As filed with the U.S. Securities and Exchange Commission on June 15, 2018.

File No. 001-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10

 

 

GENERAL FORM FOR REGISTRATION OF SECURITIES

PURSUANT TO SECTION 12(b) OR 12(g) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

 

Mercantil Bank Holding Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Florida
  65-0032379
(State or other jurisdiction of
incorporation or organization) 		  (I.R.S. Employer
Identification No.)
220 Alhambra Circle
Coral Gables, Florida
  33134
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code:

(305) 460-4038

Securities to be registered pursuant to Section 12(b) of the Act:

 

Title of each class to
be so registered

Class A Common Stock, $0.10 par value per share
Class B Common Stock, $0.10 par value per share

 

 

Securities to be registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ☐    Accelerated filer   ☐
Non-accelerated filer   ☐ (Do not check if a smaller reporting company)    Smaller reporting company   ☐
Emerging growth company   ☒     

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

 

 

 

MERCANTIL BANK HOLDING CORPORATION

INFORMATION REQUIRED IN REGISTRATION STATEMENT

CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT AND ITEMS OF FORM 10

Certain information required to be included in this Form 10 is incorporated by reference to specifically-identified portions of the body of the information statement filed herewith as Exhibit 99.1. None of the information contained in the information statement shall be incorporated by reference herein or deemed to be a part hereof unless such information is specifically incorporated by reference.

Item 1. Business.

The information required by this item is contained under the sections of the information statement entitled “Summary,” “Forward-Looking Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Selected Financial Information,” “Business,” “Certain Relationships and Related Party Transactions” and “Available Information.” Those sections are incorporated herein by reference.

Item 1A. Risk Factors.

The information required by this item is contained under the sections of the information statement entitled “Risk Factors” and “Forward-Looking Statements.” Those sections are incorporated herein by reference.

I tem 2. Financial Information.

The information required by this item is contained under the sections of the information statement entitled “Summary—Summary Historical Financial Information,” “Selected Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Those sections are incorporated herein by reference.

Item 3. Properties.

The information required by this item is contained under the section of the information statement entitled “Business—Properties.” That section is incorporated herein by reference.

Item 4. Security Ownership of Certain Beneficial Owners and Management.

The information required by this item is contained under the section of the information statement entitled “Ownership of Our Stock.” That section is incorporated herein by reference.

Item 5. Directors and Executive Officers.

The information required by this item is contained under the section of the information statement entitled “Management.” That section is incorporated herein by reference.

Item 6. Executive Compensation.

The information required by this item is contained under the sections of the information statement entitled “Executive and Director Compensation.” That section is incorporated herein by reference.

Item 7. Certain Relationships and Related Transactions.

The information required by this item is contained under the sections of the information statement entitled “Management” and “Certain Relationships and Related Party Transactions.” Those sections are incorporated herein by reference.

Item 8. Legal Proceedings.

The information required by this item is contained under the section of the information statement entitled “Business—Legal Proceedings.” That section is incorporated herein by reference.

Item 9. Market Price of, and Dividends on, the Registrant’s Common Equity and Related Stockholder Matters.

The information required by this item is contained under the section of the information statement entitled “Summary,” “Dividend Policy,” “The Spin-Off,” “Description of Capital Stock” and “Executive and Director Compensation.” Those sections are incorporated herein by reference.

Item 10. Recent Sales of Unregistered Securities.

Not applicable.

Item 11. Description of Registrant’s Securities to be Registered.

The information required by this item is contained under the section of the information statement entitled “The Spin-Off” and “Description of Capital Stock.” Those sections are incorporated herein by reference.

Item 12. Indemnification of Directors and Officers.

The information required by this item is contained under the section of the information statement entitled “Indemnification of Directors and Officers.” That section is incorporated herein by reference.

Item 13. Financial Statements and Supplementary Data.

The information required by this item is contained under the section of the information statement entitled “Index to Financial Statements” (and the financial statements and related notes referenced therein). That section is incorporated herein by reference.

Item 14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Not applicable.

Item 15. Financial Statements and Exhibits.

(a) Financial Statements

The information required by this item is contained under the section of the information statement entitled “Index to Financial Statements” (and the financial statements referenced therein). That section is incorporated herein by reference.

(b) Exhibits

See below.

 

 

The following documents are filed as exhibits hereto:

 

Exhibit

Number

  

Exhibit Description

3.1    Amended and Restated Articles of Incorporation of Mercantil Bank Holding Corporation.
3.2    Amended and Restated Bylaws of Mercantil Bank Holding Corporation.
10.1    Amended and Restated Separation and Distribution Agreement between Mercantil Servicios Financieros, C.A. and Mercantil Bank Holding Corporation, dated as of June 12, 2018.
10.2    Distribution Trust Agreement by and among Mercantil Servicios Financieros, C.A., Mercantil Bank Holding Corporation and TMI Trust Company, dated as of March 12, 2018.
10.3    Amendment No. 1, dated as of June 12, 2018, to the Distribution Trust Agreement by and among Mercantil Servicios Financieros, C.A., Mercantil Bank Holding Corporation and TMI Trust Company, dated as of March 12, 2018.
10.4    Registration Rights Agreement between Mercantil Servicios Financieros, C.A. and Mercantil Bank Holding Corporation, dated as of March 12, 2018.
21.1    List of Subsidiaries of Mercantil Bank Holding Corporation.
99.1    Preliminary Information Statement of Mercantil Bank Holding Corporation, subject to completion, dated June 15, 2018.

SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.

 

MERCANTIL BANK HOLDING CORPORATION
By:  

/s/ Millar Wilson

  Name: Millar Wilson
  Title: Chief Executive Officer

Date: June 15, 2018

 

Exhibit 3.1

AMENDED AND RESTATED

ARTICLES OF INCORPORATION

OF

MERCANTIL BANK HOLDING CORPORATION

Pursuant to Sections 607.1003 and 607.1007 of the Florida Business Corporation Act, Mercantil Bank Holding Corporation, a Florida corporation (the “ Corporation ”), hereby certifies that:

FIRST: The Corporation is named “Mercantil Bank Holding Corporation” and was originally incorporated under the name “Mountain Corporation” in the State of Florida on June 27, 1985.

SECOND: These Amended and Restated Articles of Incorporation (as may be amended, these “ Articles ”) amend, restate and supersede in their entirety any and all prior Articles of Incorporation, as amended, including any Articles of Amendment, filed with the State of Florida from the date of the Corporation’s original incorporation through the date hereof.

THIRD: These Articles contain amendments requiring shareholder approval, and were unanimously approved on January 23, 2018 by the Corporation’s shareholders by a number of votes cast for the amendment sufficient for such approval.

ARTICLE I

NAME

The name of this Corporation is “Mercantil Bank Holding Corporation”.

ARTICLE II

PURPOSE

The objects, purposes, and powers for which the Corporation is organized are as follows:

 

(1) to purchase or otherwise acquire, to own and to hold the stock of banks and other corporations, and to do every act and thing covered generally by the denominations “holding corporation”, “bank holding company”, and “financial holding company”, and especially to direct the operations of other entities through the ownership of stock or other interests therein;

 

(2) to purchase, subscribe for, acquire, own, hold, sell, exchange, assign, transfer, mortgage, pledge, hypothecate or otherwise transfer or dispose of stock, scrip, warrants, rights, bonds, securities or evidences of indebtedness issued or guaranteed by any other corporations, partnerships, limited liability companies, or trusts, or any bonds or evidences of indebtedness of the United States or any other country or jurisdiction, or any state, district, territory, dependency or county or subdivision or municipality thereof, and to issue and exchange therefor cash, capital stock, bonds, notes or other securities, evidences of indebtedness or obligations of the Corporation and while the owner thereof to exercise all rights, powers and privileges of ownership, including the right to vote on any shares of stock, voting trust certificates or other instruments so owned; and

(3) to transact any business, to engage in any lawful act or activity and to exercise all powers permitted to corporations by the Florida Business Corporation Act, as the same exists or may hereafter be amended (the “ FBCA ”).

The enumeration herein of the objects, purposes, and powers of the Corporation shall not be deemed to exclude or in any way limit by inference any powers, objects or purposes that the Corporation is empowered to exercise, whether expressly, by purpose or by any of the laws of the State of Florida or any reasonable construction of such laws.

ARTICLE III

SHARES

3.1 General . The total number of shares (“ Shares ”) of all classes of capital stock that the Corporation shall have the authority to issue is 550,000,000, consisting of the following classes:

 

(1) 500,000,000 shares of common stock, $.10 par value per share (“ Common Stock ”), divided into 400,000,000 shares of Class A Common Stock (“ Class  A Common Shares ”) and 100,000,000 shares of Class B Common Stock (“ Class  B Common Shares ”); and

 

(2) 50,000,000 shares of preferred stock, $.10 par value per share (“ Preferred Stock ”).

3.2 Common Stock .

(a) Class A Common Shares and Class B Common Shares shall be identical in all respects other than voting rights and as set forth in Section 3.4 with respect to dividends. Class B Common Shares shall not be convertible into Class A Common Shares or vice versa.

(b) Class A Common Shares shall be entitled to one vote per share on all matters.

(c) Holders of Class B Common Shares shall be entitled to one-tenth of a vote per Class B Common Share, voting (i) together with the Class A Common Shares as a single voting group on proposals to appoint the Corporation’s independent auditors, if the Corporation seeks such a vote, (ii) as required by the FBCA, and (iii) as a single voting group in the event of:

 

(1) any amendment, alteration or repeal of any provision of these Articles (including, unless no vote on such merger, consolidation or other transaction is required by clause (2) of this Section 3.2(c), any amendment, alteration or repeal by means of a merger, consolidation or otherwise) that would significantly and adversely affect the rights or voting powers of Class B Common Shares; or

 

(2)

a “ Reorganization Event ,” which shall include, without limitation, a binding statutory share exchange or reclassification involving the Class B Common Shares or a merger or consolidation of the Corporation with another corporation or other entity, unless in each case (i) the Class B Common Shares remain outstanding or, in the case of any such merger, consolidation or statutory share exchange with respect to which the Corporation is not the surviving or resulting entity, are converted into or exchanged for common stock

 

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  of the surviving or resulting entity or its ultimate parent, and (ii) such resulting shares remaining outstanding have such rights, preferences, privileges and voting powers, and limitations and restrictions thereof, taken as a whole, as are not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers, and limitations and restrictions thereof, of shares of Class B Common Shares immediately prior to consummation of such transaction, taken as a whole.

(d) Nothing in these Articles shall require a vote on the appointment or ratification of the appointment of independent auditors.

3.3 Preferred Stock . The Board of Directors is hereby expressly authorized to provide for, out of the authorized but unissued shares of Preferred Stock, one or more series of Preferred Stock and, with respect to each such series, to fix the number of shares constituting such series and the designation of such series, the voting powers, if any, of the shares of such series, and the preferences and relative, participating, optional or other special rights, if any, and any qualifications, limitations or restrictions thereof, of the shares of such series. The powers, preferences and relative, participating, optional and other special rights of each series of Preferred Stock, and the qualifications, limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding.

3.4 Dividends . Dividends upon all classes and series of shares shall be payable only when, as and if declared by the Board of Directors from funds lawfully available therefor, which funds shall include, without limitation, the Corporation’s capital surplus. Dividends upon any class or series of Corporation shares may be paid in cash, property, or shares of any class or series or other securities or evidences of indebtedness of the Corporation or any other issuer, as may be determined by resolution or resolutions of the Board of Directors, except that under no circumstances shall shares of Class B Common Stock be entitled to receive dividends or distributions payable in shares of Class A Common Stock.

ARTICLE IV

BOARD OF DIRECTORS

The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors, each of whose members shall have the qualifications, if any, set forth in the Bylaws, and who need not be residents of the State of Florida. The number of directors of the Corporation (exclusive of directors to be elected by the holders of any one or more series of Preferred Stock, if any, voting as a separate voting group or groups) that shall constitute the Board of Directors shall be determined from time to time by resolution adopted by the affirmative vote of the Board of Directors, but in no event shall be fewer than 5 nor more than 15.

ARTICLE V

SPECIAL PROVISIONS

5.1 Bylaws . Subject always to such bylaws as may be adopted from time to time by the Corporation’s shareholders, the Board of Directors is expressly authorized to adopt, alter, amend and repeal the bylaws of the Corporation, but any bylaw adopted by the Board of Directors may be altered, amended or repealed by the shareholders. The bylaws or any particular bylaw may fix a greater quorum or voting requirement for shareholders (or voting groups of shareholders) than is required by the FBCA.

 

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5.2 Special Meetings of Shareholders . A special meeting of the Corporation’s shareholders shall be held (a) on call of the Board of Directors or the person or persons authorized to do so by the bylaws, or (b) if the holders of not less than 25% of all the votes entitled to be cast on any issue proposed to be considered at the proposed special meeting sign, date and deliver to the Corporation’s Secretary one or more written demands for the meeting describing the purpose or purposes for which it is to be held. Notwithstanding the foregoing, whenever holders of one or more series of Preferred Stock shall have the right, voting separately as a class or series, to elect directors, such holders may call, pursuant to the terms of the resolution or resolutions adopted by the Board of Directors pursuant to Article III, special meetings of holders of such series of Preferred Stock.

5.3 Shareholder Action Without a Meeting . Any action required or permitted to be taken by the holders of Common Stock must be effected at a duly called annual or special meeting of the Corporation’s shareholders and may not be effected by any consent in writing. Whenever the vote of holders of shares of any class or series other than Common Stock is required or permitted by the FBCA or these Articles, the meeting and vote of such shareholders may be dispensed with if such action is taken with the written consent of such holders representing not less than a majority of the voting power of all the capital stock of such class or series entitled to vote upon such action if a meeting were held; provided that in no case shall the written consent be by such holders having less than the minimum percentage of the vote required by the FBCA or these Articles, and further provided that prompt notice is given in writing to all such shareholders entitled to vote thereon of the taking of corporate action without a meeting and by less than unanimous written consent.

5.4 Indemnification . The Corporation shall indemnify, advance expenses, and hold harmless, to the fullest extent permitted by the FBCA and other applicable law as it presently exists or may hereafter be amended, any person (a “ Covered Person ”) who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative, or investigative, and whether formal or informal, by reason of the fact that he or she, or a person for whom he or she is the legal representative, is or was a director or officer of the Corporation or, while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee, or agent of another corporation or of a partnership, limited liability company, joint venture, trust, enterprise, or nonprofit entity, including service with respect to employee benefit plans, against all liability, damages, and loss suffered and expenses (including attorneys’ fees) actually and reasonably incurred by such Covered Person. Any amendment, repeal, or modification of this Section 5.4 shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification.

 

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ARTICLE VI

AMENDMENT OF ARTICLES OF INCORPORATION

The Corporation reserves the right to amend, alter, change or repeal any provision contained in these Articles of Incorporation, in the manner now or hereafter prescribed by the FBCA or these Articles, and all rights conferred upon the Corporation’s shareholders herein are granted subject to this reservation.

* * * * *

[ Remainder of Page Intentionally Left Blank ]

 

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IN WITNESS WHEREOF, Mercantil Bank Holding Corporation has caused these Amended and Restated Articles of Incorporation to be signed by the undersigned officer on February 5 th , 2018.

 

MERCANTIL BANK HOLDING CORPORATION
By:   /s/ Ivan E. Trujillo
Name:   Ivan E. Trujillo
Title:   Corporate Secretary

 

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Exhibit 3.2

 

 

MERCANTIL BANK HOLDING CORPORATION

AMENDED AND RESTATED BYLAWS

 

 

Adopted as of May 7, 2018

TABLE OF CONTENTS

 

          Page  

ARTICLE I

   Offices      1  

              1.01

   Principal Office      1  

              1.02

   Registered Office      1  

              1.03

   Books and Records      1  

ARTICLE II

   Shareholder Meetings      1  

              2.01

   Annual Meeting      1  

              2.02

   Special Meetings      1  

              2.03

   Order of Business      1  

              2.04

   Notice of Shareholder Proposals      2  

              2.05

   Notice of Director Nominations      3  

              2.06

   Additional Provisions Relating to the Notice of Shareholder Business and Director Nominations      5  

              2.07

   Shareholder Action by Consent      5  

              2.08

   Place of Meeting      5  

              2.09

   Notice and Waiver of Notice of Shareholders’ Meeting      6  

              2.10

   Closing of Transfer Books or Fixing of Record Date      6  

              2.11

   Voting Lists      6  

              2.12

   Quorum      7  

              2.13

   Proxies      7  

              2.14

   Voting      7  

ARTICLE III

   BOARD OF DIRECTORS      7  

              3.01

   General Powers      7  

              3.02

   Number, Tenure and Qualifications      7  

              3.03

   Regular Meetings      7  

              3.04

   Special Meetings      8  

              3.05

   Notice and Waiver of Notice      8  

              3.06

   Quorum      8  

              3.07

   Manner of Acting      8  

              3.08

   Newly Created Directorships and Vacancies      8  

              3.09

   Removal of Directors      8  

              3.10

   Resignation      8  

              3.11

   Compensation      8  

              3.12

   Presumption of Assent      9  

              3.13

   Committees      9  

              3.14

   Participation by Remote Communication      9  

              3.15

  

Action Without a Meeting

     9  

              3.16

  

Conduct of Meeting

     9  

 

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TABLE OF CONTENTS

(continued)

 

          Page  

ARTICLE IV

   OFFICERS      9  

              4.01

   Number      9  

              4.02

   Election and Term of Office      10  

              4.03

   Removal      10  

              4.04

   Vacancies      10  

              4.05

   Chairman of the Board      10  

              4.06

   Vice Chairman      10  

              4.07

   Chief Executive Officer      10  

              4.08

   President      10  

              4.09

   Chief Financial Officer      11  

              4.10

   Vice Presidents      11  

              4.11

   Secretary      11  

              4.12

   Treasurer      11  

              4.13

   Compensation      11  

ARTICLE V

   CONTRACTS, LOANS, CHECKS AND DEPOSITS      12  

              5.01

   Contracts      12  

              5.02

   Loans      12  

              5.03

   Checks, Drafts, Etc.      12  

              5.04

   Deposits      12  

ARTICLE VI

   CERTIFICATED OR UNCERTIFICATED SHARES AND THEIR TRANSFER      12  

              6.01

   Certificates or Uncertificated Shares      12  

              6.02

   Transfers of Shares      13  

              6.03

   Appointment of Transfer Agent and Registrar      13  

              6.04

   Restriction on Transfer of Shares and Other Securities      13  

              6.05

   Lost Certificates      13  

              6.06

   Holder of Record      13  

ARTICLE VII

   FISCAL YEAR      13  

ARTICLE VIII

   DIVIDENDS      13  

ARTICLE IX

   SEAL      13  

ARTICLE X

   WAIVER OF NOTICE      13  

ARTICLE XI

   AMENDMENTS      14  

 

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TABLE OF CONTENTS

(continued)

 

          Page  

ARTICLE XII

   INDEMNIFICATION      14  

              12.01

   Indemnification in Proceedings Other Than Those By or In the Right of the Corporation      14  

              12.02

   Indemnification in Proceedings By or In the Right of the Corporation      14  

              12.03

   Mandatory Indemnification of Expenses in Successful Defenses      14  

              12.04

   Determination of Propriety of Indemnification      14  

              12.05

   Authorization for Indemnification      15  

              12.06

   Advancement of Expenses      15  

              12.07

   Non-Exclusivity of Indemnification and Advancement of Expenses      15  

              12.08

   Insurance      16  

              12.09

   Exculpation for Monetary Damages      16  

              12.10

   Meaning of Certain Terms for Purposes of Article XII      16  

              12.11

   Survival of Indemnification, Exculpation for Monetary Damages and Advancement of Expenses      16  

              12.12

   Severability      16  

ARTICLE XIII

   DEFINITIONS      16  

 

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MERCANTIL BANK HOLDING CORPORATION

AMENDED AND RESTATED BYLAWS

 

 

ARTICLE I

OFFICES

1.01 Principal Office . The principal office of Mercantil Bank Holding Corporation (the “ Corporation ”) shall be located in the city of Coral Gables, County of Miami-Dade, State of Florida. The Corporation may have such other offices, either within or without the State of Florida, as the Board of Directors may designate or as the business of the Corporation may from time to time require.

1.02 Registered Office . The registered office of the Corporation required by the Florida Business Corporation Act (the “ FBCA ”) to be maintained in the State of Florida initially will be 220 Alhambra Circle, Coral Gables, Florida 33134, but the address of the registered office may be changed from time to time by the Board of Directors and upon the Corporation notifying the Florida Secretary of State of such change.

1.03 Books and Records . Any records maintained by the Corporation in the regular course of its business, including its share ledger, books of account and minute books, may be maintained on any information storage device or method; provided that the records so kept can be converted into clearly legible paper form within a reasonable time. The Corporation shall convert any records so kept on the written request of any person entitled to inspect such records pursuant to the FBCA as and upon the terms determined by Corporation to reasonably comply with the FBCA.

ARTICLE II

SHAREHOLDER MEETINGS

2.01 Annual Meeting . The annual meeting of the shareholders shall be held on a date and time set by the Board of Directors for the purpose of electing directors whose terms expire at such meeting and will transact such other business as may properly be brought before the meeting in accordance with Sections 2.03 through 2.06, unless otherwise prescribed by the FBCA and other applicable law.

2.02 Special Meetings . Special meetings of the shareholders, for any purpose or purposes as may properly be brought before the meeting in accordance with Sections 2.03 through 2.06, unless otherwise prescribed by statute, may be called by the Chairman, the Chief Executive Officer, the President or any Co-President or by the Board of Directors, and shall be called by the Chief Executive Officer at the request of the holders of Shares of the Corporation’s capital stock (“ Shares ”) representing not less than 25% of all votes entitled to be cast on the proposed issue or issues. Notwithstanding the foregoing, whenever holders of one or more series of Preferred Stock shall have the right, voting separately as a class or series, to elect directors, such holders may call, pursuant to the terms of such class or series of Preferred Stock, special meetings of holders of such class or series of Preferred Stock. Only business within the purpose or purposes described in the notice of the meeting may be conducted at a special meeting of the shareholders.

2.03 Order of Business . The Chairman, or in the absence of the Chairman, the Chief Executive Officer of the Corporation designated from time to time by a majority of the entire Board, will call meetings of shareholders to order and will act as presiding officer thereof. Unless otherwise determined by the Board prior to the meeting, the presiding officer of any meeting of shareholders will also determine the order of business and have the authority in his or her sole discretion to determine the rules of procedure and regulate the conduct of the meeting, including without limitation by: imposing restrictions on the persons (other than shareholders of the Corporation or their duly appointed proxy holders) that may attend the meeting; ascertaining whether any shareholder or his or her proxy holder may be excluded from the meeting based upon any determination by the presiding officer, in his or her sole discretion, that

any such person has disrupted or is likely to disrupt the proceedings thereat; determining the circumstances in which any person may make a statement or ask questions at the meeting; ruling on all procedural questions that may arise during or in connection with the meeting; determining whether any nomination or business proposed to be brought before the meeting has been properly brought before the meeting; and determining the time or times at which the polls for voting at the meeting will be opened and closed.

2.04 Notice of Shareholder Proposals .

(a) At any meeting of shareholders, only such business may be conducted as has been properly brought before the meeting. To be properly brought before a meeting, business (other than the nomination of a person for election as a director, which is governed by Section 2.05, and, to the extent applicable, Section 2.06), must be (i) brought before the meeting by or at the direction of the Board of Directors or (ii) otherwise properly brought before the meeting by a shareholder who (A) has complied with all applicable requirements of this Section 2.04 and Section 2.06 in relation to such business, (B) was a shareholder of record of the Corporation at the time of giving the notice required by Section 2.06(a) holding at least 25% of the Corporation’s issued and outstanding Shares of the applicable class entitled to vote on the proposal, and is a shareholder of record of the Corporation at the time of the annual meeting, and (C) is entitled to vote at the meeting upon the proposal. The foregoing clause (ii) will be the exclusive means for a shareholder to submit business before a meeting of shareholders (other than proposals properly made in accordance with Rule 14a-8 under the Securities Exchange Act of 1934, as amended (such act, and the rules and regulations promulgated thereunder, the “ Exchange Act ”) and included in the notice of meeting given by or at the direction of the Board).

(b) To be in proper form, a shareholder’s notice to the Secretary must set forth in writing:

(1) As to each Proposing Person (as such term is defined in Section 2.06(d)(ii)):

(A) the name and address of such Proposing Person, as these appear on the Corporation’s stock transfer books;

(B) the number of Shares of each class and series of the Corporation directly or indirectly beneficially owned or held of record by such Proposing Person (including any Shares of any class or series of the Corporation as to which such Proposing Person has a right to acquire beneficial ownership, whether such right is exercisable immediately or only after the passage of time);

(C) a representation (1) that the shareholder giving the notice is a holder of record of Corporation Shares entitled to vote at the annual meeting on the proposal and intends to appear at the annual meeting to bring such business before the annual meeting and (2) as to whether any Proposing Person intends to deliver a proxy statement and form of proxy to holders of at least the percentage of Shares of the Corporation entitled to vote and required to approve the proposal and, if so, identifying such Proposing Person;

(D) a description of any (1) option, warrant, convertible security, stock appreciation right or similar right or interest (including any derivative securities, as defined in Securities and Exchange Commission (“ SEC ”) Rule 16a-1 under the Exchange Act), whether or not presently exercisable, with an exercise or conversion privilege or a settlement payment or mechanism at a price related to any class or series of securities of the Corporation or with a value derived in whole or in part from the value of any class or series of securities of the Corporation, whether or not such instrument or right is subject to settlement in whole or in part in the underlying class or series of securities of the Corporation or otherwise, directly or indirectly held of record or owned beneficially by such Proposing Person and (2) each other direct or indirect right or interest that may enable such Proposing Person to profit or share in any profit derived from, or to manage the risk or benefit from, any increase or decrease in the value of the Corporation’s securities, in each case regardless of whether (x) such right or interest conveys any voting rights in such security to such Proposing Person, (y) such right or interest is required to be, or is capable of being, settled through delivery of such security, or (z) such Proposing Person may have entered into other transactions that hedge the economic effect of any such right or interest (any such right or interest referred to in this clause (D) being a “ Derivative Interest ”);

 

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(E) any proxy, contract, arrangement, understanding or relationship pursuant to which the Proposing Person has a right to vote any Corporation Shares or which has the effect of increasing or decreasing the voting power of such Proposing Person;

(F) any rights directly or indirectly held of record or beneficially by the Proposing Person to dividends on Corporation Shares that are separated or separable from the underlying Corporation Shares;

(G) any performance-related fees (other than an asset-based fee) to which the Proposing Person may be entitled as a result of any increase or decrease in the value of Corporation Shares or Derivative Interests; and

(H) any other information relating to such Proposing Person that would be required to be disclosed in a proxy statement or other filing required pursuant to Section 14(a) of the Exchange Act to be made in connection with a general solicitation of proxies or consents by such Proposing Person in support of the business proposed to be brought before the meeting.

(2) As to each item of business that the shareholder giving the notice proposes to bring before the annual meeting:

(A) a description in reasonable detail of the business desired to be brought before the annual meeting and the reasons why such shareholder or any other Proposing Person believes that the taking of the action or actions proposed to be taken would be in the best interests of the Corporation and its shareholders;

(B) a description in reasonable detail of any material interest of any Proposing Person in such business and a description in reasonable detail of all agreements, arrangements and understandings among the Proposing Persons or between any Proposing Person and any other person or entity in connection with the proposal; and

(C) the text of the proposal or business (including the text of any resolutions proposed for consideration).

(c) A shareholder is not entitled to have its proposal included in the Corporation’s proxy statement and form of proxy solely as a result of such shareholder’s compliance with the foregoing provisions of this Section 2.04.

(d) If a shareholder does not appear at the annual meeting to present its proposal, such proposal will be disregarded (notwithstanding that proxies in respect of such proposal may have been solicited, obtained or delivered).

2.05 Notice of Director Nominations .

(a) Subject to the rights, if any, of any series of Preferred Stock to nominate or elect directors, only persons who are nominated in accordance with the procedures set forth in this Section 2.05 will be eligible to serve as directors. Nominations of persons for election as directors of the Corporation may be made only at an annual meeting of shareholders and only (i) by or at the direction of the Board or (ii) by a shareholder who (A) has complied with all applicable requirements of this Section 2.05 and Section 2.06 in relation to such nomination, (B) was a shareholder of record of the Corporation at the time of giving the notice required by Section 2.06(a) and is a shareholder of record of the Corporation at the time of the annual meeting, and (C) is a holder of Class A Common Shares who is entitled to vote on the election of directors at the annual meeting.

 

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(b) To be in proper form, a shareholder’s notice to the Secretary must set forth in writing:

(1) As to each Nominating Person (as such term is defined in Section 2.06(d)(iii)), the information set forth in Section 2.04(b)(i) (except that for purposes of this Section 2.05, the term “Nominating Person” will be substituted for the term “Proposing Person” in all places where it appears in Section 2.04(b)(i) and any reference to “business” or “proposal” therein will be deemed to be a reference to the “nomination” contemplated by this Section 2.05).

(2) As to each person whom the shareholder giving notice proposes to nominate for election as a director:

(A) all information with respect to such proposed nominee that would be required to be set forth in a shareholder’s notice pursuant to Section 2.04(b)(i) if such proposed nominee were a Nominating Person;

(B) all information relating to such proposed nominee that would be required to be disclosed in a proxy statement or other filing required pursuant to Section 14(a) under the Exchange Act to be made in connection with a general solicitation of proxies for an election of directors in a contested election (including such proposed nominee’s written consent to be named in the proxy statement as a nominee and to serve as a director if elected);

(C) all information that would be required to be disclosed pursuant to SEC Regulation S-K Items 403 and 404, if the shareholder giving the notice or any other Nominating Person were the “registrant” for purposes of such rule and the proposed nominee were a director or executive officer of such registrant;

(D) a completed questionnaire (in the form provided by the Secretary upon written request) with respect to the identity, background and qualification of the proposed nominee and the background of any other person or entity on whose behalf the nomination is being made;

(E) a written representation and agreement (in the form provided by the Secretary upon written request) that the proposed nominee (1) is not and will not become a party to (x) any agreement, arrangement or understanding with, and has not given any commitment or assurance to, any person or entity as to how the proposed nominee, if elected as a director of the Corporation, will act or vote on any issue or question (a “ Voting Commitment ”) that has not been disclosed to the Corporation or (y) any Voting Commitment that could limit or interfere with the proposed nominee’s ability to comply, if elected as a director of the Corporation, with the proposed nominee’s fiduciary duties under applicable law, (2) is not and will not become a party to any agreement, arrangement or understanding with any person or entity other than the Corporation with respect to any direct or indirect compensation, reimbursement or indemnification in connection with service or action as a director that has not been disclosed therein, and (3) if elected as a director of the Corporation, the proposed nominee would be in compliance and will comply, with all applicable publicly disclosed corporate governance, ethics, conflict of interest, confidentiality and Share ownership and trading policies and guidelines of the Corporation.

(c) The Corporation may require any proposed nominee to furnish such other information as may be reasonably required by the Corporation to determine the qualifications and eligibility of such proposed nominee to serve as a director.

(d) A shareholder is not entitled to have its nominees included in the Corporation’s proxy statement solely as a result of such shareholder’s compliance with the foregoing provisions of this Section 2.05.

(e) If a shareholder does not appear at the annual meeting to present its nomination, such nomination will be disregarded (notwithstanding that proxies in respect of such nomination may have been solicited, obtained or delivered).

 

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2.06 Additional Provisions Relating to the Notice of Shareholder Business and Director Nominations .

(a) To be timely, a shareholder’s notice required by Section 2.04(a) or 2.05(a) must be delivered to or mailed and received by the Secretary at the Corporation’s principal executive offices of the Corporation not less than 90 nor more than 120 calendar days prior to the first anniversary of the date on which the Corporation held the preceding year’s annual meeting of shareholders; provided , however , that if the date of the annual meeting is scheduled for a date more than 30 calendar days prior to or more than 30 calendar days after the anniversary of the preceding year’s annual meeting, notice by the shareholder to be timely must be so delivered not later than the close of business on the later of the 90th calendar day prior to such annual meeting and the 10th calendar day following the day on which public disclosure of the date of such meeting is first made. In no event will a recess or adjournment of an annual meeting (or any announcement of any such recess or adjournment) commence a new time period for the giving of a shareholder’s notice as described above.

(b) A shareholder providing notice of business proposed to be brought before a meeting pursuant to Section 2.04 or notice of any nomination to be made at an annual meeting pursuant to Section 2.05 must further update and supplement such notice, if necessary, so that the information provided or required to be provided in such notice pursuant to Section 2.04 or 2.05, as applicable, is true and correct at all times up to and including the date of the meeting (including any date to which the meeting is recessed, adjourned or postponed). Any such update and supplement must be delivered to, or mailed and received by, the Secretary at the principal executive offices of the Corporation, as promptly as practicable.

(c) The presiding officer of any meeting will, if the facts warrant, determine that a proposal was not made in accordance with the procedures prescribed by Section 2.04 and this Section 2.06 or that a nomination was not made in accordance with the procedures prescribed by Section 2.05 and this Section 2.06, and if he or she should so determine, he or she will so declare to the meeting and the defective proposal or nomination, as applicable, will be disregarded.

(d) For purposes of these Bylaws:

(1) “ public disclosure ” means disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document filed by the Corporation with the SEC pursuant to the Exchange Act or furnished by the Corporation to its shareholders.

(2) “ Proposing Person ” means (A) the shareholder providing the notice of business proposed to be brought before an annual meeting, (B) the beneficial owner or beneficial owners, if different, on whose behalf the notice of the business proposed to be brought before the annual meeting is given, and (C) any Affiliate or Associate (each within the meaning of SEC Rule 12b-2 under the Exchange Act) of such shareholder or beneficial owner.

(3) “ Nominating Person ” means (A) the shareholder providing the notice of the nomination proposed made to be at an annual meeting, (B) the beneficial owner or beneficial owners, if different, on whose behalf the notice of nomination proposed to be made at the annual meeting is given, and (C) any Affiliate or Associate (each within the meaning of SEC Rule 12b-2 under the Exchange Act) of such shareholder or beneficial owner.

2.07 Shareholder Action by Consent . Any action required or permitted by the FBCA to be taken at any annual or special meeting of shareholders must be effected at a duly called and held meeting of Corporation’s shareholders and may not be effected by any consent in writing.

2.08 Place of Meeting . The Board of Directors may designate any place, either within or without the State of Florida unless otherwise prescribed by the FBCA, as the place where any annual meeting or any special meeting of shareholders shall be held. The Board of Directors may determine, in its sole discretion, to hold the meeting solely by means of remote communication. If authorized by the Board of Directors, and subject to any guidelines and procedures adopted by the Board of Directors, shareholders not physically present at a meeting of shareholders and holders of proxies representing shareholders not physically present at that meeting may, by means of remote communication, participate in, and be deemed present and vote at, a meeting of shareholders, whether held at a designated place or solely by means of remote communication.

 

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2.09 Notice and Waiver of Notice of Shareholders ’ Meeting .

(a) Written notice stating the place, day and hour of the meeting, and a means of remote communication, if any, and, for special meetings, the purpose or purposes for which the special meeting is called, shall be given not less than 10 nor more than 60 days before the date of the meeting, either personally or by mail, electronic transmission or other electronic means, and/or publication of notice in one or more newspapers of general circulation or the equivalent, to each shareholder of record entitled to vote at such meeting, by or at the direction of the Chairman of the Board, the President or any Co-President, or the Secretary, or the officer or persons calling the meeting. If mailed, such notice shall be deemed to be delivered when (1) deposited in the United States mail postage prepaid, addressed to the shareholder at his or her address as it appears on the stock transfer books of the Corporation or (2) electronically transmitted to the shareholder. Notice may be given to shareholders sharing an address in any manner and by any means permitted by the FBCA. Any notice to shareholders may also be given by a form of electronic transmission or other electronic means consented to by the shareholder in the manner and extent permitted by the FBCA, including oral notice where reasonable under the circumstances. Except as required by statute, if an annual or special shareholders’ meeting is adjourned to a different date, time or place, notice need not be given of the new date, time or place if announced at the meeting before an adjournment is taken. Any shareholder entitled to notice of a meeting may waive such notice by signing a written waiver either before or after the date and time of the meeting set out in the notice.

