Amerant Bancorp (AMTB) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The unaudited interim consolidated financial statements detail the company's financial position, operations, equity changes, and cash flows for the periods ended June 30, 2020 Consolidated Balance Sheets The balance sheets reflect a slight increase in total assets and deposits, a significant rise in the allowance for loan losses, and the introduction of senior notes | Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :--- | :--- | :--- | | Total assets | $8,130,723 | $7,985,399 | | Cash and cash equivalents | $217,349 | $121,324 | | Securities | $1,674,811 | $1,739,410 | | Loans held for investment, gross | $5,872,271 | $5,744,339 | | Allowance for loan losses | $119,652 | $52,223 | | Total deposits | $6,024,702 | $5,757,143 | | Advances from FHLB and other borrowings | $1,050,000 | $1,235,000 | | Senior notes | $58,419 | — | | Junior subordinated debentures | $64,178 | $92,246 | | Total stockholders' equity | $830,198 | $834,701 | Consolidated Statements of Operations and Comprehensive (Loss) Income The company reported a net loss for the three and six months ended June 30, 2020, driven by a substantial increase in the provision for loan losses | Metric (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Total interest income | $64,167 | $79,226 | $135,482 | $159,533 | | Total interest expense | $17,844 | $25,437 | $39,930 | $50,307 | | Net interest income | $46,323 | $53,789 | $95,552 | $109,226 | | Provision for (reversal of) loan losses | $48,620 | $(1,350) | $70,620 | $(1,350) | | Total noninterest income | $19,753 | $14,147 | $41,663 | $27,303 | | Total noninterest expenses | $36,740 | $52,905 | $81,607 | $104,850 | | Net (loss) income | $(15,279) | $12,857 | $(11,897) | $25,928 | | Basic (loss) earnings per common share | $(0.37) | $0.30 | $(0.28) | $0.61 | | Diluted (loss) earnings per common share | $(0.37) | $0.30 | $(0.28) | $0.60 | Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity slightly decreased due to a net loss and common stock repurchases, partially offset by an increase in accumulated other comprehensive income | Metric (in thousands) | December 31, 2019 | June 30, 2020 | | :--- | :--- | :--- | | Total Stockholders' Equity | $834,701 | $830,198 | | Class A Common Stock (shares) | 28,927,576 | 28,873,196 | | Class B Common Stock (shares) | 14,218,596 | 13,286,137 | | Additional Paid in Capital | $419,048 | $359,028 | | Treasury Stock | $(46,373) | — | | Retained Earnings | $444,124 | $432,227 | | Accumulated Other Comprehensive Income | $13,234 | $34,727 | - Repurchase of Class B common stock: (932,459) shares for $15,239 thousand[12] - Other comprehensive income for the six months ended June 30, 2020, was $21,493 thousand, contributing positively to equity[10] Consolidated Statements of Cash Flows Cash and cash equivalents significantly increased, driven by financing activities like increased deposits and senior notes issuance, offsetting cash used in investing | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $26,970 | $33,469 | | Net cash (used in) provided by investing activities | $(28,534) | $224,137 | | Net cash provided by (used in) financing activities | $97,589 | $(252,999) | | Net increase in cash and cash equivalents | $96,025 | $4,607 | | Cash and cash equivalents, beginning of period | $121,324 | $85,710 | | Cash and cash equivalents, end of period | $217,349 | $90,317 | - Operating activities were positively impacted by a $70.6 million provision for loan losses (non-cash adjustment) despite a net loss[15] - Investing activities included significant purchases of available-for-sale securities ($293.0 million) and a net increase in loans ($146.3 million)[15] - Financing activities saw a net increase in demand, savings, and money market accounts ($253.8 million) and proceeds from Senior Notes issuance ($58.4 million)[15] Notes to Interim Consolidated Financial Statements (Unaudited) These notes provide detailed disclosures on business operations, accounting policies, and specific financial line items, offering crucial context for the interim results Note 1. Business, Basis of Presentation and Summary of Significant Accounting Policies Amerant Bancorp Inc operates as a bank holding company with a single-segment management approach, significantly impacted by the COVID-19 pandemic - Amerant Bancorp Inc is a Florida corporation, a bank holding company, with its principal office in Coral Gables, Florida[17] - The Company is managed as a single segment, with no separate reportable segment disclosures required under U.S GAAP[19] - In response to the COVID-19 pandemic, the Company activated its Business Continuity Plan on March 16, 2020, with approximately 86% of employees working remotely as of June 30, 2020[22][140] - The Bank participated in the SBA's Paycheck Protection Program (PPP), providing $214.1 million in loans across over 2,000 applications as of June 30, 2020[24][142] - Loan payment relief options were offered to customers impacted by COVID-19, totaling $1.1 billion as of June 30, 2020, which are not considered Troubled Debt Restructurings (TDRs)[25][144] - The Company recorded a provision for loan losses of $48.6 million in Q2 2020, including $20.2 million related to COVID-19's macroeconomic impact[30][146] - As an Emerging Growth Company (EGC), Amerant plans to adopt CECL in 2023 or earlier if it ceases to be an EGC[34][38][41] Note 2. Interest Earning Deposits with Banks Interest-earning deposits with banks, primarily with the Federal Reserve, significantly increased while their average interest rate declined | Metric (in thousands) | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Deposits with Federal Reserve | ~$182,000 | ~$93,000 | | Average interest rate | ~0.54% | ~2.19% | - These deposits mature within one year[43] Note 3. Securities The securities portfolio experienced changes in fair value and realized gains, with a notable increase in net realized gains from sales in the first half of 2020 | Debt Securities Available for Sale (in thousands) | June 30, 2020 Estimated Fair Value | December 31, 2019 Estimated Fair Value | | :--- | :--- | :--- | | U.S government-sponsored enterprise debt securities | $831,920 | $933,112 | | Corporate debt securities | $386,109 | $252,836 | | U.S government agency debt securities | $232,454 | $228,397 | | U.S treasury securities | $2,515 | $104,236 | | Municipal bonds | $66,786 | $50,171 | | Total | $1,519,784 | $1,568,752 | | Realized Gains/Losses (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Gross realized gains | $7,537 | $1,125 | $16,803 | $1,573 | | Gross