data have led us to believe that risk is not high and underwriting standards are appropriate. Of the CRE loans, 35% are retail, 30% are multifamily, 15% are office, 11% are land and construction, 5% is hospitality, and 4% are industrial and warehouse. The retail exposure is all open air, CBD, infill, retail “lifestyle” centers with no big box / mall exposure. The multifamily is not luxury towers but all low apartment complexes or 1-4 unit rental properties. The relatively low exposure to land and construction and to hospitality, CRE areas which performed poorly in Miami in the 2008 real estate crisis, is positive for the asset risk.
Current Miami CRE prices look reasonable relative to rates implying that 65-70% LTV loans are not unduly risky. Miami cap rate spreads vs. 10-year treasuries do not look especially tight relative to history and pre-crisis lows, so we are not concerned that Miami is an especially over-valued CRE market. Obviously, the current lending environment is very benign: current Florida foreclosure actions of 11,440 (1Q19 annualized) are far below peak year 133,250 in 2009. The other markets to which Amerant lends, Houston and NYC, also look reasonable under the same historical cap rate spread analysis.
Achievable Strategic Plan to Improve RoTE
Management’s strategic plan to improve RoTE over the next 1-3 years seems achievable given that many of the levers are mechanical in nature, the plan would bring the bank’s cost structure to be in-line with peers, and several items are already underway.
Amerant has $118M of outstanding trust preferred shares (“TruPS”) of which $53.9M yield 8.9% to 10.6% and cost the company $5.2M per year. Given the current CET1 ratio of 12.1% and mid- to high-single digit unadjusted RoTE, Amerant could easily pay down the TruPS within 1-2 years and has already called $25MM of the most expensive ones. Refinancing the TruPS would save the company ~$4.5M per year of interest expense.
The company has a small portfolio of loans to foreign entities, mostly to Latin American financial institutions in Brazil and elsewhere (but not to Venezuelan institutions). These are short-term loans to investment grade institutions which earn low yields of ~L+40bps. The loans are inconsistent with the US-focused strategy, so management has been and will continue to let them wind down over the next several quarters and replace them with domestic CRE and C&I loans. There is also a $1.6B securities portfolio which earns 2.72%, which management has indicated that they intend to reduce and re-deploy into traditional lending.
Finally, RoTE will improve as cost cuts, which are already underway, result in savings. Amerant should have achievable savings because 1) management is vocal about prioritizing cost cuts, 2) the cost cuts are already underway with FTEs falling from 948 in 3Q18 to 839 in 2Q19, 3) as a US subsidiary of a foreign bank, Amerant did not optimize its cost structure (or asset mix) which should leave “easy wins”, 4) the cost savings opportunity looks achievable after benchmarking Amerant’s cost structure to peers, which are on average at a 59% efficiency ratio vs. Amerant, which is currently at 74%, and 5) reduction in BSA headcount as Venezuela exposure abates, implying Amerant could right size their BSA department from approximately 200 FTEs per management to peer levels, which could be as small as a handful of employees for a bank without international concentration, which Amerant will likely become over time.
Domestic Deposit Opportunity
Today, Amerant’s domestic funding is expensive and largely time deposits, offset by its cheap international deposits, for a total overall cost of funding of 1.36%, which is a little higher than peers at 1.10%. Historically Amerant has not prioritized acquiring domestic checking and savings deposits, either retail or commercial, given the bank’s access to very cheap deposits from Venezuelan individuals. Management plans to focus much more on domestic deposit raising by requiring C&I borrowers (and to a lesser extent CRE borrowers) to use the lending bank as their primary commercial bank and peers have mentioned that lenders can acquire >20% of the initial loan balance in sticky deposits. CRE is naturally a less deposit rich source of lending than C&I, but Amerant intends to shift its loan mix from CRE to more balanced with C&I. Management indicated that loan officers have historically not been under any pressure to bring in deposits but that compensation, incentives, and pressure from management to be “bankers not lenders” will encourage bank employees to get deposits from commercial customers.
Amerant would almost certainly be worth more in a sale than where it currently trades in the public market, given that acquisition comps in Florida historically have been at a significant premium to market multiples. Historically acquisitions were done at average/median of 1.81/1.89x TBV earning an 8.1%/8.5% ROE, implying a ~22x P/E multiple, which is a meaningful acquisition premium to where peer banks trade in the market. Sell side analysts believe a sale would represent material upside from current valuation and we believe that management, the three Venezuelan families, and Patriot would consider selling the company over time if the market doesn’t reflect fair value. Banks above the line in the table below were publicly traded at the time of the acquisition while banks below the line were private.
There are ~4,700 banks in the US currently and the banking sector has been consistently consolidating since the early 1980s, with the pace of consolidation picking up over the last 10 years. The Herfindahl-Hirshman Index (“HHI”) is a commonly used measure for concentration of an industry and is used by the Department of Justice to evaluate mergers. When looking at the HHI for deposit market share by state:
Despite the consolidation that has occurred over the last 35 years, the US banking market (except for a few small states) looks to be competitive creating an opportunity for further consolidation.
Florida is on the lower end of all states, and if we only compare the top 20 states by GDP, Florida has the 6th most fragmented banking market. In 2007 Florida had 284 banks versus 109 today with the decline attributed to 60 failures, 133 mergers, and 18 openings. As a result, for Florida specifically, there has been meaningful consolidation and we would expect that trend to continue.