(b) Attendance of a shareholder at a meeting in person or by proxy constitutes a waiver of objection to: (1) lack of or defective notice, unless the shareholder, at the beginning of the meeting, objects to the holding of the meeting or the transaction of business at the meeting; or (2) consideration of any matter not identified in the notice, unless the shareholder objects to the consideration of such matter when presented at the meeting.

2.10 Closing of Transfer Books or Fixing of Record Date . For the purpose of determining shareholders entitled to notice of or to vote at any shareholders’ meeting or any adjournment thereof, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors may close the Corporation’s stock transfer books for a stated period not to exceed 70 days. In lieu of closing the stock transfer books, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than 70 days prior to the date on which the particular action requiring such determination of shareholders is to be taken. If the stock transfer books are not closed and no record date is fixed for the determination of shareholders entitled to notice of or to vote at a shareholders’ meeting, or shareholders entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or transmitted electronically or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any shareholders’ meeting has been made as provided in this section, such determination shall apply to any adjournment thereof, except where the Board of Directors fixes a new record date, which must be done if the meeting is adjourned to a date more than 120 days after the original meeting date, absent a court order.

2.11 Voting Lists . The officer or agent having charge of the stock transfer books for the Corporation’s Shares shall make, at least 10 days before each shareholders’ meeting or such shorter time as exists between the record date and the meeting, a complete list of the shareholders entitled to vote at such meeting, or any adjournment thereof, arranged by name in alphabetical order for each voting group, with the address of and the number of Shares of each class and series held by each, which list shall be kept on file at the Corporation’s principal office or at the offices of the Corporation’s transfer agent and registrar, and shall be available for inspection by any shareholder at any time during usual business hours. During such period, a shareholder or the shareholder’s agent or attorney is entitled, on written demand, to inspect the list during regular business hours and at his or her expense, provided the demand is made in accordance with Section 1602 of the FCBA and otherwise is made in good faith for a proper purpose and describes with reasonable particularity the shareholder’s purpose for such inspection. Such list shall also be produced and kept open at the time and place of the meeting and shall be available for inspection by any shareholder during the whole time of the meeting or any adjournment thereof. The shareholder list shall be prima facie evidence as to the shareholders entitled to examine such list or transfer books or to vote at the shareholders’ meeting.

 

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2.12 Quorum . Unless otherwise required by the FBCA or the Article of Incorporation, at any shareholders’ meeting, a majority of all votes entitled to be cast by the holders of the outstanding Shares of each voting group entitled to vote, represented in person or by proxy, shall constitute a quorum. If less than such number of the outstanding Shares of a voting group are represented at a meeting, a majority of the Shares of each voting group so represented or present may adjourn the meeting from time to time without further notice. Any business may be transacted at such adjourned meeting at which a quorum is present or represented that might have been transacted at the meeting as originally called.

2.13 Proxies . At all meetings of shareholders, a shareholder or his duly authorized attorney in fact may vote the shareholder’s Shares by proxy by signing an appointment form or by electronic transmission. Such appointment, or authorization to vote may be in any form or by any means authorized by the FBCA or these Bylaws. Any type of electronic transmission appearing to have been, or containing or accompanied by such information or obtained under such procedures to reasonably ensure that the electronic transmission was, transmitted by such person is a sufficient appointment, subject to the verification requested by the corporation under FBCA Section 607.0724 or any successor thereto. Such proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting. No proxy shall be valid after 11 months from the date of its execution, except as otherwise provided in the proxy.

2.14 Voting . Unless these Bylaws, the Articles of Incorporation, or the FBCA provides otherwise, each outstanding (1) Class A Common Share is entitled to one vote, and (2) each Class B Common Share is entitled to 1/10 th of a vote, in person or by proxy, on each matter that each class of Common Stock is entitled to vote upon that is submitted to a vote of shareholders. If the Articles of Incorporation provide for more or less than one vote for any Share on any matter, every reference in these Bylaws to a majority or other proportion of Shares shall refer to such a majority or other proportion of votes entitled to be cast. All elections for directors shall be decided by plurality vote; all other questions shall be decided in accordance with the FBCA, except as otherwise provided in the Articles of Incorporation and these Bylaws.

ARTICLE III

BOARD OF DIRECTORS

3.01 General Powers . All corporate powers of the Corporation shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed under the direction of, the Board of Directors of the Corporation, subject to any limitations set out in the Articles of Incorporation or these Bylaws. Directors must be natural persons who are 18 years of age or older but need not be (1) residents of the State of Florida, or (2) Corporation shareholders, except as required by Company policies.

3.02 Number, Tenure and Qualifications . The number of directors of the Corporation (exclusive of directors to be elected by the holders of any one or more series of Preferred Stock voting separately as a class or classes) that shall constitute the Board of Directors shall be determined from time to time by resolution adopted by the affirmative vote of the Board of Directors, but in no event shall be fewer than five nor more than 15. A director of the Corporation shall at all times meet the statutory and regulatory qualifications for a director of a publicly held bank holding company or financial holding company. At each annual meeting of shareholders, the holders of Shares entitled to vote in the election of directors shall elect directors to hold office until the next succeeding annual meeting or until the director’s earlier death, resignation, disqualification, or removal. Despite the expiration of a director’s term, the director shall continue to serve until his or her successor is elected and qualified or until there is a decrease in the number of directors.

3.03 Regular Meetings . A regular meeting of the newly-elected Board of Directors shall be held without other notice immediately following and at the place of each annual meeting of shareholders, at which the Board of Directors shall elect officers, appoint committees and transact any other business as shall come before the meeting. Other regular meetings of the Board of Directors shall be held at such other times and places as may from time to time be fixed by resolution of the Board of Directors. Regular meetings may be held without notice of the date, time, place, or purpose of the meeting.

 

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3.04 Special Meetings . Special meetings of the Board of Directors may be called by or at the request of the Chairman, the Chief Executive Officer or any three directors. The person or persons authorized to call special meetings of the Board of Directors may fix the place for holding any special meeting called by them.

3.05 Notice and Waiver of Notice . Notice of any special meeting shall be given at least two days in advance by written notice delivered personally, or by facsimile, telephone, electronic mail or electronic transmission or other or by United States mail to each director at his or her address in the Corporation’s records. If mailed, such notice shall be deemed to be delivered five days following the date such notice is deposited in the United States mail so addressed, with first class postage thereon prepaid. The Corporation is not required to give notice of a meeting of the Board of Directors to any director who signs a waiver of notice, either before or after the meeting. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting and a waiver of any and all objections to the place of the meeting, the time of the meeting, or the manner in which it has been called or convened, except when a director states, at the beginning of the meeting or promptly upon arrival at the meeting, any objection to the transaction of business on the grounds that the meeting is not lawfully called or convened.

3.06 Quorum . At any meeting of the Board of Directors, a majority of the directors then in office shall constitute a quorum for the transaction of business, but, if less than said number is present at a meeting, a majority of the directors present may adjourn the meeting from time to time without further notice.

3.07 Manner of Acting . The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, except as otherwise provided in the Articles of Incorporation, these Bylaws or Florida law.

3.08 Newly Created Directorships and Vacancies . Newly created directorships resulting from an increase in the number of directors and vacancies occurring in the Board of Directors for any reason may be filled by the affirmative majority vote of the Board of Directors, although less than a quorum exists, or, if no directors remain, by the affirmative vote of not less than a majority of the Shares entitled to vote in the election of directors generally. A director elected to fill a vacancy caused by resignation, death or removal shall hold office for the unexpired term of his or her predecessor. Whenever the holders of Shares of any voting group are entitled to elect a class of one or more directors by the provisions of the Articles of Incorporation, vacancies in such class may be filled by holders of Shares of that voting group or by a majority of the directors then in office elected by such voting group or by a sole remaining director so elected. If no director elected by such voting group remains in office, unless the Articles of Incorporation provide otherwise, directors not elected by such voting group may fill such vacancies as provided for vacancies generally. A vacancy that may occur at a later date by reason of a resignation effective at a later date or upon the subsequent happening of an event) may be filled before the vacancy occurs, but the new director may not take office until the vacancy occurs.

3.09 Removal of Directors . Unless the Articles of Incorporation provide that directors may be removed only for cause, a director may be removed, with or without cause, by a vote of the shareholders then entitled to vote at an election of such director, if the number of votes cast to remove such director exceeds the number of votes cast not to remove such director, at any meeting of the shareholders at which a quorum is present and the notice for which states that a purpose of the meeting is removal of such director. A director elected by a voting group of shareholders may be removed only by that voting group.

3.10 Resignation . A director may resign at any time by giving written notice to the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the Secretary of the Corporation. Unless otherwise specified in the notice, the resignation shall take effect upon receipt thereof by the Board of Directors or such officer, without any need for acceptance of such resignation.

3.11 Compensation . The Board of Directors shall have the authority to fix the compensation of the directors and to reimburse the directors for the reasonable expenses of attendance, if any, for attendance at any meeting of the Board of Directors or any committee thereof. Nothing therein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of committees also may be compensated for their service on such committees.

 

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3.12 Presumption of Assent . A director of the Corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless the director’s contrary vote, dissent or abstention is recorded in the minutes of the meeting, or unless the director shall file a written dissent to such action with the person acting as the Secretary of the meeting before the adjournment thereof or shall deliver such dissent to the Secretary of the Corporation after the adjournment of the meeting. A director who voted in favor of any such action shall not be entitled to claim that he has objected or dissented from such action.

3.13 Committees . The Board of Directors shall establish, by resolutions and adoption of charters, an Audit Committee, a Compensation Committee, a Corporate Governance and Nominating Committee and a Risk Committee may, by resolutions or adoption of charters, designate or eliminate one or more other committees. Any such committee, to the extent provided in the resolutions or charters and allowed under the FBCA, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation during intervals between meetings of the Board of Directors, and may authorize the seal of the Corporation to be affixed to all papers that may require it. No such committee shall have any power or authority to approve or recommend to shareholders actions or proposals required to be approved by shareholders, fill vacancies on the Board of Directors or any committee thereof, adopt, amend, or repeal the bylaws, authorize or approve the reacquisition of shares unless pursuant to a general formula or method specified by the Board of Directors, authorize or approve the issuance or sale or contract for the sale of Shares, or determine the designation and relative rights, preferences, and limitations of a voting group, except that the Board of Directors may authorize a committee (or a senior executive officer of the Corporation) to do so acting as a pricing committee within limits specifically prescribed by the Board of Directors. Each committee designated by the Board of Directors shall keep regular minutes of its meetings and shall report the same to the Board of Directors whenever required or requested. The provisions of this Article III governing meetings, notice and waiver of notice, and quorum and voting requirements of the Board of Directors shall apply to committees and their members, as well. Each committee must have two or more members who serve at the pleasure of the Board of Directors. The Board, by resolution, may designate one or more directors as alternate members of any such committee who may act in the place and stead of any absent member or members at any meeting of such committee.

3.14 Participation by Remote Communication . Directors may participate in and act at any regular or special meeting of the Board of Directors through the use of a conference telephone, online conference service, or other means of communications by which all directors participating in the meeting can simultaneously hear each other during the meeting, and such participation shall constitute presence in person at such meeting.

3.15 Action Without a Meeting . Any action required or permitted to be taken at a meeting of the Board of Directors or any committee thereof may be taken without a meeting if a written consent setting forth the action taken is signed by all members of the Board of Directors or committee, as the case may be, and such written consent or consents are filed with the minutes of the proceedings of the Board of Directors or of such committee. Such consents shall have the same effect as a unanimous vote of the Board of Directors or committee, as the case may be.

3.16 Conduct of Meeting . The Chairman of the Board or the Chief Executive Officer shall preside at all meetings of the Board of Directors; provided, however , that in the absence or at the request of the Chairman, or if there shall not be a person holding such offices, the person selected to preside at a meeting of directors by a vote of a majority of the continuing Board of Directors present shall preside at such meeting. The Secretary or, in the absence or at the request of the Secretary, any person designated by the person presiding at a meeting of the Board of Directors shall act as secretary of such meeting.

ARTICLE IV

OFFICERS

4.01 Number . The officers of this Corporation shall consist of a Chairman of the Board, a Vice Chairman, if any, a Chief Executive Officer, one or more Presidents and Vice Presidents, a Secretary and a Treasurer. The Chairman shall be appointed by the Board of Directors from among the members of the Board of Directors. The Board of Directors may, but shall not be required to, appoint a Vice Chairman of the Board from among its members. The Chief Executive Officer shall be selected by the Board of Directors from among its members. The Board of Directors shall appoint one or more Presidents. The Secretary and the Treasurer shall be appointed by the Board of Directors. Such other officers and assistant officers and agents as may be deemed necessary may be elected or appointed by the Board of Directors from time to time. Any two or more offices may be held by the same person.

 

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4.02 Election and Term of Office . The officers of the Corporation to be elected by the Board of Directors shall be elected annually at the organizational meeting of the Board of Directors held immediately after each annual shareholders’ meeting, or at such times as the Board of Directors shall determine. Each officer shall hold office until his or her successor shall have been duly elected and shall have qualified, or until his or her earlier death, or until he or she shall resign or shall have been removed in the manner herein provided.

4.03 Removal . Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgment the Corporation’s best interests would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. The election or appointment of an officer does not itself create contract rights.

4.04 Vacancies . A vacancy in any office because of death, resignation, removal, disqualification or otherwise, may be filled by the Board of Directors for the unexpired portion of the term.

4.05 Chairman of the Board . The Chairman of the Board, if one is elected and serving, shall preside at all meetings of the shareholders and of the Board of Directors. The Chairman shall have authority to execute bonds, mortgages, and other contracts requiring a seal, under the seal of the Corporation. The Chairman may, with the approval of the Board of Directors, or shall, at the Board’s direction, delegate any or all of such duties to the Chief Executive Officer or the President.

4.06 Vice Chairman . The Vice Chairman shall have such responsibilities and duties as may be assigned by the Board of Directors.

4.07 Chief Executive Officer . The Chief Executive Officer shall be the most senior officer of the Corporation, and shall be responsible for all of the operations of the Corporation, and shall report to the Board of Directors. The Chief Executive Officer shall see that all orders and resolutions of the Board of Directors are carried into effect. The Chief Executive Officer shall, under the direction of the Board of Directors, have general supervision and direction of the other officers, employees and agents of the Corporation and shall see that their duties, as assigned by the Board of Directors, are properly performed. The Chief Executive Officer shall designate and assign the duties of the officers under his or her supervision, with the approval of the Board of Directors or at their direction. The Chief Executive Officer shall have the authority to execute bonds, mortgages and other contracts requiring a seal, under the seal of the Corporation; he or she shall have the power to endorse, when sold, assigned, transferred or otherwise disposed of by the Corporation, all certificates for Shares, bonds, or other securities or evidences of indebtedness issued by other corporations, associations, trusts, whether public or private, or by any government or agency thereof, and owned or held by the Corporation and to make, execute and deliver all instruments or assignments or transfers of any such stocks, bonds, or other securities and assets. In the absence of the Chairman of the Board, or in the event a Chairman is not elected, the Chief Executive Officer shall have authority to do any and all things delegated to the Chairman of the Board by the Board of Directors or by any committee of the Board of Directors having authority. The Chief Executive Officer shall have such other powers and perform such other duties as the Board of Directors may from time to time prescribe.

4.08 President . The Board may elect a President or two Co-Presidents. The President or Co-Presidents shall have supervision of the operations of the Corporation subject to the direction of the Board of Directors and the Chief Executive Officer. In the event Co-Presidents are elected or appointed by the Board, each shall have and exercise the duties and responsibilities assigned to each of them by the Board of Directors and the Chief Executive Officer and their titles may include a descriptive addition, such as Co-President and Chief Financial Officer or Co-President and Chief Operating Officer. The President or the Co-Presidents shall perform such duties and exercise such other powers as the Board of Directors or the Chief Executive Officer may prescribe or delegate. The President or each Co-President shall see that all orders and resolutions of the Board of Directors and the Chief Executive

 

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Officer are carried into effect. The President or Co-Presidents shall, under the direction of the Board of Directors and the Chief Executive Officer, have general supervision and direction of the other officers, employees and agents of the Corporation reporting to the President or a Co-President and shall see that their duties, as assigned by the Board of Directors or the Chief Executive Officer, are properly performed. The President or each Co-President shall designate and assign the duties of the officers under his or her supervision, with the approval of the Board of Directors or at their direction. The President or each Co-President shall have authority to execute bonds, mortgages and other contracts requiring a seal, under the seal of the Corporation; he or she shall have power to endorse, when sold, assigned, transferred or otherwise disposed of by the Corporation, all certificates for Shares, bonds, or other securities or evidences of indebtedness issued by other corporations, associations, trusts, whether public or private, or by any government or agency thereof, and owned or held by the Corporation and to make, execute and deliver all instruments or assignments or transfers of any such stocks, bonds, or other securities.

4.09 Chief Financial Officer . Unless otherwise determined by the Board of Directors, the Chief Financial Officer shall (i) keep accurate financial records for the corporation, (ii) provide to the Chief Executive Officer and the Board of Directors, whenever requested, an account of all transactions undertaken as the Chief Financial Officer and of the financial condition of the Corporation, and (iii) perform such other duties and exercise such other powers as the Board of Directors or the Chief Executive Officer may prescribe. The Chief Financial Officer may be a Co-President or have such other titles as may be determined by the board of Directors.

4.10 Vice Presidents . The Vice Presidents (in order of the Executive Vice Presidents, Senior Vice Presidents, Vice Presidents, Assistant Vice Presidents, each class in order of the seniority of its respective members or as designated by resolution of the Board of Directors) shall, in the absence or disability of the Chairman of the Board, the Chief Executive Officer and President or Co-Presidents, perform the duties and exercise the powers of said officers, and shall perform such other duties and exercise such other powers as the Board of Directors, the Chief Executive Officer or the President may prescribe. One or more Vice Presidents may be designated by the Board of Directors as “Executive Vice President,” “Senior Vice President,” and “Vice President.”

4.11 Secretary . The Secretary, if present, shall act as secretary at all meetings of the Board of Directors and of the shareholders and keep the minutes thereof in a book or books to be provided for that purpose; shall see that all notices required to be given by the Corporation are duly given and served; shall attest any document, instrument or agreement executed by any other proper officer of the Corporation and affix the seal of the Corporation; shall have charge of the stock records of the Corporation; shall see that all reports, statements and other documents required by law are properly maintained; may sign, with any other proper officer of the Corporation thereunto authorized, certificates for Shares, securities or evidences of indebtedness of the Corporation; and, in general, shall perform all the duties incident to the office of the Secretary and such other duties as from time to time may be assigned by the Chairman of the Board or the Board of Directors.

4.12 Treasurer . The Treasurer, if any, shall have charge and custody of and be responsible for the funds and securities of the Corporation; shall receive and give receipts for moneys due and payable to the Corporation from any source whatsoever, and deposit all such moneys in the name of the Corporation in such banks, trust companies or other depositories and shall perform all of the duties incident to the officer of Treasurer and such other duties as from time to time may be assigned by the Chief Executive Officer or by the Board of Directors. If required by the Board of Directors, the Treasurer shall give a bond for the faithful discharge of the duties of the office of Treasurer in such sum and with such surety or sureties as the Board of Directors shall determine.

4.13 Compensation . The salaries of the Corporation’s executive officers shall be fixed from time to time by or under the authority of the Board of Directors, after taking account of the recommendations of the Corporation’s Compensation Committee and in accordance with the Compensation Committee’s charter. The Board of Directors may, from time to time, delegate to any principal officer or the Compensation Committee the power to fix the salaries of other officers, agents, factors and employees. No officer shall be prevented from receiving such salary by reason of the fact that he or she is also a director of the Corporation or a member of any committee contemplated by these Bylaws.

 

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ARTICLE V

CONTRACTS, LOANS, CHECKS AND DEPOSITS

5.01 Contracts . The Board of Directors may authorize any officer or officers, or agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances.

5.02 Loans . Except for loans incurred in the ordinary course of business and that mature in less than 12 months, no loans shall be contracted on behalf of the Corporation and no evidences of indebtedness shall be issued in its name unless authorized by a resolution of the Board of Directors. Such authority may be general or confined to specific instances, and may delegate authority to the Executive Management Committee specific officers.

5.03 Checks, Drafts, Etc. All checks, drafts or other orders for the payment of money, notes or other evidences or indebtedness issued in the name of the Corporation shall be signed by such officer or officers, or agent or agents of the Corporation and in such manner as shall from time to time be determined by resolution of the Board of Directors.

5.04 Deposits . All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositories as the Board of Directors may authorize or authorize one or more of the Corporation’s officers to select.

ARTICLE VI

CERTIFICATED OR UNCERTIFICATED SHARES AND THEIR TRANSFER

6.01 Certificates or Uncertificated Shares .

(a) Shares of the Corporation may be evidenced by certificates for Shares of stock (in such form as the Board of Directors may from time to time prescribe) or may be issued in uncertificated form. The issuance of Shares in uncertificated form shall not affect Shares already represented by a certificate until the certificate is surrendered to the Corporation. Except as expressly provided by law, there shall be no differences in the rights and obligations of shareholders based on whether or not their Shares are represented by certificates. Within a reasonable time after the issuance or transfer of uncertificated Shares, the Corporation shall send to the registered owner thereof a written notice containing the information required to be set forth or stated on the certificates pursuant to the FBCA. All Shares of Corporation Common Stock shall be in uncertificated form.

(b) Within a reasonable time after the issue or transfer of shares without certificates, the corporation shall send the shareholder a written statement of the information required on certificates by FBCA Sections 607.0625 (2) and (3), and, if applicable, any restrictions on transfer, including those specified by FBCA Section 607.0627.

(c) If certificates are issued to represent Shares, such certificates shall be signed by the President or a Co-President and the Secretary, or by such other officers authorized by law and by the Board of Directors. All certificates for Shares shall be in the form approved by the Board and shall be consecutively numbered or otherwise identified, and shall state (i) the name of the Corporation, (ii) that the Corporation is incorporated in the State of Florida, (iii) the name of the person to whom the Shares are issued, (iv) the number and class of Shares and the designation of the series, if any, the certificate represents and (v) the CUSIP number and ISIN number (if applicable) for such Shares. The name and address of the shareholders, the number of Shares and date of issue shall be entered on the stock transfer books of the Corporation or its transfer agent and registrar. All certificates surrendered to the Corporation for transfer shall be canceled and no new certificate shall be issued until the former certificate for a like number of Shares shall have been surrendered and canceled, except that in case of a lost, destroyed or mutilated certificate a new certificate may be issued therefor upon such terms and indemnity to the Corporation as the Board of Directors may prescribe.

 

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6.02 Transfers of Shares . Transfer of Shares of the Corporation shall be made only (a) on the Corporation’s stock transfer books by the holder of record thereof or by his or her legal representative, who shall furnish proper evidence of authority to transfer, or by his or her attorney thereunto authorized by power of attorney duly executed and filed with the Corporation’s stock transfer agent and registrar, and (b) on surrender for cancelation of the certificate for such Shares, provided a certificate was issued.

6.03 Appointment of Transfer Agent and Registrar . The Corporation may, from time to time, appoint one or more transfer agents and registrars, which shall maintain the Corporation’s stock transfer books.

6.04 Restriction on Transfer of Shares and Other Securities . A written restriction on the transfer or registration of transfer of Shares or other securities of the Corporation, if permitted by FBCA Section 607.0627 (or any successor provision) and noted conspicuously on any certificate representing such Shares or other securities or contained in an information statement required by FBCA Section 607.0626(2) (or any successor provision), may be enforced against the holder of the restricted Shares or other securities or any successor or transferee of the holder, including an executor, administrator, trustee, guardian or other fiduciary entrusted with like responsibility for the person or estate of the holder. Stop transfer notices may be placed in the Corporation’s stock transfer books with respect to restricted Shares or other securities.

6.05 Lost Certificates . The Chairman of the Board, the Chief Executive Officer, the President or any Co-Presidents, the Chief Financial Officer or such other officers, employees or agents as the Board of Directors or such designated officers may direct, may authorize the issuance of a new certificate in place of a certificate claimed to have been lost, destroyed or mutilated, upon receipt of an affidavit of such fact from the person claiming the loss or destruction and any other documentation satisfactory to the Board of Directors or such officer. At the discretion of the Corporation, any such claimant may be required to give the Corporation a bond in such sum as the Corporation may direct to indemnify against the loss from any claim with respect to the certificate claimed to have been lost or destroyed.

6.06 Holder of Record . Except as otherwise required by law, the Corporation may treat the person in whose name the Shares stand of record on its books as the absolute owner of the Shares and the person exclusively entitled to receive notices to shareholders, distributions in respect of Shares, and to exercise voting rights and otherwise exercise the rights, powers and privileges of ownership of such Shares.

ARTICLE VII

FISCAL YEAR

The fiscal year of the Corporation shall be the calendar year, unless otherwise determined by the Board of Directors.

ARTICLE VIII

DIVIDENDS

The Board of Directors, from time to time, may declare, and the Corporation may pay, dividends on its outstanding Shares in the manner and upon the terms and conditions provided by law and the Articles of Incorporation.

ARTICLE IX

SEAL

The seal of the Company shall be circular in form and shall have inscribed thereon the name of the Company, the year of incorporation, and the name of the state of incorporation, and may include an emblem.

ARTICLE X

WAIVER OF NOTICE

Unless otherwise provided by law, whenever any notice is required to be given to any shareholder or director of the Corporation under the provisions of these Bylaws or under the provisions of the Articles of Incorporation, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice.

 

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ARTICLE XI

AMENDMENTS

These Bylaws may be altered, amended or repealed and new Bylaws may be adopted by a majority of the Directors at any regular meeting of the Board of Directors, or at any special meeting of the Board of Directors when the proposed amendment has been set out in the notice of such special meeting. The shareholders may also amend the Bylaws by the affirmative vote of a majority of the Shares entitled to vote.

ARTICLE XII

INDEMNIFICATION

12.01 Indemnification in Proceedings Other Than Those By or In the Right of the Corporation . The Corporation shall indemnify, to the fullest extent permitted by the FBCA, any director of the Corporation or any officer elected by the Board of Directors (and may indemnify any other officer or any employee or agent of the Corporation) who was or is a party to any action, suit, proceeding, whether civil, criminal, administrative or investigative, and whether formal or informal (other than an action by or in the right of the Corporation) by reason of the fact that such person is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, limited liability company, joint venture, trust or other enterprise, against liability incurred in connection with such proceeding, including any appeal thereof, if such person acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the Corporation’s best interests, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any proceeding by judgment, order, settlement or conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner that such person reasonably believed to be in, or not opposed to, the best interests of the Corporation, or, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful.

12.02 Indemnification in Proceedings By or In the Right of the Corporation . The Corporation shall indemnify any director of the Corporation or any officer elected by the Board of Directors (and may indemnify any other officer or any employee or agent of the Corporation) who was or is a party to any proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact such person is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, limited liability company, joint venture, trust or other enterprise, against expenses and amounts paid in settlement not exceeding, in the judgment of the Board of Directors, the estimated expense of investigating, litigating or otherwise bringing the proceeding to conclusion, actually and reasonably incurred in connection with the defense or settlement of such proceeding, including any appeal thereof, if such person acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable unless and only to the extent that the court in which such proceeding was brought, or any other court of competent jurisdiction, shall determine upon application that, despite the adjudication of liability but in view of all circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses that such court shall deem proper.

12.03 Mandatory Indemnification of Expenses in Successful Defenses . To the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any proceeding referred to in Sections 12.01 or 12.02, or in defense of any claim, issue, or matter therein, such person shall be indemnified against expenses actually and reasonably incurred by him or her in connection therewith.

12.04 Determination of Propriety of Indemnification . Any indemnification under Sections 12.01 or 12.02, unless pursuant to a determination by a court, shall be made by the Corporation only upon a determination in the specific case that indemnification of the director, officer, employee or agent is proper in the circumstances because such person has met the applicable standard of conduct set forth in Sections 12.01 or 12.02, as the case may be, and if indemnification is determined to be proper, then, in the case of proposed indemnification of any person other than a director of the Corporation or a board-elected officer, only as authorized in the specific case. Such determination or authorization shall be made (i) by the Board of Directors by a majority vote of a quorum consisting

 

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of directors who were not parties to such proceeding, (ii) if such a quorum is not obtainable, or, even if obtainable, by majority vote of a committee duly designated by the Board of Directors (in which directors who are parties may participate) consisting solely of two or more directors not at the time parties to the proceeding, (iii) by a written opinion of independent legal counsel selected by the Board of Directors as described in (i) above or by the committee as described in (ii) above, or, if a quorum of the directors cannot be obtained for (i) and the committee cannot be designated under (ii), selected by majority vote of the full Board of Directors (in which directors who are parties may participate), or (iv) by the shareholders by a majority vote of a quorum consisting of shareholders who were not parties to such proceeding or, if no such quorum is obtainable, by a majority vote of shareholders who were not parties to such proceeding.

12.05 Authorization for Indemnification . Evaluation of the reasonableness of expenses and authorization of indemnification shall be made in the same manner as the determination that indemnification is permissible, as set forth in Section 12.04, except that, if the determination of permissibility of indemnification is made by independent legal counsel, the Board of Directors or Committee of the Board of Directors who selected such independent legal counsel in accordance with Section 12.04(iii) shall evaluate the reasonableness of expenses and may authorize indemnification.

12.06 Advancement of Expenses . Expenses incurred by a director of the Corporation or any officer in defending a civil or criminal proceeding shall be paid by the Corporation in advance of the final disposition of such proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized in this Article XII. Such expenses incurred by other officers, employees or agents of the Corporation may, at the discretion of the Board of Directors, be paid in advance upon such terms or conditions, including receipt of the undertaking to repay as described above, as the Board of Directors deems appropriate.

12.07 Non-Exclusivity of Indemnification and Advancement of Expenses . The indemnification and advancement of expenses provided by, or granted pursuant to, this Article XII shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled, and the Corporation may make any other or further indemnification or advancement of expenses of any of its directors, officers, employees or agents, under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action by such a director, officer, employee or agent in such person’s official capacity and as to action in another capacity while holding such office or position; provided, however , that indemnification shall not be made to or on behalf of, and any advancement of expenses shall be repaid by, any director, officer, employee or agent for expenses, penalties or other payments incurred in an administrative proceeding or action instituted by an appropriate regulatory agency, if the proceeding or action results in a final order assessing civil money penalties or requiring affirmative action by an individual or individuals in the form of payments to the Corporation; and provided further that indemnification or advancement of expenses shall not be made to or on behalf of any director, officer, employee or agent if a judgment or other final adjudication establishes that such person’s actions, or omissions to act, were material to the cause of action so adjudicated and constitute:

(a) a violation of the criminal law, unless the director, officer, employee or agent had reasonable cause to believe his or her conduct was lawful or had no reasonable cause to believe his or her conduct was unlawful;

(b) a transaction from which the director, officer, employee or agent derived an improper personal benefit;

(c) in the case of a director, a circumstance under which the liability provisions of FBCA Section 607.0834 (or any successor provision) are applicable; or

(d) willful misconduct or a conscious disregard for the best interests of the Corporation in a proceeding by or in the right of the Corporation to procure a judgment in its favor or in a proceeding by or in the right of a shareholder.

 

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12.08 Insurance . The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, limited liability company, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether or not the Corporation would have the power to indemnify such person against such liability under this Article XII.

12.09 Exculpation for Monetary Damages . A director shall not be held personally liable to the Corporation, its shareholders or any other persons for monetary damages for breach of his or her fiduciary duty as a director, including any statement, vote, decision or failure to act, regarding corporate management or policy to the fullest extent permitted now or hereafter by FBCA Section 607.0831 (or any successor provision). Any repeal or modification of this Section 12.09 by the shareholders of the Corporation shall not adversely affect any right of protection of a director of the Corporation existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification. If the FBCA hereafter is amended to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the Corporation, in addition to the limitation on personal liability provided herein, shall be limited to the fullest extent permitted by the amended FBCA.

12.10 Meaning of Certain Terms for Purposes of Article XII . For purposes of this Article XII, references to the “Corporation” shall include, in addition to the resulting corporation, any constituent corporation or other entity or enterprise (including any constituent of a constituent) absorbed in a consolidation or merger that, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation or other entity or enterprise, or who is or was serving at the request of such constituent corporation or other entity or enterprise as a director, officer, employee or agent of another corporation, partnership joint venture, trust or other enterprise shall stand in the same position under this Article XII with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued. For purposes of this Article XII, references to “other enterprises” shall include employee benefit plans; references to “expenses” shall include reasonable attorney’s fees and charges, including those for appeal; references to “liability” shall include obligations to pay a judgment, settlement, penalty, fine (including an excise tax assessed with respect to any employee benefit plan), and expenses actually and reasonably incurred with respect to a proceeding; references to “proceeding” shall include any threatened, pending or completed action, suit, or other type of proceeding, whether civil, criminal, administrative (including without limitation regulatory or self-regulatory) or investigative and whether formal or informal; references to “agent” shall include a volunteer; references to “serving at the request of the Corporation” shall include any service as a director, officer, employee or agent of the Corporation that imposes duties on, or involves services by, such director, officer, employee, or agent, including duties relating to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he or she reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “not opposed to the best interests of the Corporation” as referred to in this Article XII.

12.11 Survival of Indemnification, Exculpation for Monetary Damages and Advancement of Expenses . The indemnification, exculpation for monetary damages and advancement of expenses provided by, or granted pursuant to, this Article XII shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors, and administrators, and personal and legal representatives of such a person.

12.12 Severability . In the event that any of the provisions of this Article XII (including any provision within a single section, paragraph or sentence) is held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, the remaining provisions are severable and shall remain enforceable to the fullest extent permitted by law.

ARTICLE XIII

DEFINITIONS

Terms defined in the Articles of Incorporation have the same meanings when used in these Bylaws.

 

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Exhibit 10.1

AMENDED AND RESTATED SEPARATION AND DISTRIBUTION AGREEMENT

by and between

MERCANTIL SERVICIOS FINANCIEROS, C.A.,

and

MERCANTIL BANK HOLDING CORPORATION

Dated as of June 12, 2018

TABLE OF CONTENTS

 

          Page  
ARTICLE I    The Separation      2  

Section 1.1

  

Assignment of Assets; Assumption of Liabilities

     2  

Section 1.2

  

Termination of Agreements and Intergroup Indebtedness

     2  

Section 1.3

  

Certain Intergroup and Transition Services

     2  

Section 1.4

  

Resignations

     3  

Section 1.5

  

Other Transaction Agreements

     3  
ARTICLE II    The Distribution Trust and the Distribution      3  

Section 2.1

  

Delivery of Company Shares to the Trust

     3  

Section 2.2

  

Record Date and Record Holders

     4  

Section 2.3

  

Distribution Agent

     4  

Section 2.4

  

The MSF Representatives

     4  

Section 2.5

  

The Distribution

     5  

Section 2.6

  

Retained Shares

     5  

Section 2.7

  

No Change in MSF Shares

     6  

Section 2.8

  

Unclaimed Shares

     6  

Section 2.9

  

The Voting Trust

     6  
ARTICLE III    Information      6  

Section 3.1

  

Access to Information

     6  

Section 3.2

  

Privilege

     7  

Section 3.3

  

Record Retention

     7  

Section 3.4

  

Ownership of Information

     7  

Section 3.5

  

Reimbursement for Providing Information

     7  

Section 3.6

  

Limitation of Liability

     8  
ARTICLE IV    Employee Matters      8  

Section 4.1

  

Allocation of Employment of Certain Employees

     8  

Section 4.2

  

No Third Party Beneficiaries

     8  
ARTICLE V    Tax Matters      8  

Section 5.1

  

Tax Treatment of the Distribution

     8  

Section 5.2

  

Distribution-Related Proceedings

     9  
ARTICLE VI    Mutual Releases; Indemnification      10  

Section 6.1

  

Mutual Release of Pre-Separation Claims

     10  

Section 6.2

  

Indemnification by MSF

     11  

Section 6.3

  

Indemnification by the Company

     12  

Section 6.4

  

Indemnification Procedures

     13  

Section 6.5

  

Tax Effects, Insurance Proceeds, and Other Amounts

     15  

Section 6.6

  

No Release of Insurer Obligations

     16  

Section 6.7

  

Subrogation

     16  

Section 6.8

  

Joint Defense and Cooperation

     16  

Section 6.9

  

Survival of Rights and Obligations

     16  

 

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TABLE OF CONTENTS

(continued)

 

          Page  
ARTICLE VII    Conditions to the Separation and Distribution      17  

Section 7.1

  

Conditions to the Separation and Distribution

     17  
ARTICLE VIII    Further Assurances and Additional Covenants      17  

Section 8.1

  

Further Assurances

     17  

Section 8.2

  

Use of Names; Transition Trademark License

     18  

Section 8.3

  

Licenses

     19  

Section 8.4

  

Allocation of Costs and Expenses

     20  

Section 8.5

  

Disposition of Company Shares; Registration Rights

     20  

Section 8.6

  

Confidentiality

     23  

Section 8.7

  

Non-Competition and Non-Solicitation

     25  

Section 8.8

  

Insurance Policies

     26  

Section 8.9

  

Cayman Bank

     26  

Section 8.10

  

Compliance as an Affiliate

     26  

Section 8.11

  

Cooperation, Generally; etc.