realized losses | — | $(133) | $(23) | $(577) | | Realized gains, net | $7,537 | $992 | $16,780 | $996 | - Unrealized losses on debt securities available for sale were $5.6 million at June 30, 2020, considered temporary and primarily due to changes in interest rates[48][49][50] - Equity securities (mutual funds) had a fair value of $24.4 million at June 30, 2020, recognizing $0.6 million in unrealized gains for the six months ended June 30, 2020[51] Note 4. Loans The loan portfolio increased slightly, with growth in consumer and residential loans offsetting a decline in commercial real estate and international loans | Loan Class (in thousands) | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Real estate loans | $4,477,515 | $4,405,278 | | Commercial loans | $1,247,455 | $1,234,043 | | Loans to financial institutions and acceptances | $16,597 | $16,552 | | Consumer loans and overdrafts | $130,704 | $88,466 | | Total Loans held for investment, gross | $5,872,271 | $5,744,339 | | International Loans (in thousands) | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Venezuela | $93,770 | $112,297 | | Others | $62,395 | $59,140 | | Total | $156,165 | $171,437 | - Loans pledged as collateral to secure FHLB advances were $1.5 billion at June 30, 2020, down from $1.6 billion at December 31, 2019[54] - The company phased out its legacy credit card products, resulting in no outstanding credit card balances as of June 30, 2020[57] Note 5. Allowance for Loan Losses The allowance for loan losses significantly increased due to substantial provisions reflecting macroeconomic deterioration from COVID-19 and specific reserve needs | Metric (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Balances at beginning of period | $72,948 | $60,322 | $52,223 | $61,762 | | Provision for loan losses | $48,620 | $(1,350) | $70,620 | $(1,350) | | Loans charged-off (net of recoveries) | $(1,916) | $(1,568) | $(3,191) | $(3,008) | | Balances at end of period | $119,652 | $57,404 | $119,652 | $57,404 | | ALL by Impairment Methodology (in thousands) | June 30, 2020 | June 30, 2019 | | :--- | :--- | :--- | | Individually evaluated | $27,704 | $4,525 | | Collectively evaluated | $91,948 | $52,879 | | Total | $119,652 | $57,404 | - Impaired loans totaled $77.5 million at June 30, 2020, compared to $30.3 million at December 31, 2019, with a significant portion having a valuation allowance[71][72] - Loan payment relief options offered due to COVID-19 totaled $1.1 billion as of June 30, 2020, and are not considered TDRs[75] Note 6. Time Deposits Time deposits increased, particularly those in larger denominations, while brokered time deposits decreased | Time Deposits (in thousands) | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | $100,000 or more | ~$1,500,000 | ~$1,400,000 | | More than $250,000 | ~$784,000 | ~$733,000 | | Brokered time deposits | $588,000 | $662,000 | Note 7. Advances from the Federal Home Loan Bank and Other Borrowings Outstanding FHLB advances decreased following a significant restructuring of fixed-rate advances in April 2020 to extend maturities and lower interest rates | Year of Maturity | Interest Rate (2020) | Outstanding at June 30, 2020 (in thousands) | Outstanding at December 31, 2019 (in thousands) | | :--- | :--- | :--- | :--- | | 2020 | 0.44% to 2.35% | — | $135,000 | | 2020 | 1.73% to 2.03% | — | $150,000 | | 2021 | 1.75% to 3.08% | — | $210,000 | | 2022 | 0.65% to 2.80% | $50,000 | $120,000 | | 2023 and after | 0.62% to 3.23% | $1,000,000 | $620,000 | | Total | | $1,050,000 | $1,235,000 | - In early April 2020, $420.0 million of fixed-rate FHLB advances were restructured, extending maturities and lowering interest rates, resulting in a $17.0 million loss blended into new yields[84] Note 8. Senior Notes The company completed a $60.0 million offering of unsecured senior notes in June 2020 with a 5.75% coupon rate due in 2025 - On June 23, 2020, Amerant Bancorp Inc completed a $60.0 million offering of senior notes with a 5.75% coupon rate, due 2025[85] - Net proceeds from the senior notes offering totaled $58.4 million after $1.6 million in direct issuance costs[85] - The Senior Notes are unsecured, unsubordinated, and fully and unconditionally guaranteed by Amerant Florida Bancorp[85] Note 9. Junior Subordinated Debentures Held by Trust Subsidiaries The company redeemed $26.8 million of its 8.90% trust preferred capital securities in January 2020, reducing liabilities and annual interest expense | Trust Subsidiary | Principal Amount of Debenture Issued to Trust (in thousands) | Year of Issuance | Annual Rate | Year of Maturity | | :--- | :--- | :--- | :--- | :--- | | Commercebank Capital Trust I | — (redeemed) | 1998 | 8.90% | 2028 | | Commercebank Capital Trust VI | $9,537 | 2002 | 3-M LIBOR + 3.35% | 2033 | | Commercebank Capital Trust VII | $8,248 | 2003 | 3-M LIBOR + 3.25% | 2033 | | Commercebank Capital Trust VIII | $5,155 | 2004 | 3-M LIBOR + 2.85% | 2034 | | Commercebank Capital Trust IX | $25,774 | 2006 | 3-M LIBOR + 1.75% | 2038 | | Commercebank Capital Trust X | $15,464 | 2006 | 3-M LIBOR + 1.78% | 2036 | | Total (June 30, 2020) | $64,178 | | | | | Total (December 31, 2019) | $92,246 | | | | - On January 30, 2020, the Company redeemed all $26.8 million of its outstanding 8.90% trust preferred capital securities, reducing financial liabilities by $28.1 million[86][88] - This redemption is expected to reduce the Company's annual pretax interest expense by approximately $2.4 million[368] Note 10. Derivative Instruments The company utilizes interest rate swaps and caps to manage interest rate risk, with significant notional amounts for customer and mirror contracts | Derivative Instrument (in thousands) | June 30, 2020 Fair Value (Assets) | June 30, 2020 Fair Value (Liabilities) | December 31, 2019 Fair Value (Assets) | December 31, 2019 Fair Value (Liabilities) | | :--- | :--- | :--- | :--- | :--- | | Interest rate swaps (cash flow hedges) | $79 | $2,005 | $301 | — | | Interest rate swaps (not hedging) | $47,116 | $47,116 | $11,236 | $11,236 | | Interest rate caps (not hedging) | $16 | $57 | $33 | $46 | | Total | $47,211 | $49,178 | $12,097 | $11,809 | - As of June 30, 2020, the Company had 67 interest rate swap contracts with customers (notional amount $456.9 million) and 67 mirror contracts[91] - As of June 30, 2020, the Company had 18 interest rate cap contracts with customers (notional amount $360.5 million) and 11 mirror contracts (notional amount $184.4 million)[94] Note 11. Stock-based Incentive Compensation Plan The stock-based incentive plan saw activity in restricted stock awards and units, resulting in