Amerant Bancorp (AMTB) Risk Analysis

We face risks of litigation and regulatory investigations and actions, including the risk of class action lawsuits. Plaintiffs in class action and other lawsuits against us may seek very large or indeterminate amounts, including punitive and treble damages. Due to the vagaries of litigation, the outcome of a litigation matter and the amount or range of potential loss at particular points in time may normally be difficult to ascertain. A substantial legal liability or a significant federal, state or regulatory action, inquiry or investigation could harm our reputation, result in material fines, penalties, or legal costs, divert management resources away from our business, and otherwise adversely affect our business, financial condition, results of operations, or cash flows. Even if we ultimately prevail in a litigation, regulatory action or investigation, our ability to attract new customers, retain our current customers and recruit and retain employees could be adversely affected. Regulatory inquiries and litigation may also adversely affect the prices or volatility of our securities specifically, or the securities of our industry, generally.

Severe weather and natural disasters, (including hurricanes, tornados, earthquakes, fires, droughts and floods), acts of war or terrorism (such as hostilities in Ukraine and the Middle-East region), epidemics and global pandemics (such as the COVID-19 outbreak), theft, civil unrest, government expropriation, condemnation or other external events in the markets where we operate or where our customers live (including Venezuela) could have a significant effect on our ability to conduct business. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, impair employee productivity, result in loss of revenue and/or cause us to incur additional expenses. The occurrence of any such event could adversely affect our business, financial condition, results of operations, or cash flows. Our business is mainly concentrated in South Florida and the greater Tampa, Florida area, which may increase our risks from extreme weather. These market areas are susceptible to hurricanes, tropical storms and other similar severe weather events which could have the effects indicated above. Additionally, the potential for such weather events has and may continue to cause our customers to incur higher property and casualty insurance premiums which may adversely affect the value and sales of real estate in the markets we operate. Additionally, the impact of severe weather in the markets where we operate has and may continue to increase the cost and reduce the availability of insurance needed for our business operations.

Liquidity is essential to our business as we require sufficient liquidity to meet customer deposit maturities and withdrawals, customer loan requests, payments on debt obligations as they come due and other cash commitments under normal operating conditions and unpredictable circumstances. Liquidity risk is the potential that the Company will be unable to meet its obligations as they become due because of an inability to obtain adequate funding or liquidate assets. Our funding sources include deposits (core and non-core), federal funds purchased, securities sold under repurchase agreements, short-and long-term debt, the Federal Reserve Discount Window (Discount Window) and Federal Home Loan Bank of Atlanta, or FHLB, advances. We also use brokered deposits and wholesale funding, which not only increases our liquidity risk but could also increase our interest rate expense and potentially increase our deposit insurance costs. Institutions that are less than well-capitalized may be unable to raise or renew brokered deposits under the prompt corrective action rules. See "Supervision and Regulation-Capital Requirements" in the Form 10-K. In addition, we maintain a portfolio of securities that can be used as a source of liquidity. Any significant restriction or disruption of our ability to obtain funding from these or other sources could adversely affect our liquidity and our ability to meet our current and future financial obligations, which could materially affect our financial condition or results of operations. Our ability to obtain funding in adequate amounts and on acceptable terms to finance or capitalize our activities could be impaired by factors that affect us, the financial services industry, or the economy in general, including but not limited to: economic downturns in the markets in which we operate or in the financial or credit markets in general; rising interest rates; the liquidity needs of our depositors and competition for deposits; the availability of collateral that is acceptable to the FHLB and the Federal Reserve Bank, fiscal and monetary policy; and regulatory changes. In addition, our ability to borrow money or issue debt depends on market conditions, the availability of credit, our credit ratings, and our overall credit capacity. Alternative funding to deposits may carry higher costs. If we are required to rely more heavily on more expensive and potentially less stable funding sources or if additional financing sources are unavailable or are not available on acceptable terms, our profitability, liquidity, and prospects could be adversely affected.

We operate many different financial service functions and rely on the ability of our employees, third party vendors and systems to process a significant number of transactions. Operational risk is the risk of loss from operations, including fraud by employees or outside persons, employees' execution of incorrect or unauthorized transactions, data processing and technology errors or hacking and breaches of internal control systems. We have adopted flexible work arrangements that permit some employees to work from home full or part time, and these work arrangements could strain our technology resources and introduce operational risks, including heightened cybersecurity risk, as remote working environments can be less secure. We, as other financial institutions, are inherently exposed to fraud risk. Fraudsters are leveraging new technologies, including artificial intelligence, to impersonate our customers and/or steal personally identifiable information to commit fraud. Fraudulent activity can take many forms and has increased as new products and features that facilitate the access for financial services are implemented, such as real-time payment services. We are susceptible to fraud being perpetrated by customers, employees, vendors, or members of the general public. We are subject to fraud risk in connection with loan origination, payment transactions (including ACH transactions, wire transactions, and digital payments), ATM transactions, checking, withdrawal transactions and other transactions. In connection with loan origination, we significantly rely on information supplied by loan applicants and third parties, including the information contained in the loan application, appraisals of property, title information as well as employment and income documentation provided by third parties. If any of this information is misrepresented and we do not detect such misrepresentation prior to funding, we generally bear the risk of loss related to the misrepresentation. Although we are constantly investing in systems, resources, and controls aimed at mitigating fraud risk, there can be no assurance that our efforts will be effective in detecting and preventing fraud or that we will not incur fraud losses or costs or other damage related to such fraud, at levels that adversely affect our business, financial condition, results of operations, cash flows, or reputation.