     27  
ARTICLE IX    Dispute Resolution      27  

Section 9.1

  

General Provisions

     27  

Section 9.2

  

Consideration by Senior Executives

     28  

Section 9.3

  

Mediation

     29  

Section 9.4

  

Arbitration

     29  

Section 9.5

  

Fees and Costs of Dispute Resolution

     30  
ARTICLE X    Termination      30  

Section 10.1

  

Termination

     30  

Section 10.2

  

Effect of Termination

     30  
ARTICLE XI    General Provisions      30  

Section 11.1

  

Definitions; Rules of Constructions

     30  

Section 11.2

  

Notices

     34  

Section 11.3

  

Entire Agreement

     35  

Section 11.4

  

Assignment

     35  

Section 11.5

  

No Restrictions on Company Changes; Cooperation

     36  

Section 11.6

  

No Third-Party Beneficiaries

     36  

Section 11.7

  

Governing Law; Jurisdiction; Waiver of Jury Trial

     37  

Section 11.8

  

Severability

     37  

Section 11.9

  

Representations and Warranties

     37  

Section 11.10

  

No Construction Against Drafter

     38  

Section 11.11

  

Amendments and Waiver

     38  

Section 11.12

  

Waivers

     38  

Section 11.13

  

Enforcement

     38  

Section 11.14

  

Consent to Jurisdiction and Venue

     38  

Section 11.15

  

Limited Liability

     39  

Section 11.16

  

Counterparts; etc.

     39  

 

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INDEX OF DEFINED TERMS

 

Action

     30  

Affiliate

     30  

Affiliate Shares

     21  

Agreement

     1  

Bank

     1  

BHC Act

     31  

Business Day

     31  

Cayman Bank

     26  

Cayman Bank Sale

     26  

Change in Control

     31  

Change in Control Act

     31  

Class A Shares

     1  

Class B Shares

     1  

Code

     8  

Company

     1  

Company Confidential Information

     23  

Company Entities

     31  

Company Group

     31  

Company Group Employees

     8  

Company Indemnified Parties

     11  

Company Shares

     1  

Company Transfer Agent

     31  

Computershare

     31  

Consents

     31  

Contract

     31  

Control

     32  

Covered Business

     25  

CPR

     29  

CPR Arbitration Rules

     29  

Delivery Date

     3  

Dispute

     28  

Dispute Notice

     28  

Dispute Response

     28  

Distributed Shares

     1  

Distribution

     1  

Distribution Agent

     4  

Distribution Agent Agreement

     4  

Distribution Trust

     1, 32  

Distribution Trust Agreement

     32  

Effective Time

     1  

Exchange Act

     32  

Federal Reserve

     32  

Governmental Approvals

     32  

Governmental Authority

     32  

Group

     32  

Income Taxes

     32  

Indemnified Party

     13  

Indemnifying Party

     13  

Intergroup Indebtedness

     32  

Law

     33  

Liabilities

     33  

License

     33  

Liens

     4  

MSF Class A Shares

     1  

MSF Class B Shares

     1  

MSF Confidential Information.

     23  

MSF Entities

     33  

MSF Group

     33  

MSF Group Employees

     8  

MSF Indemnified Parties

     12  

MSF Marks

     19  

MSF Name

     19  

MSF Representatives

     4  

MSF Services Company

     26  

MSF Transfer Agent

     33  

Net Insurance Proceeds

     15  

Notice of Claim

     13  

OCC

     33  

Person

     33  

Piggyback Registration Statement

     22  

Privilege

     7  

Record Date

     4  

Record Holders

     1, 4  

Reg. K

     20  

Reg. W

     33  

Reg. W Compliant

     33  

Reg. Y

     3  

Registrable Shares

     22  

Registration Rights Agreement

     22  

Reorganization Event

     33  

Representative

     33  

Resale Registration Statement

     22  

Retained Shares

     1  

SEC

     33  

Securities Act

     34  

Separation

     1  

Spin-off Registration Statement

     1  

Subsidiary

     34  

Taxes

     34  

Third-Party Claims

     11  

Transaction Agreements

     34  

Transactions

     5  

Trustee

     34  

Voting Trust

     34  
 

 

-iii-

AMENDED AND RESTATED SEPARATION AND DISTRIBUTION AGREEMENT

This Amended and Restated Separation and Distribution Agreement, dated as of March 12, 2018 (this “ Agreement ”), is by and between MERCANTIL SERVICIOS FINANCIEROS, C.A., a Venezuela corporation (“MSF”), and MERCANTIL BANK HOLDING CORPORATION, a Florida corporation and a wholly-owned subsidiary of MSF (the “ Company ”). This Agreement amends and restates in its entirety the Separation and Distribution Agreement, dated as of March 12, 2018, between MSF and the Company.

MSF is a Venezuela financial services holding company with operations in a number of countries, including the United States. The Company is MSF’s wholly-owned top-tier U.S. bank holding company, and conducts its operations through its subsidiaries, including its wholly-owned indirect subsidiary, Mercantil Bank, N.A., a national bank organized under the laws of the United States, and its subsidiaries (collectively, the “ Bank ”).

MSF’s board of directors and shareholders unanimously have approved a separation of the Company and MSF (the “ Separation ”) by a pro rata distribution of the Company’s Class A common stock, par value $.10 per share (the “ Class A Shares ”) and the Company’s Class B common stock, par value $.10 per share (the “ Class B Shares ” and, together with the Class A Shares and any successors to any such classes of shares, the “ Company Shares ”) to holders of record of MSF’s Class A common stock (“ MSF Class A Shares ” and Class B common stock (“ MSF Class B Shares ”) as of the Record Date (as defined herein) (such holders, the “ Record Holders ” and such distribution, the “ Distribution ”).

MSF’s and the Company’s respective Boards of Directors have approved this Agreement.

As contemplated by this Agreement, MSF and the Company have established the Distribution Trust, a non-discretionary grantor trust governed by the laws of Florida (the “ Distribution Trust ”), pursuant to the Distribution Trust Agreement with the Trustee. On the Delivery Date (as defined herein), MSF has transferred ownership to the Distribution Trust, of 80.1% of the Class A Shares and 80.1% of the Class B Shares of which will be held by the Distribution Trust for benefit of the Record Holders (other than MSF subsidiaries that are also Record Holders). MSF has transferred ownership of the remaining 19.9% of the Class A Shares and 19.9% of the Class B Shares to the Distribution Trust for benefit of MSF and its subsidiaries that are Record Holders. The Company Shares held in the Distribution Trust for benefit of the Record Holders (other than MSF subsidiaries that are also Record Holders) are the “ Distributed Shares .” The Company Shares held in Trust for benefit of MSF and its subsidiaries are the “ Retained Shares .”

The Distribution of the Distributed Shares from the Trust to the Record Holders will occur upon the Company’s registration statement on SEC Form 10, or other applicable form, registering the Class A Shares and the Class B Shares, as such registration statement may be amended or supplemented from time to time, the (“ Spin-off Registration Statement ”) is declared effective by the SEC (the “ Effective Time ”).

The parties believe it is appropriate and desirable to set forth the principal corporate transactions required to effect the Separation and certain other agreements that will, following the consummation of the Separation and Distribution, govern certain matters relating to the parties’ relationship.

 

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In consideration of the premises and other good and valuable consideration, the receipt of which is acknowledged, the parties, intending to be legally bound, agree as follows:

ARTICLE I

THE SEPARATION

Section 1.1 Assignment of Assets; Assumption of Liabilities .

There are no assets that will be transferred or assigned to, or liabilities to be assumed by, MSF from the Company or by the Company from MSF on the Distribution Date.

Section 1.2 Termination of Agreements and Intergroup Indebtedness .

(a) Subject to Section 1.3 providing for transition services, under existing contracts in effect, as amended on or prior to the Separation, the MSF Entities, on the one hand, and the Company Entities, on the other hand, shall terminate all Contracts between or among MSF or any MSF Entity, on the one hand, and the Company or any Company Entity, on the other hand, effective as of the Separation. No such terminated Contract (including any provision thereof that purports to survive termination) shall be of any further force or effect after the Separation and all parties shall be released from all obligations thereunder. Each party shall, at the reasonable request of the other party, take, or cause to be taken, such other actions as may be necessary to effect the foregoing. The foregoing notwithstanding, nothing in this Section 1.2 is intended to or shall affect any deposit accounts or ordinary course banking relationships between the MSF Entities and the Company Entities, all of which shall continue in full force and effect.

Section 1.3 Certain Intergroup and Transition Services .

(a) Schedule 1.3A sets forth certain Contracts where one or more Company Entities have provided or will provide services to one or more MSF Entities. Notwithstanding anything to the contrary in any such Contracts or in Section 1.2(a) , unless otherwise prohibited by applicable Law or a Governmental Authority, such Contracts shall remain in full force and effect in accordance with their respective terms, subject to semi-annual reviews and changes in pricing, until the earlier of (i) the first anniversary of the Separation or at the end of the 18 month following the Distribution Date, as shown on Schedule 1.3A , unless such Contract is extended or earlier terminated by mutual agreement of the parties to such Contract or (ii) upon a Change in Control of MSF, at which time such Contracts may terminated by the Company. Upon and following termination of a Contract, such Contract shall be of no further force or effect, and all parties to such Contract shall be released from all such Contract obligations for future services as of and following termination. Each party shall, at the reasonable request of the other party, take or cause to be taken, such other actions as may be necessary to effect the foregoing. Any such contracts with the Bank shall be on terms and conditions that are Reg. W compliant.

(b) Schedule 1.3B sets forth certain Contracts where one or more MSF Entities have provided or will provide services to one or more Company Entities. Notwithstanding anything to the contrary in any such Contracts or in Section 1.2(a) , unless otherwise prohibited by applicable Law or a Governmental Authority, such Contracts shall remain in full force and effect in accordance with their respective terms, at the prices in effect as of the Separation (provided such pricing is Reg. W Compliant), until the earlier of (i) the first

 

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anniversary of the Separation, unless extended or earlier terminated by mutual agreement of the parties to such Contract or (ii) upon a Change in Control of MSF, at which time such Contracts may terminated by the Company. Upon and following termination of a Contract, such Contract shall be of no further force or effect, and all parties to such Contract shall be released from all such Contract obligations for future services as of and following termination. Each party shall, at the reasonable request of the other party, take, or cause to be taken, such other actions as may be necessary to effect the foregoing.

(c) The MSF Entities and the Company Entities, or any of them, may enter into one or more consulting Contracts with the other or with respect to their personnel, provided that the consulting party and its personnel shall have no decision-making authority with respect to the party to which such consulting services are provided. Any Consulting Agreements shall comply with applicable Law, including Federal Reserve Regulation Y (“ Reg. Y ”) and Reg. W.

(d) All Contracts referred to in this Section 1.3 where the Bank is a party shall be Reg. W Compliant.

(e) The term of any Contracts referred to in this Section 1.3 may be shortened in the event of any action or request by the Federal Reserve or OCC, and the term shall, upon notice by the Company to MSF, be shortened to the longest permissible period not to exceed the original term. The parties may mutually extend any Contracts referred to in this Section 1.3 by mutual consent, absent any Federal Reserve or OCC action or request, which the Company determines will not permit such extension.

Section 1.4 Resignations . Except as set forth on Schedule 1.4 , on or prior to the Separation, MSF shall cause each officer and director of an MSF Entity serving as an officer or director of a Company Entity to resign, effective not later than the Separation, from all such positions with such Company Entity. Except as set forth on Schedule 1.4 , on or prior to the Separation, the Company shall cause each officer and director of a Company Entity serving as an officer or director of an MSF Entity to resign, effective not later than the Separation, from all such positions with such MSF Entity.

Section 1.5 Other Transaction Agreements . At or prior to the Distribution Date and subject to the satisfaction or waiver of the conditions set forth in Section 7.1 , each party shall execute and deliver those other Transaction Agreements not already executed and delivered, and such other documents, instruments and agreements as may be necessary or appropriate to effect the transactions contemplated by this Agreement.

ARTICLE II

THE DISTRIBUTION TRUST AND THE DISTRIBUTION

Section 2.1 Delivery of Company Shares to the Trust .

(a) On the delivery date specified by the Company and MSF (the “ Delivery Date ”), MSF will transfer, assign, convey and deliver ownership of 74,212,408 shares of Class A Stock and 53,253,157 shares of Class B Stock, which constitute 100% of all issued and outstanding Company Shares to the Distribution Trust by book entry on the Company’s books and records, with written confirmation of such transfer delivered by the Company to the Trustee.

 

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The Company Shares shall be delivered to the Trustee free and clear of all liens, pledges, security interests, claims and other encumbrances (collectively, “ Liens ”). All Company Shares delivered to the Trustee on the Delivery Date or otherwise shall be registered on the Company’s books and records in the Trustee’s name as Trustee under the Distribution Trust Agreement for the benefit of (a) the MSF shareholders who are the Record Holders as to the Distributed Shares and (b) MSF as to the Retained Shares. The Trustee shall hold the Company Shares pursuant to the terms and conditions of the Distribution Trust.

(b) On the Delivery Date, subject to adjustment, and as provided in Sections 2.1(a) and 2.6 , the Distributed Shares and the Retained Shares shall be as follows:

 

Class of Stock

   Distributed Shares    Retained Shares    Totals

Class A

   60,880,929    13,331,479    74,212,408

Class B

   43,880,032    9,373,125    53,253,157

(c) All Company Shares will be held in the Distribution Trust in accordance with the Distribution Trust Agreement pending the effectiveness of the Spin-off Registration Statement, and shall be subject to the terms of this Agreement.

Section 2.2 Record Date and Record Holders . MSF shall establish, pursuant to authorization by MSF’s board of directors, the record date (the “ Record Date ”) for determining the shareholders of record (the “ Record Holders ”) of MSF Shares entitled to receive the Distribution Shares. The Company Shares will be delivered from the Trust to the Distribution Agent for Distribution to MSF Record Holders as of the Distribution Date in accordance with this Agreement and Section 4 of the Distribution Trust Agreement as soon as the Company notifies the Trustee of the Effective Time and upon the Company and the MSF Representatives confirming to the Trustee that the conditions contained in Article VII below have been satisfied or waived.

Section 2.3 Distribution Agent . Prior to the Distribution, the Company shall enter into an agreement (the “ Distribution Agent Agreement ”) with a distribution agent (the “ Distribution Agent ”), providing for the Distribution in accordance with the terms of this Agreement. The Distribution Agent may be Computershare or the MSF Transfer Agent, or such other person as the Company may select.

Section 2.4 The MSF Representatives . (a) MSF irrevocably has appointed Gustavo J. Vollmer A., Gustavo Marturet M. and Rene Brillenbourg C. to act as the exclusive agents, powers of attorney and representatives to act for and on behalf of MSF and the MSF shareholders in connection with the Distribution Trust Agreement and this Agreement. The Representatives, or any two of them (the “ MSF Representatives ”), shall take any action, that MSF is required or permitted to take under the Distribution Trust Agreement or hereunder with respect to Company Shares held by the Trust, and are granted an irrevocable proxy, coupled with an interest, to vote any and all Company Shares at any time after delivery of all Company Shares to the Distribution Trust and before the Distribution. The MSF Representatives’ sole duties and obligations are set forth in Section 2.4(b) . MSF shall indemnify, defend and hold harmless the MSF Representatives from and against all Liabilities for acting pursuant to the authority granted in this Section 2.4 .

 

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(b) The MSF Representatives are authorized and directed to execute and deliver all (i) Officer’s Certificates, notices, writings, documents, instruments and agreements and communications under the Distribution Trust Agreement and other Transaction Agreements. The MSF Representatives otherwise shall act for and on behalf of MSF and its shareholders as they deem necessary, desirable or expedient to effect promptly the Separation, the Distribution and all related Transactions, including regarding any contribution of Retained Shares or beneficial ownership thereof to the Company upon a Change in Control of MSF (“ Transactions ”) contemplated herein or in the Distribution Trust Agreement, at the earliest times, and to anything incidental to or in furtherance of the Separation, Distribution and the other Transactions and the preservation and protection of the value of the Distributed Shares. The appointment of the MSF Representatives shall survive any Change in Control of MSF, or change in MSF’s management or policies and shall terminate only upon the termination or expiration of this Agreement and the last Transaction Agreement. Any two of the MSF Representatives shall be necessary to act, but in the event there are, for any reason, less than two MSF Representatives, the remaining MSF Representative may take any action hereunder.

Section 2.5 The Distribution .

(a) On or prior to the Distribution Date, and subject to the satisfaction or waiver (to the extent waivable) of the conditions to the Separation and Distribution set forth in Section 7.1 below and in Section 4 of the Distribution Trust Agreement, the Trustee will, upon the written direction of the Company and the MSF Representatives given to the Trustee not less than five business days in advance of the Distribution Date, promptly deliver the Distributed Shares to the Distribution Agent, by book entry and written confirmation to MSF and the Company.

(b) The Distribution Agent shall effect the Distribution pursuant to the Distribution Agent Agreement, on or as soon as practicable after the Distribution Date, to each MSF Class A Stock Record Holder, one share of Class A Stock for each MSF Class A Share held as of the Record Date and, to each MSF Class B Stock Record Holder, one share of Class B Stock for each MSF Class B Share held as of the Record Date. This one-for-one distribution is the “ Distribution Ratio .”

(c) The Distribution Agent shall deliver to MSF Record Holders entitled to receive Distributed Shares all required U.S. federal tax forms, including withholding forms, and forms and certifications and information required by FATCA, which the Company determines are appropriate. The Company will not pay any dividends or make any payments to such MSF shareholders until it has received such forms in form and substance satisfactory to the Company.

Section 2.6 Retained Shares . Any Company Shares distributed to MSF Subsidiaries in respect of the 1,435,954 MFS Class A Shares and the 1,224,245 MSF Class B Shares held by MSF Subsidiaries shall be included in Retained Shares for all other purposes of this Agreement. Accordingly, to maintain a pro rata distribution and to maintain the Retained Shares at no more than 19.9% of the outstanding Company Shares of each class, all Company Shares distributed in respect of MSF Shares held of record by MSF Subsidiaries shall be returned automatically by the MSF Subsidiaries immediately following the Distribution and on the same day as the

 

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Distribution, to the Distribution Trust and shall be held in the Distribution Trust by MSF as Retained Shares. The Distribution Trust will continue to hold the Retained Shares after the Distribution Date pursuant to the Distribution Trust Agreement, pending the sale or other disposition of the Retained Shares by MSF, in accordance with Section 8.5 below and the Distribution Trust Agreement.

Section 2.7 No Change in MSF Shares . From the date hereof through the Distribution Date, MSF shall not change the number of MSF Class A Shares or MSF Class B Shares issued and outstanding. Accordingly, the numbers of Distributed Shares and Retained Shares of each class, shall not be adjusted and the Distribution Ratio shall not change, provided however, the numbers of Distributed Shares and Retained Shares may be adjusted, if necessary, for rounding differences and otherwise to preserve the one-for-one Distribution Ratio and limit the Retained Shares to no more than 19.9% of each Class of Company Shares immediately following the Distribution.

Section 2.8 Unclaimed Shares . Any Company Shares made available to the Distribution Agent that remain unclaimed, or lack any required U.S. federal income tax or FATCA forms, 180 days after the Distribution Date, shall be delivered to the Company. The Company shall hold such Company Shares for the account of the appropriate Record Holders and any such Record Holder shall look only to the Company for such Company Shares, subject to applicable escheat or other abandoned property Laws.

Section 2.9 The Voting Trust . MSF and the Company shall cooperate in the termination of the Voting Trust effective not later than the Distribution Date.

ARTICLE III

INFORMATION

Section 3.1 Access to Information .

(a) Except in the case of an adversarial Action between any MSF Entity, on the one hand, and any Company Entity, on the other hand (which shall be governed by such discovery rules as may be applicable thereto), and subject to Section 3.2 , each of MSF and the Company, on behalf of the MSF Entities and the Company Entities, respectively, agrees to provide, or cause to be provided, to each other as soon as reasonably practicable after written request therefor, subject to applicable Laws relating to the exchange of information, and only in such manner that does not cause unreasonable disruption of such Person’s business of such Person, any information existing as of the Separation and in the possession or under the control of such Person that the requesting party reasonably needs (1) to comply with reporting, disclosure, filing or other requirements imposed on the requesting party by applicable Laws or by Governmental Authority having jurisdiction over the requesting party, (2) for use in any other judicial, regulatory, administrative or other proceeding or in order to satisfy audit, accounting, claims, regulatory, litigation or other similar requirements, or (3) to comply with its obligations, or confirm compliance of the other party’s obligations, under this Agreement or any other Transaction Agreement; provided , however , that (i) the requesting Person shall agree in writing to keep any information that includes proprietary, confidential or privileged information of the providing Person confidential, except to the extent that such records or documents are required to be disclosed by applicable Law or legal process, (ii) each party agrees to notify the providing

 

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Person of any Action whereby such requesting Person might be required to disclose proprietary, confidential or privileged information, so that the providing Person may seek a protective order, and (iii) in the event that any party determines that any such provision of information could be commercially detrimental, violate any applicable Law or provision of any material Contract, or waive any attorney-client privilege, the parties shall take all reasonable measures to permit the compliance with such obligations in a manner that avoids any such harm or consequence.

(b) Following the Distribution Date, each party shall make its and its Group’s employees reasonably available to the other party during normal business hours and on reasonable notice to discuss any information provided hereunder.

Section 3.2 Privilege . The provision of any information pursuant to this Article III will not be deemed a waiver of any privilege, including privileges arising under or related to the attorney-client privilege or any other applicable privilege (a “ Privilege ”). Following the Separation, neither the Company or any other member of the Company Group, on the one hand, nor MSF or any other member of the MSF Group, on the other hand, will be required to provide any information pursuant to this Article III , if the provision of such information would serve as a waiver of any Privilege afforded such information.

Section 3.3 Record Retention . To facilitate the exchange of information pursuant to this Article III and other provisions of this Agreement after the Separation, the parties shall use their commercially reasonable efforts to retain all information in their respective possession or control in accordance with their respective policies as in effect prior to the Separation, or as thereafter amended generally consistent with this Article III . Neither party shall destroy, nor permit any other members of its Group to destroy, any information that the other party may have the right to obtain pursuant to this Agreement prior to the sixth anniversary of the date of this Agreement without first using its reasonable efforts to notify the other party of the proposed destruction and giving the other party the opportunity to take possession of such information prior to such destruction; provided , however , that in the case of any information relating to Taxes or employee benefits, such period shall be extended to the expiration of the applicable statute of limitations (giving effect to any extensions thereof); provided further , however , neither party shall destroy, nor permit any member of its Group to destroy, any information required to be retained by applicable Law.

Section 3.4 Ownership of Information . Any information owned by either the Company Group or the MSF Group that is provided to a requesting party pursuant to Section 3.1 shall be deemed to remain the confidential property of the providing party. Unless specifically set forth herein or in any Transaction Agreement, nothing contained in this Agreement shall be construed as granting or conferring rights of license or otherwise in any such information.

Section 3.5 Reimbursement for Providing Information . The party requesting information hereunder shall reimburse the party providing such information for the reasonable costs, if any, of preparing and delivering such information, to the extent that such costs are incurred for the benefit of the requesting party. Except as may be otherwise specifically provided elsewhere in this Agreement or in any other agreement between the parties, such costs shall be computed in accordance with the providing party’s standard methodology and procedures.

 

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Section 3.6 Limitation of Liability . No party shall have any liability to any other party in respect of information exchanged or provided pursuant to this Article III , provided that the providing party shall be responsible for any untrue statement or alleged untrue statement of a material fact, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.

ARTICLE IV

EMPLOYEE MATTERS

Section 4.1 Allocation of Employment of Certain Employees . Schedule 4.1 sets forth (1) those employees of a member of the Company Group that are to be employees of the MSF Group after the Separation (such employees, the “ MSF Group Employees ”), and (2) those employees of a member of the MSF Group that are to be employees of the Company Group after the Separation (such employees, the “ Company Group Employees ”). As of the Separation, the MSF Group Employees shall cease to be employees of the Company Group and shall become employees of the MSF Group, as determined by MSF, and the Company Group Employees shall cease to be employees of the MSF Group and shall become employees of the Company Group, as determined by the Company. Any employment records of MSF Group Employees maintained by the Company Group shall be transferred to MSF, and any employment records of Company Group Employees maintained by the MSF Group shall be transferred to the Company.

Section 4.2 No Third Party Beneficiaries . Nothing in this Article IV shall (1) limit the right of a party to terminate or suspend the employment of any employee, whether before, on or after the Separation, (2) be deemed to modify any rights or benefits of any participant or eligible employee under any employee benefit plan, (3) prevent a party from amending or terminating any employee benefit, incentive or deferred compensation plan, (4) require a party to sponsor, maintain or contribute to any particular employee benefit plan, program or arrangement or to provide or continue any particular benefit to employees, or (5) be construed as providing any rights to any employee or dependent, participant or any other Person, whether as a third party beneficiary or otherwise with respect to the matters set forth in this Article IV .

ARTICLE V

TAX MATTERS

Section 5.1 Tax Treatment of the Distribution . For U.S. federal and applicable state Income Tax purposes, the parties intend the Distribution to be treated as a distribution of Company stock that is non-taxable to MSF shareholders under section 355(a) of the Internal Revenue Code of 1986, as amended (the “ Code ”).

Except as required as a result of a Final Determination, none of MSF, the Company, nor their respective Subsidiaries or Affiliates, shall take any position inconsistent with the foregoing treatment. “Final Determination” means the final resolution of liability for any Income Tax, which resolution may be for a specific issue or adjustment or for a taxable year or period, by (1) IRS Form 870 or 870-AD (or any successor forms thereto), on the date of acceptance by or on behalf of the taxpayer, or by a comparable form under the Laws of a state or local taxing jurisdiction, except that a Form 870 or 870-AD or comparable form shall not constitute a Final

 

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Determination to the extent that it reserves (whether by its terms or by operation of Law) the right of the taxpayer to file a claim for refund or the right of the Tax authority to assert a further deficiency in respect of such issue or adjustment or for such taxable period (as the case may be); (2) a decision, judgment, decree, or other order by a court of competent jurisdiction, which has become final and unappealable; (3) a closing agreement or accepted offer in compromise under Sections 7121 or 7122 of the Code, or a comparable agreement under the Laws of a state or local taxing jurisdiction; (4) any allowance of a refund or credit in respect of an overpayment of Income Tax, but only after the expiration of all periods during which such refund may be recovered (including by way of offset) by the jurisdiction imposing such Income Tax; or (5) any other final disposition, including by reason of the expiration of the applicable statute of limitations or by mutual agreement of the parties.

Section 5.2 Distribution-Related Proceedings .

(a) MSF shall notify the Company in writing of any communication with respect to any pending or threatened Distribution-Related Proceeding no later than 10 Business Days after MSF or any of its Subsidiaries or Affiliates first receives written notice thereof. MSF shall include with such notification a true, correct and complete copy of any written communication, and an accurate and complete written summary of any oral communication, received by MSF or any of its Subsidiaries or Affiliates. “Distribution-Related Proceeding” means any audit or other examination, or judicial or administrative claim, action or proceeding relating to actual or claimed liability for, or refunds or adjustments with respect to, Income Taxes of MSF shareholders, in which the Internal Revenue Service, another Tax authority or any other party asserts a position that could reasonably be expected to adversely affect the intended treatment of the Distribution set forth in Section 5.1 .

(b) In the event of any Distribution-Related Proceeding, (1) MSF shall consult with the Company reasonably in advance of taking any significant action in connection with such proceeding, (2) MSF shall consult with the Company and offer the Company a reasonable opportunity to comment before submitting any written materials prepared or furnished in connection with such proceeding, (3) MSF shall defend such proceeding diligently and in good faith, (4) the Company shall be entitled to participate in such proceeding with counsel of its own choosing and receive copies of any written materials relating to such proceeding received from the relevant Tax authority, (5) MSF shall not settle, compromise or abandon any such proceeding without obtaining the prior written consent of the Company, and (6) MSF shall indemnify and hold harmless the Company and the Company Group from and against all Distribution-Related Proceedings and findings thereof, including any resulting Taxes or payments to any Governmental Authority outside the United States.

(c) Notwithstanding anything to the contrary herein, in the event of a conflict between the procedures set forth in this Section 5.2 and Section 6.4 , the provisions of this Section 5.2 shall govern.

 

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ARTICLE VI

MUTUAL RELEASES; INDEMNIFICATION

Section 6.1 Mutual Release of Pre-Separation Claims .

(a) Except as provided in Section 6.1(c) , effective as of the Separation, MSF for itself and on behalf of each MSF Entity, irrevocably releases and forever discharges and holds harmless each Company Entity from any and all liabilities whatsoever owing to any MSF Entity, whether at Law or in equity (including any right of contribution), whether arising under any Contract, by operation of Law or otherwise, existing or arising from any acts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed on or before the Separation, whether or not known as of the Separation, including in connection with the Separation and Distribution and all other activities to implement the Separation and Distribution.

(b) Except as provided in Section 6.1(c) , effective as of the Separation, the Company for itself and on behalf of each Company Entity, irrevocably releases and forever discharges and holds harmless each MSF Entity from any and all liabilities whatsoever owing to any Company Entity, whether at Law or in equity (including any right of contribution), whether arising under any Contract, by operation of Law or otherwise, existing or arising from any acts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed on or before the Separation, whether or not known as of the Separation, including in connection with the Separation and Distribution and all other activities to implement the Separation and Distribution.

(c) Nothing contained in Sections 6.1(a)  or (b)  shall impair any right of any Person to enforce this Agreement, including, without limitation, the indemnification obligations set forth in Sections 6.2 and 6.3 , any other Transaction Agreement or any Contract between any Company Entity and any MSF Entity that does not terminate as of the Separation, in each case in accordance with its terms. In addition, nothing contained in Sections 6.1(a)  or (b)  shall release any Person from:

 

  (1) any Liability, contingent or otherwise, assumed, transferred, assigned or allocated to any Company Entity or MSF Entity, as the case may be, in accordance with, or any other liability of such Person under, this Agreement or any other Transaction Agreement;

 

  (2) any Liability, the release of which would result in the release of any Person other than a MSF Entity or a Company Entity or their respective directors, officers, employees, agents and representatives; provided that the parties shall not bring any Action or permit any of their Subsidiaries or Affiliates to bring any Action against any Person with respect to any Liability to the extent that such Person would be released with respect to such Liability by this Section 6.1 but for the provisions of this clause (3);

 

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  (3) any deposit Liabilities or Intergroup Indebtedness, if any, due and owing to the MSF Group or the Company Group up to and through the Separation as a result of banking transactions in the ordinary course of business; or

 

  (4) any Liability the parties may have with respect to indemnification or contribution pursuant to the Trust Agreement or any Transaction Agreement for any Actions by a third party (“ Third-Party Claims ”) that are subject to the indemnification provisions provided for in this Article VI , shall be governed by the provisions of this Article VI or other Transaction Agreements, as applicable; provided , that, as between the Company and MSF, the allocation indemnity and contribution Liabilities of MSF and the Company under the Trust Agreement shall be governed by Section 8.4 below.

In addition, nothing contained in Section 6.1(b) shall release MSF and any member of the MSF Group from indemnifying and advancing expenses to the fullest extent permitted by applicable Law to any director, officer, employee or agent of the Company or a Company Entity who was a director, Trustee, officer, employee or agent of any member of the MSF Group or any of their Affiliates on or prior to the Separation, or was or is serving, or hereafter serves, at the request of MSF, as a director, officer, employee, consultant, or agent of another corporation, partnership, joint venture, or other enterprise, against expenses, attorneys’ fees, judgments, fines, and amounts paid in settlement, actually and reasonably incurred in connection with any Action with respect to which he or she was entitled to such indemnification or advancement of expenses pursuant to then-existing obligations.

(d) The Company agrees, for itself and on behalf of each Company Entity, not to make any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution or any indemnification, against MSF or any MSF Entity, with respect to any Liabilities it has released expressly pursuant to this Section 6.1 . MSF agrees, for itself and on behalf of each MSF Entity, not to make any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution or any indemnification, against the Company or any other Company Entity, with respect to any Liabilities it has released expressly pursuant to this Section 6.1 .

(e) At any time, at the request of any other party, each party shall cause each other Company Entity or other MSF Entity, as applicable, to execute and deliver releases reflecting the provisions of this Section 6.1 .

Section 6.2 Indemnification by MSF . To the fullest extent provided by applicable Law, MSF and each member of the MSF Group, shall indemnify, defend and hold each member of the Company Group and each of their respective present and former officers, directors, employees and agents (excluding such Persons in their capacities as MSF Group officers, directors, employees and agents), each of their heirs, legatees, executors, and other personal and legal representatives, successors and assigns of any of the foregoing, and each Person who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the

 

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Exchange Act (collectively, the “ Company Indemnified Parties ”), from and against any and all Liabilities of the Company Indemnified Parties relating to, arising out of, or resulting from any of the following items (without duplication):

 

  (1) the operation of the business of the MSF Entities (other than any Company Entities) prior to the Separation;

 

  (2) the failure of any member of the MSF Group or any other Person to pay, perform or otherwise promptly discharge any Liabilities of the MSF Group, whether prior to or after the Separation;

 

  (3) any breach by any member of the MSF Group of this Agreement or any of the Transaction Documents;

 

  (4) any untrue statement or alleged untrue statement of a material fact, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, made by or on behalf of any member of the MSF Group contained in the Spin-off Registration Statement or any other registration statement, report, document filed with or provided to the SEC pursuant to the Securities Act or the Exchange Act, including a Resale Registration Statement.

Section 6.3 Indemnification by the Company . To the fullest extent permitted by applicable Law, the Company shall indemnify, defend and hold harmless each member of the MSF Group and each of their respective present and former officers, directors, employees and agents (excluding such Persons in their capacities as Company Group officers, directors, employees and agents), each of the heirs, legatees, executors, and other personal and legal representatives, successors and assigns of any of the foregoing, and each Person who controls MSF within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (collectively, the “ MSF Indemnified Parties ”), from and against any and all Liabilities of the MSF Indemnified Parties relating to, arising out of, or resulting from any of the following items (without duplication):

 

  (1) the operation of the business of the Company Entities prior to the Separation;

 

  (2) the failure of any member of the Company Group or any other Person to pay, perform or otherwise promptly discharge any Liabilities of the Company Group, whether prior to or after the Separation;

 

  (3) any breach by any member of the Company Group of this Agreement or any of the Transaction Documents; and

 

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  (4) any untrue statement or alleged untrue statement of a material fact, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, made by or on behalf of any member of the Company Group contained in the Spin-off Registration Statement or any other document filed with or provided to the SEC pursuant to the Securities Act or the Exchange Act, including a Resale Registration Statement.

Section 6.4 Indemnification Procedures .

(a) A Person entitled to indemnification under this Article VI (an “ Indemnified Party ”) shall give written notice (a “ Notice of Claim ”) to the party required to indemnify the Indemnified Party (the “ Indemnifying Party ”) within 20 Business Days after the Indemnified Party has knowledge of any Third-Party Claim or other event that reasonably could be expected to give rise to a right of indemnification under this Agreement. No failure to give such Notice of Claim shall affect the indemnification obligations of the Indemnifying Party hereunder, except to the extent that such failure actually prejudiced such Indemnifying Party’s ability to successfully defend the matter giving rise to the claim. The Notice of Claim shall state the nature of the claim, the estimated amount of the Liability, if known, and the method of computation thereof, all with reasonable particularity and containing a reference to the provisions of this Agreement under which such right of indemnification is claimed or arises.