recognized compensation expenses and remaining unamortized compensation | Restricted Stock Awards Activity | Number of restricted shares | Weighted-average grant date fair value | | :--- | :--- | :--- | | Non-vested shares, beginning of year | 495,131 | $13.48 | | Granted | 6,591 | $15.17 | | Vested | (433) | $13.58 | | Forfeited | (64,281) | $13.45 | | Non-vested shares at June 30, 2020 | 437,008 | $13.51 | - Compensation expense for restricted stock awards was $1.0 million for the six months ended June 30, 2020, with $2.1 million in unamortized deferred compensation remaining[96] | Restricted Stock Units (RSUs) Activity | Stock-settled RSUs (Number) | Cash-settled RSUs (Number) | Total RSUs (Number) | | :--- | :--- | :--- | :--- | | Nonvested, beginning of year | 35,489 | 19,230 | 54,719 | | Granted | 22,302 | 11,151 | 33,453 | | Vested | (3,439) | — | (3,439) | | Non-vested, end of year | 54,352 | 30,381 | 84,733 | - Compensation expense for RSUs was $0.2 million for the six months ended June 30, 2020, with $0.4 million in unamortized deferred compensation remaining for stock-settled RSUs[98] Note 12. Income Taxes The company's effective tax rate for the first half of 2020 was 20.75%, slightly lower than the prior year due to non-taxable income and state taxes | Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Effective tax rate | 20.75% | 21.50% | - The effective tax rates differ from statutory rates mainly due to forecasted permanent non-taxable interest and other income, and the effect of corporate state taxes[100] Note 13. Accumulated Other Comprehensive Income ("AOCI") AOCI significantly increased, driven by net unrealized holding gains on debt securities, partially offset by unrealized losses on cash flow hedges | AOCI Component (in thousands) | June 30, 2020 Net of Tax Amount | December 31, 2019 Net of Tax Amount | | :--- | :--- | :--- | | Net unrealized holding gains on debt securities available for sale | $30,928 | $7,225 | | Net unrealized holding gains on interest rate swaps designated as cash flow hedges | $3,799 | $6,009 | | Total AOCI | $34,727 | $13,234 | | Other Comprehensive Income (in thousands) | Six Months Ended June 30, 2020 Net of Tax Amount | Six Months Ended June 30, 2019 Net of Tax Amount | | :--- | :--- | :--- | | Net unrealized holding gains on debt securities available for sale | $23,703 | $29,839 | | Net unrealized holding losses on interest rate swaps designated as cash flow hedges | $(2,210) | $(536) | | Total other comprehensive income | $21,493 | $29,303 | Note 14. Stockholders' Equity Stockholders' equity decreased slightly due to a net loss and Class B common stock repurchases, with the company also canceling a significant number of treasury shares | Common Stock (shares) | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Class A outstanding | 28,873,196 | 28,927,576 | | Class B outstanding | 13,286,137 | 14,218,596 | | Class B treasury stock | — | 3,532,457 | - In February 2020, the Company repurchased 932,459 shares of Class B common stock for approximately $15.2 million[107] - In March 2020, the Board authorized the cancellation of all 4,464,916 shares of Class B Common Stock previously held as treasury stock[108] Note 15. Commitments and Contingencies The company is involved in ordinary course legal actions and has off-balance sheet credit risk commitments, with potential liabilities not deemed material - Management believes the outcome of legal proceedings will not have a significant effect on the Company's consolidated financial position or results of operations[109] | Off-Balance Sheet Credit Risk (in thousands) | Approximate Contract Amount at June 30, 2020 | | :--- | :--- | | Commitments to extend credit | $786,034 | | Standby letters of credit | $12,268 | | Commercial letters of credit | $3,428 | | Total | $801,730 | - Rent expense under noncancelable lease agreements was $3.0 million for the six months ended June 30, 2020[110] Note 16. Fair Value Measurements The company measures various assets and liabilities at fair value, primarily using observable market inputs (Level 2), with fair values of certain instruments differing from carrying values | Assets Measured at Fair Value (in thousands) | June 30, 2020 Total | December 31, 2019 Total | | :--- | :--- | :--- | | Debt securities available for sale | $1,519,784 | $1,568,752 | | Equity securities with readily determinable fair values not held for trading | $24,425 | $23,848 | | Bank owned life insurance | $214,693 | $211,852 | | Derivative instruments | $47,211 | $12,097 | | Total Assets | $1,806,113 | $1,816,549 | | Liabilities Measured at Fair Value (in thousands) | | | | Derivative instruments | $49,178 | $11,809 | - The majority of fair value measurements for assets and liabilities are categorized as Level 2, indicating the use of third-party models with observable market inputs[114][116] | Financial Instrument (in thousands) | June 30, 2020 Carrying Value | June 30, 2020 Estimated Fair Value | December 31, 2019 Carrying Value | December 31, 2019 Estimated Fair Value | | :--- | :--- | :--- | :--- | :--- | | Loans | $2,966,143 | $2,847,190 | $2,819,477 | $2,721,291 | | Time deposits | $1,833,597 | $1,864,959 | $1,745,735 | $1,759,347 | | Advances from the FHLB | $1,050,000 | $1,083,807 | $1,235,000 | $1,244,515 | | Senior notes | $58,419 | $60,724 | — | — | | Junior subordinated debentures | $64,178 | $53,180 | $92,246 | $86,738 | Note 17. Earnings Per Share The company reported basic and diluted losses per common share due to a net loss, which rendered potential dilutive instruments anti-dilutive | EPS Metric (in thousands, except per share data) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net (loss) income available to common stockholders | $(15,279) | $12,857 | $(11,897) | $25,928 | | Basic weighted average shares outstanding | 41,720 | 42,466 | 41,953 | 42,610 | | Diluted weighted average shares outstanding | 41,720 | 42,819 | 41,953 | 42,865 | | Basic (loss) earnings per common share | $(0.37) | $0.30 | $(0.28) | $0.61 | | Diluted (loss) earnings per common share | $(0.37) | $0.30 | $(0.28) | $0.60 | - Potential dilutive instruments were excluded from diluted EPS for June 30, 2020, due to the reported net loss making their inclusion anti-dilutive[119] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This analysis details the company's financial condition and operational results, highlighting the significant impact of the COVID-19 pandemic and strategic responses Cautionary Notice Regarding Forward-Looking Statements Statements about future results and the impact of the COVID-19 pandemic are forward-looking and