Our success depends, in large part, on our ability to attract and retain experienced personnel in key positions. Intense competition exists in the activities and markets that we serve for candidates with appropriate qualifications and demonstrated ability. If we are unable to hire and retain key individuals, we may be unable to implement our business strategy and our business, financial condition and results of operations may be negatively impacted. Our ability to attract and retain employees could also be impacted by changing workforce expectations, practices, and preferences, including remote work and hybrid work preferences, and increasing labor shortages and competition for labor, which could increase labor costs. Failure to attract well-qualified employees or to develop and retain our employees may adversely affect our business, financial condition, results of operations, or cash flows.

We outsource many of our major systems and critical back-office functions, and therefore depend on a variety of third-party vendors to support our operations. These vendors provide essential services, including, but not limited to, core systems support, data processing, transaction recording and monitoring, online and mobile banking platforms, and network and internet connectivity. Our ability to operate effectively depends on the successful, secure, and uninterrupted performance of these third-party systems and services. Any failure or interruption in the services provided by these vendors including as a result of operational breakdowns, cybersecurity incidents, or system outages, could cause an interruption of our operations. Such disruptions could impair our ability to process transactions, serve customers, or maintain business continuity, and could result in a loss of customers and business, reputational harm, could subject us to additional regulatory scrutiny, or could expose us to legal liability. Any of these occurrences could have a material adverse effect on our business, financial condition, results of operations, or cash flows.

FDIC insurance premiums we pay may change and be significantly higher in the future. The FDIC may be forced to charge higher premiums in the future if market developments significantly deplete the insurance fund of the FDIC and reduce the ratio of reserves to insured deposits. In addition, the method that the FDIC uses to determine the amount of our deposit insurance premium will change once our total consolidated assets exceed $10 billion, which we expect may happen in 2026. Any increases in our assessment rate, future special assessments, or required prepayments in FDIC insurance premiums could reduce our profitability or limit our ability to pursue certain business opportunities, which could adversely affect our business, financial condition, results of operations, or cash flows.

From time to time, we implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, including external factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, that may impact the successful implementation of a new line of business and/or a new product or service. In developing and marketing new lines of business and/or new products and services, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved, and price and profitability targets may not prove feasible, which could in turn have a material negative effect on our operating results. The financial services industry is constantly undergoing rapid technological changes with frequent introductions of new technology-driven products and services, including the increased usage of artificial intelligence and intelligent automation within the industry. Our future success will partially depend upon our ability to use technology effectively to provide products and services that will satisfy our customer needs and to create additional efficiencies in our operations. We may be unable to effectively implement new technology-driven enhancements of products and services or be successful in marketing such products and services to our customers. In addition, our implementation of certain new technologies, such as those related to artificial intelligence and automation, in our processes may have unintended consequences due to their limitations or our failure to use them effectively. Many larger competitors have substantially greater resources to invest in technological improvements and, increasingly, non-banking firms are using technology to compete with traditional lenders for loans and other banking services. Third parties and vendors upon which we rely for our technology needs may not be able to develop, on a cost-effective basis, systems that will enable us to keep pace with such developments. As a result, our larger competitors may be able to offer additional or superior products compared to those that we will be able to provide, which would put us at a competitive disadvantage. We may lose customers seeking new technology-driven products and services to the extent we are unable to provide such products and services. The ability to keep pace with technological change is important and the failure to do so could adversely affect our business, financial condition, results of operations, or cash flows. Additionally, any new line of business, new product or service and/or new technology could require the establishment of new key and other controls and have a significant impact on our existing system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business, new products or services and/or new technologies could adversely affect our business, financial condition, results of operations, or cash flows.