(b) The obligations of an Indemnifying Party under this Article VI with respect to Liabilities arising from Third-Party Claims shall be governed by and contingent upon the following additional terms and conditions:

 

  (1) The Indemnified Party at the time it gives a Notice of Claim to the Indemnifying Party of the Third-Party Claim shall advise the Indemnifying Party that the Indemnifying Party shall be permitted, at its option, to assume and control the defense of such Third-Party Claim at its expense and through counsel of its choice reasonably satisfactory to the Indemnified Party if (1) it gives written notice of its intention to do so to the Indemnified Party within 20 Business Days of its receipt of the Notice of Claim, (2) the Third-Party Claim involves only money damages and does not seek an injunction or other equitable relief, (3) settlement of or an adverse judgment with respect to the Third-Party Claim is not, in the good faith judgment of the Indemnified Party, likely to establish a precedential custom or practice materially adverse to the continuing business interests or the reputation of the Indemnified Party, and (4) the Indemnifying Party conducts the defense of the Third-Party Claim actively and diligently.

 

  (2)

In the event the Indemnifying Party exercises its right to undertake the defense against any such Third-Party Claim in accordance with this Section 6.4 , the Indemnified Party shall cooperate with the Indemnifying Party in such defense and make available to the

 

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  Indemnifying Party all witnesses and Information in its possession or under its control relating thereto as is reasonably requested by the Indemnifying Party; provided , however , if the defendants in any Action include both the Indemnified Party and the Indemnifying Party and such Indemnified Party concludes in good faith that counsel selected by the Indemnifying Party has a conflict of interest because of the availability of different or additional defenses to such Indemnified Party, such Indemnified Party shall have the right to select separate counsel reasonably acceptable to the Indemnifying Party to participate in the defense of such Action on its behalf, at the expense of the Indemnifying Party; provided , further , that such Indemnifying Party shall not, in connection with any one such Action or separate but substantially similar or related Actions, be liable for the reasonable fees and expenses of more than one separate counsel (in addition to any local counsel).

 

  (3) Notwithstanding the foregoing, the Indemnified Party, during the period the Indemnifying Party is determining whether to elect to assume the defense of a matter covered by this Section 6.4(b) , may take such reasonable actions, at the Indemnifying Party’s expense, as it deems necessary to preserve any and all rights with respect to the defense of such matter, without such actions being construed as a waiver of the Indemnified Party’s rights to defense and indemnification pursuant to this Agreement. In the event the Indemnified Party conducts the defense against any such Third-Party Claim, the Indemnified Party shall keep the Indemnifying Party timely and fully informed of the defense and the status, and the Indemnifying Party (1) shall cooperate with the Indemnified Party in such defense and make available to it all such witnesses and Information in its possession or under its control relating thereto as is reasonably requested by the Indemnified Party and (2) may participate by its own counsel and at its own expense in the defense of such Third-Party Claim.

(c) In no event shall an Indemnified Party admit any Liability with respect to, or settle, compromise or discharge, any Third-Party Claim without the Indemnifying Party’s prior written consent; provided , however , that the Indemnified Party shall have the right to settle, compromise or discharge such Third-Party Claim without the consent of the Indemnifying Party if the Indemnifying Party and its directors and officers, employees and agents and Affiliates are completely and irrevocably released from all Liability with respect to, or arising from, the matters that relate to the Third-Party Claim.

(d) Any Liability that does not result from a Third-Party Claim shall be asserted by written notice given by the Indemnified Party to the Indemnifying Party. Such Indemnifying Party shall have 30 days after the receipt of such notice to respond thereto. If such Indemnifying Party does not respond within such 30-day period, such Indemnifying Party shall be deemed to have refused to accept responsibility to make payment. If such Indemnifying Party does not respond within such 30-day period or rejects such claim in whole or in part, such Indemnified Party shall be free to pursue such remedies as may next be available to such party as contemplated by this Agreement and the other Transaction Agreements.

 

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Section 6.5 Tax Effects, Insurance Proceeds, and Other Amounts .

(a) In no event shall an Indemnifying Party be liable for special, punitive, exemplary, incidental, consequential or indirect damages, or lost profits of an Indemnified Party, whether based on contract, tort, strict liability, other Law or otherwise, provided such exclusion of damages shall not apply to claims for such damages made as part of a Third-Party Claim.

(b) The amount of any loss shall be:

 

  (1) increased (retroactively or prospectively) to take into account any cash net Tax cost actually incurred by an Indemnified Party arising from any payments received from the Indemnifying Party (grossed up for such increase); and

 

  (2) reduced (retroactively or prospectively) to take into account any cash net Tax benefit actually recognized by an Indemnified Party arising from the incurrence or payment of any such loss. In computing the amount of such Tax cost or Tax benefit, an Indemnified Party shall be deemed to recognize all other items of income, gain, loss, deduction or credit before recognizing any item arising from the receipt or accrual of any payment with respect to any such loss or the incurrence or payment of any such loss. If an Indemnified Party shall have received or accrued the payment required by this Agreement from an Indemnifying Party and shall subsequently actually recognize any cash net Tax benefit arising from the incurrence or payment of such loss, then such Indemnified Party promptly shall pay to such Indemnifying Party a sum equal to the amount of such net Tax benefit, up to the aggregate amount of any payments received from such Indemnifying Party pursuant to this Agreement in respect of such loss.

(c) An Indemnified Party shall take all reasonable steps to mitigate a Liability upon becoming aware of any event, which could reasonably be expected to give rise to indemnity by an Indemnifying Party hereunder. Indemnification for liabilities hereunder shall be determined after taking into account and reducing the Indemnifying Party’s obligations under this Section 6.5 any indemnity, contribution or other payments received by the Indemnified Party from any third person with respect thereto.

(d) Without limiting the generality of Section 6.5(c), to the extent that any Liability that is subject to indemnification under this Agreement is covered by insurance paid by the Indemnified Party, the amount of any indemnity payment shall be reduced by the Net Insurance Proceeds of any insurance policy paid to the Indemnified Party with respect to such

 

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liability. For purposes of this Section 6.5 , “ Net Insurance Proceeds ” means the insurance proceeds actually received, less the present value of any actual, additional, or increased premium, deductibles, co-payments, other payment obligations (including attorneys’ fees and other costs of collection) which is reasonably expected to arise as a result of the claim over the next three years, is quantifiable with reasonable certainty over the next three years, and is mutually agreed at the time any indemnity payment is made, that arises over the three years. If any Indemnified Party recovers an amount from a third Person in respect of any liability for which indemnification is provided in this Agreement after (i) the full amount of such indemnifiable Liability has been paid by an Indemnifying Party or (ii) after an Indemnifying Party has made a payment towards such indemnifiable Liability and the amount received from the third Person exceeds the remaining unpaid balance of such indemnifiable Liability, then the Indemnified Party will promptly pay to the Indemnifying Party the amount of the recovery up to the full amount of the indemnifiable Liability paid by the Indemnifying Party and shall release the Indemnifying Party from any further obligation on the indemnifiable Liability equal to the different between total recovery from a third Person, less all amounts paid by the Indemnifying Party and repaid hereunder.

Section 6.6 No Release of Insurer Obligations . An insurer or other third Person who would otherwise be obligated to defend or make payment for any liability or claim shall not be relieved of or released, in whole or in part, from such responsibility solely by virtue of this Agreement, including the indemnification and contribution provisions of this Agreement or have any subrogation rights with respect thereto, it being expressly understood and agreed that no insurer or any other third Person shall be entitled to a benefit it would not be entitled to receive in the absence of the indemnification provisions hereof.

Section 6.7 Subrogation . In the event of payment by or on behalf of any Indemnifying Party to any Indemnified Party in connection with any Third-Party Claim, such Indemnifying Party shall be subrogated to and shall stand in the place of such Indemnified Party as to any events or circumstances in respect of which such Indemnified Party may have any right, defense or claim relating to such Third-Party Claim. Such Indemnified Party shall cooperate with such Indemnifying Party in a reasonable manner, and at the cost and expense of such Indemnifying Party, in enforcing and pursuing any subrogated right, defense or claim.

Section 6.8 Joint Defense and Cooperation . With respect to any Third-Party Claim in which both parties are, or reasonably may be expected to be, named as parties, or that otherwise implicates both parties in a material fashion, the parties shall reasonably cooperate with respect to such Third-Party Claim and if the parties agree, maintain a joint defense in a manner that will preserve applicable Privileges.

Section 6.9 Survival of Rights and Obligations . The rights and obligations of each Indemnified Party under this Article VI shall survive the Separation as well as the Distribution, any sale or other transfer by any party of any assets or businesses or the delegation, assignment, assumption or novation by it of any liabilities, as well as the sale or disposition of any Retained Shares.

 

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ARTICLE VII

CONDITIONS TO THE SEPARATION AND DISTRIBUTION

Section 7.1 Conditions to the Separation and Distribution . In no event shall the Separation and Distribution occur unless the following conditions shall have been satisfied or waived (to the extent permitted by applicable Law) by the Company:

 

  (1) each of the material Transaction Agreements shall be in full force and effect and the parties thereto shall have performed or complied with all of their respective covenants, obligations and agreements contained herein and therein and as required to be performed or complied with, on or prior to the Distribution Date;

 

  (2) all third party consents and waivers, as to material Contracts or required for the Separation and Distribution shall have been obtained and shall be in full force and effect;

 

  (3) the Spin-off Registration Statement shall have been declared effective by the SEC, and no stop-order shall be in effect with respect thereto;

 

  (4) MSF and the Company shall have received a tax opinion from Jones Day that the Separation and Distribution should be treated as a distribution of Company Shares that is non-taxable to MSF shareholders under Section 355(a) of the Code for U.S. federal income tax purposes; and

 

  (5) all Government Approvals required of United States federal and state authorities shall have been received, and shall be in full force and effect.

ARTICLE VIII

FURTHER ASSURANCES AND ADDITIONAL COVENANTS

Section 8.1 Further Assurances .

(a) In addition to the terms and actions specifically provided for in this Agreement and the other Transaction Agreements, each of the parties shall use its reasonable efforts, prior to, on and after the Distribution Date, to take, or cause to be taken, all actions, and to do, or cause to be done, all things, reasonably necessary, proper or advisable under applicable Laws and Contracts to consummate and make effective the transactions contemplated herein and in the Transaction Agreements.

 

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(b) Without limiting the generality of Section 8.1(a) , prior to, on and after the Distribution Date, without any further consideration, the parties shall, and shall cause their respective Groups and their Representatives to all commercially reasonable efforts to:

 

  (1) cooperate with each other to obtain all Consents necessary, appropriate or expedient to effect this Agreement and the other Transaction Agreements and the transactions contemplated herein and therein;

 

  (2) continue to identify transition, regulatory and other issues, and enter into such transition and other agreements and arrangements, including such consulting or other agreements, arrangements, commitments and alternatives as may be desirable to permit each party to carry on its businesses and maintain its human capital and other resources, while limiting disruptions to their respective customers and counterparties, and preserving their respective businesses;

 

  (3) make all filings and seek at the earliest practical time all necessary Governmental Approvals from the Federal Reserve and the OCC and other Governmental Authorities to the transactions needed to expedite the Separation and Distribution and the transactions contemplated herein and in the Transaction Agreements, and enter into any such commitments or conditions necessary thereto;

 

  (4) take all reasonable actions to further the transactions contemplated herein and in the Transaction Agreements, and to address efficiently any other issues as these may arise; and

 

  (5) provide such reasonable assurances, officer’s certificates, confirmations and other documentation required for the foregoing and otherwise required by accountants, lawyers, Governmental Authorities and other third Persons in connection with this Agreement and the transactions contemplated herein and in the other Transaction Agreements.

Section 8.2 Use of Names; Transition Trademark License .

(a) At all times from and after the Distribution Date, the MSF Group and the Company Group shall reflect accurately the historical relationship between the MSF Group and the Company Group, including in filings, reports and other documents required by applicable Law, Governmental Authorities and applicable securities exchanges.

(b) After the Distribution Date, no member of the Company Group shall use the MSF Names or MSF Marks (each as defined below), except as permitted by this Section 8.2 or otherwise agreed in writing, and except in filings, reports and other documents required by applicable Law, Governmental Authorities, or applicable securities exchanges to be filed or made publicly available.

 

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(c) MSF hereby grants to the Company a worldwide, non-exclusive, non-transferable, non-assignable (other than to other members of the Company Group), royalty-free, fully paid-up license, with no right to sublicense (other than to other members of the Company Group), for a period of up to two years after the Distribution Date, to use the MSF Name and MSF Marks only in connection with the Company Group’s business and only in the form in which such MSF Marks were used by the Company Entities prior to the Distribution Date. Following the first anniversary through the second anniversary of the Distribution Date, the Company, for itself and its subsidiaries, shall pay MSF fees for such license equal to $400,000 or the fair market value determined by an independent third party. All such use shall be in strict accordance with the policies of MSF and the Company’s related party policies in effect as of the date of this Agreement and on terms and conditions, including pricing, which are Reg. W Compliant. To the extent the Company assigns or sublicenses the license to another member of the Company Group, the Company shall cause such member to comply with the restrictions of such license as set forth in this Section 8.2 , and the terms of any such assignment or sublicense shall be Reg. W Compliant.

(d) The Company, on behalf of itself and the other members of the Company Group, acknowledges that none of them shall (1) have any right, title or interest in any MSF Name and MSF Marks (except for the license granted by Section 8.2(c) ) or otherwise in writing, or (2) contest the ownership or validity of any right, title or interest of MSF or any member of the MSF Group in or to any MSF Name or MSF Mark.

(e) For purposes of this Section 8.2 , “ MSF Name ” means “Mercantil” and “MSF Marks” means the names “Mercantil,” “Mercantil Bank” and the Mercantil logo used in signage, stationary and forms on the date hereof.

(f) MSF hereby grants to the Company and its Subsidiaries a worldwide, exclusive, non-transferable, non-assignable (other than to other members of the Company Group), a royalty-free, fully paid-up license, with no right to sublicense (other than to other members of the Company Group), for a period of up to two years after the Distribution Date, to use the internet domain name “mercantilbank.com”. MSF represents and warrants that it owns, or has the license to use and ability to sublicense, the domain name “mercantilbank.com”. MSF shall use commercially reasonable efforts to file, prosecute and maintain all related registrations and registration applications for such domain name during the term of the license. The license to use such domain name pursuant to this Section 8.2(d) shall terminate automatically upon termination of the license to use the MSF Name and MSF Marks pursuant to Section 8.2(c) . Notwithstanding any such termination, MSF shall, for up to 36 months after such termination, cause the domain name “mercantilbank.com” to redirect to the domain name designated by the Company and redirect any email sent to the “mercantilbank.com” domain to the email domain designated by the Company. MSF and the Company agree that all content on “www.mercantilbank.com” is owned and shall remain owned after the Distribution, solely by the Company and its subsidiaries.

Section 8.3 Licenses . Each party shall cause the appropriate members of its Group to prepare, file and obtain all Governmental Approvals from applicable Government Authorities necessary or expedient to effect the Separation and Distribution and the other transactions contemplated hereby, as may be necessary or advisable in connection with the transactions contemplated by this Agreement and the other Transaction Agreements. The Company Group and the MSF Group shall cooperate and use all commercially reasonable efforts in such matters.

 

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Section 8.4 Allocation of Costs and Expenses . Except as otherwise provided in Section 8.5 (Registration Rights) and Section 9.5 (Dispute Resolution), the Transaction Documents, any other agreement between the parties relating to the Separation or the Distribution, or as otherwise agreed between the parties, each party shall pay its own costs and expenses, including legal fees and expenses, incurred in connection with the preparation of this Agreement, the Transaction Documents and the Separation and Distribution. As between the Company and MSF, and without affecting the terms of the Distribution Trust Agreement, the Company and MSF shall equally share the fees and expenses of the Trustee, including legal fees and expenses, provided that any contribution or indemnity payable to the Trustee pursuant to the Distribution Trust Agreement shall be determined by the relative knowledge and fault of the Company and MSF, the ability of the Company or MSF to prevent the act or omission giving rise to the Trustee’s claim, and the relative benefits received by the Company and MSF, respectively

Section 8.5 Disposition of Company Shares; Registration Rights .

(a) MSF will use all commercially reasonable efforts to sell or dispose of the Retained Shares as provided in the Distribution Trust Agreement, including Section 5 of the Distribution Trust Agreement. From the Delivery Date until the 90 th day following the Effective Time, or such earlier date as the Company may authorize by an Officer’s Certificate delivered to the Trustee, MSF may transfer Retained Shares, only to the Company, provided such transfers are made pursuant to available exemptions from registration under the Securities Act, and provided further that any such transferees are restricted from any transfers of such Retained Shares until, upon and after the 90 th day after the Effective Time (the “ 90 th Day ”) and then only pursuant to (i) an effective registration statement under the Securities Act as to which no stop orders are in effect or (ii) available exemptions from registration under the Securities Act.

(b) Upon and following the 90 th Day, MSF or the MSF Representatives may direct the transfer by written notice to the Trustee and the Company to any underwriter or placement or other agent for disposition of Retained Shares pursuant to (i) an effective registration statement under the Securities Act as to which no stop order is in effect or (ii) available exemptions from registration under the Securities Act, in each case subject to the Transfer Restrictions.

(c) In addition to the securities law restrictions in preceding paragraphs (a) and (b) of this Section, MSF may transfer Retained Shares held by the Trust (i) in transactions to its affiliates, pursuant to exemptions from registration under the Securities Act prior to the Distribution Date and subject to Federal Reserve Regulation K (“ Reg. K ”) and Reg. Y non-objection or approvals, or waivers thereof from the Federal Reserve, (ii) pursuant to one or more Company registration statements that have been declared effective by the SEC, (iii) in transactions where no transferee or associated group of transferees would receive more than 2% of the outstanding Company voting securities of any class, (iv) in transactions where the transferee controls more than 50% of the Company’s outstanding voting securities without transfer from or at the direction of MSF, (v) as to contribution of all remaining Retained Shares to the Company effective immediately, prior to a Change in Control of MSF or in other transactions where the Federal Reserve has no objections. MSF or the MSF Representatives shall notify the Trustee and the Company in writing of any intended transfer, except a contribution contemplated by Section 8.5(c)(v) and Section 8.5(d), whereupon notice shall be given promptly following such contribution of Retained Shares held by the Distribution Trust herein and confirm in such writing MSF’s compliance with this Section 8.5 and the Distribution Trust, not less than 15 Business Days prior to any such transfer. The Company shall notify the Federal Reserve of any such disposition.

 

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(d) In order to preserve and protect the value of the Distributed Shares and Retained Shares, all of MSF’s rights, title and interest, including beneficial interest in the Retained Shares held at any time in the Trust or otherwise, and whether before or after the Distribution, shall ipso facto and automatically be contributed by MSF to the Company and held by the Trustee for the sole benefit of the Company, effective immediately prior to any Change in Control of MSF. The foregoing shall be effective regardless of the form or duration of such actions, events or Laws, and whether or not specific to MSF and/or to other financial institutions, and shall include events, actions and Laws that are more general in nature or effect. The MSF Representatives then able to act, which may be one or more persons, and the Company’s Board of Directors may determine, by mutual written agreement, within 60 days after an apparent Change in Control, that no Change in Control had occurred and, that as a result of such mistake, the Change in Control and contribution of Retained Shares to the Company, shall be deemed rescinded ab initio and be of no force or effect. Upon such determination and agreement, with the non-objection of the Federal Reserve, and delivery of appropriate Officer’s Certificates of MSF and the Company to the Trustee, provided the Retained Shares would be Registrable Shares and are returned to and held by the Distribution Trust on behalf of MSF in accordance with the Distribution Trust Agreement.

(e) Retained Shares, if any, held by the Trust on the Trust Termination Date, shall be delivered to MSF and the respective MSF Subsidiaries, if any, that are Record Holders, or with the Company’s written consent, to any designee of MSF, in accordance with the Separation Agreement and pursuant to written direction delivered to the Trustee and the Company at any time before or after the Delivery Date, subject to Federal Reserve non-objection confirmed by an Officer’s Certificate from MSF. Absent express Federal Reserve non-objection confirmed by Officer’s Certificates from the Company and the MSF Representatives to the Trustee, in no event shall more than an aggregate of (i) 4.9% of the then outstanding shares of Company Class A Stock and (ii) 4.9% of the then outstanding shares of Company Class B Stock otherwise be returned to MSF and MSF Subsidiaries, and MSF or the MSF Representatives and the Company shall determine the disposition of any Company Shares in excess of such amounts. As between the Trustee and the Company, the Company shall be solely responsible for all such matters, and shall confirm such matters to the Trustee by an Officer’s Certificate.

(f) No interests in the Trust or the Company Shares held in the Trust may be transferred or disposed of, except as provided herein and in the Trust Agreement and the Registration Rights Agreement. The Retained Shares are restricted securities under the Securities Act and have not been registered for resale, transfer or disposition. Any Distributed Shares held by Affiliates of the Company, including Company directors and executive officers, and for so long as MSF may be an Affiliate of the Company following the Separation and Distribution, Company Shares held by MSF and its directors, executive officers and controlling person (collectively, “ Affiliate Shares ”) also are restricted securities under the Securities Act and have not been registered for resale, transfer or other disposition. Affiliate Shares, including any Retained Shares, cannot be transferred sold or disposed of by any such Persons absent an effective registration of such shares under the Securities Act as to which no stop order is in effect or pursuant to available exemptions from registration under the Securities Act. Section 5 of the Trust Agreement contains other restrictions on transfer of the Retained Shares, all of which are incorporated herein by this reference.

(g) The Company shall maintain, and cause its transfer agent and registrar to, maintain transfer restrictions, including restrictive legends on all Affiliate Shares and Retained Shares in the form attached as Exhibit 1 hereto.

(h) The Company and MSF shall enter into a registration rights agreement (the “ Registration Rights Agreement ”) providing for the registration with the SEC of the offering and sale of the Retained Shares. Registrable Shares (“ Registrable Shares ”) mean all Retained Shares, as provided in the Registration Rights Agreement, except that Retained Shares will cease to be Registrable Shares, as provided in the Registration Rights Agreement, including upon the earliest to occur of the following: (i) the sale of such shares pursuant to a registration statement, SEC Rule 144 or other exemptions from registration; or (ii) such shares become eligible for resale by its holder under SEC Rule 144 without volume limitations). The Registration Rights Agreement shall provide for the following:

 

  (1) “piggyback” registration rights, pursuant to which, in lieu of its obligations under Section 8.5(g)(2) , if the Company notifies MSF of its determination to prepare and file with the SEC a registration statement under the 1933 Act relating to an offering for its own account under the Company Shares within 120 days of the Distribution Date or thereafter, other than on SEC registration statement Forms S-4 or S-8 or their then-equivalent forms, MSF will have certain rights to have included in such piggyback registration statement (each a “ Piggyback Registration Statement ”) such part of such Registrable Shares as are permitted by the Registration Rights Agreement and the underwriters of the offering;

 

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  (2) resale registration rights, pursuant to which the Company shall use its commercially reasonable efforts to file, a registration statement on Form S-3, Form S-1, or other applicable form with the SEC, a “ Resale Registration Statement ”) to register the resale, from time to time, by MSF of all Registrable Shares not registered under a Piggyback Registration Statement or otherwise sold or disposed of by MSF;

 

  (3) customary provisions relating to each party’s respective responsibility under anti-fraud provisions of the securities Laws for information furnished by a party for use in a Resale Registration Statement or Piggyback Registration Statement, and customary indemnification and contribution provisions, and other customary underwriting agreement provisions, including lock-up provisions applicable to the Company and certain of its shareholders;

 

  (4) provisions allocating to the Company and MSF, expenses incurred under the Registration Rights Agreement; and

 

  (5) provisions prohibiting MSF from offering, selling, or otherwise disposing of Registrable Shares other than in compliance with applicable Law (including Laws regulating insider trading), this Agreement, the Distribution Trust Agreement and the Registration Rights Agreement, and the Company’s policy on insider trading of Company Shares.

(i) MSF and the Company shall cooperate, and shall cause their affiliates to cooperate, in the preparation and amendment of any registration statements contemplated by this Section 8.5 , and with any underwriters or agents in the sale or disposition of Retained Shares, including executing such documents, instruments, filings and agreements, including lock-up agreements, as may be necessary or appropriate to the offer and sale of Company Shares, including Retained Shares.

(j) In the event of a conflict or inconsistency between this Section 8.5 and the Registration Rights Agreement, the Registration Rights Agreement shall be determinative and control.

 

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Section 8.6 Confidentiality .

(a) For purposes of this  Section 8.6 , any information, material, or documents relating to the business of the Company currently or formerly conducted, or proposed to be conducted, by any member of the Company Group furnished to or in possession of any member of the MSF Group, irrespective of the form of communication, and all notes, analyses, compilations, forecasts, data, translations, studies, memoranda, or other documents prepared by any member of the MSF Group or their respective officers, directors and Affiliates, that contain or otherwise reflect such information, material or documents is hereinafter referred to as “ Company Confidential Information .” Notwithstanding the foregoing, “Company Confidential Information” does not include, and there shall be no obligation hereunder with respect to, information that (1) is or becomes generally available to the public, other than as a result of a use or disclosure by any member of the MSF Group or its Representatives not otherwise permissible hereunder, (2) MSF can demonstrate was or became available to such member of the MSF Group from a source other than the Company Group or its Representatives, or (3) is developed independently by such member of the MSF Group without reference to Company Confidential Information; provided , however , that, in the case of clause (2), the source of such information was not known by such member of the MSF Group to be bound by a confidentiality agreement with, or other contractual, legal or fiduciary obligation of confidentiality to, the Company or any member of the Company Group with respect to such information.

(b) For purposes of this  Section 8.6 , any information, material, or documents relating to the business of MSF currently or formerly conducted (other than the business of the Company Group), or proposed to be conducted, by any member of the MSF Group furnished to or in possession of any member of the Company Group, irrespective of the form of communication, and all notes, analyses, compilations, forecasts, data, translations, studies, memoranda, or other documents prepared by any member of the Company Group or their respective officers, directors and Affiliates, that contain or otherwise reflect such information, material or documents is hereinafter referred to as “ MSF Confidential Information. ” Notwithstanding the foregoing, “MSF Confidential Information” does not include, and there shall be no obligation hereunder with respect to, information that (1) is or becomes generally available to the public, other than as a result of a use or disclosure by any member of the Company Group or its Representatives not otherwise permissible hereunder, (2) the Company can demonstrate was or became available to such member of the Company Group from a source other than the MSF Group, or (3) is developed independently by such member of the Company Group without reference to the MSF Confidential Information;  provided ,  however , that, in the case of clause (2), the source of such information was not known by such member of the Company Group to be bound by a confidentiality agreement with, or other contractual, legal or fiduciary obligation of confidentiality to, MSF or any member of the MSF Group with respect to such information.

(c) From and after the Separation, and except as provided by this Agreement or any Transaction, including Section 8.6(e) of this Agreement, MSF shall not, and shall cause the other members of the MSF Group and their respective officers, directors, employees, and other agents and Representatives, not to, directly or indirectly, disclose, reveal, divulge or communicate to any Person other than Representatives of such Person who reasonably need to know such information in providing services to any member of the MSF Group or use or

 

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otherwise exploit for its own benefit or for the benefit of any third party, any Company Confidential Information (as defined below). If any uses or disclosures are made in connection with providing services to any member of the MSF Group under this Agreement or any Transaction Document, then the Company Confidential Information so used or disclosed shall be used only as required to perform the services. The MSF Group shall use the same degree of care to prevent and restrain the unauthorized use or disclosure of the Company Confidential Information as they currently use for their own confidential information of a like nature, but in no event less than a reasonable standard of care.

(d) From and after the Separation, subject to  Section 8.7(c)  and except as contemplated by this Agreement or any Transaction Agreement, the Company shall not, and shall cause the other members of the Company Group and their respective officers, directors, employees, and other agents and Representatives, not to, directly or indirectly, disclose, reveal, divulge or communicate to any Person other than Representatives of such Person who reasonably need to know such information in providing services to the Company or any member of the Company Group or use or otherwise exploit for its own benefit or for the benefit of any third party, any MSF Confidential Information (as defined below). If any uses or disclosures are made in connection with providing services to any member of the MSF Group under this Agreement or any Transaction Document, then the MSF Confidential Information so used or disclosed shall be used only as required to perform the services. The Company Group shall use the same degree of care to prevent and restrain the unauthorized use or disclosure of the MSF Confidential Information as they currently use for their own confidential information of a like nature, but in no event less than a reasonable standard of care.

(e) If a member of the MSF Group, on the one hand, or a member of the Company Group, on the other hand, or their respective Representatives are requested or required (by oral question, interrogatories, requests for information or documents, subpoena, civil investigative demand or similar process) by any Governmental Authority or pursuant to applicable Law to disclose or provide any Company Confidential Information or MSF Confidential Information, as applicable, the Person receiving such request or demand shall provide the other party with written notice of such request or demand as promptly as practicable under the circumstances and seek an appropriate protective or confidentiality order or similar protection from public disclosure. The party receiving such request or demand agrees to take, and cause its Representatives to take, at the requesting party’s expense, all other reasonable steps necessary to obtain confidential treatment by the recipient. Subject to the foregoing, the party that received such request or demand may thereafter disclose or provide any Company Confidential Information or MSF Confidential Information, as the case may be, to the extent required by such Law (as so advised by counsel) or by lawful process or such Governmental Authority, provided it uses commercially reasonable efforts to obtain a protective order or confidential treatment of the Confidential Information.

Section 8.7 Non-Competition and Non-Solicitation .

(a) Except as expressly provided by this Agreement or the Transaction Agreements, during the five-year period immediately following the Distribution Date, the MSF Group shall not, directly or indirectly through another Person, own, manage, operate, control, participate in, or otherwise carry on, domestic, international, personal and commercial banking services, including investment, trust, fiduciary, and estate planning (the “ Covered Business ”) in the United States and its territories, except:

 

  (1) the ownership by any member of the MSF Group of less than 5% of the outstanding shares of voting securities (as defined in Reg. Y, assuming the conversion, exercise or exchange of any securities or instruments that provide conversion, exchange or other rights to acquire voting securities) of any entity engaged in the Covered Business listed on a national securities exchange or publicly traded in the over-the-counter market;

 

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  (2) if any third Person not a member of the MSF Group as of the Distribution Date, which owns or conducts a Covered Business in the United States prior to any ownership in MSF or any MSF Group member acquires, directly or indirectly, prior to the fifth anniversary of the Distribution Date, beneficial ownership of 50% or more of the voting securities of MSF (including by way of merger or any other business combination) or all or substantially all assets of MSF, then, nothing in this Agreement shall be a limitation on any activities of such acquiring party or its Affiliates, other than MSF Entities, upon and following such acquisition;

 

  (3) any Subsidiary or business sold or otherwise disposed of by any member of the MSF Group prior to an event described in Section 8.7(a)(2) shall no longer be subject to the provisions of this Agreement (and neither MSF nor any other Person shall be subject to the provisions of this Agreement with respect to such former Subsidiary or business); provided , that such Subsidiary or business (and MSF with respect thereto) shall not be so released if any member of the MSF Group in MSF or any MSF Group member retains an interest of 20% or more in such Subsidiary or business;

 

  (4) MSF may establish and maintain one or more wholly-owned subsidiaries in the United States solely to provide services to members of the MSF Group outside the United States (the “ MSF Services Company ”); and

 

  (5) purchase or sell marketable securities of U.S. issuers subject to the limitations of Section 8.7(a)(1) , or participation as a purchase of non-controlling interests in syndicated loans originated in the United States.

(b) Except as expressly contemplated by this Agreement or the Transaction Agreements, during the five-year period immediately following the Separation, the MSF Group shall not, on its own behalf or on behalf of any other Person, directly or indirectly, solicit or attempt to solicit for hire any person who is then an employee of the Company Group; provided , however , that the prohibition against solicitation shall not apply to (i) solicitations made to the

 

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general public (e.g., newspaper or similar advertisements) not specifically addressed to any such employee or solicitations by recruiting firms retained by the MSF Group not specifically directed at the employees of the Company Group, to (ii) resignations of Company Group employees who accept employment with the MSF Services Company or (iii) as the Company or MSF may otherwise agree.

(c) Except as expressly contemplated by this Agreement or the Transaction Agreements, during the five-year period immediately following the Separation, the MSF Entities shall not, directly or through another Person, solicit or attempt to solicit any Person or entity who was a customer of the Company Entities for any Covered Business in the United States or its territories.

(d) This Section 8.7 is not intended to, and shall not restrict the MSF Entities or the Company Entities from referring customers to each other, or from serving customers who do business or who may do business with both MSF Entities and Company Entities.

Section 8.8 Insurance Policies . MSF and the Company shall, and shall cause each member of the MSF Group and the Company Group, respectively, to timely notify their respective insurers and bonding companies of this Agreement and the transactions contemplated hereby. The MSF Group and the Company Group shall cooperate in obtaining “tail” and other insurance and bond coverages that are deemed appropriate and cost efficient. The MSF Group and the Company Group shall cooperate to obtain, at mutually beneficial prices, separate insurance coverages upon and following the Separation.

Section 8.9 Cayman Bank . MSF and its subsidiaries will sell, and the Company and its subsidiaries will purchase, 100% of the stock of Mercantil Bank and Trust Limited (Cayman) (the “ Cayman Bank ”) in a format, and upon terms, conditions and price that are mutually acceptable to MSF and the Company (the “ Cayman Bank Sale ”), subject to the receipt of all necessary Governmental Approvals and Consents. MSF and the Company will, and will cause their applicable subsidiaries to, preserve the Cayman Bank’s business and preserve the customer relationships with the Cayman Bank, and will include confidentiality, nonsolicitation and noncompetition provisions similar to the nonsolicitation and noncompetition provisions in this Agreement. The existing administration and service agreement agreements will continue until the Cayman Bank Sale is completed. Such agreements are and shall be on arms-length terms consistent with Federal Reserve, Regulation W.

Section 8.10 Compliance as an Affiliate . MSF acknowledges that it is an “affiliate” of the Company, and for so long as it is a Company affiliate or has any confidential non-public information regarding the Company or the Bank, will comply and cause its affiliates to comply, with the Company’s securities trading policies and applicable securities laws, including with respect to the sale or disposition of Retained Shares.

 

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Section 8.11 Cooperation, Generally; etc. MSF and the Company shall cooperate to effect the Separation and Distribution and the related Transactions as promptly as possible. Following the Separation and Distribution, the parties will, and will cause their respective Affiliates to, cooperate with respect to the Separation and Distribution, and the ongoing relationships among the MSF Group and the Company Group. Among other things, such cooperation shall include:

(a) Communication and cooperation to comply with banking laws and policies, including operation consistent with Reg. Y, Reg. W and any commitments and conditions imposed by the Federal Reserve or OCC in connection with the Separation and Distribution and any requirements imposed as a result of such Governmental Authorities’ parallel banking policies;

(b) Cooperate in making all bank regulatory and SEC filings, applications, reports, notices, registration statements and providing other information required of the Company or MSF;

(c) The Company, with MSF’s cooperation, shall use all commercially reasonable efforts to file and have a registration statement, which may be a Piggyback Registration Statement, effective as provided in the Registration Rights Agreement, and cooperate in connection with any take down offerings and sales pursuant to Resale Registration Statement or a Piggyback Registration Statement or as otherwise permitted herein and Section 5 of the Trust Agreement;

(d) Executing and performing their respective obligations under the Distribution Trust Agreement and the Registration Rights Agreement, including MSF cooperation with any underwriters, purchasers or placement agents for Company Shares; and

(e) MSF shall use all commercially reasonable efforts to sell or dispose of all Retained Shares as promptly as possible, beginning 90 days after the Distribution Date and not later than the Trust Termination Date, subject to any Federal Reserve requirements.

ARTICLE IX

DISPUTE RESOLUTION

Section 9.1 General Provisions .