subject to significant risks and uncertainties - Forward-looking statements cover future financial and operating results, economic conditions, and the challenges posed by the COVID-19 pandemic[123] - The potential adverse effect of the COVID-19 pandemic is identified as one of the most significant factors that could materially affect the Company's results[123] - Additional factors causing deviation from expectations include strategic plan execution, operational risks, market conditions, interest rate changes, credit quality, and regulatory requirements[125][127][129][130][132] Overview The company's operations were significantly impacted by COVID-19, leading to a net loss in Q2 2020 from increased loan loss provisions despite improved operating income - Amerant Bancorp Inc is headquartered in Coral Gables, Florida, operating banking centers in South Florida, Houston, Dallas, and New York City[135] - The Company is closing one banking center in Florida and one in Texas by year-end 2020 to optimize its retail network[135] - The Business Continuity Plan was activated on March 16, 2020, with 86% of employees working remotely as of June 30, 2020[140] - The Bank participated in the SBA's Paycheck Protection Program (PPP), approving $214.1 million in loans across over 2,000 applications by June 30, 2020[142] - Loan payment relief options were offered to customers impacted by COVID-19, totaling $1.1 billion as of June 30, 2020[144] - The Company recorded a provision for loan losses of $48.6 million in Q2 2020, primarily due to specific reserve requirements and estimated macroeconomic deterioration[146] Summary Results for Three Months Ended June 30, 2020 vs. 2019 | Metric | Q2 2020 (in millions) | Q2 2019 (in millions) | Change (%) | | :--- | :--- | :--- | :--- | | Net (loss) income | $(15.3) | $12.9 | (218.8)% | | Operating income | $21.6 | $14.0 | 53.8% | | Net interest income (NII) | $46.3 | $53.8 | (13.9)% | | Net interest margin (NIM) | 2.44% | 2.92% | (48 bps) | | Provision for loan losses | $48.6 | $(1.4) | N/M | | ALL to total loans | 2.04% | 0.99% | 105 bps | | Net charge-offs to average total loans | 0.13% | 0.11% | 2 bps | | Noninterest income | $19.8 | $14.1 | 39.6% | | Noninterest expense | $36.7 | $52.9 | (30.6)% | | Efficiency ratio | 55.6% | 77.9% | (22.3 pp) | | Stockholders' book value per common share | $19.69 | $19.35 | 1.8% | | Total loans | $5.9 billion | $5.7 billion | 2.2% | | Total deposits | $6.0 billion | $5.8 billion | 4.6% | Selected Financial Information This summary of key financial data highlights the company's net loss, increased loan loss provisions, and improved efficiency, alongside adjusted non-GAAP metrics Consolidated Balance Sheets (in thousands) | Metric | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total assets | $8,130,723 | $7,985,399 | | Total gross loans | $5,872,271 | $5,744,339 | | Allowance for loan losses | $119,652 | $52,223 | | Total deposits | $6,024,702 | $5,757,143 | | Advances from FHLB and other borrowings | $1,050,000 | $1,235,000 | | Senior notes | $58,419 | — | | Junior subordinated debentures | $64,178 | $92,246 | | Stockholders' equity | $830,198 | $834,701 | | Assets under management and custody | $1,715,804 | $1,815,848 | Consolidated Results of Operations (in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net interest income | $46,323 | $53,789 | $95,552 | $109,226 | | Provision for loan losses | $48,620 | $(1,350) | $70,620 | $(1,350) | | Noninterest income | $19,753 | $14,147 | $41,663 | $27,303 | | Noninterest expense | $36,740 | $52,905 | $81,607 | $104,850 | | Net (loss) income | $(15,279) | $12,857 | $(11,897) | $25,928 | Key Financial Ratios (%) | Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Net interest margin (NIM) | 2.44% | 2.92% | 2.55% | 2.94% | | Net (loss) income / Average total assets (ROA) | (0.75)% | 0.66% | (0.30)% | 0.66% | | Net (loss) income / Average stockholders' equity (ROE) | (7.21)% | 6.56% | (2.82)% | 6.76% | | Total capital ratio | 14.34% | 14.70% | 14.34% | 14.70% | | Non-performing assets / Total assets | 0.95% | 0.41% | 0.95% | 0.41% | | Allowance for loan losses / Total loans | 2.04% | 0.99% | 2.04% | 0.99% | | Efficiency ratio | 55.60% | 77.87% | 59.47% | 76.80% | Non-GAAP Financial Measures Reconciliation This reconciliation of non-GAAP measures to their GAAP counterparts excludes restructuring costs and other items to clarify underlying operational performance - Non-GAAP financial measures are used to explain results to shareholders and for internal evaluation, adjusting for items like restructuring costs and securities gains[196][197] Adjusted Noninterest Expenses (in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Total noninterest expenses | $36,740 | $52,905 | $81,607 | $104,850 | | Less: Total restructuring costs | $1,318 | $2,736 | $1,672 | $3,669 | | Adjusted noninterest expenses | $35,422 | $50,169 | $79,935 | $101,181 | Adjusted Net (Loss) Income (in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net (loss) income | $(15,279) | $12,857 | $(11,897) | $25,928 | | Plus after-tax restructuring costs | $1,045 | $2,148 | $1,325 | $2,880 | | Adjusted net (loss) income | $(14,234) | $15,005 | $(10,572) | $28,808 | Operating Income (in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net (loss) income | $(15,279) | $12,857 | $(11,897) | $25,928 | | Plus: income tax (benefit) expense | $(4,005) | $3,524 | $(3,115) | $7,101 | | Plus: provision for (reversal of) loan losses | $48,620 | $(1,350) | $70,620 | $(1,350) | | Less: securities gains, net | $7,737 | $992 | $17,357 | $996 | | Operating income | $21,599 | $14,039 | $38,251 | $30,683 | Results of Operations - Comparison of Results of Operations for the Three and Six Month Periods Ended June 30, 2020 and 2019 This comparison analyzes the drivers behind the net loss, changes in income and expenses, and the significant increase in the allowance for loan losses Net (loss) income The company reported a net loss due to a substantial increase in the provision for loan losses, partially offset by lower noninterest expenses and higher noninterest income | Metric (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net interest income | $46,323 | $53,789 | $95,552 | $109,226 | | Provision for (reversal of) loan losses | $48,620 | $(1,350) | $70,620 | $(1,350) | | Noninterest income | $19,753 | $14,147 | $41,663 | $27,303 | | Noninterest expense | $36,740 | $52,905 | $81,607 | $104,850 | | Net (loss) income | $(15,279) | $12,857 | $(11,897) | $25,928 | | Basic (loss) earnings per common share | $(0.37) | $0.30 | $(0.28) | $0.61 | | Diluted (loss) earnings per common share | $(0.37) | $0.30 | $(0.28) | $0.60 | - The $28.1 million decrease in net income for Q2 2020 was mainly due to a $48.6 million provision for loan losses, primarily from COVID-19 impacts and specific commercial loan reserves[204] - Adjusted net loss for Q2 2020 was $14.2 million, excluding restructuring costs[209] - Operating income increased to $21.6 million in Q2 2020 (vs $14.0 million in Q2 2019), excluding loan loss provisions, securities gains, and income tax[209] Net interest income Net interest income declined due to a significant drop in average yields on interest-earning assets, partially offset by lower funding costs and strategic actions - Net interest income for Q2 2020 was $46.3 million, a 13.9% decline from Q2 2019, driven by a 91 basis point drop in average yield on interest-earning assets[216] - Net interest margin (NIM) decreased 48 basis points to 2.44% in Q2 2020 from 2.92% in Q2 2019[216] - Interest expense on total interest-bearing liabilities decreased by $7.6 million (29.9%) in Q2 2020, mainly due to lower deposit costs and FHLB advances[224] - Average online deposits increased by $143.2 million (188.4%) in Q2 2020 compared to Q2 2019, contributing to higher time deposits[225] - The company restructured $420.0 million of fixed-rate FHLB advances in April 2020, extending maturities and lowering interest rates[217] Average Balance Sheet, Interest and Yield/Rate Analysis This analysis illustrates the impact of declining interest rates on asset yields and liability costs, resulting in net interest margin compression Three Months Ended June 30, 2020 vs. 2019 | Metric | Q2 2020 Average Balances (in thousands) | Q2 2020 Yield/Rates | Q2 2019 Average Balances (in thousands) | Q2 2019 Yield/Rates | | :--- | :--- | :--- | :--- | :--- | | Total interest-earning assets | $7,635,630 | 3.38% | $7,400,802 | 4.29% | | Loan portfolio, net | $5,712,548 | 3.77% | $5,641,686 | 4.75% | | Total interest-bearing liabilities | $6,272,441 | 1.14% | $6,225,123 | 1.64% | | Total deposits | $5,039,631 | 1.12% | $5,035,035 | 1.36% | | Net interest income | | $46,323 | | $53,789 | | Net interest rate spread | | 2.24% | | 2.65% | | Net interest margin | | 2.44% | | 2.92% | Six Months Ended June 30, 2020 vs. 2019 | Metric | H1 2020 Average Balances (in thousands) | H1 2020 Yield/Rates | H1 2019 Average Balances (in thousands) | H1 2019 Yield/Rates | | :--- | :--- | :--- | :--- | :--- | | Total interest-earning assets | $7,549,163 | 3.61% | $7,491,440 | 4.29% | | Loan portfolio, net | $5,643,088 | 4.04% | $5,674,606 | 4.74% | | Total interest-bearing liabilities | $6,267,053 | 1.28% | $6,335,185 | 1.60% | | Total deposits | $5,016,230 | 1.24% | $5,130,489 | 1.32% | | Net interest income | | $95,552 | | $109,226 | | Net interest rate spread | | 2.33% | | 2.69% | | Net interest margin | | 2.55% | | 2.94% | - Average non-performing loans were $50.4 million in Q2 2020 and $41.6 million in H1 2020[243] Analysis of the Allowance for Loan Losses The allowance for loan losses significantly increased, driven by substantial provisions reflecting the estimated impact of the COVID-19 pandemic and specific loan deterioration Changes in Allowance for Loan Losses (in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Balance at beginning of period | $72,948 | $60,322 | $52,223 | $61,762 | | Total Charge-offs | $(2,126) | $(2,021) | $(3,734) | $(3,633) | | Total Recoveries | $210 | $453 | $543 | $625 | | Net charge-offs | $(1,916) | $(1,568) | $(3,191) | $(3,008) | | Provision for (reversal of) loan losses | $48,620 | $(1,350) | $70,620 | $(1,350) | | Balance at end of period | $119,652 | $57,404 | $119,652 | $57,404 | - The provision for loan losses in Q2 2020 was $48.6 million, including $28.2 million for specific reserve requirements and $20.2 million for estimated losses from COVID-19[249] - A $20.0 million specific reserve was recorded for a $39.8 million commercial loan relationship with a Miami-based coffee trader in Q2 2020[250] - Approximately 42% of the outstanding loan portfolio was tied to industries potentially more vulnerable to COVID-19[252] - Commercial Real Estate (CRE) loans represented 50.2% of total loans at June 30, 2020, with an estimated weighted average LTV of 61% and DSCR of 1.7x[253] Noninterest Income Noninterest income significantly increased, driven by substantial net gains on the sale of securities and higher income from brokerage and advisory activities Noninterest Income (in thousands) | Noninterest Income Category | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Deposits and service fees | $3,438 | $4,341 | $7,728 | $8,427 | | Brokerage, advisory and fiduciary activities | $4,325 | $3,736 | $8,458 | $7,424 | | Securities gains, net | $7,737 | $992 | $17,357 | $996 | | Cards and trade finance servicing fees | $273 | $1,419 | $668 | $2,334 | | Other noninterest income | $2,619 | $1,875 | $4,684 | $3,857 | | Total noninterest income | $19,753 | $14,147 | $41,663 | $27,303 | - The increase in noninterest income for Q2 2020 was mainly due to $7.5 million in net gains on the sale of 30-year Treasury securities[260] - Brokerage, advisory, and fiduciary activities increased due to a larger allocation of AUMs in advisory services and higher customer trading activity[262][267] - Cards and trade finance servicing fees declined significantly due to changes in the company's credit card programs[263][268] - Data processing and fees for other services, previously provided to the Former Parent, were absent in 2020[265] Noninterest Expense Noninterest expenses decreased significantly, driven by lower salaries and benefits from staff reductions and deferral of PPP loan origination expenses Noninterest Expense (in thousands) | Noninterest Expense Category | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Salaries and employee benefits | $21,570 | $34,057 | $50,896 | $67,494 | | Occupancy and equipment | $4,220 | $4,232 | $8,023 | $8,274 | | Professional and other services fees | $3,965 | $3,954 | $6,919 | $7,398 | | Telecommunications and data processing | $3,157 | $3,233 | $6,621 | $6,259 | | Other operating expenses | $628 | $4,242 | $2,871 | $8,903 | | Total noninterest expenses | $36,740 | $52,905 | $81,607 | $104,850 | - Salaries and employee benefits decreased by $12.5 million (36.7%) in Q2 2020, primarily due to staff reductions and the deferral of $7.8 million in PPP loan origination expenses[275] - Other operating expenses decreased by $3.6 million (85.2%) in Q2 2020, mainly due to the absence of rebranding costs[276] - Restructuring costs for H1 2020 included $1.7 million, primarily for staff reduction and digital transformation