We rely heavily on communications and information systems, including those provided by third-party service providers, to conduct our business. Any security breach of these systems could result in failures or disruptions which could impact our ability to serve our customers, operate our business and affect our customers' privacy and could damage our reputation, result in a loss of business, subject us to additional regulatory scrutiny or enforcement or expose us to civil litigation and possible financial liability. Our systems and networks, as well as those of our third-party service providers, are subject to security risks and could be susceptible to information security breaches and cyberattacks. Information security breaches and cyberattack incidents include, but are not limited to, attempts to access customer or company information, the introduction of malicious code or computer viruses, and denial-of-service attacks. Such incidents may result in unauthorized access, theft, misuse, loss, disclosure, or destruction of data (including confidential customer information), account takeovers, service interruptions, or other adverse events. These threats may arise from human error, fraud, or malicious actions by internal or external parties, or from accidental technological failures. Cyber threats are rapidly evolving and we may not be able to anticipate or prevent all such attacks and could be held liable for any security breach or loss. These risks have increased with the adoption of cloud and other technologies, such as the implementation of remote work protocols and may continue to increase in the future as the use of mobile banking and other internet-based products and services continues to grow. We have previously been notified by certain third-party vendors of potential cybersecurity incidents affecting their systems. In each instance, we activated our incident response plan, worked with the vendors and external advisors to conduct forensic analyses, and evaluated whether customer information had been accessed or exfiltrated. Where appropriate, impacted customers received notice and were offered credit monitoring services. Although these incidents did not materially adversely affect our business, financial condition, or results of operations, they illustrate the risks inherent in relying on third-party providers. We are not aware of any ongoing issues involving these vendors; however, we-and our customers, regulators, and service providers-have experienced, and are likely to continue experiencing, increasing information security and cybersecurity threats and attacks, see "Item 1C. Cybersecurity" for an additional discussion on our information security program. Despite our cybersecurity policies and procedures and our efforts to monitor and ensure the integrity of our and our service providers' systems, we may not be able to anticipate all types of security threats, nor may we be able to implement preventive measures effective against all such security threats. In addition, the impact and severity of a particular cyberattack may not be immediately clear, and it may take a significant amount of time before such determination can be made. While the investigation of a cyberattack is ongoing, we may not be fully aware of the extent of the harm caused by the cyberattack and it may not be clear how to contain and remediate such harm and any damage may continue to spread. Security breaches or interruptions of systems operated by us or our third-party service providers may have serious adverse financial and other consequences, including significant legal and remediation costs, disruption of operations, misappropriation of confidential information, as well as damage to our customers and our counterparties. Any related losses and claims may not be covered by our insurance. In addition to the immediate costs of any failure, interruption or security breach, including those at our third-party service providers, these events could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to legal liability, any of which could adversely affect on business, financial condition, results of operations, or cash flows.

The Florida banking markets in which we do business are highly competitive; therefore, our future growth and success will depend on our ability to compete effectively in these markets. We compete for deposits, loans, and other financial services in our markets with other local, regional and national commercial banks, thrifts, credit unions, mortgage lenders, trust services providers and securities advisory and brokerage firms. Recent regulatory changes have reduced compliance obligations for large bank holding companies and increased the asset thresholds that trigger more stringent requirements. As a result, certain bank holding companies with less than $250?billion in total consolidated assets, previously subject to heightened prudential standards, may become more competitive or pursue growth opportunities more aggressively. Marketplace lenders operating nationwide over the internet are also growing rapidly, other fintech developments, including blockchain and other technologies, may potentially disrupt the financial services industry and impact the way banks do business. Many of our competitors offer products and services different from us, and have substantially greater resources, name recognition and market presence than we do, which benefits them in attracting business. In addition, larger competitors may be able to price loans and deposits more aggressively than we are able to and have broader and more diverse customer and geographic bases to draw upon.

In December 2021, we sold our approximately 177,000 square foot headquarters building (the "Property") and entered into an 18-year triple net lease for the Property (the "Lease") at an initial base rent of $7,500,000 per year (escalating 1.5% each year), under which we are also responsible for the Property's insurance, real estate taxes, and maintenance and repair expenses. During the term of the Lease, we have the right to sublet the whole or any part of the Property. While we occupy and we expect to continue to occupy a portion of the Property, we also currently sublease and intend to continue to sublease a significant portion of the Property to third parties. When we sublease spaces in the Property to third parties, we are not released from our underlying obligations under the Lease. We rely on the sublease income from subtenants to offset the expenses incurred related to our obligations under the Lease. Although we assess the financial condition of each subtenant to which we sublease space in the Property, the financial condition of each such subtenant or of a sublease guarantor(s), if any, may deteriorate over time. If a subtenant of the Property does not perform under the terms of a sublease agreement (due to its financial condition or other factors), we may not be able to recover amounts owed to us under the terms of each sublease agreement or the related guarantees, if any. If subtenants default or terminate their subleases with us, we may experience a loss of planned sublease rental income, which could adversely impact our business, financial condition, results of operations, or cash flows. Additionally, if subtenants default on their sublease obligations with us or otherwise terminate their sublease agreement with us, we may be unable to secure a new subtenant on a timely basis, or at all, on the same or more favorable rent terms.