(a) Any dispute, controversy or claim arising out of or relating to this Agreement or the Transaction Documents or to the extent explicitly set forth in another Transaction Document, or the validity, interpretation, breach or termination thereof (a “ Dispute ”), shall be resolved in accordance with the procedures set forth in this Article IX , which shall be the sole and exclusive procedures for the resolution of any such Dispute unless otherwise specified below.

(b) Commencing with a request contemplated by Section 9.2 , all communications between the parties or their representatives in connection with the attempted resolution of any Dispute, including any mediator’s evaluation referred to in Section 9.3 , shall be deemed to have been delivered in furtherance of a Dispute settlement and shall be exempt from discovery and production, and shall not be admissible in evidence for any reason (whether as an admission or otherwise), in any arbitral, judicial or other proceeding for the resolution of the Dispute.

(c) Except as provided in Section 9.1(f) in connection with any Dispute, the parties expressly waive and forego any right to special, indirect, incidental, punitive, consequential, exemplary, statutorily-enhanced or similar damages in excess of compensatory damages, provided that any Liabilities for any such damages with respect to a Third-Party Claim shall be considered direct damages.

 

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(d) The specific procedures set forth below, including the time limits referenced therein, may be modified by written agreement of the parties.

(e) All applicable statutes of limitations and defenses based upon the passage of time shall be tolled while the procedures specified in this Article IX are pending. The parties will take such actions, if any, required to effectuate such tolling, including executing a tolling agreement.

(f) Notwithstanding anything to the contrary contained in this Article IX , any Dispute relating to a member of the MSF Group’s rights as a shareholder of the Company pursuant to applicable Law, the Company’s articles of incorporation, or its bylaws will not be governed by or subject to the procedures set forth in this Article IX .

Section 9.2 Consideration by Senior Executives . If a Dispute is not resolved in the normal course of business at the operational level, the parties shall attempt in good faith to resolve such Dispute by negotiation between the chief executive officers of the respective business entities involved in such Dispute or their respective senior-level designees. Either party may initiate the executive negotiation process by providing a written notice to the other (the “ Dispute Notice ”). Fifteen days after delivery of the Dispute Notice, the receiving Party shall submit to the other a written response (the “ Dispute Response ”). The Dispute Notice and the Dispute Response shall include (1) a statement of the Dispute and of each party’s position, and (2) the name and title of the executive who will represent that party and of any other Person who will accompany the executive. Such executives will meet in person or by telephone within ten Business Days of the date of the Dispute Notice to seek a resolution of the Dispute. If the Dispute is not resolved in 30 days from the Dispute Response, the Dispute shall be referred to the chief executive officers of MSF and the Company within 20 days.

Section 9.3 Mediation . If a Dispute is not resolved as provided in Section 9.2 within 20 days from the referral to the MSF and Company chief executive officers, then either party may submit the Dispute for resolution by mediation pursuant to the CPR International Institute for Dispute Resolution (the “ CPR ”) Model Mediation Procedure as then in effect. The parties will select a mediator from the CPR Panels of Distinguished Neutrals. If the parties are unable to select a mutually agreeable mediator within 20 days following the submission of the Dispute to the CPR, the CPR shall select the mediator from the CPR Panels of Distinguished Neutrals. Either party at commencement of the mediation may ask the mediator to provide an evaluation of the Dispute and the parties’ relative positions.

Section 9.4 Arbitration .

(a) If a Dispute is not resolved by mediation as provided in Section 9.3 within 30 days of the selection of a mediator (unless the mediator chooses to withdraw sooner), either party may submit the Dispute to be finally resolved by arbitration pursuant to the CPR Rules for Non-Administered Arbitration as then in effect (the “ CPR Arbitration Rules ”). The parties consent to a single, consolidated arbitration for all known Disputes existing at the time of the arbitration and for which arbitration is permitted.

 

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(b) The neutral organization for purposes of the CPR Arbitration Rules will be the CPR. The arbitral tribunal will be composed of three arbitrators, of whom each party shall appoint one in accordance with the “screened” appointment procedure provided in Rule 5.4 of the CPR Arbitration Rules. The arbitration will be conducted in Miami, Florida, U.S.A. Each party will be permitted to present its case, witnesses and evidence, if any, in the presence of the other party. A written transcript of the proceedings will be made and furnished to the parties. The arbitrators will determine the Dispute in accordance with the Laws of the State of Florida, without giving effect to any conflict of Law rules or other rules that might render such Law inapplicable or unavailable, and will apply this Agreement and the Transaction Documents according to their respective terms; provided , however , that any Dispute in respect of a Transaction Document which by its terms is governed by the law of a jurisdiction other than the State of Florida will be determined by the Law of such other jurisdiction and provided , further , however , that the provisions of this Agreement relating to arbitration will in any event be governed by the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq.

(c) The parties agree to be bound by any award or order resulting from any arbitration conducted in accordance with this Section 9.4 and further agree that judgment on any award or order resulting from an arbitration conducted under this Section 9.4 may be entered and enforced in any court having jurisdiction thereof.

(d) Except as expressly permitted by this Agreement, neither party shall commence or voluntarily participate in any court action or proceeding concerning a Dispute, except (1) for enforcement as contemplated by Section 9.4(c) , (2) to restrict or vacate an arbitral decision based on the grounds specified under applicable Law, or (3) for interim relief as provided in Section 9.4(e) . For purposes of the foregoing, the parties submit to the exclusive jurisdiction of the federal and State of Florida courts in the federal Southern District of the State of Florida.

(e) In addition to the authority otherwise conferred on the arbitral tribunal, the tribunal will have the authority to make such orders for interim relief, including injunctive relief, as it may deem just and equitable. Notwithstanding Section 9.4(d) , each party acknowledges that in the event of any actual or threatened breach of the provisions of Section 8.2 (Use of Names), Section 8.3 (Licenses), Section 8.6 (Registration Rights), Section 8.7 (Confidentiality), and Section 8.8 (Non-Competition and Non-Solicitation), where the remedy at Law would not be adequate, and therefore injunctive temporary restraining orders or other interim relief may be sought immediately to restrain such breach or threatened breach. If the arbitral tribunal shall not have been appointed, either party may seek interim relief from a federal or State of Florida court in the federal Southern District of Florida. Upon appointment of the arbitral tribunal following any grant of interim relief by a court, the tribunal may affirm or disaffirm such relief, and the parties will seek modification or rescission of the court action as necessary to accord with the tribunal’s decision.

 

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Section 9.5 Fees and Costs of Dispute Resolution . Each party will bear its own costs, including attorneys’ fees, incurred in connection with the resolution of any Dispute in accordance with this Article IX .

ARTICLE X

TERMINATION

Section 10.1 Termination . This Agreement may be terminated only by the mutual written agreement of MSF and the Company.

Section 10.2 Effect of Termination . In the event of any termination of this Agreement prior to the Distribution Date pursuant to Section 10.1 , no party to this Agreement (or any of its Representatives) shall have any liability or further obligation to any other party or third party with respect to this Agreement.

ARTICLE XI

GENERAL PROVISIONS

Section 11.1 Definitions; Rules of Constructions .

(a) When used in this Agreement, the following terms shall have the respective meanings specified below:

“ Action ” means any action, claim, charge, grievance, complaint, arbitration, proceeding, review, audit, hearing, investigation, litigation or suit (whether civil, criminal, administrative, investigative or informal) commenced, brought or heard by or before any Governmental Authority or arbitral authority or tribunal.

“ Affiliate ” or “ affiliated ” mean, with respect to any Person, any direct or indirect Subsidiary of such Person, and any other Person that directly, or through one or more intermediaries, controls or is controlled by or is under common control with such first Person; provided , however , from and after the Separation, no member of the Company Group shall be deemed an Affiliate of any member of the MSF Group for purposes of this Agreement and the Transaction Documents and no member of the MSF Group shall be deemed an Affiliate of any member of the Company Group for purposes of this Agreement and the Transaction Documents, except as otherwise provided herein or therein. The foregoing sentence notwithstanding, (i) MSF and members of the MSF Group and (ii) the Company and members of the Company Group shall be deemed “Affiliates” for purposes of the U.S. federal and state securities laws and the U.S. federal banking laws until the Company notifies MSF that due to reductions in MSF’s ownership of Company Shares and other relevant facts, that MSF and the MSF Entities are no longer in control of the Company and the members of the Company Group for purposes of the U.S. federal securities laws, and the Bank Holding Company Act of 1956 (the “ BHC Act ”) or the U.S. federal Change in Bank Control Act of 1978 (the “Change in Control Act”).

“ Business Day ” means Monday to Friday, except for any such day on which banking institutions in Miami, Florida or New York City are authorized or required to close.

 

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“ Change in Control ” means, with respect to a Person, any change in Control for any purposes, including generally under the BHC Act, Change in Control Act, and/or United States federal securities Laws (regardless of whether the BHC Act, Change in Control Act or such securities Laws would apply to the Person taking Control or to any transaction, event or action); and also shall include (i) any takeover, acquisition, merger, consolidation, statutory or other share exchange, receivership, bankruptcy, conservatorship or other transaction, event or action of any kind, including the removal, replacement, detention, incarceration, or diminution or limitation of any kind upon the duties, authority or discretion of, any one or more of such Person’s executive officers or directors or the board of directors or any committee thereof, (ii) any other action by any Person, including attempts to exercise Control of a Person, any taking, directly or indirectly, by any Person, of any interest in Company Shares held, directly or indirectly, of record or beneficially by MSF, or (iii) the adoption or enforcement of any Law, which has the same or similar effects, regardless of the form or duration of such transactions, actions or events; and whether or not any such transactions, actions or events are specific to MSF, and/or other financial institutions, and shall include transactions, events, actions or Laws that are more general in nature or effect.

“ Company Entities ” means the Company and each of its Subsidiaries, excluding the Mercantil Entities.

“ Company Group ” means the Company Entities and, after the Separation, any Person that may become an Affiliate of the Company from time to time. Company Group excludes any member of the MSF Group.

“ Company Transfer Agent ” means Computershare or such other transfer agent and registrar as the Company may appoint after the Distribution.

“ Computershare ” means, collectively, Computershare Trust Company, N.A. and Computershare, Inc., the transfer agent and registrar for Company Shares.

“ Consents ” means any material consent, approval, release, substitution or amendment from any third parties, other than Governmental Approvals.

“ Contract ” means any written or oral agreement, arrangement, authorization, sale order, purchase order, open bid, commitment, contract, indenture, mortgage, note, instrument, evidence of indebtedness, loan, license, obligation, restriction, memorandum of understanding, letter of intent, covenant, or undertaking of any kind or character, or other document to which any Person is a party or that is binding on any Person or its capital stock, assets or business, in each case, whether express or implied, including all amendments, modifications and supplements thereto and waivers and Consents thereunder.

“ Control ,” (with “controlled by” and “under common control with”) mean the possession, directly or indirectly, of the power to direct or cause the direction of management or policies of any Person or the power to appoint or remove directors or executive officers, whether through the ownership of voting securities or otherwise, and as such terms are used in the U.S. federal securities laws, the BHC Act and the Change in Control Act.

“ Distribution Trust ” means the Trust established by the Distribution Trust Agreement, as amended, among MSF, the Company and TMI Trust Company, as trustee dated as of March 12, 2018.

“ Distribution Trust Agreement ” means the trust agreement among MSF, the Company and TMI Trust Company, as trustee, dated as of March 12, 2018 establishing the Distribution Trust.

“ Exchange Act ” means the Securities Exchange Act of 1934.

“ Federal Reserve ” means the Board of Governors of the Federal Reserve System or its delegees.

“ Governmental Approvals ” means any material notices, reports or other filings to be made, or any consents, registrations, approvals, permits or authorizations to be obtained from, any Governmental Authority.

 

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“ Governmental Authority ” means any applicable executive, legislative, judicial or other governmental, quasi-governmental, civil or military, regulatory or self-regulatory authority, agency, department, board, commission, political subdivision or instrumentality, whether federal, state, local or foreign and any Person exercising or asserting the powers of any of the foregoing, and any Person owned or controlled by, or acting for or on behalf of any of the foregoing.

“ Group ” means the MSF Group or the Company Group, as the case may be.

“ Income Taxes ” means any and all Taxes that are based upon, measured by, or calculated with respect to (1) net income or profits (including, but not limited to, any capital gains, gross receipts, or minimum Tax, and any Tax on items of Tax preference, but excluding sales, use, value added, real property gains, real or personal property, transfer or similar Taxes), (2) any net worth, franchise or similar tax, or (3) any combination of clauses (1) or (2).

“ Intergroup Indebtedness ” means any intercompany payables, accounts, advances, loans, guarantees or other credit support, commitments and indebtedness for borrowed money from a MSF Entity and a Company Entity or from a Company Entity to a MSF Entity, other than (1) any contingent liabilities and accounts payable arising pursuant to the Transaction Agreements and (2) any agreements with respect to continuing transactions between the MSF Group and the Company Group, such as the Contracts listed on Schedule 1.6 .

“ Law ” means any federal, state, local or foreign law (including common law), statute, code, rule, regulation, ordinance or other published requirement enacted, promulgated, issued or adopted by a Governmental Authority.

“ Liabilities ” mean all debts, liabilities, guarantees, damages, claims, demands, fines, judgments, penalties, commitments and obligations of any kind or nature, whether primary or secondary, asserted or unasserted, known or unknown, absolute or contingent, accrued or unaccrued, matured or unmatured or otherwise, whenever or however arising, regardless of whether these would be required by applicable accounting standards or principles to be reflected in financial statements.

“ License ” means any license, ordinance, authorization, permit, certificate, right, easement, variance, exemption, or franchise from any Governmental Authority.

“ MSF Entities ” means MSF and its Subsidiaries, excluding the Company Entities.

“ MSF Group ” means the MSF Entities and, after the Separation, any Person that may become an Affiliate of MSF from time to time. MSF Group excludes any member of the Company Group.

“ MSF Transfer Agent ” means Computershare or such other transfer agent and registrar as MSF may appoint after the Distribution.

“ OCC ” means the U.S. Office of the Comptroller of the Currency.

“ Person ” means any individual, corporation, partnership, firm, joint venture, association, joint-stock company, trust, unincorporated organization, Governmental Authority or other entity.

 

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“ Reg. W ” means and includes U.S. Federal Reserve Act, Sections 23A and 23B, and Federal Reserve Regulation W thereunder.

“ Reg. W Compliant ” means that any Contract or transaction, including any “covered transaction” subject to Reg. W, between or among MSF or any member of the MSF Group and the Bank or its Subsidiaries, is compliant with Reg. W. Such compliance includes (1) permissible in amount, both singly and when considered with other covered transactions and (2) terms and under circumstances, including credit standards, that are (i) substantially the same, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions with or involving nonaffiliates, and (ii) in the absence of comparable transactions, on terms and under circumstances, including credit standards, that in good faith would be offered to, or would apply to, nonaffiliates.

“Reorganization Event” has the meaning specified in Section 11.15(a).

“ Representative ” of Person means that Person’s agents and representatives, including accountants, attorneys, independent contractors, consultants, bankers, investment and sources of financing.

“ SEC ” means the U.S. Securities and Exchange Commission.

“ Securities Act ” means the Securities Act of 1933 and the SEC rules and regulations thereunder.

“ Subsidiary ” or “ subsidiary ” means, with respect to any Person, any corporation, limited liability company, joint venture, or partnership that such Person (1) beneficially owns, either directly or indirectly, more than 50% of (i) the total combined voting power of all classes of voting securities of such entity, (ii) the total combined equity interests, or (iii) the capital or profit interests, in the case of a partnership; or (2) otherwise has the power to vote, either directly or indirectly, sufficient securities to elect a majority of the board of directors or similar governing body.

“ Taxes ” means all taxes of any kind, together with interest, penalties, and other additions related to taxes, imposed by any Governmental Authority.

“ Transaction Agreements ” means collectively this Agreement, and all other agreements, documents, and instruments related and material to the Transactions.

“ Trustee ” means TMI Trust Company, as trustee under the Trust Agreement.

“ Voting Trust ” means the Amended and Restated Voting Trust Agreement among Mercantil Servicios Financieros, C.A., Mercantil Commercebank Holding Corporation and the Trustees to Establish The Mercantil Commercebank Voting Trust dated April 4, 2017, as amended.

(b) The words “include,” “includes,” “including” and their derivations are to be read as if they were followed by the phrase “without limitation.” The headings contained in this Agreement are for convenience of reference only and do not affect the meanings of this Agreement’s provisions. Any reference to an agreement means that agreement as amended or supplemented, subject to any restrictions on amendment contained herein or therein. Unless specified otherwise, any reference to a Law means such Law as amended or supplemented from time to time, and includes any rules and regulations promulgated thereunder, as amended or supplemented. Any reference to gender includes all genders, and the singular shall include the plural and vice versa.

 

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Section 11.2 Notices . All notices, requests and other communications to any party hereunder shall be in writing and shall be deemed given if delivered personally, by facsimile, by email (with a return receipt) or sent by recognized overnight courier to the parties at the following addresses:

 

  If to MSF:    Luis Alberto Fernandes, Esq.
Avenida Andrés Bello No. 1
Edificio Mercanti
Caracas 1050,
Venezuela
Telephone: 58 (212) 503-1940
E-mail: lafernandes@bancomercantil.com
  If to the MSF   
  Representatives:    Gustavo Marturet
220 Alhambra Circle
12 th Floor
Coral Gables, FL 33134
Telephone: (954) 415-8524
E-mail: marturetgustavo@yahoo.com
  If to the Company:    220 Alhambra Circle
12 Floor Miami, Florida 33134
Attn: Millar Wilson
Telephone: (305) 460-4025
E-mail: mwilson@mercantilcb.com
  with copies to:    Ralph F. MacDonald, III
Jones Day
1420 Peachtree Street, N.E.
Suite 800
Atlanta, Georgia 30309-3053
Telephone: (404) 581-8622
E-mail: cmacdonald@jonesday.com

or such other addresses, facsimile numbers or email addresses as such party may hereafter specify by like notice to the other parties. All such notices, requests and other communications shall be deemed received on the date of receipt by the recipient thereof if received prior to 5:00 P.M. in the place of receipt and such day is a Business Day in the place of receipt. Otherwise, any such notice, request or communication shall be deemed not to have been received until the next succeeding Business Day in the place of receipt.

 

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Section 11.3 Entire Agreement . This Agreement (together with the other Transaction Agreements, the exhibits and the schedules and the other documents delivered pursuant to this Agreement) constitutes the parties’ complete understanding and agreement hereby, and supersedes all prior and contemporaneous negotiations and agreements between the parties on the matters contained in this Agreement. The provisions of this Agreement may not be explained, supplemented or qualified through evidence of trade usage or a course of dealings. In entering into this Agreement, neither party has relied upon any statement, representation, warranty or agreement of the other party except for those expressly contained in this Agreement. There are no conditions to the effectiveness of this Agreement, other than those expressly stated in this Agreement.

Section 11.4 Assignment .

(a) Except as set forth in any other Transaction Agreement, neither this Agreement nor any of the rights, interests or obligations under this Agreement may be assigned, in whole or in part, by operation of Law or otherwise, by either of the parties without the prior written consent of the other party. No party may delegate any performance under this Agreement. Any purported assignment of rights or delegation of performance or obligations in violation of this Section 11.4 is void ab initio .

(b) This Agreement binds and benefits the parties and their respective permitted successors and assigns, and their heirs, legatees, and personal and legal representatives.

Section 11.5 No Restrictions on Company Changes; Cooperation .

(a) Nothing in this Agreement is intended to, or shall restrict the Company or any of its subsidiaries from approving, entering into or completing one or more mergers, consolidations, statutory or other share exchanges, stock splits, stock dividends, stock buybacks or repurchases or other actions or transactions, including reclassifications or other changes, which affect the number or rights of Distributed Shares and/or Retained Shares, whether before or after the Distribution, and/or which result in any Distributed Shares and/or Retained Shares being converted into the right solely to receive cash or other securities in respect of some or all Company Shares held (each, a “ Reorganization Event ”). The numbers and classes of Company Shares shall be adjusted appropriately by the Company to reflect any Reorganization Events.

(b) In the event that the Company reduces the number of Company Class A Shares (or successor voting securities) or Class B Shares or changes the classes of authorized Company Shares through one or more Reorganization Events, MSF shall, upon the effective time of any Reorganization Event, sell to the Company, such number of each class of Company Shares or successor shares, as will result in MSF holding not more than 19.9% of each class of Company Shares or successor shares then outstanding. The price to be paid by the Company for any Company Shares or shares under this Section 11.5(b) shall be the cash paid per relevant Company Share or share in the Reorganization Event. If no cash is payable in the Reorganization Event, the price shall be (i) the volume weighted average price per relevant Company Share or share during a period of at least 5 trading days preceding or following the Reorganization Event’s effective time or such other period may be specified in the Reorganization agreement or resolutions or (ii) book value per a relevant Company Share or share as of the Company’s latest quarterly reporting date, unless otherwise mutually agreed by MSF and the Company.

(c) MSF and MSF subsidiaries shall not purchase or acquire, directly or indirectly, any Company Shares at any time, except for Company Shares received in respect of Retained Shares held by such holder, solely as a result of any Reorganization Events, and any such Company Shares received in a Reorganization Event shall be subject to Section 11.5(b).

 

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(d) MSF and the MSF subsidiaries shall cooperate with the Company in effecting Reorganization Events.

Section 11.6 No Third-Party Beneficiaries . Except for the provisions of Sections 6.2 and 6.3 , nothing in this Agreement is intended to or shall confer upon any Person other than the parties any rights or remedies hereunder, whether as third beneficiaries or otherwise.

Section 11.7 Governing Law; Jurisdiction; Waiver of Jury Trial .

(a) This Agreement shall be governed by, and construed in accordance with, the laws of the State of Florida, applicable to contracts executed in and to be performed entirely within that State.

(b) All Actions and proceedings arising out of this Agreement not otherwise resolved as provided in Article IX , together with the enforcement of any judgments or orders resulting from such proceedings, shall be heard and determined in any state or federal court sitting in the Southern District of the State of Florida, and the parties hereby irrevocably submit to the exclusive jurisdiction of such courts (and, in the case of appeals, appropriate appellate courts therefrom). The parties irrevocably waive the defense of an inconvenient forum to the maintenance of any such action or proceeding. Each party hereby consents to process being served in any such action or proceeding by the delivery of a copy thereof to the addresses and set forth in Section 11.2 , and each party acknowledges that such service shall constitute good and sufficient service of process or notice thereof. The consents to jurisdiction set forth in this Section 11.7(b) do not constitute general consents to service of process in the State of Florida and will have no effect for any purpose except as provided in this Section 11.7(b) .

(c) Each party hereby waives to the fullest extent permitted by applicable Law any right it may have to a trial by jury with respect to any litigation between the parties directly or indirectly arising out of, under or in connection with this Agreement or any of the transactions contemplated hereby.

Section 11.8 Severability . If any term or other provision of this Agreement is determined by a court of competent jurisdiction to be invalid, illegal or incapable of being enforced by any rule of Law or public policy, all other terms, provisions and conditions of this Agreement shall nevertheless remain in full force and effect. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible to the fullest extent permitted by applicable Law in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible.

 

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Section 11.9 Representations and Warranties .

(a) The Company represents and warrants to MSF that (1) the Company has full corporate power and authority to execute and deliver this Agreement and the other Transaction Agreements, (2) this Agreement and the other Transaction Agreements have been duly authorized by all necessary corporate action and have been duly executed and delivered by the Company and are binding obligations, enforceable against the Company in accordance with their respective terms, (3) none of the execution of this Agreement and the other Transaction Documents, the consummation of the Separation and Distribution, or the performance of the Company’s obligations will (i) result in a breach of the Company’s charter, bylaws, or equivalent organizational or governing documents, (2) violate any applicable Law, or except as provided in Schedule 11.9(a) hereto, (3) conflict with, result in a breach of, constitute a default under or result in the acceleration of, create in any Person the right to accelerate, terminate, modify, or cancel, or require any notice or Consent under any material Contract to which the Company or another Company Entity is a party or by which it is bound or by which any of its assets is subject.

(b) MSF represents and warrants to the Company that (1) MSF has full corporate power and authority to execute and deliver this Agreement and the other Transaction Agreements, (2) this Agreement and the other Transaction Agreements have been duly authorized by all necessary corporate action and have been duly executed and delivered by MSF and are binding obligations, enforceable against MSF in accordance with their respective terms, and no further Governmental Approvals are required in Venezuela, (3) none of the execution of this Agreement and the other Transaction Documents, the consummation of the Separation and Distribution, or the performance of MSF’s obligations will (i) result in a breach of MSF’s charter, bylaws, or equivalent organizational or governing documents, (2) violate any applicable Law, or except as provided in Schedule 11.9(b) hereto, (3) conflict with, result in a breach of, constitute a default under or result in the acceleration of, create in any Person the right to accelerate, terminate, modify, or cancel, or require any notice or Consent under any material Contract to which MSF or another MSF Entity is a party or by which it is bound or by which any of its assets is subject.

Section 11.10 No Construction Against Drafter . Each party has participated in negotiating and drafting this Agreement, so if an ambiguity or question of intent or interpretation arises, this Agreement is to be construed as if the parties had drafted it jointly, as opposed to being construed against a party because it was responsible for drafting one or more provisions of this Agreement.

Section 11.11 Amendments and Waiver . The parties may amend this Agreement only by a written agreement executed by the parties.

Section 11.12 Waivers . The parties may waive any provision in this Agreement only by a writing executed by the party against whom the waiver is sought to be enforced. No failure or delay in exercising any right or remedy, or in requiring the satisfaction of any condition, under this Agreement or any Transaction Documents, and no act, omission or course of dealing between the parties, operates as a waiver or estoppel of any right, remedy or condition. A waiver made in writing on one occasion is effective only in that instance and only for the purpose and period stated.

Section 11.13 Enforcement . The parties agree that time is of the essence in the performance of this Agreement, and that irreparable damage would occur in the event of delay, or if any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties will be entitled to temporary restraining orders, injunctions or similar equitable relief to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement.

 

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Section 11.14 Consent to Jurisdiction and Venue . In the event that any party hereto commences a lawsuit or other proceeding relating to or arising from this Agreement, the parties hereto agree to the personal jurisdiction by and venue in the state and federal courts in the Federal Southern District of the State of Florida and waive any objection to such jurisdiction or venue. The parties hereto consent to and agree to submit to the exclusive jurisdiction of any of the courts specified herein and agree to accept service of process to vest personal jurisdiction over them in any of these courts.

Section 11.15 Limited Liability . Notwithstanding any other provision of this Agreement, no shareholder or Representative of either party, solely in such Person’s capacity as such, but without limiting MSF’s obligations hereunder to the Company individually, as a Company shareholder or otherwise, shall have any liability in respect of or relating to the covenants or obligations of such party under this Agreement or in respect of any securities delivered with respect hereto or thereto and, to the fullest extent legally permissible, each party, for itself and its shareholders, directors, officers and Affiliates, waives and agrees not to seek to assert or enforce any such liability that any such Person otherwise might have pursuant to applicable Law.

Section 11.16 Counterparts; etc . This Agreement may be executed in two or more identical counterparts, all of which shall constitute one and the same agreement, which will be effective when executed by each party and delivered to the other party. This Agreement may be executed and delivered electronically, by facsimile, pdf or otherwise, any of which shall have the same force and effect as a manually executed original.

 

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[SIGNATURE PAGE FOLLOWS]

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective undersigned officers.

 

ATTEST     MERCANTIL SERVICIOS FINANCIEROS, C.A.
By:    /s/ Guillermo Ponce     By:   /s/ Luis Alberto Fernandes
Name:   Guillermo Ponce     Name:   Luis Alberto Fernandes
Title:   Corporate Secretary     Title:   General Counsel
          [Corporate Seal]      
ATTEST     MERCANTIL BANK HOLDING CORPORATION
By:   /s/ Julio Pena     By:   /s/ Millar Wilson
Name:   Julio Pena     Name:   Millar Wilson
Title:   Assistant Corporate Secretary     Title:   Vice Chairman and CEO
          [Corporate Seal]      

[Signature Page to Separation and Distribution Agreement]

EXHIBIT 1

Restrictive Legends on all Affiliate Shares and Retained Shares

1. Transfer Restrictions

The following transfer restrictions shall be maintained by the Company and its Transfer Agent.

NONE OF THE SHARES OF THE COMPANY’S SHARES OF CLASS A COMMON STOCK OR CLASS B COMMON STOCK (INDIVIDUALLY AND COLLECTIVELY, “SHARES”) HAVE BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE ACT OF 1934 (THE “FEDERAL SECURITIES LAWS”), OR THE SECURITIES, OR “BLUE SKY,” LAWS OF ANY STATE OR OTHER DOMESTIC OR FOREIGN JURISDICTION. NEITHER THESE SHARES NOR ANY INTEREST THEREIN MAY BE SOLD, PLEDGED, HYPOTHECATED, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO A REGISTRATION STATEMENT IN EFFECT UNDER THE FEDERAL SECURITIES LAWS, INCLUDING A REGISTRATION STATEMENT ON SEC FORM 10 OR A WRITTEN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE FOR SUCH TRANSACTIONS UNDER THE FEDERAL SECURITIES LAWS AND OTHER APPLICABLE LAWS.

SCHEDULE 1.2(A)

Intergroup Indebtedness

None.

SCHEDULE 1.3A

Transition Service Contracts for the Provision of Services

by the Company Group to the MSF Group

Each Transaction Service Agreement shall have an initial term of 12 months (18 months for Transaction Service Agreement #12) subject to earlier termination or mutual extension by up to six months. Each Transaction Service Agreement shall be amended to provide that the recipient of any services shall, in addition to the payments provided under each Transaction Service Agreement, pay all taxes, including value added taxes, sales and use taxes, withholding and other taxes (excluding income taxes on income earned by the provider) with respect to such services, less the provider’s estimated tax credits, if any, resulting from such tax payments by the recipient of the services.

 

1. Service Agreement, dated December 1, 2014, by and between Mercantil Commercebank, N.A. (now Mercantil Bank, N.A.) and Alvina Corporation, N.V. (now Alvina Corporation), as amended by the Notification and Acknowledgement, dated September 6, 2017, from Millar Wilson to Julio Pena.

Services provided:

 

- Administration

- Legal Counsel

- Market Risk

  

- Accounting & Financial Reporting

- Operations & Technology

 

2. Treasury and Custody Services and Pledge Agreement, dated October 24, 2016, by and between Alvina Corporation, N.V. (now Alvina Corporation) and Mercantil Commercebank, N.A. (now Mercantil Bank, N.A.).

 

3. Services Agreement, dated January 1, 2013, by and between Mercantil Commercebank, N.A. (now Mercantil Bank, N.A.) and Mercantil Bank & Trust Limited, (Cayman) as amended by the Notification and Acknowledgement, dated August 17, 2017, from Roland Bernabela to Julio Pena.

Services provided:

 

- Administration

- Audit

- Compliance

- Credit Risk

- Legal Counsel

- Loan Review (Credit Administration)

- Market Risk

- Operational Risk & Physical Security

- Profitability & Budgeting

  

- Accounting & Financial Reporting

- Operations & Technology

 

4. Treasury and Custody Services and Pledge Agreement, Dated September 23, 3016, by and between Mercantil Bank and Trust (Cayman), Ltd. and Mercantil Commercebank, N.A. (now Mercantil Bank, N.A.).

 

5. Master Participation Agreement, dated May 13, 2002 by and between Commercebank, N.A. (now Mercantil Bank, N.A.) and BMC Bank & Trust Ltd (now Mercantil Bank and Trust (Cayman), Ltd.).

Services provided:

 

- Funded or unfunded participations

  

 

6. Services Agreement, dated January 1, 2013, by and between Mercantil Commercebank, N.A. (now Mercantil Bank, N.A.) and Mercantil, C.A. Banco Universal Curacao Branch, as amended by the Notification and Acknowledgement, dated August 17, 2017, from Roland Bernabela to Julio Pena.

 

- Administration

- Audit

- Operational Risk & Physical Security

- Compliance

- Market Risk

- Profitability & Budgeting

- Accounting & Financial Reporting

- Operations & Technology

  

7. Master Participation Agreement, dated September 26, 2017 by and between Mercantil Bank, N.A. and Mercantil, C.A. Banco Universal Curacao Branch.

Services provided:

 

- Funded or unfunded participations

  

 

8. Treasury and Custody Services and Pledge Agreement, dated as of September 23, 2016, by and between Mercantil Commercebank, N.A. (now Mercantil Bank, N.A.) and Mercantil, C.A. Banco Universal Curacao Branch.

 

9. Services Agreement, dated January 1, 2013, by and between Mercantil Commercebank, N.A. (now Mercantil Bank, N.A.) and Mercantil Bank (Schweiz), A.G., as amended by the Notification and Acknowledgement, dated August 21, 2017, from Thomas Ita to Julio Pena.

Services provided:

 

- Administration

- Credit Risk

- Human Resources

- Loan Review (Credit Administration)

- Market Risk

- Profitability & Budgeting

   - Operations & Technology

 

10. Treasury and Custody Services and Pledge Agreement, dated March 4, 2010, by and between Mercantil Commercebank, N.A. (now Mercantil Bank, N.A.) and Mercantil Bank (Schweiz), A.G.

 

11. Master Participation Agreement, dated May 13, 2002 by and between Commercebank, N.A. (now Mercantil Bank, N.A.) and Banco Mercantil (Schweiz) A.G.

Services provided:

 

- Funded or unfunded participations

 

 

12. Services Agreement, dated January 1, 2013, by and between Mercantil Commercebank, N.A. (now Mercantil Bank, N.A.) and Mercantil Bank (Curacao), N.V., as amended by the Notification and Acknowledgement, dated August 21, 2017, from Roland Bernabela to Julio Pena.

Services provided:

 

- Administration

- Audit

- Compliance

- Credit Risk

- Human Resources

- Legal Counsel

- Market Risk

- Operational Risk & Physical Security

- Profitability & Budgeting

  

- Accounting & Financial Reporting

- Operations & Technology

 

13. Master Participation Agreement, dated May 1, 2004 by and between Commercebank, N.A. (now Mercantil Bank, N.A.) and Banco Mercantil Venezolano, N.A. (now Mercantil Bank (Curacao) N.V.)

Services provided:

 

- Funded or unfunded participations

  

 

14. Treasury and Custody Services and Pledge Agreement, dated as of September 23, 2016, by and between Mercantil Commercebank, N.A. (now Mercantil Bank, N.A.) and Mercantil Bank (Curacao) N.V.

 

15. Agreement for the Reimbursement of Administrative and Other Services Provided, dated June 26, 2015, Mercantil Commercebank, N.A. (now Mercantil Bank, N.A.) and Mercantil Holding Financerio International, as amended by the Notification and Acknowledgement, dated September 1017, from Javier Gambera to Julio Pena.

Services provided:

 

- Administration

- Profitability & Budgeting

   - Accounting & Financial Reporting

 

16. Agreement for the Reimbursement of Administrative and Other Services Provided, dated January 1, 2013, by and between Mercantil Commercebank, N.A. (now Mercantil Bank, N.A.) and Mercantil Bank (Panama), S.A. (now Mercantil Banco, S.A.), as amended by the Notification and Acknowledgement, dated August 31, 2017, from Alberto Carrasquero to Julio Pena.

Services provided:

 

- Administration

- Human Resources

- Profitability & Budgeting

   - Accounting & Financial Reporting

 

17. Treasury and Custody Services and Pledge Agreement, dated as of December 1, 2008, by and between Mercantil Bank (Panama), S.A. (now Mercantil Banco, S.A.) and Mercantil Commercebank, N.A. (now Mercantil Bank, N.A.).

 

18. Master Participation Agreement, dated February 10, 2017 by and between Mercantil Bank, N.A. and Mercantil Bank (Panama) S.A. (now Mercantil Banco, S.A.).

Services provided:

 

- Funded or unfunded participations

  

 

19. Agreement for the Reimbursement of Administrative and Other Services Provided, dated December 10, 2012, by and between Mercantil Commercebank, N.A. (now Mercantil Bank, N.A.) and Mercantil Capital Markets (Panama), S.A. (now Mercantil Servicios de Inversion, S.A.), as amended by the Notification and Acknowledgement, dated August 30, 2017, from Jose Manuel Rodriguez Ferreira to Julio Pena.

Services provided:

 

- Administration

- Human Resources

  

 

20. Services Agreement, dated March 1, 2018, by and between Mercantil Bank, N.A. and Mercantil Servicios Financieros, C.A. (“MSF”).