expenses[214] - The Company is progressing with digital transformation efforts and plans to close two banking centers[277] Income Taxes The company reported an income tax benefit due to its net loss, with the effective tax rate remaining relatively stable | Income Tax Metric (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Income tax benefit (expense) | $4,005 | $(3,524) | $3,115 | $(7,101) | | Effective income tax rate | 20.77% | 21.51% | 20.75% | 21.50% | - The net deferred tax asset increased by $10.2 million to $15.6 million at June 30, 2020, mainly due to a $67.4 million net increase in the allowance for loan losses[285] Financial Condition - Comparison of Financial Condition as of June 30, 2020 and December 31, 2019 This analysis details changes in assets, liabilities, and equity, including an increase in total assets, a rise in deposits, and reduced FHLB advances Assets Total assets increased by $145.3 million to $8.1 billion, primarily due to higher cash and cash equivalents and net loans - Total assets increased to $8.1 billion at June 30, 2020, from $8.0 billion at December 31, 2019, a 1.8% increase[286] - This change includes increases of $96.0 million (79.1%) in cash and cash equivalents and $60.5 million (1.1%) in loans held for investment, net[286] - Partially offsetting these increases was a decrease of $64.6 million (3.7%) in total securities[286] Cash and Cash Equivalents Cash and cash equivalents significantly increased by $96.0 million, driven by higher Federal Reserve balances and proceeds from Senior Notes issuance - Cash and cash equivalents increased to $217.3 million at June 30, 2020, from $121.3 million at December 31, 2019, an increase of $96.0 million or 79.1%[287] - The increase is attributed to higher balances at the Federal Reserve for COVID-19 mitigation and $58.4 million in net proceeds from Senior Notes[287] - Net cash provided by financing activities was $97.6 million for the six months ended June 30, 2020, including a $253.8 million net increase in demand, savings, and money market deposits[290] Loans The loan portfolio grew by $127.9 million to $5.9 billion, driven by domestic loan growth including PPP loans, while international loans declined | Loan Metric (in thousands) | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total loans, gross | $5,872,271 | $5,744,339 | | Total loans, gross / total assets | 72.2% | 71.9% | | Allowance for loan losses | $119,652 | $52,223 | | ALL / total loans, gross | 2.04% | 0.91% | | CRE Loan Portfolio by Industry (in thousands) | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Retail | $1,116,359 | $1,143,565 | | Multifamily | $823,450 | $801,626 | | Office space | $444,621 | $453,328 | | Land and construction | $284,766 | $278,688 | | Hospitality | $191,946 | $198,807 | | Industrial and warehouse | $88,149 | $96,102 | | Total | $2,949,291 | $2,972,116 | - Domestic loan exposure increased by $143.2 million (2.6%), including $214.1 million in PPP loans and growth in jumbo mortgages[298] - International loans declined by $15.3 million (8.9%), with syndicated loans also decreasing by $84.9 million (15.1%)[298][300] Foreign Outstanding The international loan portfolio decreased by $15.3 million, primarily due to a decline in Venezuelan exposure | Country of Risk (in thousands) | June 30, 2020 Net Exposure | % Total Assets | December 31, 2019 Net Exposure | % Total Assets | | :--- | :--- | :--- | :--- | :--- | | Venezuela | $93,770 | 1.1% | $112,297 | 1.4% | | Other | $62,395 | 0.8% | $59,140 | 0.7% | | Total | $156,165 | 1.9% | $171,437 | 2.1% | | Maturities of International Loans (in thousands) | Less than 1 year | 1-3 Years | More than 3 years | Total | | :--- | :--- | :--- | :--- | :--- | | June 30, 2020 | $7,213 | $24,369 | $124,583 | $156,165 | | December 31, 2019 | $14,287 | $12,899 | $144,251 | $171,437 | | Change | $(7,074) | $11,470 | $(19,668) | $(15,272) | - All foreign loans are denominated and payable in U.S Dollars[301] Loan Quality Loan quality deteriorated as non-performing assets increased significantly due to a large commercial loan and other loans placed on non-accrual status Allocation of Allowance for Loan Losses (in thousands) | Loan Segment | June 30, 2020 ALL | % of Loans in Each Category to Total Loans | December 31, 2019 ALL | % of Loans in Each Category to Total Loans | | :--- | :--- | :--- | :--- | :--- | | Real estate | $54,498 | 49.8% | $25,040 | 51.7% | | Commercial | $56,783 | 38.9% | $22,132 | 38.1% | | Consumer and others | $5,712 | 8.3% | $1,677 | 6.9% | | International Loans | $2,659 | 2.7% | $3,332 | 3.0% | | Total ALL | $119,652 | 100.0% | $52,223 | 100.0% | | % of Total Loans | 2.04% | | 0.91% | | Non-Performing Assets (in thousands) | Non-Performing Asset Category | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Non-Accrual Loans | $77,260 | $32,922 | | Total Past Due Accruing Loans | — | $5 | | Total Non-Performing Loans | $77,260 | $32,927 | | Other Real Estate Owned | $42 | $42 | | Total Non-Performing Assets | $77,302 | $32,969 | - Non-performing assets increased by $44.3 million (134.5%), mainly due to a $39.8 million commercial loan relationship placed on non-accrual status[310] Loans by Credit Quality Indicators (in thousands) | Loan Class (Credit Risk Rating) | June 30, 2020 Total | December 31, 2019 Total | | :--- | :--- | :--- | | Special Mention | $22,871 | $32,986 | | Substandard | $64,803 | $30,766 | | Doubtful | $22,758 | $4,962 | | Total Classified Loans | $110,432 | $68,714 | - Substandard loans increased by $34.0 million (110.6%) due to the downgrade of a $39.8 million commercial loan relationship[314] - Doubtful loans increased by $17.8 million (358.7%) mainly from the downgrade of $19.3 million within the same commercial loan relationship[316] - Potential problem loans increased by $7.5 million (267.0%) to $10.3 million at June 30, 2020[322][323] Securities The securities portfolio decreased slightly, with a notable increase in corporate debt and a decrease in U.S Treasury debt, while average duration shortened Securities Portfolio Composition (in thousands) | Security Category | June 30, 2020 Amount | June 30, 2020 % | December 31, 2019 Amount | December 31, 2019 % | | :--- | :--- | :--- | :--- | :--- | | Debt securities available for sale | $1,519,784 | 90.8% | $1,568,752 | 90.1% | | Corporate debt (available for sale) | $386,109 | 23.1% | $252,836 | 14.5% | | U.S Treasury debt (available for sale) | $2,515 | 0.2% | $104,236 | 6.0% | | Debt securities held to maturity | $65,616 | 3.9% | $73,876 | 4.3% | | Equity securities | $24,425 | 1.5% | $23,848 | 1.4% | | Other securities (FHLB & Fed