Deposit and Fee Income Decline Accelerates
Amerant’s checking and savings deposits have declined from $5.2B or 83% of total deposits at YE15 to $3.9B or 62% of total deposits at YE18. This has been driven by the economic troubles in Venezuela as shown by the rapid decline in USD GDP since 2015. Customers have been withdrawing USD deposits in order to pay for daily expenses as local currency has become worthless. Foreign deposits have declined from $4.5B or 69% of total deposits at YE15 to $3.0B or 50% of total deposits at YE18.
Ultimately, the pace of foreign deposit declines or potential increases is levered to the economic situation in Venezuela and whether customers need to draw down on their savings or want to move money outside of the country for safe keeping. Management expects the decline rate of total foreign deposits to normalize at ~9% YoY from its current 13.7% YoY.
Management believes that deposits from wealthier customers are sticky and not declining because these individuals do not have an immediate need for cash and see value in holding savings outside of the country. These deposits comprise ~25% of foreign deposits and we believe that a case where all foreign deposits outside of these deposits are withdrawn is a reasonable downside scenario but unlikely given the observed decline rate under the current situation in Venezuela. Additionally, while difficult to predict, it appears that the political and economic situation in Venezuela is getting closer a resolution given increased international and domestic pressure on Maduro.
As foreign deposits decline, we expect interest expense to increase as Amerant initially replaces those deposits with expensive time deposits and fee income and wealth management services related to those accounts to decline. We think a reasonable case to model is where foreign deposits decline at their current pace for ~2-3 years but acknowledge that there is a risk that declines are more severe given their unpredictable nature.
Loan losses / Macro Recession
In a macro economic downturn where national or Miami property values declined materially, a CRE and Florida exposed bank like Amerant would probably not trade at a high multiple. Although loan loss reserves would temporarily increase in that scenario, driving down RoTE, we believe based on the 50-60% average LTV across the CRE/mortgage portfolio that even under a normalization of interest rates to long term average combined with a widening of cap rates to mid-crisis peaks, the average/median Amerant loan would still not be impaired to > 100% LTV. Therefore, while we think our exit options/multiples would be less attractive and an M&A exit would be less likely, this scenario will ultimately result in a lower IRR but the risk of material asset impairment is low.
Strategic Plan Fails to Improve RoTE
If management’s strategic plan fails and the RoTE falls below current levels, the bank could trade at a low multiple. Although we believe many parts of the strategic plan are obviously achievable, there is still execution risk for the management team to successfully implement it. Amerant is currently one of 5 banks in the United States trading below tangible book value out of ~220 public banks with market capitalization greater than $300M; given the simple and clean RE-focused asset portfolio, we believe it is extremely unlikely that the bank will trade below tangible book value for a sustained period of time, even if the RoTE improvements fail to materialize.
Digital / Competition
Like all “brick and mortar” banks Amerant is exposed to the risks of technological disruption and the large technology capital expenditure budgets of the largest national consumer banks, which are growing their share of total US deposits (e.g. the average American visits a bank branch once per year but interacts with his/her primary bank digitally 20 times per month). The risk is therefore that Amerant is unable to find new customers or loses current customers as digitally native banks or large national banks with sophisticated digital product offerings take more of the market. We believe that the erosion, if it happens, will be slow and that 1) Amerant is somewhat less exposed than some peers because its customers are mostly SMEs, for whom technology is less important than it is to retail consumers; 2) Amerant’s very small branch footprint is positive because there is less cost structure to eliminate as technology replaces branches over time; and 3) the risk of technology/competition has been widely discussed in the banking industry for many years and is likely priced into regional bank trading multiples.
Bank Secrecy Act (“BSA”) / Anti-Money Laundering (“AML”) Risk
Due to the bank’s interaction with Venezuelan nationals, Amerant has above-average risk of incurring regulatory actions like fines and penalties due to violations of BSA/AML. The other US banks which have historically faced BSA/AML-related enforcement actions from the FDIC/OCC/Federal Reserve, several of which are based in Florida or Miami, given the concentrated international population, including Ocean Bank, Pacific National, and Eastern National, had serious deficiencies in their monitoring systems as well as understaffed BSA departments that caused the regulator to give several warnings and finally formal consent orders/penalties. Amerant with 200 BSA-related employees is not understaffed relative to its size and emphasizes its strenuous efforts to comply with BSA/AML regulations, including 1) eliminating a material portion of Venezuelan banking customers and $273MM of mostly commercial deposits over 2017 and 2018 which were potentially related to any Venezuelan state entity and 2) appointing to their board 31-year OCC alumnus John Quill, who was brought on for his expertise in bank regulatory compliance.
The author is presenting the views of an investment firm that has a material long position in the securities of the company discussed herein. The author is not otherwise affiliated with such company, including as an employee, director or consultant. The views expressed herein are provided solely for informational purposes and do not constitute an offer to sell, or the solicitation of an offer to buy, any security. The information provided herein is not intended to be, and should not be, relied upon as an investment recommendation in connection with any investment decision. The contents of this message should not be construed as legal, tax, accounting, investment or other advice. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information or opinions contained herein by the author or its affiliates and no liability is accepted by such persons for the accuracy or completeness of any such information or opinions. The information and opinions contained herein are provided as of the date this message is originally posted. The author has not independently verified all information contained herein and has no obligation to update any of the information provided. The views expressed herein are subject to change without notice at any time and the author and its affiliates may trade in any manner in the company’s securities, whether consistent or inconsistent with the information provided herein, as they deem appropriate. Past performance of a security is neither indicative nor a guarantee of future results of such security. There can be no assurance that an investment in the company will be profitable or that the assumptions regarding future events and situations will materialize or prove correct.
Execution of strategic plan and normalization of RoTE.
Stabilization of low-cost deposit declines.
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