Services provided:

 

- Consulting Services

  

 

21. Investment Management Agreement, dated February 26, 2016 by and between Mercantil Commercebank, N.A. (now Mercantil Bank, N.A.) and Luz Capital Ltd. (“LUZ”).

Services provided:

 

- Investment Services

  

 

22. Services Agreement, dated March 1, 2018 by and between Mercantil Bank, N.A. and G200 Leasing. (“G200”).

Services provided:

 

- Accounting & Financial Reporting

- Operations

  

SCHEDULE 1.3B

Transition Service Contracts for the Provision of Services

by the MSF Group to the Company Group

None.

SCHEDULE 1.7

Certain Officers and Directors

Subject in each case to Federal Reserve approval, the SEC’s regulations regarding independence of directors, and the listing standards of any exchange on which the Company Shares are listed:

 

  1. Gustavo J. Volmer will serve as Executive Chairman of MSF and various MSF Entities and as Non-Executive Chairman of the Company and the Bank post-Separation.

 

  2. Millar Wilson will provide consulting services to the MSF Group while serving as a Company executive.

 

  3. Alfonso Figueredo will provide consulting services to the MSF Group while serving as a Company executive.

 

  4. Miguel A. Capriles will serve on the board of directors of MSF and the Company.

 

  5. Gustavo Marturet will serve on the board of directors of MSF and the Company.

 

  6. Gustavo J. Vollmer will serve on the board of directors of MSF and the Company.

 

  7. The current directors and officers of the Cayman Bank, who are directors and officers of the Company or its subsidiaries, shall continue as directors and officers of the Cayman Bank.

SCHEDULE 4.1

MSF Group Employees and Company Group Employees

None.

SCHEDULE 11.9(a)

None.

SCHEDULE 11.9(b)

None.

Exhibit 10.2

DISTRIBUTION TRUST AGREEMENT

This Distribution Trust Agreement (the “ Agreement ” or “ Trust Agreement ”), dated as of March 12, 2018, is by and among Mercantil Servicios Financieros, C.A., a Venezuela corporation (“ MSF ”), Mercantil Bank Holding Corporation, a Florida corporation (the “ Company ”) and TMI Trust Company, a Texas trust company, solely as trustee and not in its individual capacity (the “ Trustee ”), establishes the Distribution Trust (the “ Trust ”).

MSF currently is the Company’s sole shareholder. MSF’s board of directors and shareholders have approved a separation of the Company and MSF (the “ Separation ”) by a pro rata distribution as described in Section 4 of this Agreement (the “ Distribution ”) of the shares of Company Class A Stock (“ Class A Stock ”) and Company Class B Stock (“ Class B Stock ,” and collectively with the Class A Stock, “ Company Shares ”) to holders of record (“ Record Holders ”) of MSF Class A and Class B common stock described as “Distributed Shares” in Section 4 below, respectively on the record date set by MSF and communicated to the Trustee by the Company and MSF or the MSF Representatives in a written notice in accordance with Section 4 of this Agreement (“ Record Date ”). Herein, MSF Class A common stock (“ MSF Class A Shares ”) and MSF Class B common stock (“ MSF Class B Shares ”) are individually and collectively sometimes referred to as “ MSF Shares. ” As used herein, absent contrary written directions to the Trustee from the Company, only shares of Class A Stock are “voting securities.” All Company Shares are in book-entry form only in the books and records of the Company.

Certain MSF subsidiaries (“ MSF Subsidiaries ”) hold an aggregate of 1,435,954 MSF Class A Shares and an aggregate of 1,224,245 MSF Class B Shares.

MSF will effect the transfer of ownership of all Company Shares prior to the Distribution Date by transferring and delivering, on the delivery date specified by the Company and the MSF Representatives communicated in a written notice to the Trustee (the “ Delivery Date ”), all of the outstanding Company Shares to the Trust by book-entry on the Company’s books and records and written confirmation of such transfer delivered by the Company to the Trustee. The Company Shares that will be held in the Trust solely for and on behalf of the MSF Record Holders, including the Record Holders of the MSF Subsidiary Shares at the time of the Distribution, are called the “ Distributed Shares .” All other Company Shares are called “ Retained Shares .”

The Distributed Shares, shall be distributed on the distribution date that the MSF Representatives and the Company communicate to the Trustee in a written notice in accordance with Section 4 of this Agreement (the “ Distribution Date ”) to the Record Holders. Record Holders of MSF Class A Shares shall receive an aggregate of 80.1% of the Company’s outstanding Class A Stock and Record Holders of MSF Class B Shares shall receive an aggregate of 80.1% of the Company’s outstanding Class B Stock.

In order to maintain a Distribution that is pro rata and to maintain the total Retained Shares beneficially held by MSF and the MSF Subsidiaries at no more than 19.9% of the outstanding Company Shares of each class, the 1,435,954 shares of Company Class A Stock and the 1,224,245 shares of Company Class B Stock (“ Subsidiary Shares ”) distributed in respect of MSF Shares held of record by MSF Subsidiaries shall be returned automatically by the MSF Subsidiaries immediately following the Distribution and on the same day as the Distribution (the “ Distribution Date ”), to the Distribution Trust and upon and after such time shall be Retained Shares. The Distribution Trust will hold all Retained Shares, including Subsidiary Shares, following the Distribution pursuant to the Distribution Trust Agreement, pending the sale or other disposition of the Retained Shares, in accordance with Section 8.5 below and the Distribution Trust Agreement. MSF, together with and on behalf of the MSF Subsidiaries will retain aggregate beneficial ownership, subject to the Trust’s terms and conditions, of 19.9% of the Company Shares of each class as Retained Shares.

The Separation and Distribution Agreement dated as of March 12, 2018 by and between MSF and the Company (the “ Separation Agreement ”) governs the terms of the Separation.

The Distribution shall not be completed until a registration statement on United States Securities and Exchange Commission (“ SEC ”) Form 10 or other applicable form (the “ Spin-off Registration Statement ”) is declared effective by the SEC (the “ Effective Time ”).

Computershare Trust Company, N.A. and Computershare, Inc. (individually and collectively, “ Computershare ”) are the transfer agent and registrar for Company Shares (the “ Company Transfer Agent ”). Mercantil Banco Universal is the transfer agent and registrar for all MSF Shares (the “ MSF Transfer Agent ”). JPMorgan Chase Bank, N.A. is the depository for the outstanding American Depository Receipts (“ ADRs ”) representing MSF Shares. No ADRs will be created in respect of any Company Shares.

In consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are acknowledged, the parties hereto, intending to be legally bound, agree as follows:

1. Appointment of and Acceptance by Trustee . MSF and the Company hereby appoint the Trustee to serve as the Trustee hereunder. The Trustee hereby accepts such appointment, and upon receipt of all the outstanding Company Shares, shall hold and deliver the Company Shares in accordance with this Agreement for and on behalf of the Record Holders as to the Distributed Shares, and for and on behalf of MSF as to the Retained Shares.

2. Delivery of Company Shares to Trustee .

(a) On March 15, 2018, or such other delivery date specified by the Company and MSF (the “ Delivery Date ”), MSF will transfer, assign and deliver 74,212,408 shares of Class A Stock and 53,253,157 shares of Class B Stock to the Trust by book entry on the Company’s books and records and written confirmation to the Trustee. These comprise 100% of all issued and outstanding Company Shares of each class. The Company Shares shall be delivered to the Trustee free and clear of all liens, pledges, security interests, claims and other encumbrances (collectively, “ Liens ”). All Company Shares delivered to the Trustee on the Delivery Date or otherwise shall be registered on the Company’s books and records in the Trustee’s name as Trustee under this Trust Agreement for the benefit of (a) the MSF shareholders as to the Distributed Shares and (b) MSF as to the Retained Shares.

 

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(b) On the Delivery Date, the Distributed Shares and the Retained Shares shall be as follows, subject to appropriate adjustment in the event of a stock split, stock dividend or other change in the number of outstanding MSF Shares or Company Shares (a “ Corporate Event ”), including as a result of exercises of options on MSF Shares, provided that the Distribution Ratio (as defined in Section 4(b)) shall not change. The MSF Representatives or the Company shall provide the Trustee with an Officer’s Certificate describing such Corporate Event, if any, and providing updated numbers at least 5 Business Days before the Distribution Date:

 

Class of Stock    Distributed Shares    Retained Shares    Totals

Class A

   60,880,929    13,331,479    74,212,408

Class B

   43,880,032    9,373,125    53,253,157

Prior to the Distribution Date, MSF has agreed not to change the number of MSF Class A Shares or MSF Class B Shares issued and outstanding. Accordingly, the numbers of Distributed Shares and Retained Shares of each class, shall not be adjusted and the Distribution Ratio shall not change; provided, however , the numbers of Distributed Shares and Retained Shares may be adjusted, if necessary, for rounding differences, and otherwise to preserve the one-for-one Distribution Ratio and limit the Retained Shares to no more than 19.9% of each Class of Company Shares immediately following the Distribution.

Promptly after the Record Date, the MSF Representatives or the Company will deliver an Officer’s Certificate to the Trustee that includes a true and correct list of all the Record Holders of Company Shares of each Class.

(c) As used in this Agreement, “ Officer’s Certificate ” means an officer’s certificate executed by the chief executive officer, president, chief financial officer, treasurer, assistant treasurer, corporate secretary, assistant corporate secretary or any other officer authorized to execute such officer’s certificate, or in the case of the MSF Representatives, a letter or other writing or instrument, that is signed by two of the MSF Representatives.

3. Trustee Duties .

(a) During the term of the Trust (the “ Trust Term ”), the Trustee shall safeguard, preserve and protect the Company Shares in accordance with this Agreement, and the Trustee shall not sell, transfer or otherwise dispose of the Company Shares or any interest therein, and shall maintain the Company Shares free and clear of all Liens.

(b) The Trustee shall have no discretionary authority hereunder, including voting or disposition of the Company Shares held by the Trust, other than as provided herein, and shall exercise no control over the Company’s management or policies. MSF irrevocably has appointed Gustavo J. Vollmer A., Gustavo Marturet M. and Rene Brillenbourg C. to act as the exclusive agents, powers of attorney and representatives for and on behalf of MSF and the MSF

 

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shareholders in connection with this Trust Agreement (the “ MSF Representatives ”). The MSF Representatives, or if for any reason there are less than two MSF Representatives, the remaining MSF Representative, or any two of them, may take any action, which MSF is required or permitted to take hereunder, and hold an irrevocable proxy, coupled with an interest, to vote any and all Company Shares at any time after delivery of all Company Shares to the Trust and before the Distribution. Upon and following the Distribution, in the event of any vote or action by Company shareholders at a meeting or otherwise, the Trustee shall vote all Retained Shares, which are entitled to vote on any matter, pro rata in accordance with the votes of the other holders of Class A Stock and Class B Stock, as applicable.

(c) The Trustee shall have no management duties or obligations to manage (other than as specifically provided in this Section 3 ) the Company Shares or make the Company Shares productive of income or otherwise.

4. The Distribution .

(a) On or prior to the Distribution Date, the Trustee will, upon the written direction of the Company given to the Trustee, promptly deliver the Distributed Shares to Computershare, or such other distribution agent as may be selected by the Company (the “ Distribution Agent ”), by (i) book entry on the Company’s books and records, or (ii) if the Company Shares are eligible for clearance and settlement through the facilities of The Depository Trust Company (“ DTC ”) with a direction from the Company to the Trustee that the Distributed Shares are to be recorded in the name of the Distribution Agent.

(b) Subject to this Section 4 , the Company shall notify the Trustee in writing of the Distribution Date not less than five Business Days in advance of the Distribution Date. Each Record Holder of MSF Class A Stock shall be entitled to receive one share of Class A Stock for each MSF Class A Share held as of the Record Date, and each Record Holder of MSF Class B Stock shall be entitled to receive one share of Class B Stock for each MSF Class B Share held as of the Record Date. This one-for-one distribution is the “ Distribution Ratio .” Upon receipt of the Distributed Shares from the Trustee, the Distribution Agent shall be responsible for effecting the Distribution pursuant to a separate distribution agent agreement between the Company and the Distribution Agent, on or as soon as practicable after the Distribution Date.

(c) Conditions to Distribution . The Distribution shall be subject to the fulfillment at or prior to the Distribution Date of conditions set forth in the Separation Agreement. In no event shall the Distribution occur unless all conditions to the Distribution pursuant to the Separation shall have been satisfied or waived (to the extent permitted by applicable Law) by the Company and the MSF Representatives, as applicable. The Company and the MSF Representatives shall confirm the satisfaction or waiver of all such conditions to the Distribution as part of the notice provided to the Trustee pursuant to Section 4(b) .

(d) As used in this Agreement, “ Business Day ” means Monday to Friday, except for any such day on which banking institutions in Miami, Florida, New York City or Dallas, Texas are authorized or required to close.

 

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5. Retained Shares .

(a) All Retained Shares shall be held by the Trust for the benefit of MSF and the MSF Subsidiaries or MSF’s designees until the earlier of (i) the disposition of the Retained Shares as provided herein and (ii) the Trust Termination Date, as defined in Section 6 below.

(b) From the Delivery Date until the 90 th day following the Effective Time, or such earlier date as the Company may authorize by an Officer’s Certificate delivered to the Trustee, MSF may transfer any Company Share that are Retained Shares at the time of transfer, only to the Company or to affiliates of MSF or the Company, provided such transfers are made pursuant to available exemptions from registration under the Securities Act of 1933 and the rules and regulations thereunder (the “ Securities Act ”), and provided further that any such transferees are restricted from any transfers of such Retained Shares until after the 90 th day after the Effective Time (the “ 90 th Day ”) and then only pursuant to (i) an effective registration statement under the Securities Act as to which no stop orders are in effect or (ii) available exemptions from registration under the Securities Act.

(c) Upon and following the 90 th Day, MSF or the MSF Representatives may direct the transfer by written notice to the Trustee and the Company to any underwriter or placement or other agent for disposition of Retained Shares pursuant to (i) an effective registration statement under the Securities Act as to which no stop order is in effect or (ii) available exemptions from registration under the Securities Act, in each case subject to the Transfer Restrictions.

(d) In addition to the securities law restrictions in preceding paragraphs (b) and (c) of this Section, MSF may transfer Retained Shares held by the Trust (i) in transactions to its affiliates, pursuant to exemptions from registration under the Securities Act prior to the Distribution Date and subject to non-objection or approval by or waivers from the Board of Governors of the Federal Reserve or its delegee (the “ Federal Reserve ”), (ii) pursuant to one or more Company registration statements that have been declared effective by the SEC, (iii) in transactions where no transferee or associated group of transferees would receive more than 2% of the outstanding Company voting securities of any class, (iv) in transactions where the transferee controls more than 50% of the Company’s outstanding voting securities without transfer from or at the direction of MSF, or in other transactions where the Federal Reserve has no objections. MSF or the MSF Representatives shall notify the Trustee and the Company in writing of any intended transfer of Retained Shares held by the Trust herein and confirm in such writing MSF’s compliance with this Section 5 and the Separation Agreement, not less than 15 Business Days prior to any such transfer. MSF and the Company shall jointly notify the Federal Reserve of any such disposition.

(e) Retained Shares, if any, held by the Trust on the Trust Termination Date, shall be delivered to MSF and the respective MSF Subsidiaries that are Record Holders, or with the Company’s written consent, to any designee of MSF, in accordance with the Separation Agreement and pursuant to written direction delivered to the Trustee and the Company at any time before or after the Delivery Date, subject to Federal Reserve non-objection confirmed by an Officer’s Certificate from MSF. Absent express Federal Reserve non-objection confirmed by Officer’s Certificates from the Company and the MSF Representatives to the Trustee, in no event

 

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shall more than an aggregate of (i) 4.9% of the then outstanding shares of Company Class A Stock and (ii) 4.9% of the then outstanding shares of Company Class B Stock otherwise may be returned to MSF and MSF Subsidiaries, and MSF or the MSF Representatives and the Company shall determine the disposition of any Company Shares in excess of such amounts. As between the Trustee and the Company, the Company shall be solely responsible for all such matters, and shall confirm such matters to the Trustee by an Officer’s Certificate.

6. Term of Trust . The Term shall commence on the Delivery Date, and shall terminate on the Trust Termination Date. The “ Trust Termination Date” shall be the earliest of (i) the Distribution of all the Distributed Shares and the delivery to transferees from the Trust, which may include MSF and the MSF Subsidiaries, as provided in Section 5(e) above, of all the Retained Shares, together with all the other Trust assets, if any, pursuant to the applicable provisions of this Trust Agreement, (ii) the date following the Distribution Date when MSF is deemed by the Federal Reserve to not “control” the Company under Section 2(a)(2) of the Bank Holding Company Act of 1956 (the “ BHC Act ”) as a result of its Company Share ownership or otherwise, and (iii) the Business Day immediately preceding the second anniversary of the Delivery Date. The Company and the MSF Representatives shall confirm the occurrence of such events in an Officer’s Certificate delivered to the Trustee.

 

7. Representations and Warranties .

(a) MSF and the Company represent and warrant, respectively, to the Trustee and each other, that:

(i) they are validly existing as corporations organized under the laws of Venezuela and Florida, respectively;

(ii) they have full authority to execute, deliver and perform this Trust Agreement;

(iii) all Officer’s Certificates, confirmations and orders delivered to the Trustee hereunder are and shall be complete and accurate in all material respects; and

(iv) The Company has held its 2018 annual shareholders’ meeting and does not anticipate holding any other shareholders’ meetings or taking any shareholder action by unanimous written consent prior to the Distribution Date.

(b) The Trustee represents and warrants to MSF and the Company that it:

(i) is validly existing as a trust company under the laws of the State of Texas; and

(ii) has been authorized to exercise trust and fiduciary powers and has full authority to execute, deliver and perform this Trust Agreement.

 

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8. Certain Trust Provisions

(a) Interests in the Trust are non-transferable, and the Trustee shall not consent to any such transfers, unless authorized in writing by the Company. The sale, transfer, pledge, hypothecation or other disposition of Company Shares is restricted, generally, and are subject to the restrictive legend maintained on the Company’s and the Transfer Agent’s books and records and set forth in attached Exhibit 1 (the “ Transfer Restrictions ”). The Trustee acknowledges the Transfer Restrictions and will not transfer or deliver any Company Shares except upon written direction of the Company, which written confirmation shall confirm satisfaction of the Transfer Restrictions’ exceptions for certain sales or dispositions.

(b) Any dividend declared and paid by the Company prior to the Delivery Date shall be paid and belong solely to MSF or its designee, and shall not be property of the Trust or held by the Trustee. If any such dividend is received by the Trustee, the Trustee shall hold such funds in trust solely for the benefit of MSF or its designee and deliver such funds promptly as directed in writing by MSF.

(c) Each of MSF and the Company shall be solely responsible for all their respective filings and reports with all governmental and regulatory authorities, including without limitation, the SEC and the Federal Reserve with respect to MSF and the Company. The Trustee shall reasonably cooperate with MSF and the Company in connection with any such filings and reports during the Term due on or after the Delivery Date, provided the Trustee will have no obligation with respect to the content or timing of any such filings or reports by MSF or the Company, or any of their directors, officers or subsidiaries, and by any holder of Company Shares or MSF Shares. MSF and the Company will cooperate with the Trustee, if the Trustee is required to make such filings and reports, if any, with respect to MSF, the Company or the Company Shares held hereunder, solely as a result of this Agreement.

(d) The Company or its designee will act as information agent (the “ Information Agent ”) in connection with the Separation and the Distribution. The Trustee has no obligation to act as Information Agent for or on behalf of the Company.

(e) Computershare, or such other person as may be appointed by the Company, as the Company’s Transfer Agent and Distribution Agent, will be responsible for all U.S. income tax reporting and compliance with respect to the Company Shares, and the Trustee shall have no obligation to act in any such capacity. The Trustee has no obligation to act as the Transfer Agent or Distribution Agent for or on behalf of the Company.

(f) Neither the Trustee nor any agent of the Trustee shall have any responsibility for any actions taken or not taken by the Depositary Trust Company or any other applicable depositary, the Company Transfer Agent, the MSF Transfer Agent, the Distribution Agent or the depositary for the ADRs.

(g) Nothing herein, including Section 5, is intended to, or shall restrict the Company or any of its subsidiaries from approving, entering into or completing a merger, consolidation, statutory share exchange, stock split, stock dividend or other action or transaction that affects the number of Retained Shares, converts Retained Shares into Class A Stock or the Company voting common stock or results in any Distributed Shares or Retained Shares being converted into the right solely to receive cash in respect of all or some Company Shares held.

 

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9. Resignation or Removal of Trustee . The Trustee may resign and be discharged from the performance of its duties hereunder by giving 30 days’ prior written notice to MSF and the Company specifying a date when such resignation shall take effect, provided a successor trustee (“ Successor Trustee ”) has been appointed and assumes the duties of Trustee hereunder. The Company and the MSF Representatives, acting jointly, may remove and discharge the Trustee from the performance of its duties hereunder at any time by giving 30 days’ prior written notice to the Trustee specifying a date when such removal shall take effect, provided a Successor Trustee has been appointed and assumes the duties of Trustee hereunder. Upon any such notice of resignation or removal, the Company and the MSF Representatives shall appoint a Successor Trustee hereunder prior to the effective date of such resignation or removal. If the Company or MSF fails to appoint a Successor Trustee within such time, or such designated Successor Trustee becomes unwilling or unable to serve as such, the Trustee shall have the right to petition a court of competent jurisdiction to appoint a Successor Trustee, and all costs and expenses (including, without limitation, reasonable attorneys’ fees) related to such petition shall be paid by the Company or MSF, jointly and severally. The Trustee shall transmit all records pertaining to the Trust assets, transmit the Company Shares and other Trust assets, if any, then held hereunder to the Successor Trustee, after making copies of such records as the Trustee deems advisable and after deduction and payment to the Trustee of all fees and expenses (including any court costs and reasonable attorneys’ fees) incurred by the Trustee in connection with the performance of its duties hereunder. The provisions of this Trust Agreement shall continue as to any actions taken or omitted to be taken by the Trustee under this Trust Agreement prior to the date on which a Successor Trustee becomes the Trustee hereunder. Any Successor Trustee(s) shall be U.S. citizens or entities organized under the laws of the United States or any state of the United States.

10. Binding Effect; Successors . This Trust Agreement shall be binding upon the respective parties hereto and their successors and assigns. If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business (including the Trust) to another corporation or entity, the successor or transferee corporation or entity without any further act shall be the Successor Trustee.

11. Limitations on Trustee Obligations . The Trustee undertakes to perform only such duties as are expressly set forth herein and no other duties shall be implied. The Trustee shall not be liable under and has no duty to inquire as to the provisions of any agreement other than this Trust Agreement. The Trustee shall not be charged with any knowledge of the terms of the Separation Agreement or any other agreement referred to herein (unless the Trustee, in its capacity as Trustee, is a party to such agreement), the Company Shares, the MSF Shares or any constituent documents of the Company or MSF. The Trustee shall not be liable for any action taken or omitted by it in good faith, except to the extent that a court of competent jurisdiction determines, in a final, non-appealable decision, that the Trustee’s gross negligence or willful misconduct was the sole cause of any loss to MSF or the Company. The Trustee’s sole responsibility shall be for the safekeeping and delivery of the Company Shares and the other Trust assets, if any, held by it in accordance with the terms of this Trust Agreement.

 

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The Trustee shall not be charged with knowledge or notice of any fact or circumstance not specifically set forth herein or in a written notice, Officer’s Certificate, order or provided to the Trustee hereunder. The Trustee may rely upon any notice, order, Officer’s Certificate, instruction, request or other instrument, or writing, including email, from the Company or the MSF Representatives not only as to its due execution, validity and effectiveness, but also as to the truth and accuracy of any information contained therein, which Trustee shall believe to be genuine and to have been signed or presented by the person or parties purporting to sign the same. The Trustee shall have no duty or obligation to verify the facts or conclusions stated in any notice, Officer’s Certificate, order or writing, including email.

In no event shall Trustee be liable for incidental, indirect, special, consequential or punitive damages or penalties (including, but not limited to lost earnings), even if the Trustee has been advised of the likelihood of such damages or penalty and regardless of the form of action.

The Trustee shall not be responsible for delays or failures in performance resulting from acts beyond its control, including without limitation acts of God, strikes, lockouts, riots, acts of war or terror, epidemics, governmental regulations, fire, communication line failures, computer viruses, power failures, earthquakes or other disasters. The Trustee shall not be obligated to take any legal action or commence any proceeding in connection with the Company Shares or other Trust assets, if any, held by it in accordance with this Trust Agreement or the Separation Agreement, or to appear in, prosecute or defend any such legal action or proceeding, except to safeguard the Company Shares, including, without limitation, from any persons or entities claiming such Company Shares or Trust assets or any interest therein, for themselves or on behalf of MSF, its shareholders or anyone else, or their successors or assigns and then only at the Company’s and the MSF Representative’s written direction and at the Company’s sole expense, and provided further that MSF and the Company, jointly and severally, shall indemnify, defend and hold harmless the Indemnified Parties in connection with any such matters pursuant to Section 12 hereof. The Trustee may consult legal counsel selected by it in the event of any dispute or question as to the construction of any of the provisions hereof or of any other relevant agreement or of its duties hereunder, or relating to any dispute involving any party hereto, and shall incur no liability and shall be fully indemnified from any liability whatsoever in acting in accordance with the advice of such counsel. MSF and the Company, jointly and severally, shall promptly pay, upon demand, within 30 days of billing, the reasonable fees and expenses of any such counsel. MSF and the Company agree to perform or procure the performance of all further acts and things, and execute and deliver such further documents, as may be required by law or as Trustee may reasonably request in connection with its duties hereunder. No rights conferred upon the Trustee hereunder that might be construed as conferring discretionary rights on the Trustee will be construed as duties.

The Trustee is authorized, in its sole discretion, to comply with final non-appealable orders issued by any state or Federal court in the United States having jurisdiction with respect to the Company Shares.

 

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12. Indemnification of Trustee . From and at all times after the date of this Trust Agreement, MSF and the Company shall, to the fullest extent permitted by law, indemnify, defend and hold harmless the Trustee and each director, officer, employee, attorney, agent and affiliate of Trustee (collectively, the “ Indemnified Parties ”) against any and all actions, claims (whether or not valid), losses, damages, liabilities, penalties, costs and expenses of any kind or nature (including without limitation reasonable attorneys’ fees, costs and expenses) incurred by or asserted against any of the Indemnified Parties, whether direct, indirect or consequential, as a result of or arising from or in any way relating to any claim, demand, suit, action or proceeding (including any inquiry or investigation) by any person whether threatened or initiated, asserting a claim for any legal or equitable remedy against any person under any statute or regulation, including, but not limited to, any federal or state securities laws, or under any common law or equitable cause or otherwise, arising from or in connection with the negotiation, preparation, execution, performance or failure of performance in connection with this Trust Agreement or any transactions contemplated herein, whether or not any such Indemnified Party is a party to any such action, proceeding, suit or the target of any such inquiry or investigation; provided, however , that no Indemnified Party shall have the right to be indemnified hereunder for any liability finally determined by a court of competent jurisdiction, subject to no further appeal, to have resulted solely from the gross negligence or willful misconduct of such Indemnified Party. MSF and the Company further agree, jointly and severally, to indemnify each Indemnified Party for all costs, including reasonable attorney’s fees actually incurred by such Indemnified Party in connection with the enforcement of MSF’s and the Company’s indemnification obligations hereunder. All Indemnified Parties shall have the right to employ one counsel reasonably acceptable to the Company to represent all the Indemnified Parties with respect to any action or claim brought or asserted against any of them, and the reasonable fees of such counsel shall be paid upon demand by MSF and the Company. The obligations of MSF and the Company under this Section 12 shall survive any termination of this Trust Agreement and the resignation or removal of Trustee.

Neither the payment by MSF or the Company of any claim by the Trustee for indemnification hereunder nor the disbursement of any amounts to Indemnified Parties from the Company Shares, other Trust assets, if any, or the respective assets of MSF or the Company in respect of a claim by the Indemnified Parties for indemnification shall impair, limit, modify or affect, as between MSF and the Company, the respective rights and obligations of MSF and the Company under the Separation Agreement.

13. Compensation of Trustee . MSF and the Company agree, jointly and severally, to pay the Trustee for its services hereunder in accordance with Schedule A attached hereto from the date of this Agreement to immediately prior to the earlier of (i) the effective time of the appointment of a Successor Trustee or (ii) termination of this Agreement. Any fees for partial periods shall be prorated based on the billing period and the actual number of days that this Agreement is in effect during such billing period.

14. Other Terms Applicable to Trustee . Any terms and conditions contained in Exhibit 1 are incorporated by reference herein, and shall be a part of this Agreement as if fully set forth herein.

15. Consent to Jurisdiction and Venue . In the event that any party hereto commences a lawsuit or other proceeding relating to or arising from this Agreement, the parties hereto agree to the personal jurisdiction by and venue in the state and federal courts in the Federal Southern District of the State of Florida and waive any objection to such jurisdiction or venue. The parties hereto consent to and agree to submit to the jurisdiction of any of the courts specified herein and agree to accept service of process to vest personal jurisdiction over them in any of these courts.

 

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16. Notices . All notices, approvals, consents, requests and other communications hereunder shall be in writing and shall be delivered (i) by personal delivery, or (ii) by recognized overnight courier service, or (iii) by certified or registered mail, return receipt requested, or (iv) via facsimile transmission, with confirmed receipt or (v) via email, including by PDF attachment thereto of an executed document. Notice shall be effective upon receipt, except for notice via email, which shall be effective only when the recipient, by return email or notice delivered by other method provided for in this Section 16 , acknowledges having received that email (with an automatic “read receipt” or similar notice not constituting an acknowledgement of an email receipt for purposes of this Section 16 .) Such notices shall be sent to the applicable party or parties at the address specified below:

 

If to MSF:     
   Luis Alberto Fernandes, Esq.
   Avenida Andrés Bello No. 1
   Edificio Mercanti
   Caracas 1050,
   Venezuela
   Telephone: (305) 342-5893
   E-mail: lafernandes@bancomercantil.com
If to the MSF     
Representatives:     
   Gustavo Marturet
   c/o 220 Alhambra Circle
   12th Floor
   Coral Gables, FL 33134
   Telephone: (954) 415-8524
   E-mail: marturetgustavo@yahoo.com
If to the Company:     
   Millar Wilson
   Mercantil Bank Holding Corporation
   220 Alhambra Circle
   Coral Gables, Florida 33134
   Telephone: (305) 460-4025
   Facsimile: (305) 460-8658
   E-mail: mwilson@mercantilcb.com
If to the Trustee:     
   TMI Trust Company, as Trustee
   ATTN: Kathy E. Knapp
   1100 Abernathy Road, Suite 480
   Atlanta, Georgia 30328
   Telephone: 678-221-5917
   Facsimile: 678-221-5917
   E-mail: kknapp@tmico.com

 

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or to such other address as a party may designate, which shall be effective on the date given or, if specified otherwise in the notice, on the date specified therein.

17. Amendment, Waiver and Assignment . None of the terms or conditions of this Trust Agreement may be changed, waived, modified, discharged, terminated or varied in any manner whatsoever unless in writing duly signed by each party to this Trust Agreement, or in the case of MSF, by the MSF Representatives. No course of conduct shall constitute a waiver of any of the terms and conditions of this Trust Agreement, unless such waiver is specified in writing, and then only to the extent so specified. A waiver of any of the terms and conditions of this Trust Agreement on one occasion shall not constitute a waiver of the other terms of this Trust Agreement, or of such terms and conditions on any other occasion. Except as provided in Section 9 hereof, this Trust Agreement may not be assigned by any party without the written consent of the other parties.

18. Severability . To the extent any provision of this Trust Agreement is determined to be invalid under applicable law, such provision shall be ineffective only to the extent of such invalidity, without affecting the other provisions of this Agreement.

19. Governing Law . This Agreement shall be construed and interpreted in accordance with the laws of the State of Florida, without giving effect to the conflict of laws principles thereof. It is intended that the Trust is and shall be a “grantor trust” for all United States Federal and state income tax purposes, and all parties hereto shall treat the Trust as such.

20. Entire Agreement . This Agreement, together with the Exhibits and Schedules hereto and any writing incorporated herein by reference in this Agreement, constitutes the entire agreement between the parties relating to the holding, investment and disbursement of the Company Shares and other Trust assets, if any, and sets forth the obligations and duties of Trustee hereunder. Nothing in this Trust Agreement, express or implied, is intended to or shall confer upon any other person, including, without limitation, any shareholders, creditors, regulatory or governmental or regulatory authority, conservator, receiver or similar official of any party, any right or remedy as a third party beneficiary or otherwise, of any nature whatsoever, under or by reason of this Trust Agreement.

21. Execution in Counterparts; Electronic Execution and Delivery . This Trust Agreement may be executed in two or more identical counterparts, each of which shall be an original, and all counterparts shall constitute one and the same agreement. The delivery of copies of this Trust Agreement and any written notices, instruments, Officer’s Certificates provided incident to or in connection with this Agreement, including, without limitation, any signatures, pages by PDF, facsimile or electronic transmission shall constitute effective execution and delivery as to the parties as provided in Section 16 above, and shall have the same force and effect as manually executed originals.

 

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22. Effect of Termination . Upon the Trust Termination Date, any Company Shares, if any, then held by the Trust will be delivered to MSF or to its designee as directed by MSF or the MSF Representatives, subject to Section 5(e) and the Separation Agreement. Upon and following the termination of the Trust and the Trust Agreement, the Trustee shall have no further obligation or liability whatsoever with respect to this Trust Agreement or the Company Shares or any other Trust assets, if any. Such termination shall not affect any rights or obligations arising or resulting from any acts, omissions, issues or events arising prior to the termination of the Trust.

23. Tax Reporting . The Trustee shall have no responsibility for any tax advice or for the tax consequences of this Trust Agreement or the Separation Agreement, and MSF and the Company are relying on their own tax advisors as to all tax matters. MSF and the Company shall provide the Trustee with MSF’s and the Company’s Form W-8 and an original Form W-9, if and as applicable, together with any other documentation and information requested by Trustee in connection with Trustee’s reporting obligations under applicable United States Internal Revenue regulations or Venezuela income tax law.

24. WAIVER OF JURY TRIAL . EACH PARTY TO THIS AGREEMENT HEREBY WAIVES ANY RIGHT THAT IT MAY HAVE TO A TRIAL BY JURY ON ANY CLAIM, COUNTERCLAIM, SETOFF, DEMAND, ACTION OR CAUSE OF ACTION (1) ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT OR (2) IN ANY WAY IN CONNECTION WITH OR PERTAINING OR RELATED TO OR INCIDENTAL TO ANY DEALINGS OF THE PARTIES TO THIS AGREEMENT OR IN CONNECTION WITH THIS AGREEMENT OR THE EXERCISE OF ANY PARTY’S RIGHTS AND REMEDIES UNDER THIS AGREEMENT OR THE CONDUCT OR THE RELATIONSHIP OF THE PARTIES TO THIS AGREEMENT, WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER IN CONTRACT, TORT OR OTHERWISE. EACH PARTY HEREBY FURTHER ACKNOWLEDGES AND AGREES THAT EACH HAS REVIEWED OR HAD THE OPPORTUNITY TO REVIEW THIS WAIVER WITH ITS RESPECTIVE LEGAL COUNSEL, AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH SUCH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A CONSENT BY ALL PARTIES TO A TRIAL BY THE COURT.

25. Miscellaneous . The words “include,” and any derivation thereof mean without limitation by reason of enumeration or otherwise. The headings contained in this Agreement are for convenience of reference only and shall not affect the meanings of the terms of this agreement. Any reference to an agreement means that agreement as amended or supplemented and then in effect. Any reference to gender includes all genders, and the singular includes the plural and vice versa. Whenever MSF is required to take any action, make any delivery or provide any notice hereunder, any two of the MSF Representatives may act for and on behalf of MSF upon and following a change in “control” of MSF. Change in control shall have the same meaning as in the BHC Act and/or the United States’ Change in Bank in Control Act.