Reserve stock) | $64,986 | 3.8% | $72,934 | 4.2% | | Total Securities | $1,674,811 | 100.0% | $1,739,410 | 100.0% | - The investment portfolio's average duration decreased to 2.6 years from 3.8 years, due to strategic purchases of U.S Treasuries and CMOs[331][420] Weighted Average Yields for Securities Portfolio (June 30, 2020) | Security Category | Total Yield | | :--- | :--- | | Debt securities available for sale | 2.71% | | U.S Government sponsored enterprise debt | 2.62% | | Corporate debt (domestic) | 3.21% | | U.S Government agency debt | 2.11% | | Municipal bonds | 3.11% | | Corporate debt (foreign) | 2.89% | | U.S treasury securities | 0.34% | | Debt securities held to maturity | 2.38% | | Equity securities | 2.05% | | Other securities | 5.65% | | Total Securities | 2.80% | Liabilities Total liabilities increased by $149.8 million to $7.3 billion, driven by higher deposits and Senior Notes issuance, partially offset by reduced FHLB advances - Total liabilities increased to $7.3 billion at June 30, 2020, from $7.2 billion at December 31, 2019, a 2.1% increase[332] - This increase was primarily driven by a $267.6 million (4.6%) rise in total deposits and $58.4 million from Senior Notes issuance[332] - These increases were partially offset by a $185.0 million (15.0%) decrease in FHLB advances and the $28.1 million redemption of junior subordinated debentures[332] Deposits Total deposits increased by $267.6 million to $6.0 billion, primarily due to PPP loan funds and reciprocal deposit growth, while foreign deposits declined - Total deposits increased to $6.0 billion at June 30, 2020, from $5.8 billion at December 31, 2019, a 4.6% increase[334] - Deposit growth was mainly driven by $132.7 million in PPP loan funds, $67.8 million in reciprocal deposit account balances, and higher online CDs[334] Deposits by Country of Domicile (in thousands) | Deposit Category | June 30, 2020 | December 31, 2019 | Change Amount | Change % | | :--- | :--- | :--- | :--- | :--- | | Domestic | $3,432,971 | $3,121,827 | $311,144 | 10.0% | | Foreign: Venezuela | $2,202,340 | $2,270,970 | $(68,630) | (3.0)% | | Foreign: Others | $389,391 | $364,346 | $25,045 | 6.9% | | Total Deposits | $6,024,702 | $5,757,143 | $267,559 | 4.6% | - Core deposits were $4.7 billion at June 30, 2020, representing 77.2% of total deposits[341] - Brokered deposits decreased by $94.5 million (13.8%) to $587.9 million at June 30, 2020[342] Short-Term Borrowings The company had no outstanding short-term borrowings at June 30, 2020, a significant decrease from year-end 2019 - No outstanding short-term borrowings were reported at June 30, 2020[346] | Short-Term Borrowings (in thousands) | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Outstanding at period-end | — | $285,000 | | Average amount | $167,500 | $478,333 | | Maximum amount outstanding at any month-end | $300,000 | $600,000 | | Weighted average interest rate (during period) | 1.45% | 2.29% | Return on Equity and Assets The company reported negative returns on average assets (ROA) and average equity (ROE) for the period, reflecting the net loss incurred Return on Equity and Assets (%) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net (loss) income / Average total assets (ROA) | (0.75)% | 0.66% | (0.30)% | 0.66% | | Net (loss) income / Average stockholders' equity (ROE) | (7.21)% | 6.56% | (2.82)% | 6.76% | | Adjusted net (loss) income / Average total assets (Adjusted ROA) | (0.70)% | 0.77% | (0.26)% | 0.73% | | Adjusted net (loss) income / Average stockholders' equity (Adjusted ROE) | (6.72)% | 7.66% | (2.51)% | 7.51% | - Average stockholders' equity to average total assets ratio was 10.46% for Q2 2020 and 10.53% for H1 2020[350] Capital Resources and Liquidity Management Stockholders' equity slightly decreased, while the company actively managed liquidity by restructuring FHLB advances, issuing Senior Notes, and increasing cash reserves - Stockholders' equity decreased by $4.5 million (0.5%) to $830.2 million, primarily due to a $11.9 million net loss and $15.2 million Class B common stock repurchase[354] - The company repurchased 932,459 Class B common shares for $15.2 million and canceled all 4,464,916 treasury Class B shares[355][356] - Outstanding FHLB advances were $1.05 billion at June 30, 2020, with an additional $1.4 billion available[357][361] - A $60.0 million offering of Senior Notes was completed in June 2020, providing $58.4 million in net proceeds[363] - The company increased cash and cash equivalents by $96.0 million in H1 2020 as a preventive measure against COVID-19 impacts[366] - On January 30, 2020, $26.8 million of 8.90% trust preferred capital securities were redeemed, reducing Tier 1 equity capital by $24.7 million and annual pretax interest expense by $2.4 million[368] Regulatory Capital Requirements The company and the bank maintained capital ratios above regulatory minimums and adopted simplified capital rules with no material effect Company's Consolidated Regulatory Capital Ratios (%) | Capital Ratio | June 30, 2020 Actual Ratio | December 31, 2019 Actual Ratio | Regulatory Minimums Capitalized Ratio | | :--- | :--- | :--- | :--- | | Total capital ratio | 14.34% | 14.78% | 10.00% | | Tier 1 capital ratio | 13.08% | 13.94% | 8.00% | | Tier 1 leverage ratio | 10.39% | 11.32% | 5.00% | | Common Equity Tier 1 (CET1) | 12.13% | 12.60% | 6.50% | Bank's Consolidated Regulatory Capital Ratios (%) | Capital Ratio | June 30, 2020 Actual Ratio | December 31, 2019 Actual Ratio | Regulatory Minimums Capitalized Ratio | | :--- | :--- | :--- | :--- | | Total capital ratio | 13.39% | 13.15% | 10.00% | | Tier 1 capital ratio | 12.13% | 12.32% | 8.00% | | Tier 1 leverage ratio | 9.64% | 10.01% | 5.00% | | Common Equity Tier 1 (CET1) | 12.13% | 12.32% | 6.50% | - The Company adopted simplified capital rules in Q1 2020, which had no material effect on its regulatory capital and ratios[373] - The Company opted out of adopting the new 'community bank leverage ratio' (CBLR) due to its current and projected size and operations[374] Off-Balance Sheet Arrangements Off-balance sheet arrangements primarily consist of commitments to extend credit and letters of credit, which saw a slight decrease | Off-Balance Sheet Arrangement (in thousands) | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Commitments to extend credit | $786,034 | $820,380 | | Letters of credit | $15,696 | $17,414 | | Total | $801,730 | $837,794 | Contractual Obligations Material changes to contractual obligations include the restructuring of FHLB advances and the issuance of Senior Notes - In early April 2020, $420.0 million of fixed-rate FHLB advances were restructured, extending maturities from 2021 to 2023 at lower interest rates[379] - On June 23, 2020, the Company completed a $60.0 million offering of Senior Notes (5.75% coupon, due 2025), providing $58.4 million in net proceeds[380] Critical Accounting Policies and Estimates The preparation of financial statements requires significant management estimates, particularly for the allowance for loan losses and goodwill impairment - Key estimates include the allowance for loan losses and goodwill impairment, which are sensitive to economic conditions and the COVID-19 pandemic[386] - The ALL is determined using specific and general reserves, considering historical loss rates, economic conditions, and qualitative factors, including the probable deterioration from COVID-19[387][388][392] - An interim goodwill impairment test was performed as of June 30, 2020, due to COVID-19 related triggering events, concluding that goodwill was not impaired[396] Recently Issued Accounting Pronouncements There are no recently adopted accounting pronouncements; information on pending standards is referenced to Note 1 of the interim consolidated financial statements ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company manages market risks, primarily interest rate and price risks, through sensitivity analyses on earnings, economic value of equity, and investment portfolios Market Risk Measurement The company uses sensitivity analyses to monitor interest rate and price risks, managing exposures within board-approved limits while remaining asset sensitive - Interest rate and price risks are the most significant market risks, monitored using sensitivity analyses on earnings, economic value of equity (EVE), and investment portfolio exposure[401][406] - The company is asset sensitive, meaning income is expected to increase when interest rates rise and decrease when they fall[407] Earnings Sensitivity to Interest Rate Changes (Change in Net Interest Income over 12 months, in thousands) | Change in Interest Rates (Basis points) | June 30, 2020 Change in earnings | June 30, 2020 % Change | December 31, 2019 Change in earnings | December 31, 2019 % Change | | :--- | :--- | :--- | :--- | :--- | | Increase of 200 | $19,823 | 11.1% | $14,237 | 6.9% | | Increase of 100 | $12,446 | 7.0% | $10,091 | 4.9% | | Decrease of 25 | $(3,368) | (1.9)% | $(4,856) | (2.3)% | | Decrease of 100 | — | —% | $(20,739) | (10.0)% | Economic Value of Equity (EVE) Sensitivity to Interest Rate Changes (%) | Change in Interest Rates (Basis points) | June 30, 2020 Change in equity | December 31, 2019 Change in equity | | :--- | :--- | :--- | | Increase of 200 | (2.10)% | (11.10)% | | Increase of 100 | 1.3% | (3.86)% | | Decrease of 25 | (0.80)% | 0.24% | | Decrease of 100 | —% | (0.11)% | Available for Sale Portfolio Mark-to-Market Exposure (in thousands) | Change in Interest Rates (Basis points) | June 30, 2020 Change in market value | December 31, 2019 Change in market value | | :--- | :--- | :--- | | Increase of 200 | $(100,107) | $(148,369) | | Increase of 100 | $(42,789) | $(69,956) | | Decrease of 25 | $9,547 | $14,008 | | Decrease of 100 | — | $53,946 | Limits Approval Process The Asset/Liability Committee (ALCO) is responsible for managing market risk exposures and monitoring compliance with board-approved limits - The ALCO manages market risk exposures, monitors compliance with board-approved limits, and recommends changes to these limits[422] - Limits are reviewed annually or more frequently, considering factors like capital levels and earnings[422] ITEM 4. CONTROLS AND PROCEDURES This section confirms the effectiveness of the company's disclosure controls and procedures as of June 30, 2020, with no material changes in internal control Evaluation of Disclosure Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2020, ensuring timely and accurate reporting - The company's disclosure controls and procedures are designed to ensure information required for SEC reports is recorded, processed, summarized, and reported timely[426] - The CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2020[427] Changes in Internal Control Over Financial Reporting No changes in internal control over financial reporting were identified that materially affected, or are reasonably likely to materially affect, internal controls - No material changes in internal control over financial reporting occurred during the period covered by this Form 10-Q[428] Limitations on Effectiveness of Controls and Procedures Management acknowledges that any control system can only provide reasonable, not absolute, assurance of achieving control objectives due to inherent limitations - Controls and procedures provide only reasonable, not absolute, assurance of achieving desired control objectives[429] - The design of controls must consider resource constraints and management judgment in evaluating benefits versus costs[429] PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The company is involved in ordinary course legal actions, with a previously disclosed lawsuit settled confidentially in July 2020 with no material impact - The company is engaged in ordinary course litigation, with management believing potential liabilities are not material[431] - A lawsuit against Amerant Trust and Kunde Management, LLC, filed in September 2017, was settled confidentially on July 6, 2020[432][433] - The settlement agreement did not have a material impact on the Company's financial condition or operating results[433] ITEM 1A. RISK FACTORS This section updates risk factors, emphasizing the significant adverse impact of the COVID-19 pandemic and risks associated with the PPP and debt servicing - The COVID-19 pandemic has significantly impacted economic conditions, adversely affecting the company's business, financial condition, and results of operations[435][438] - The company increased its provision for loan losses in Q1 and Q2 2020 due to estimated macroeconomic deterioration from COVID-19[439] - Participation in the SBA's Paycheck Protection Program (PPP) exposes the company to litigation risks and risks that the SBA may not fund all PPP loan guaranties[446][449][450] - The fair value of investment securities can fluctuate due to market conditions beyond the company's control, such as changes in interest rates and defaults[451] - The company's ability to service its debt depends on future operating performance, economic conditions, and regulatory constraints on subsidiary dividends[452][454][455] [ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS](index=113&type=section&id=ITEM%202.%20UNREGISTERED%20SALES%20OF