 

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26. Publicity . No party will (a) use any other party’s proprietary indicia, trademarks, service marks, trade names, logos, symbols, or brand names, or (b) otherwise refer to or identify any other party in advertising, publicity releases, or promotional or marketing publications, or correspondence to third parties without, in each case, securing the prior written consent of such other party; provided, however , the Company may identify the Trustee in any disclosures, reports or documents filed or provided under the Securities Act or the Securities Exchange Act of 1934.

[SIGNATURE PAGE FOLLOWS]

 

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IN WITNESS WHEREOF , the parties hereto have caused this Trust Agreement to be executed under seal by their respective duly authorized officers as of the date first above written.

 

MERCANTIL SERVICIOS FINANCIEROS, C.A.
By:   /s/ Luis Alberto Fernandes
Name:   Luis Alberto Fernandes
Title:   General Counsel
MERCANTIL BANK HOLDING CORPORATION
By:   /s/ Millar Wilson
Name:   Millar Wilson
Title:   Vice Chairman and CEO
TMI TRUST COMPANY , solely as trustee and
not individually
By:   /s/ Dennis Gillespie
Name:  

Dennis D. Gillespie

Title:  

Executive Vice President

 

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EXHIBIT I

Other Terms and Conditions

1. Transfer Restrictions

The following transfer restrictions shall be maintained by the Company and its Transfer Agent.

NONE OF THE SHARES OF THE COMPANY’S SHARES OF CLASS A COMMON STOCK OR CLASS B COMMON STOCK (INDIVIDUALLY AND COLLECTIVELY, “SHARES”) HAVE BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE ACT OF 1934 (THE “FEDERAL SECURITIES LAWS”), OR THE SECURITIES, OR “BLUE SKY,” LAWS OF ANY STATE OR OTHER DOMESTIC OR FOREIGN JURISDICTION. NEITHER THESE SHARES NOR ANY INTEREST THEREIN MAY BE SOLD, PLEDGED, HYPOTHECATED, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO A REGISTRATION STATEMENT IN EFFECT UNDER THE FEDERAL SECURITIES LAWS, INCLUDING A REGISTRATION STATEMENT ON SEC FORM 10 OR A WRITTEN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE FOR SUCH TRANSACTIONS UNDER THE FEDERAL SECURITIES LAWS AND OTHER APPLICABLE LAWS.

 

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SCHEDULE A

Schedule of Fees for Services as Trustee

 

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Exhibit 10.3

AMENDMENT NO. 1

TO

DISTRIBUTION TRUST AGREEMENT

This Amendment No. 1 (the “ Amendment ”) amends the Distribution Trust Agreement (the “ Agreement ” or “ Trust Agreement ”), dated as of March 12, 2018 by and among Mercantil Servicios Financieros, C.A., a Venezuela corporation (“ MSF ”), Mercantil Bank Holding Corporation, a Florida corporation (the “ Company ”) and TMI Trust Company, a Texas trust company, solely as trustee and not in its individual capacity (the “ Trustee ”), which established the Distribution Trust (the “ Trust ”). Upon execution and delivery, this Amendment shall be immediately effective.

The Company and MSF believe it is necessary and appropriate to amend the Trust and the Trust Agreement to preserve and protect the value of the Company Shares held in the Trust, and the value of the Distributed Shares to MSF shareholders upon and following the Distribution.

In consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are acknowledged, the parties hereto, intending to be legally bound, agree as follows:

1. All references to “Subsidiary Shares” shall mean the 1,435,954 shares of Company Class A Stock and the 1,224,245 shares of Company Class B Stock to be held by MSF Subsidiaries immediately following the distribution and any other Company Shares that may be held by MSF Subsidiaries.

2. MSF, the Company and the MSF Subsidiaries have agreed that all MSF Subsidiaries’ rights, title and interest in and to the Subsidiary Shares shall be transferred to MSF immediately following such shares becoming Retained Shares following the Distribution, and shall, upon such transfer, continue to be held as Retained Shares solely on behalf of MSF hereunder. Following such transfers, all references in Section 5 of the Agreement to MSF Subsidiaries shall mean MSF.

3. The last sentence in Section 5(d) shall be amended to read in its entirety as follows:

“MSF or the MSF Representatives, and the Company shall jointly notify the Federal Reserve of such disposition.”

4. The words “or any MSF Representative” shall be added at the end of the first sentence of Section 5(e).

5. Existing Section 5(e) shall be amended to delete all references to “MSF Subsidiaries” and renumbered and moved to become new Section 5(h) . New Section 5(e) is added and shall read in its entirety as follows:

“(e) In order to preserve and protect the value of the Distributed Shares and Retained Shares, all Retained Shares held at any time in the Trust or otherwise, and whether before or after the Distribution, shall ipso facto and automatically be contributed by MSF to the Company and held by the Trustee solely on behalf of, and for the benefit of, the Company, effective immediately prior to any Change in Control of MSF.

6. New Sections 5(f) and 5(g) are added, which shall read in their entirety as follows:

(f) Upon the occurrence of any Change in Control action or event described in Section 5(e) (a “ Control Event ”), the Company and any MSF Representatives then able to act, shall, as promptly as possible upon learning of such Control Event, notify the Trustee in writing and deliver Officer’s Certificates confirming their belief that a Control Event has occurred, and all Retained Shares ipso facto and automatically shall be held hereunder on behalf of and for the sole benefit of the Company effective immediately prior to the Control Event. If a Control Event has occurred upon or prior to the Trust Termination Date, and No Change in Control Certificate has been delivered timely to the Trustee as provided in Section 5(g) , all Retained Shares shall be delivered to the Company as a contribution to the Company’s capital to preserve and protect the value of the Distributed Shares.”

(g) Within 60 days following a Control Event, a majority of MSF Representatives then able to act, which may be one or more MSF Representatives, and the Company’s Board of Directors, can determine that the earlier determination that a Control Event had occurred was a mistake, and the Company’s chief executive officer and such MSF Representative(s) shall deliver a joint Officer’s Certificate (a “ No Control Event Certificate ”) to the Trustee confirming that no Change in Control has occurred and is continuing, and that any prior determination of a Control Event is void ab initio . Upon delivery of such No Control Event Certificate to the Trustee, which shall confirm that the Federal Reserve has no objection thereto, all remaining Retained Shares will thereafter be held in the Trust for the benefit of MSF, provided the formerly Retained Shares would be Registrable Shares and are returned to and held by the Distribution Trust on behalf of MSF in accordance with the Distribution Trust Agreement, unless and until a subsequent Control Event occurs, whereupon Sections 5(e) and 5(f) shall be effective ipso facto and automatically immediately prior to such subsequent Control Event.

 

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7. Section 6 shall be amended to read in its entirety as follows:

 

  6. Term of Trust .

(a) The Term shall commence on the Delivery Date, and shall terminate on the Trust Termination Date. The “ Trust Termination Date” shall be the earliest of (i) the Distribution of all the Distributed Shares and the delivery to transferees from the Trust, which may include MSF or the Company, as provided in Section 5 above, of all the Retained Shares, together with all the other Trust assets, if any, pursuant to the applicable provisions of this Trust Agreement and (ii) the date following the Distribution Date when MSF is deemed by the Federal Reserve to not “control” the Company under Section 2(a)(2) of the BHC Act as a result of its Company Share ownership or otherwise, provided no Control Event has occurred or is continuing and the period for delivery of a No Control Event Certificate has expired without delivery of such Certificate. Otherwise, the Trust shall terminate no later than the Business Day immediately preceding the second anniversary of the Delivery Date, provided no Control Event has occurred and is continuing (the “ Outside Date ”). The Company and the MSF Representatives shall confirm the occurrence of such events in Officer’s Certificates delivered to the Trustee.

(b) Neither a Control Event nor a No Change in Control Certificate shall cause the Trust to terminate.

8. Section 8(b) shall be amended as to read in its entirety as follows:

(b) Any dividend declared and paid by the Company prior to the Delivery Date shall be paid and belong solely to MSF or its designee as long as MSF is the beneficiary of the Retained Shares, and shall not be property of the Trust or held by the Trustee. If any such dividend is received by the Trustee, the Trustee shall hold such funds in trust solely for the benefit of MSF or its designee and deliver such funds promptly as directed in writing by MSF, unless such delivery is prohibited or restricted by applicable Law or such dividend is payable after a Control Event has occurred and is continuing. If, as a result of any applicable Law, the Company cannot pay or deliver the dividend for such shares to MSF, it shall provide the Trustee with an Officer’s Certificate to such effect, and the Trust shall hold such amounts in trust in an account invested in short term U.S. Treasury or U.S. government agency securities as the Trustee is directed jointly in an Officer’s Certificate from the MSF Representative(s) and the Company. Absent any such direction, such amounts shall be held in an interest bearing money market deposit account with a U.S.

 

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commercial bank having not less than $50 billion in capital. If, upon the Trust Termination Date, such amounts cannot be paid or delivered to MSF, Trustees shall return such amounts to the Company which shall hold such amounts in trust for the benefit of MSF, and shall, subject to applicable Law, pay such amounts to a former MSF subsidiary, as directed by a MSF Representative.

9. Section 8(g) shall be amended to read in its entirety as follows:

(g) Nothing herein, including Section 5, is intended to, or shall restrict the Company or any of its subsidiaries from, following the Distribution, approving, entering into or completing one or more mergers, consolidations, statutory or other share exchanges, stock splits, stock dividends, stock buybacks or repurchases, or other actions or transactions, including reclassifications or other changes, which affect the number or classes of Distributed Shares or Retained Shares after the Distribution, and/or which result in any Distributed Shares or Retained Shares being converted into the right solely to receive cash in respect of some or all Company Shares held (each, a “ Reorganization Event ”). The Company shall deliver promptly an Officer’s Certificate to the Trustee describing the Reorganization Event and specifying its effective time and any changes to the Distributed Shares and/or the Retained Shares, and showing the appropriate adjustments reflecting any Reorganization Events.

10. The following new Section 8(h) is added:

(h) In the event that the Company reduces the number of Company Class A Shares or Class B Shares (or any successor classes to Class A Shares or Class B Shares) or changes the classes of authorized Company Shares through one or more Reorganization Events, MSF shall sell to the Company at the same price paid by the Company for Company Shares in each Reorganization Event, such number of each class of Company Shares or shares, as will result in MSF holding not more than 19.9% of each class of Company Shares then outstanding. If, as a result of any applicable Law, the Company cannot pay or deliver the purchase price for such shares to MSF, it shall provide the Trustee with an Officer’s Certificate to such effect, and the Trust hold such purchase amounts in trust in an account invested in short term U.S. Treasury or U.S. government agency securities as directed jointly in an Officer’s Certificate from the MSF Representative(s) and the Company delivered to the Trustee. If, upon the Trust Termination Date, such amounts cannot be paid or delivered to MSF, the Trustee shall return such amounts to the Company, which shall hold such amounts in trust for the benefit of MSF, and shall, subject to applicable Law, pay such amounts to a former MSF subsidiary, as directed by the MSF Representative(s).

 

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11. A new paragraph is added at the end of Section 11 , which shall read as follows:

“The Trustee shall not be responsible for any investment decisions or results (including losses) with respect to funds invested hereunder, and MSF and the Company shall be solely responsible for such matters. The Trustee shall not be responsible for or make any payments that are inconsistent with applicable Law.”

12. Section 14 is amended to read in its entirety as follows:

14. Other Terms Applicable to Trustee and Certain Defined Terms . Certain terms used herein shall have the respective meanings provided in Exhibit 2 . Exhibits 1 and 2 are incorporated by reference herein, and shall be a part of this Agreement as if fully set forth herein.

13. New Exhibit 2 is added and shall read in its entirety as shown on the attached.

Except as amended above by this Amendment, the Trust and the Agreement shall remain in full force and effect unmodified hereby.

[SIGNATURE PAGE FOLLOWS]

 

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IN WITNESS WHEREOF , the parties hereto have caused this Amendment to the Trust Agreement to be executed as of June 12, 2018 under seal by their respective duly authorized officers as of the date first above written.

 

MERCANTIL SERVICIOS FINANCIEROS,

C.A.

By:   /s/ Luis Alberto Fernandes
Name:   Luis Alberto Fernandes
Title:   General Counsel

 

MERCANTIL BANK HOLDING

CORPORATION

By:   /s/ Millar Wilson
Name:   Millar Wilson
Title:   Vice Chairman and CEO

 

TMI TRUST COMPANY , solely as trustee and not individually

By:   /s/ Kathy E. Knapp
Name:   Kathy E. Knapp
Title:   Vice President

 

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EXHIBIT 2

Certain Defined Terms

“ Control ,” including the terms “controlling,” “controlled” and “under common control with,” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of any person, or the power to appoint or remove directors, whether through the ownership of voting securities, or otherwise, and as such terms are used in the Bank Holding Company Act of 1956 (the “ BHC Act ”), the Change in Bank Control Act of 1978 (the “ Change in Control Act ”), or U.S. federal securities Laws.

“ Change in Control ” means, with respect to a Person, any change in Control for any purposes, including generally under the BHC Act, Change in Control Act, and/or United States federal securities Laws (regardless of whether the BHC Act, Change in Control Act or such securities law would apply to the Person taking Control or to any transaction, event or action); and shall also include (i) any takeover, acquisition, merger, consolidation, statutory or other share exchange, receivership, bankruptcy, conservatorship or transaction, event or action of any kind, including the removal, replacement, detention, incarceration, or diminution or limitation of any kind upon the duties, authority or discretion of, any one or more of such Person’s executive officers or directors or the board of directors or any committee thereof, (ii) any other action by any Governmental Authority, including any attempts to Control any Person, directly or indirectly, or any taking, directly or indirectly, by any Governmental Authority, of any interest in Company Shares directly or indirectly held of record or beneficially by MSF, and/or (iii) the adoption or enforcement of any Law, which has the same or similar effects, regardless of the form or duration of such transactions, actions or events and whether or not such transactions, events, actions or Laws are specific to MSF, and/or other financial institutions, or are more general in nature or effect.

“ Governmental Authority ” means any applicable executive, legislative, judicial or other governmental, quasi-governmental, civil or military, regulatory or self-regulatory authority, agency, department, board, commission, political subdivision or instrumentality, whether federal, state, local or foreign, and any Person exercising or asserting, directly or indirectly, the powers of any of the foregoing, and any Person owned or controlled by, or acting for or on behalf of any of the foregoing.

“ Law ” means any federal, state, local or foreign law (including common law), statute, code, rule, regulation, ordinance, order or other published requirement enacted, promulgated, issued or adopted by a Governmental Authority.

“ Person ” means any individual, corporation, partnership, firm, joint venture, association, joint-stock company, trust, unincorporated organization, Governmental Authority or other entity.

 

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Exhibit 10.4

REGISTRATION RIGHTS AGREEMENT

This Registration Rights Agreement, dated as of March 12, 2018 (this “ Agreement ”), is by and between MERCANTIL SERVICIOS FINANCIEROS, C.A., a Venezuela corporation (“ MSF ”), and MERCANTIL BANK HOLDING CORPORATION, a Florida corporation and a subsidiary of MSF (the “ Company ”). Capitalized terms used in this Agreement and not otherwise defined herein have the respective meanings provided in the Separation Agreement.

MSF and the Company are parties to that certain Separation and Distribution Agreement, dated as of March 12, 2018 (the “ Separation Agreement ”). MSF has delivered ownership of all issued and outstanding Company Class A Shares and Class B Shares (collectively, “ Company Shares ”) to the Distribution Trust on the Delivery Date. The Distribution Trust holds the Distributed Shares for the benefit of the Record Holders, and will cause the Distributed Shares to be distributed to the Record Holders on the Distribution Date. The Retained Shares will be held in the Distribution Trust for the benefit of MSF subsidiaries pending the transfer to MSF of Retained Shares by MSF subsidiaries, and the subsequent sale or disposition of Retained Shares by MSF and the Trust Termination Date.

The Company has agreed in Section  8.5 of the Separation Agreement to provide MSF certain registration rights with respect to the Retained Shares, which are set forth in this Agreement.

In consideration of the premises and other good and valuable consideration, the receipt of which is acknowledged, the parties, intending to be legally bound, agree as follows:

ARTICLE I

GENERAL

1.1 Definitions . As used in this Agreement, the following terms shall have the following respective meanings:

“ Affiliate ” means, with respect to any person, any other person that controls, or is controlled by, or is under common control with, such Person.

“ BHC Act ” means the U.S. federal Bank Holding Company Act of 1956 and Federal Reserve rules and regulations thereunder.

“ Change in Control ” means, with respect to a Person, any change in Control for any purposes, including generally under the BHC Act, Change in Control Act, and/or United States federal securities Laws (regardless of whether the BHC Act, Change in Control Act or such securities Laws would apply to the Person taking Control or to any transaction, event or action); and also shall include (i) any takeover, acquisition, merger, consolidation, statutory or other share exchange, receivership, bankruptcy, conservatorship or other transaction, event or action of any kind, including the removal, replacement, detention, incarceration, or diminution or limitation of any kind upon the duties, authority or discretion of, any one or more of such Person’s executive officers or directors or the board of directors or any committee thereof, (ii) any other action by any Person, including attempts to exercise Control of a Person, any taking, directly or indirectly, by any Person, of any interest in Company Shares held, directly or indirectly, of record or beneficially by MSF, or (iii) the adoption or enforcement of any Law, which has the same or similar effects, regardless of the form or duration of such transactions, actions or events; and whether or not any such transactions, actions or events are specific to MSF, and/or other financial institutions, and shall include transactions, events, actions or Laws that are more general in nature or effect.

“ Change in Control Act ” means the U.S. federal Change in Bank Control Act of 1978 and Federal Reserve and OCC rules and regulations thereunder.

“ Control ,” including the terms “controlling,” “controlled” and “under common control with,” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of any person, or the power to appoint or remove directors or executive officers, whether through the ownership of voting securities, or otherwise, and as such terms are used in the BHC Act, Change in Control Act, or U.S. federal securities laws.

“ Excluded Offering ” means a public offering of Company Shares (or securities convertible into, or exchangeable or exercisable for Company Shares, or which have voting rights or participation features with Company Shares) (i) pursuant to any stock purchase plan, dividend reinvestment plan, stock ownership plan, or stock option or equity compensation or incentive plan or other similar plan where stock is being offered or issued, directly or indirectly, to or for the benefit of any employees, potential employees, officers, directors, agents or consultants of the Company and/or its subsidiaries, or (ii) made as consideration pursuant to an acquisition or business combination (whether a merger, consolidation, share exchange or otherwise), a partnership or joint venture or strategic alliance or investment by the Company or similar non-capital raising transaction (but not an offering to raise capital or monies to pay the purchase consideration for such an acquisition).

“ Federal Reserve ” means the Board of Governors of the Federal Reserve System and its delegees.

“ Governmental Authority ” means any applicable executive, legislative, judicial or other governmental, quasi-governmental, civil or military, regulatory or self-regulatory authority, agency, department, board, commission, political subdivision or instrumentality, whether federal, state, local or foreign, and any Person exercising or asserting, directly or indirectly, the powers of any of the foregoing, and any Person owned or controlled by, or acting for or on behalf of any of the foregoing.

“ IPO ” means an initial underwritten public offering of Company Class A common stock.

“ Misstatement ” means an untrue statement of a material fact contained in a document, or an omission of a material fact required to be stated in such document or necessary to make the statements in such document not misleading in light of the circumstances under which they were made.

“ OCC ” means the Office of the Comptroller of the Currency.

“ Registrable Shares ” means the Retained Shares held in the Distribution Trust on behalf of MSF, including any Company Shares initially held by the Distribution Trust as Retained Shares on behalf of MSF subsidiaries immediately following the Distribution and which Retained Shares have been transferred and delivered to MSF by such subsidiaries, and any Company Shares received in respect of such Retained Shares solely as a result of a Reorganization Event. Registrable Shares shall cease to be Registrable Shares upon the earliest to occur of the following: (i) the sale of such shares pursuant to a Registration Statement, Rule 144 or other exemptions from registration, or any other sales, transfers, contribution, buybacks, or repurchases of Registrable Securities to or by the Company or (ii) any remaining Retained Shares become eligible for resale by MSF under Rule 144 without volume and manner of sale limitations, (iii) upon and following any Change in Control of MSF or (iv) upon the occurrence or existence of any event or condition described in Section 2.7(1) below.

“ Registrable Shares outstanding ” means the number of shares determined by calculating the total number of outstanding Company Shares that are Registrable Shares at any date of determination.

 

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“ Registration Expenses ” means all fees and expenses incurred by the Company relating to any registration, qualification or compliance pursuant to this Agreement, including all registration and filing fees, Company counsel fees and expenses, exchange listing fees, transfer agent’s and registrar’s fees, cost of distributing prospectuses in preliminary and final form as well as any supplements thereto, printing expenses, fees and disbursements of one Company counsel, blue sky fees and expenses, Financial Industry Regulatory Authority fees, expenses of the Company’s independent accountants, and any other Persons retained by the Company, but excluding the compensation of regular employees of the Company, which shall be paid in any event by the Company, and excluding Selling Expenses, which shall be paid by MSF.

“ Registration Statement ” means a Piggyback Registration Statement or a Shelf Registration Statement.

“ Reorganization Event ” has the meaning provided in Section  3.2(a) .

“ Rule 144 ” means Rule 144 promulgated by the SEC pursuant to the Securities Act, as amended from time to time, or any similar rule or regulation hereafter adopted by the SEC having substantially the same effect as such Rule.

“ SEC ” means the U.S. Securities Exchange Commission.

“ Securities Act ” means the Securities Act of 1933, and the SEC rules and regulations thereunder.

“ Selling Expenses ” means all underwriting discounts, selling commissions and stock transfer taxes applicable to the sale of Registrable Shares, Counsel for MSF, and any expenses charged by underwriters, including counsel fees and expenses, for diligence or otherwise in connection with any Underwritten Offering, subject to Section  2.4 .

“ Share Lock-up ” means the restrictions contained in or contemplated by the IPO underwriting agreement or other underwriting agreements, or any documents or agreements related thereto with respect to Company Shares, which limit offers, sales and registrations of Company Shares by the Company and its Affiliates or selling shareholders and related matters following the pricing of an IPO and any other Underwritten Offering of Company Shares, after giving effect to any waivers, modifications or terminations of such restrictions.

“ Underwritten Offering ” means an offering of securities registered with the SEC under the Securities Act conducted by one or more underwriters pursuant to the terms of an underwriting agreement.

ARTICLE II

REGISTRATION AND SHARE TRANSFERS

2.1 Securities Act Transfer Restrictions . All issued and outstanding Company Shares have been transferred to and are held in the Distribution Trust, and the Distribution Trust Agreement restricts transfers of such Company Shares, and all interests therein and in the Distribution Trust. MSF is an Affiliate of the Company and the Registrable Shares may not be offered or sold except pursuant to an effective registration statement or an available exemption from registration under the Securities Act. Accordingly, MSF shall not and shall not permit any MSF subsidiaries to, directly, indirectly or through others, offer, sell or dispose of any Company Shares or any interest therein, except pursuant to a Registration Statement as contemplated herein or pursuant to SEC Rule 144 or another

 

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exemption from registration under the Securities Act, if available. Prior to any transfer of Company Shares other than pursuant to an effective registration statement, MSF shall notify the Company of such transfer and the Company may require MSF to provide, prior to such transfer, such evidence that the transfer will comply with the Securities Act, including written representations and an opinion of counsel, as the Company and/or its Transfer Agent may reasonably request. The Company has imposed stop-transfer instructions with respect to any Company Shares beneficially owned by directly or indirectly MSF, and has placed restrictive legends in the Company’s and the Transfer Agents’ books evidencing the Company Shares, as set forth in Exhibit  1 .

2.2 Registrable Shares . The initial number of Registrable Shares shall be 14,767,433 Class A Shares and 10,597,370 Class B Shares, which shall be subject to appropriate adjustment in the case of one or more Reorganization Events. No Company Shares purchased or acquired by or on behalf of MSF, directly or indirectly, or otherwise beneficially owned directly or indirectly by MSF at any time after the Delivery Date, will be Registrable Shares, except (x) Company Shares received by MSF subsidiaries in the Distribution and transferred by such subsidiaries to MSF and (y) those Company Shares received by MSF after the Distribution in respect of Retained Shares solely as a result of one or more Reorganization Events. No Company Shares held by MSF subsidiaries shall be registrable Shares, unless and until transferred and delivered to MSF, and held by MSF for sale or disposition.

2.3 Piggyback Registrations .

(a) The Company shall notify MSF in writing at least 10 Business Days (or such shorter period of time that is reasonable under the circumstances) prior to the filing of a Piggyback Registration Statement (as defined below), including the filing of a preliminary prospectus supplement, in the case of a Piggyback Offering to be conducted pursuant to a shelf registration statement that is already effective, for purposes of an Underwritten Offering of Company Shares to the public (whether for its own account or the account of others) (a “ Piggyback Offering ”), other than an Excluded Offering, and shall afford MSF the opportunity to include in such registration statement all or part of the Registrable Shares, subject to the terms and conditions hereof and the Separation Agreement. If MSF seeks to include any Registrable Shares in any such Registration Statement, MSF shall notify the Company in writing, within five Business Days after receipt of the notice from the Company, provided that MSF shall have two Business Days after receipt of a such a notice to request inclusion of Registrable Securities in a Piggyback Registration Statement in the case of a “bought deal”, “registered direct offering,” “at the market” or “overnight transaction” where no preliminary prospectus is used. If MSF decides not to include all of the Registrable Shares in any such registration statement, MSF shall nevertheless continue to have the right to include any Registrable Shares in any subsequent registration statement as may be filed by the Company with respect to such an offering (other than an Excluded Offering), all upon the terms and conditions set forth herein, except to the extent such Registrable Shares have been registered for resale pursuant to Section  2.3 . Any registration statement (including the filing of a preliminary prospectus supplement, in the case of a Piggyback Offering to be conducted pursuant to a shelf registration statement that is already effective) filed for purposes of such an underwritten offering of Company Common Stock that includes an offer of Registrable Shares is referred to herein as a “ Piggyback Registration Statement .”

(b) MSF may elect to withdraw from any Underwriting Offering by written notice to the Company and the managing underwriter, delivered at least 10 calendar days prior to the effective date of the Piggyback Registration Statement or in the case of a Piggyback Registration Statement to be consummated pursuant to a shelf registration statement that is already effective or that will automatically become effective upon filing, two days after the public announcement of the Underwritten Offering or if the Underwritten Offering is publicly announced at the beginning of a Business Day, 3:00 P.M. New York City time on such day.

(c) The Company shall have the right to select the managing underwriter or underwriters to administer any underwritten offering pursuant to a Piggyback Registration Statement, and shall have the right to consent to any underwriter proposed for an underwritten offering of Company Shares by MSF pursuant to a Shelf Registration Statement.

 

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(d) MSF shall enter into an underwriting agreement with the Company and the underwriters and shall sell its Registrable Securities included in any Piggyback Underwritten Offering, upon the same terms and conditions as those applicable to the Company, except as expressly provided herein.

(e) MSF may exercise the Piggyback Registration Rights only as to the same class of Company Shares as the Company proposes to sell in the underwritten offering covered by a Piggyback Registration Statement.

(f) The Company shall have the right to withdraw or delay, any Piggyback Registration Statement or terminate any associated Piggyback Underwritten Offering at any time in the case of a Piggyback Underwritten Offering, without MSF’s consent, whether or not MSF has elected to include Registrable Shares in such registration. Any such termination shall not affect MSF’s registration rights hereunder to register Registrable Shares, and in the case of a delay, shall be permitted to delay its registration request for the period of the Company’s delay as to the Company Shares.

(g) At any time when an effective Shelf Registration Statement is current, the Company may, but shall have no obligation to permit, MSF to include Company Shares in a Piggyback Registration Statement, and if any such Company Shares are included in a Piggyback Registration Statement and sold, an identical number of Company Shares otherwise registered for resale by MSF shall be deregistered from the Shelf Registration Statement.

2.4 Shelf Registration; Exempt Resales .

(a) At any time, subject to any Share Lock-up that MSF or the Company is then a party to, upon MSF’s written request, the Company shall use commercially reasonable efforts to file with the SEC, as soon as practicable, a registration statement on Form S-1, Form S-3, or such other SEC form that the Company is eligible to use with respect to resales by MSF from time to time pursuant to SEC Rule 415, whether underwritten or otherwise, of any Registrable Shares then outstanding by MSF (the “ Shelf Registration Statement ”). The Company shall use Form S-3, if it is then eligible to use Form S-3.

(b) The Company shall use commercially reasonable efforts to (1) cause the Shelf Registration Statement to be declared effective under the Securities Act as promptly as practicable after it is filed and (2) keep the Shelf Registration Statement (or a replacement Shelf Registration Statement) continuously effective and in compliance with the Securities Act and usable for the resale of Registrable Shares until the earlier of (i) the second anniversary of effectiveness of the Shelf Registration Statement and (ii) such time as no Registrable Shares remain, as determined by the Company.

(c) The plan of distribution contained in the Shelf Registration Statement referred to in this Section  2.3 (or related prospectus supplement) shall be determined by MSF, subject to the reasonable review of and consent (not to be unreasonably delayed, conditioned or withheld) of the Company. MSF shall be entitled to sell Registrable Shares pursuant to the Shelf Registration Statement from time to time and at such times as MSF shall determine, subject to Section  2.5 below. MSF shall promptly advise the Company of its intention to sell Registrable Shares pursuant to the Shelf Registration Statement.

 

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(d) If MSF intends to sell Registrable Shares pursuant to the Shelf Registration Statement through an Underwritten Offering, the Company shall use commercially reasonable efforts to facilitate such an offering; provided , however , that the Company will not be required to facilitate any Underwritten Offering, unless (i) the Registrable Shares requested to be included in such Underwritten Offering constitute at least 25% of the Registrable Shares then outstanding and (ii) the anticipated aggregate offering price for such Underwritten Offering, based on the then-current market prices, net of underwriting discounts and commissions, would exceed $50,000,000. MSF may sell Registrable Securities pursuant to the Shelf Registration Statement, subject to applicable Share Lock-ups, in no more than one Underwritten Offerings during the term of this Agreement.

(e) Notwithstanding the registration obligations set forth in Section  2.2(a) , in the event the SEC informs the Company that all of the Registrable Shares then outstanding cannot, as a result of the application of Rule 415 of the Securities Act, be registered for resale as a secondary offering on a single registration statement, the Company shall (1) file amendments to the initial Shelf Registration Statement as required by the SEC or (2) withdraw the initial Shelf Registration Statement and file a new Shelf Registration Statement, in either case covering the maximum number of Registrable Shares permitted to be registered by the SEC, and shall use commercially reasonable efforts to file with the SEC, as promptly as practicable, one or more additional Shelf Registration Statements to register for resale those Registrable Shares that were not registered for resale on the initial Shelf Registration Statement, as amended, or the new Shelf Registration Statement.

2.5 Expenses of Registration . Except as specifically provided herein, all Registration Expenses incurred in connection with any registration, qualification or compliance hereunder shall be borne and paid by the Company and all Selling Expenses shall be borne and paid by MSF (except in the case of a Piggyback Offering in which the Selling Expense shall be allocated on a pro rata basis between MSF and the Company based on the number of Company Shares sold by each of them in such Piggyback Offering). The respective obligations of the parties under Section 2.4 shall apply irrespective of whether a Registration Statement becomes effective or is withdrawn, delayed or suspended, or whether an Underwritten Offering is consummated or is withdrawn, delayed or suspended.

2.6 Suspension Periods . The Company may delay (i) the filing of any Registration Statement or (ii) any underwritten offering, and, if it determines necessary or appropriate, withdraw any Registration Statement that has been filed, but only if the Company’s board of directors makes a good faith determination that, if such delay or withdrawal is not taken or made, it would materially and adversely affect the Company and its subsidiaries taken as a whole or materially interfere with, or jeopardize the success of, any pending or proposed material transaction, including any material debt or equity financing, any material acquisition or disposition, any material recapitalization or reorganization or any other material transaction, whether due to commercial reasons, a desire to avoid premature disclosure of information or any other reason. Any period during which the Company has delayed a filing or an offering pursuant

 

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to this Section  2.5 is a “ Suspension Period .” In no event shall there be more than two Suspension Periods during any period of 365 consecutive days, and the aggregate number of days covered by any one or more Suspension Periods shall not exceed 60 days in the aggregate during any period of 365 consecutive days.

2.7 Obligations of the Company . Whenever required to effect the registration of any Registrable Shares under this Agreement, the Company shall, as expeditiously as practicable:

(a) before filing a registration statement pursuant to this Agreement, or any prospectus or any amendments or supplements thereto or any issuer free writing prospectuses related thereto, (i) furnish to MSF copies of all such documents proposed to be filed and give MSF a reasonable opportunity to review and comment on such documents to the extent these contain information regarding MSF or its plan of distribution before these are filed, (ii) make any changes with respect to, and in reliance upon, information regarding MSF reasonably requested by MSF to such documents prior to filing, and (iii) notify MSF of the effectiveness of each such registration statement;

(b) furnish to MSF such number of copies of a prospectus, including a preliminary prospectus, and each supplement thereto, in conformity with the requirements of the Securities Act, and such other documents as MSF may reasonably request in order to facilitate the disposition of Registrable Shares;

(c) use commercially reasonable efforts to register or qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by MSF and as required by such securities or Blue Sky laws, as long as the Company is not required in connection therewith or as a condition thereto to qualify to do business, to file a general consent to service of process in any such jurisdictions, or to become subject to taxation in any such jurisdiction;

(d) in the event of any Underwritten Offering, enter into and perform and cause its directors, executive officers and principal shareholders to enter into and perform their respective obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering;

(e) at any time when a prospectus covering the resale of Registrable Shares is required to be delivered under the Securities Act, promptly notify MSF of the happening of any event as a result of which such prospectus includes a Misstatement, and promptly prepare and file with the SEC (and furnish to MSF a reasonable number of copies of) a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Shares, such prospectus does not contain such Misstatement;

(f) in the event of any Underwritten Offering, use commercially reasonable efforts to furnish, on the date that such Registrable Shares are delivered to the underwriters for sale, (i) an opinion dated as of such date, of Company counsel for the purposes of such registration, in form and substance customarily given to underwriters in an Underwritten Offering, addressed to the underwriters, and (ii) a “comfort” letter dated as of such date, from the independent registered public accountants of the Company, in form and substance as is customarily given by independent registered public accountants to underwriters in an Underwritten Offering, addressed to the underwriters;

 

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(g) promptly notify MSF in the event of the issuance of any stop order suspending the effectiveness of a registration statement, or any order suspending or preventing the use of any related prospectus or suspending the qualification of any equity securities included in such registration statement for sale in any jurisdiction, and use commercially reasonable efforts to obtain the withdrawal of such order;

(h) use commercially reasonable efforts to facilitate the timely delivery of Registrable Shares, free, to the extent permitted by law and the Distribution Trust Agreement, of all restrictions on transferability and free of any Voting Trust or Distribution Trust restrictions or rights;

(i) use commercially reasonable efforts to comply with all applicable rules and regulations of the SEC under the Securities Act and the Exchange Act, including Rule 172, and notify MSF promptly if the Company no longer satisfies the conditions of Rule 172;

(j) use commercially reasonable efforts to list the Registrable Shares covered by such registration statement with any securities exchange on which the Company Shares are then listed;

(k) upon the request of MSF, use commercially reasonable efforts to de-register any Registrable Shares covered by the Shelf Registration Statement in order that such Registrable Shares may be included in a Piggyback Registration Statement, or vice versa; and

(l) the Company shall have no obligation under this Agreement to (i) register any Retained Shares, (ii) permit or facilitate the offering or sale of any Retained Shares pursuant to any Registration Statement or in any exempt transactions or (iii) pay any amounts to MSF or MSF Indemnified Parties, if and to the extent any such activity or payment would be limited or prohibited by United States federal or state Law, including United States executive order, the United States Department of the Treasury or any office thereof, including the Office of Foreign Assets Control, or any applicable United States, United Kingdom, European Union, Latin America or Canada sanctions (individually and collectively, “ Sanctions ”).

2.8 Obligations of MSF . Whenever required or requested by the Company or any underwriters to effect the registration of Registrable Shares or to offer and sell such securities, MSF agrees for itself and its Affiliates and as a condition to MSF’s obligations hereunder, to expeditiously:

(a) cooperate and cause their representatives to cooperate, with the Company and the underwriters, and provide all information requested, including a plan of distribution in the case of a Shelf Registration Statement, including any undertakings that the SEC may request with respect to any Registration Statement as to MSF’s possible status as a statutory underwriter;

(b) make MSF’s officers and representatives available in connection with the preparation of any Registration Statement and related prospectuses, free writing prospectuses, amendments and supplements, and any underwriting agreement and related agreements;

 

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(c) timely make any filings or requests, obtain any determinations, waivers, or nonobjections from, and file such notices with the Federal Reserve, the OCC, Nasdaq (or such other market on which the Company Shares are traded) and the SEC, which are necessary, desirable or expedient to the offer and sale of the Registrable Shares and the reporting thereof; and

(d) furnish to the Company in writing such information (the “ Shareholder Information ”) regarding itself and its Affiliates, the Registrable Securities held by MSF and its subsidiaries and the intended methods of disposition of the Registrable Securities held by them, which is necessary to effect any Registration Statement or which is requested by the Company. MSF shall promptly notify the Company of any Misstatement or other inaccuracy or change in information previously furnished by it or on its behalf to the Company or of the occurrence of any event, in either case as a result of which any Registration Statement or any prospectus or other information included or incorporated therein contains or would contain an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and promptly furnish to the Company any additional information required to correct and update any previously furnished information or required so that such Registration Statement or any prospectus or other information included or incorporated therein shall not contain Misstatements; and

(e) execute and deliver such agreements, officer’s certificates and other documents and instruments as the Company reasonably requests.

2.9 Other MSF Obligations . Further, MSF shall:

(a) offer and sell the Registrable Securities only in compliance with any requirements of the Separation Agreement, this Agreement, any conditions, commitments and requirements of the Federal Reserve or other applicable Governmental Authority and applicable securities laws;

(b) maintain the confidentiality of any confidential information, including “material nonpublic information” received from or otherwise made available by the Company to MSF or its representatives. Information that (i) is or becomes available to MSF from a public source other than as a result of a disclosure by MSF or any of its Affiliates, but only to the extent such information was not originally released in violation of a duty or contractual obligation of confidentiality, including any breaches of Company policy, (ii) is disclosed to MSF by a third-party source who MSF reasonably believes is not bound by an obligation of confidentiality to the Company, or (iii) is or becomes required to be disclosed by MSF by United States federal or state law, including by court order, or to a prospective transferee of Company Shares shall not be deemed to be “confidential information” for purposes of this Agreement;

(c) not use a free-writing prospectus to offer or sell any Company Shares or other Registrable Securities without the Company’s prior written consent;

(d) cause each MSF Affiliate that is a holder of Registrable Securities to comply with all of MSF’s obligations under this Agreement and the Separation Agreement, and MSF shall be responsible for any breaches or violations by such MSF Affiliate;

 

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(e) cause each MSF subsidiary that is a record holder of Company Shares immediately following the Distribution, to transfer and deliver all Company Shares held by such subsidiaries to MSF;

(f) cease, as of the date that a final prospectus is made available to it for distribution to prospective purchasers of Registrable Shares, to distribute or use copies of any preliminary prospectus prepared in connection with the offer and sale of such Registrable Shares. Further, upon receipt of any notice from the Company of the happening of any event of the kind described in Sections 2.6(e) or 2.7(d) , MSF shall immediately discontinue dispositions of Registrable Shares pursuant to the Registration Statement relating to such Registrable Shares until MSF receives copies of the supplemented or amended prospectus contemplated by Sections 2.6(e) or 2.7(d) and, if so directed by the Company, shall deliver to the Company (at the Company’s expense) all copies, other than permanent file copies, then in such Stockholder’s possession of the prospectus relating to such Registrable Shares current at the time of receipt of such notice. If any such event occurs due to the inaccuracy of the MSF Information for inclusion in the registration statement, notwithstanding any other provision hereof, MSF shall pay all expenses attributable to the preparation, filing and delivery of any supplemented or amended prospectus contemplated by this subsection.

2.10 Other Delays and Suspensions . No sales of Retained Shares shall be made pursuant to a Shelf Registration or otherwise when MSF is restricted by a Share Lock-up agreement or by the Company’s insider trading policy and during any Suspension Period. Upon receipt of written notice from the Company that (i) a registration statement or prospectus contains a Misstatement, (ii) an amendment to a registration statement is required to update such registration statement as a result of the filing of an annual report on Form 10-K under the Exchange Act, or (iii) that the Company intends to make a public offering of securities, whether or not these include Company Shares, MSF shall promptly discontinue disposition of Registrable Shares covered by such registration statement or prospectus until it has received copies of the supplemented or amended prospectus that corrects such Misstatement, or until MSF is advised in writing by the Company that the use of the prospectus may be resumed.

2.11 Termination of Registration Rights . MSF’s registration rights shall expire upon the earliest of (i) the date all Company Shares held by MSF may be sold without volume or manner of sale restrictions under SEC Rule 144 (after taking into account whether MSF is an Affiliate of the Company as determined by the Company), (ii) the Company has sold, transferred, contributed or disposed of all Registrable Shares or (iii) there are no Registrable Shares outstanding.

2.12 Delay of Registration; Furnishing Information; and Limitations of Underwritten Offerings .

(a) MSF shall have no right to obtain or seek an injunction restraining or otherwise delaying any registration, Registration Statement, offering, whether or not an Underwritten Offering, by the Company with respect to any securities as the result of any controversy that might arise with respect to the interpretation or implementation of this Agreement.

(b) It shall be a condition precedent to the obligations of the Company to take any action pursuant to Sections 2.2 or 2.3 that MSF shall furnish to the Company such information regarding MSF, the Registrable Shares held by MSF and the intended method of disposition of such securities, as each may be required to effect the registration, offering or sale of the Registrable Shares.

 

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(c) Notwithstanding anything to the contrary in this Agreement, if the managing underwriters in any Underwritten Offering determine in good faith that marketing factors, including any potential delay or price realizable per Company Shares, require a limitation of the number of Company Shares to be offered and sold pursuant to a Piggyback Registration Statement, the number of Company Shares that may be included in such Underwritten Offering will be allocated first to the Company and second to MSF’s Registrable Shares.

2.13 Indemnification .

(a) In the event any Registrable Shares are included in a Registration Statement under this Agreement, then, to the extent permitted by law, the Company will indemnify and hold harmless MSF and its officers, directors, agents and employees, and each Person, if any, who controls MSF within the meaning of the Securities Act or the Exchange Act and the officers, directors, agents and employees of such controlling persons (collectively, “ MSF Indemnified Parties ”), against any losses, claims, damages, or liabilities to which any of the foregoing Persons may become subject under the Securities Act, the Exchange Act or any state securities or Blue Sky laws, insofar as such losses, claims, damages, or liabilities (or actions, investigations or proceedings in respect thereof) (collectively, “ Losses ”) arise out of or are based upon: (1) any actual or alleged Misstatement contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments, supplements, or free writing prospectuses thereto, except to the extent that such actual or alleged Misstatement is based solely upon and in conformity with information provided in writing by MSF expressly for use therein; and/or (2) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities or Blue Sky law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities or Blue Sky law that is not otherwise covered by clause (1) and the Company will pay to MSF and MSF Indemnified Parties, all fees and expenses, including legal fees and expenses (including the fees and expenses of one local counsel), as reasonably incurred by, and billed to them in connection with investigating or defending any such Loss. The indemnity contained in this Section  2.12(a ) shall not apply to amounts paid in settlement, or compromise of any such Loss, if such settlement is effected without the prior written consent of the Company, unless such settlement contains an unconditional, irrevocable and complete release of the Company and Company Indemnified Parties, from all Losses arising from or related to the matters giving rise to such Losses that are the subject of the settlement.

(b) In the event any Registrable Shares are included in a Registration Statement under this Agreement, then, to the extent permitted by law, MSF will indemnify and hold harmless the Company and its officers, directors, agents and employees, and each Person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act and the officers, directors, agents and employees of such controlling persons (collectively, the “ Company Indemnified Parties ”), against any Losses to which any of the foregoing Persons may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such Losses arise out of or are based upon: (i) any actual or alleged Misstatement regarding MSF and provided in writing by MSF expressly for use in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments, supplements, or free writing prospectuses thereto; and/or (2) any violation or alleged violation by MSF of the Securities Act, the Exchange Act, any state securities or Blue Sky law or any rule or regulation promulgated under the Securities Act the Exchange Act or any state securities or Blue Sky law that is not otherwise covered by the immediately preceding clause (1); and MSF will pay to the Company, and the other Company Indemnified Parties, all fees and expenses, including legal fees and expenses (including the fees and expenses of one local counsel), as reasonably incurred by,

 

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and billed to them in connection with investigating or defending any such Losses. The indemnity contained in this Section  2.12(b) shall not apply to amounts paid in settlement or compromise of any such Losses, if such settlement or compromise is effected without the consent of MSF, unless such settlement contains an unconditional, irrevocable and complete release MSF and MSF Indemnified Parties, from all Losses including any Losses payable by the Company and/or Company Indemnified Persons to any underwriters, brokers or placement agents, arising from or related to the matters giving rise to such Losses that are the subject of the settlement. In no event shall the aggregate of all indemnification payments by MSF under this Section  2.12(b) exceed the gross proceeds from the offering in respect of Registrable Shares sold on behalf of MSF , provided MSF was, at all relevant times, and remains in compliance with its other representations, warranties, agreements and obligations under this Agreement and any other agreements related to the registration, offering or sale of Company Shares .

(c) Promptly after receipt by an indemnified party under this Section  2.12 of notice of the commencement of any claim or action (including any governmental action or investigation), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section  2.12 , deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however , that an indemnified party (together with all other indemnified parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the reasonable fees and expenses of such counsel to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or differing potential interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the indemnified party under this Section  2.12 , except to the extent such failure to give notice has a material adverse effect on the ability of the indemnifying party to defend such action.

(d) If the indemnification provided for in this Section  2.12 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any Loss or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such Losses in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such Losses, as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties’ relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. The amount MSF will be obligated to contribute pursuant to this Section  2.12(d) will be limited to an amount equal to the per share offering price multiplied by the number of Company Shares sold by MSF pursuant to the registration statement that gives rise to such obligation to contribute (less the aggregate amount of any damages that MSF has otherwise been required to pay in respect of such Losses or any substantially similar Loss arising from the sale of such Registrable Shares) , provided MSF was, at all relevant times, and remains in compliance with its other representations, warranties, agreements and obligations under this Agreement and any other agreements related to the registration, offering or sale of Company Shares. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution hereunder from any person who was not guilty of such fraudulent misrepresentation.

 

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(e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control; provided that MSF’s indemnification contribution and other payment obligations under any underwriting or placement agreement shall not limit or change MSF’s obligations under this Section  2.12 without MSF’s and the Company’s consent.

(f) The obligations of the Company and MSF under this Section  2.12 shall survive the completion of any offering or sale of Registrable Shares pursuant to a Registration Statement under this Agreement, and the termination of this Agreement. The indemnity and contribution agreements contained in this Section  2.12 are in addition to any liability that an indemnifying party may have to an indemnified party.

2.14 Rule 144 Reporting . With a view to making available to MSF the benefits of SEC Rule 144, which may permit the sale of the Registrable Shares to the public without registration, the Company agrees to use its reasonable best efforts to:

 

  (1) make and keep public information available, as this term is used in Rule 144 or any similar or analogous rule promulgated under the Securities Act, at all times after the effective date of this Agreement;

 

  (2) file with the SEC, in a timely manner, all reports and other documents required of the Company under the Exchange Act; and

 

  (3) so long as MSF owns any Registrable Shares, furnish to MSF promptly upon request, a written statement by the Company as to its compliance with the reporting requirements of Rule 144 and of the Exchange Act; a copy of the most recent annual or quarterly report of the Company; and such other reports and documents as MSF may reasonably request in availing itself of any rule or regulation of the SEC allowing it to sell any such securities without registration.

2.15 Restrictions on Holders of Registrable Shares .

(a) At any time when there is more than one beneficial holder of Registrable Shares, they shall act collectively as if they were one person holding all Registrable Shares, and any act, determination or request permitted or required to be done or made hereunder by the MSF Representatives on behalf of MSF and any other holder of Registrable Shares shall be done or made solely by the MSF Representatives.

(b) Company Shares may be transferred to and held by Persons other than MSF subject to the Separation Agreement and this Agreement; provided, however , no Company Shares shall be transferred to Company Subsidiaries and all Company Shares transferred to or held by any such other Person shall automatically cease to be Registrable Shares, and the transferee shall have no registration rights or other rights or benefits of MSF hereunder. Any transferred Company Shares shall be restricted securities subject to the restrictions of Section  2.1 hereof and to the Separation Agreement, absent the sale pursuant to an effective Registration Statement or a determination by the Company that such Company Shares are no longer are restricted in the hands of the transferee under applicable securities laws, this Agreement and the Separation Agreement.

 

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(c) Neither MSF or any MSF subsidiary shall purchase or acquire any Company Shares at any time, except MSF may receive Company Shares after the Delivery Date with respect to Retained Shares solely as a result of a Reorganization Event. Any such Company Shares received in a Reorganization Event shall be subject to Section  11.5(b) of the Separation Agreement.

2.16 Other Agreements Regarding Underwritten Offerings . MSF may participate in any Underwritten Offering pursuant to a Piggyback Registration Statement effected hereunder, provided MSF completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements, Share Lock-up agreements and other documents, officer’s certificates, instruments or agreements required under the terms of such underwriting arrangements, or which are reasonably requested by the Company.

2.17 Share Lock-up Agreements . MSF shall on behalf of itself and its subsidiaries, enter into a Share Lock-up agreement in connection with each Underwritten Offering (including any IPO) that includes Registrable Shares, and if, at any time that the Company conducts an Underwritten Offering that does not include Registrable Shares, and the underwriters for such Underwritten Offering so request, then MSF shall, and shall cause its Affiliates to, enter into a customary Share Lock-up agreement with respect to the Registrable Shares. A Share Lock-up Agreement shall be for not more than 180 days following consummation of an IPO Underwritten Offering and such shorter period(s) as may be requested for non-IPO Underwritten Offerings.

ARTICLE III

MISCELLANEOUS

3.1 Assignment .

(a) Neither this Agreement nor any of the rights, interests or obligations under this Agreement may be assigned or transferred, in whole or in part, by operation of Law or otherwise, by MSF or as a result of any Law, or action of any Governmental Authority taken without the Company’s prior written consent. The Company may assign or transfer its rights and obligations hereunder, provided any successor or assign expressly assumes the Company’s rights and obligations under this Agreement. Any purported assignment of rights or delegation of performance or obligations in violation of this Section  3.1 is void ab initio .

(b) This Agreement binds and benefits the parties and their respective permitted successors and assigns, and their heirs, legatees, and personal and legal representatives.

3.2 No Restrictions on Company Changes; Cooperation .

(a) Nothing in this Agreement is intended to, or shall restrict the Company or any of its subsidiaries, following the Distribution from completing one or more mergers, consolidations, statutory share exchanges, stock splits, stock dividends, stock buybacks or repurchases, reorganizations or other actions or transactions, including reclassifications or other changes, which affect the number or classes of Distributed Shares and/or Retained Shares of any class outstanding after the Distribution, and/or which result in any Distributed Shares or Retained Shares being converted into the right solely to receive cash in respect of some or all Company Shares held (each, a “ Reorganization Event ”). The numbers and classes of Registrable Shares shall be adjusted appropriately by the Company to reflect any Reorganization Events.

 

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(b) In the event that the Company reduces the number of Company Class A Shares or Class B Shares through one or more Reorganization Events, MSF, immediately and automatically upon the effective time of the Reorganization Event, shall sell to the Company at the same price paid by the Company in the Reorganization Event, such number of shares of each class of Company Shares or shares, as will result in MSF holding not more than 19.9% of each class of Company Shares or shares then outstanding.

(c) MSF shall and shall cause the MSF subsidiaries to cooperate with the Company in effecting Reorganization Events.

3.3 Governing Law; Jurisdiction; Waiver of Jury Trial .

(a) This Agreement shall be governed by, and construed in accordance with, the laws of the State of Florida, applicable to contracts executed in and to be performed entirely within that State.

(b) All actions, claims and proceedings arising out of this Agreement not otherwise resolved as provided in Article IX of the Separation Agreement, together with the enforcement of any judgments or orders resulting from such proceedings, shall be heard and determined in any state or federal court sitting in the Southern District of the State of Florida, and the parties hereby irrevocably submit to the exclusive jurisdiction of such courts (and, in the case of appeals, appropriate appellate courts therefrom). The parties irrevocably waive the defense of an inconvenient forum to the maintenance of any such action or proceeding. Each party hereby consents to process being served in any such action or proceeding by the delivery of a copy thereof to the addresses and set forth in Section  3.6 , and each party acknowledges that such service shall constitute good and sufficient service of process or notice thereof. The consents to jurisdiction set forth in this Section  3.3(b) do not constitute general consents to service of process in the State of Florida and will have no effect for any purpose except as provided in this Section  3.3(b) .

(c) EACH PARTY HEREBY WAIVES TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY CLAIM, ACTION OR PROCEEDING LITIGATION BETWEEN THE PARTIES DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY.

3.4 No Third-Party Beneficiaries . No transferees of Registrable Shares shall have any registration rights or other rights hereunder. Except for the provisions of Section  2.12 as to MSF Indemnified Parties and Company Indemnified Parties, nothing in this Agreement is intended to or shall confer upon any person other than the parties hereto any rights or remedies hereunder, whether as third beneficiaries or otherwise.

 

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3.5 Interpretation . The words “include,” “includes,” “including” and their derivations are to be read as if they were followed by the phrase “without limitation.” The headings contained in this Agreement are for convenience of reference only and do not affect the meanings of this Agreement’s provisions. Any reference to an agreement means that agreement as amended or supplemented, subject to any restrictions on amendment contained herein or therein. Unless specified otherwise, any reference to a Law means such Law as amended or supplemented from time to time, and includes any rules and regulations promulgated thereunder, as amended or supplemented. Any reference to gender includes all genders, and the singular shall include the plural and vice versa. A “person” or “persons” shall include individuals and entities.

3.6 Notices . All notices, requests and other communications to any party hereunder shall be in writing and shall be deemed given if delivered personally, by facsimile, by email (with a return receipt) or sent by recognized overnight courier to the parties at the following addresses:

 

If to MSF:   

Luis Alberto Fernandes, Esq.

Avenida Andrés Bello No. 1

Edificio Mercanti

Caracas 1050,

Venezuela

Telephone: 58 (212) 503-1940

E-mail: lafernandes@bancomercantil.com

  
If to the MSF      
Representatives:   

Gustavo Marturet

220 Alhambra Circle

12 th Floor

Coral Gables, FL 33134

Telephone: (954) 415-8524

E-mail: marturetgustavo@yahoo.com

  
If to the Company:   

220 Alhambra Circle

12 Floor

Miami, Florida 33134

Attn: Millar Wilson

Telephone: (305) 460-4025

E-mail: mwilson@mercantilcb.com

  

 

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with copies to:   

Ralph F. MacDonald, III

Jones Day

1420 Peachtree Street, N.E.

Suite 800

Atlanta, Georgia 30309-3053

Telephone: (404) 581-8622

E-mail: cmacdonald@jonesday.com

  

or such other addresses, facsimile numbers or email addresses as such party may hereafter specify by like notice to the other parties. All such notices, requests and other communications shall be deemed received on the date of receipt by the recipient thereof if received prior to 5:00 P.M. in the place of receipt and such day is a Business Day in the place of receipt. Otherwise, any such notice, request or communication shall be deemed not to have been received until the next succeeding Business Day in the place of receipt.

3.7 Amendments and Waivers . The parties may amend this Agreement only by a written agreement executed by the parties. The parties may waive any provision in this Agreement only by a writing executed by the party against whom the waiver is sought to be enforced. No failure or delay in exercising any right or remedy, or in requiring the satisfaction of any condition, under this Agreement, and no act, omission or course of dealing between the parties, operates as a waiver or estoppel of any right, remedy or condition. A waiver made in writing on one occasion is effective only in that instance and only for the purpose and period stated.

3.8 Termination . This Agreement shall terminate automatically upon there being no Registrable Shares.

3.9 Enforcement . The parties agree that irreparable damage would occur if any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed, except as provided in Section 2.11 and otherwise herein, that the parties will be entitled to temporary restraining orders, injunctions or similar equitable relief to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement.

3.10 Severability . If any term or other provision of this Agreement is determined by a court of competent jurisdiction to be invalid, illegal or incapable of being enforced by any rule of Law or public policy, all other terms, provisions and conditions of this Agreement shall nevertheless remain in full force and effect. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible to the fullest extent permitted by applicable Law in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible

3.11 No Construction Against Drafter . Each party has participated in negotiating and drafting this Agreement, so if an ambiguity or question of intent or interpretation arises, this Agreement is to be construed as if the parties had drafted it jointly, as opposed to being construed against a party because it was responsible for drafting one or more provisions of this Agreement.

 

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3.12 Counterparts; etc . This Agreement may be executed in two or more identical counterparts, all of which shall constitute one and the same agreement, which will be effective when executed by each party and delivered to the other party. The Agreement may be executed and delivered electronically by facsimile, pdf, or otherwise, any of which shall have the same force and effect as a manually executed original.

3.13 Entire Agreement . This Agreement constitutes the full and entire understanding and agreement among the parties with regard to the subject matter hereof.

[signature page follows]

 

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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective undersigned officers.

 

ATTEST     MERCANTIL SERVICIOS FINANCIEROS, C.A.
By:   /s/ Guillermo Ponce     By:   /s/ Luis Alberto Fernandes
Name:   Guillermo Ponce     Name:   Luis Alberto Fernandes
Title:   Corporate Secretary     Title:   General Counsel
          [Corporate Seal]      
ATTEST     MERCANTIL BANK HOLDING CORPORATION
   
By:   /s/ Julio Pena     By:   /s/ Millar Wilson
Name:   Julio Pena     Name:   Millar Wilson
Title:   Assistant Corporate Secretary     Title:   Vice Chairman and CEO
          [Corporate Seal]      

 

[Signature Page to Registration Rights Agreement]

EXHIBIT 1

Restrictive Legends on all Affiliate Shares and Retained Shares

1. Transfer Restrictions

The following transfer restrictions shall be maintained by the Company and its Transfer Agent.

NONE OF THE SHARES OF THE COMPANY’S SHARES OF CLASS A COMMON STOCK OR CLASS B COMMON STOCK (INDIVIDUALLY AND COLLECTIVELY, “SHARES”) HAVE BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE ACT OF 1934 (THE “FEDERAL SECURITIES LAWS”), OR THE SECURITIES, OR “BLUE SKY,” LAWS OF ANY STATE OR OTHER DOMESTIC OR FOREIGN JURISDICTION. NEITHER THESE SHARES NOR ANY INTEREST THEREIN MAY BE SOLD, PLEDGED, HYPOTHECATED, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO A REGISTRATION STATEMENT IN EFFECT UNDER THE FEDERAL SECURITIES LAWS, INCLUDING A REGISTRATION STATEMENT ON SEC FORM 10 OR A WRITTEN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE FOR SUCH TRANSACTIONS UNDER THE FEDERAL SECURITIES LAWS AND OTHER APPLICABLE LAWS.

Exhibit 21.1

Mercantil Bank Holding Corporation Subsidiaries

 

Subsidiary

  

Jurisdiction of Incorporation

Mercantil Commercebank Voting Trust    Florida
Mercantil Florida Bancorp, Inc.    Florida
Mercantil Bank, N.A.    Florida
Commercebank Capital Trust I    Florida
Commercebank Capital Trust II    Florida
Commercebank Capital Trust III    Florida
Commercebank Capital Trust VI    Florida
Commercebank Capital Trust VII    Florida
Commercebank Capital Trust VIII    Florida
Commercebank Capital Trust IX    Florida
Commercebank Capital Trust X    Florida
Mercantil Investment Services, Inc.    Florida
Mercantil Trust Company, N.A.    Florida
CB Reit Holding Corporation    Florida
220 Alhambra Properties, LLC    Florida
MCNA Properties IV, LLC    Florida
CTC Management Services, LLC    Florida
CB Real Estate Investment, Inc.    Florida
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Exhibit 99.1

LOGO

Caracas, Venezuela        

            , 2018

Dear Mercantil Servicios Financieros, C.A. Shareholder,

On December 15, 2017, our shareholders voted to approve the separation of our subsidiary, Mercantil Bank Holding Corporation, or the Company, through a spin-off. We believe that Mercantil Servicios Financieros, C.A., which we call MSF, and the Company will be better-positioned, as separate, independent companies, to capture growth opportunities by operating with greater focus on their respective businesses, strategic priorities and markets.

MSF expects to continue to offer banking, investment and insurance services in all markets where it presently operates outside of the United States.

The Company will focus on providing banking and financial services in the United States, where it has offices in South Florida, the greater Houston, Texas area and the greater New York City area.

We believe that the spin-off will simplify MSF’s and the Company’s respective businesses and regulation. It will enable each of the groups to develop and focus on their respective strategies, core competencies, markets and growth opportunities. When the spin-off is complete, we believe investors will be better able to value MSF and the Company on their respective financial, operational and risk characteristics.

MSF has placed all outstanding shares of Company class A common stock and class B common stock, collectively, the Company Shares, into a newly created Florida common law, non-discretionary, grantor trust, or the Trust, for the benefit of MSF, and its shareholders of record on April 2, 2018. The Trust facilitates the spin-off. All Company Shares will be held by the Trust until the Company’s Registration Statement on Form 10, including the accompanying information statement, has been declared effective by the United States Securities and Exchange Commission, or the SEC.

The Trust will distribute 80.1% of the outstanding Company Shares pro rata to the MSF record holders. Each MSF record holder is entitled to receive one share of Company class A common stock for each share of MSF class A common stock held as of the record date, and one share of Company class B common stock for each share of MSF, class B common stock held as of the record date. We call these the Distributed Shares. The Company Shares retained in the Trust on behalf of MSF and its shareholders, or the Retained Shares, will be held in the Trust for sale or disposition during the term of the Trust. To the extent that any MSF subsidiaries are MSF record holders of MSF shares, such shares will remain in the Trust and will be included in the 19.9% of the Retained Shares. The proceeds to MSF from such sales will support MSF’s and its subsidiaries’ businesses.

The Company intends to list, on the Nasdaq Stock Market, its class A common stock under the symbol “MBNAA” and its class B common stock under the symbol “MBNAB.”

Following the spin-off, you will own shares in both MSF and the Company. The number of MSF shares held by MSF shareholders will not change as a result of the spin-off. You do not need to take any action to receive the Company Shares to which you are entitled as a MSF shareholder. You do not need to pay MSF or the Company any consideration or surrender or exchange your MSF shares.

The spin-off is expected to be tax-free for United States income tax purposes. When the spin-off was approved, the MSF board of directors also declared a cash dividend payable to MSF shareholders on the record date, which is expected to compensate shareholders subject to Venezuela income taxes on the expected Venezuela income taxes applicable to the Distributed Shares.

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I encourage you to read the attached Information Statement, which is being made available to all MSF shareholders who held shares as of the record date. It describes the separation in detail and provides important business and financial information about the Company.

Questions may be directed to the places shown on the inside front cover of the accompanying Information Statement.

We are confident the spin-off will create two companies with greater potential for the future. We remain committed to working on your behalf to continue to build long-term shareholder value.

Sincerely,

Gustavo J. Vollmer A.

Chairman and CEO

Mercantil Servicios Financieros, C.A.

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LOGO

220 Alhambra Circle, Coral Gables, Florida 33134

            , 2018

Dear Future Mercantil Bank Holding Corporation Shareholder,

On behalf of the entire team at Mercantil Bank Holding Corporation, which I refer to as we, our or the Company, we welcome you as a future Company shareholder and are pleased to provide this Information Statement describing the Company and our business.

We are a bank holding company headquartered in Coral Gables, Florida, with $8.4 billion in assets, $6.3 billion in deposits, $712.3 million in common equity and $1.7 billion assets under management or custody as of March 31, 2018. We conduct our business primarily through our wholly-owned subsidiary bank, Mercantil Bank, N.A, or the Bank, including its trust and investment services subsidiaries. The Bank, which was founded in 1979, is the fifth largest bank headquartered in Florida. We have been a wholly-owned subsidiary of Mercantil Servicios Financieros, C.A., or MSF, since 1987.

We provide individuals and businesses a comprehensive array of deposit, credit, investment, wealth management and fiduciary services, both in the United States and to select international customers. The Bank’s primary markets are South Florida, where it operates 15 banking centers in Miami-Dade, Broward and Palm Beach counties; the greater Houston, Texas area where it has seven banking centers in Harris and Montgomery counties; and the New York City area where it has a loan production office in Midtown Manhattan.

As an independent company, we expect to be able to allocate our capital more efficiently and better access the United States capital markets to expand and serve our growing markets. We anticipate that this will enable us to expand our business, improve and expand our products and services, enhance our market recognition with investors and attract, retain and incent our employees with equity awards that align the interests of our employees and shareholders.

The Company’s management and employee teams will continue after the spin-off is completed, and all of us are enthusiastic about our future. The spin-off will allow us to simplify and focus our operations to better serve our U.S. and non-U.S. customers. We will continue our strong customer service and culture.

All of our shares are in book-entry form and no certificates will be issues. We will notify our shareholders upon completion of the spin-off. No action or payment is required by you to receive Company shares.

The Company intends to list, on the Nasdaq Stock Market, its class A common stock under the symbol “MBNAA” and its class B common stock under the symbol “MBNAB.”

I encourage you to read the enclosed information statement to learn more about the spin-off, the Company and our plans. Questions may be directed to the places shown on the inside front cover of the accompanying Information Statement.

Sincerely,

Millar Wilson

Chief Executive Officer

Mercantil Bank Holding Corporation

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The information contained herein is not complete and may be changed. A Registration Statement on Form 10 relating to these securities has been filed with the United States Securities and Exchange Commission under the United States Securities Exchange Act of 1934, as amended. This preliminary information statement is not an offer to sell or a solicitation of an offer to buy any securities.

 

 

Preliminary and Subject to Completion, dated June 15, 2018

INFORMATION STATEMENT

LOGO

Mercantil Bank Holding Corporation

Distribution of 60,880,929 Shares of Class A Common Stock

and

Distribution of 43,880,032 Shares of Class B Common Stock

 

 

Mercantil Bank Holding Corporation, which we refer to as we, us, our, ourselves and the Company, is furnishing this information statement in connection with the proposed distribution of 80.1% of the outstanding shares of our Class A common stock, par value $0.10 per share, or Class A common stock, and our class B common stock, par value $0.10 per share, or Class B common stock, previously held by Mercantil Servicios Financieros, C.A., which we refer to as MSF, to holders of record of MSF’s class A common stock and class B common stock. Throughout this information statement, we collectively refer to our Class A common stock and Class B common stock as Company Shares, and MSF class A common stock and MSF class B common stock as MSF common stock, or MSF Shares.

On December 15, 2017, shareholders representing approximately 85% of MSF’s class A common stock who were present or represented in a special shareholder meeting of MSF unanimously voted to approve our spin-off from MSF, which we refer to as the spin-off. We have been a wholly owned subsidiary of MSF since 1987. As part of the spin-off, MSF has placed all of its shares of our Class A common stock and Class B common stock (representing 100% of our outstanding shares) into a newly created Florida common law, non-discretionary, grantor trust, which we refer to as the Trust, for the benefit of MSF and its shareholders of record on April 2, 2018, which we refer to as the record date. The shares to be distributed to MSF shareholders of record will be held by the Trust until the Registration Statement on Form 10, or the Spin-off Registration Statement, of which this information statement is a part, has been declared effective by the U.S. Securities and Exchange Commission, which we refer to as the SEC. As soon as practical after the Spin-off Registration Statement has been declared effective, 80.1% of our outstanding shares of Class A common stock and Class B common stock will be distributed to the MSF record holders, as beneficiaries of the Trust, pro rata on the basis of one share of Class A common stock and one share of Class B common stock for each share of MSF common stock, respectively. We refer to this as the Distribution, and the Company Shares that are distributed are referred to as the Distributed Shares.

As an MSF shareholder on the record date, you are entitled to receive one share of our Class A common stock for each share of MSF class A common stock you held of record on the record date, and one share of our Class B common stock for each share of MSF class B common stock held of record on the record date.

The Trust will retain the Company Shares remaining in the Trust after the Distribution, which will represent 19.9% of our outstanding Class A and Class B common stock pending their sale or disposition on behalf of MSF. To the extent that any MSF subsidiaries are MSF record holders, their shares also will remain in the Trust and will be included in the 19.9% of the Company Shares retained by MSF as a beneficiary of the Trust. Approximately 1,435,954 shares of our Class A common stock and 1,224,245 shares of our Class B common stock will be held by MSF subsidiaries. All such shares will be held by the Trust and included in the 19.9% of Company Shares retained by MSF, and which MSF will sell or dispose of.

The Company Shares will be issued in book-entry form only, which means that no physical stock certificates will be issued. The Distribution is expected to be tax-free to MSF’s shareholders for U.S. federal income tax purposes. Under Venezuelan law, the Distribution is considered taxable income to MSF’s shareholders at a rate of 34% of MSF’s carrying value of the Company’s Class A common stock and Class B common stock. Such amounts are not subject to withholding taxes under applicable Venezuelan income tax law. At the same time as the MSF board of directors approved the Distribution, it declared a cash dividend, subject to the Distribution, in an amount believed sufficient to compensate MSF shareholders for such Venezuela income tax liability.

We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, which we refer to as the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, which we refer to as the JOBS Act. Therefore, we are allowed to provide in this information statement more limited disclosures than a registrant that would not so qualify. In addition, for so long as we remain an emerging growth company, we may also take advantage of certain limited exceptions from investor protection laws such as the Sarbanes-Oxley Act of 2002, which we refer to as the Sarbanes-Oxley Act, and the Investor Protection and Securities Reform Act of 2010, for limited periods. See “Summary — Emerging Growth Company Status.”

No further vote of MSF shareholders is required in connection with the Distribution and MSF is not subject to the U.S. proxy solicitation rules. Therefore, this information statement is not soliciting your vote or proxy.

You are not required to pay for the shares of our common stock you will receive in the Distribution or to surrender or exchange any certificates of shares of MSF common stock in order to receive Company Shares in the Distribution. All outstanding MSF Shares will remain outstanding upon the Distribution. There will be no change in the number of your MSF Shares as a result of the Distribution. Upon the Distribution, you will own both MSF Shares and Company Shares.

All of the Company Shares are now held in trust for the benefit of MSF and its shareholders as of the record date. Accordingly, there is no current trading market for our common stock and trading in the Company Shares, or in any interest in the Trust is strictly prohibited. We intend to list our Class A common stock on the Nasdaq Stock Market under the symbol “MBNAA” and intend to list our Class B common stock on the Nasdaq Stock Market under the symbol “MBNAB.”

We expect that the Distribution from the Trust will occur on or about             , 2018.

 

 

In reviewing this information statement, you should carefully consider the matters described under the caption “ Risk Factors ” beginning on page 14.

Neither the SEC nor any state or other securities authority has approved or disapproved these securities or determined if this information statement is truthful or complete. Any representation to the contrary is a criminal offense.

This information statement does not constitute an offer to sell or the solicitation of an offer to buy any securities.

The date of this information statement is             , 2018.

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Inquiries

MSF will notify its shareholders of record of the Distribution by notice published in two newspapers of general circulation in Venezuela, notices and hyperlinks posted on our and MSF’s websites, and electronic mail, which will include hyperlinks to our and MSF’s websites and to this information statement. We will mail copies of this information statement to MSF shareholders of record whose address of record is in the United States.

For persons that are not currently MSF Shareholders:

MBHC ProspectiveInvestors@fticonsulting.com

 

Questions regarding MSF Shares or Company Shares should be directed as follows:

[●]

MSF Shares:

[●]

MSF ADRs:

[●]

Company Shares:

Computershare, as the Company Transfer Agent

[●]

The Company:

[●]

In Venezuela, Company Shareholders may also contact:

[●]

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TABLE OF CONTENTS

 

     Page  

SUMMARY

     1  

RISK FACTORS

     14  

FORWARD-LOOKING STATEMENTS

     43  

DIVIDEND POLICY

     44  

SELECTED FINANCIAL INFORMATION

     45  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     48  

SUPERVISION AND REGULATION

     116  

BUSINESS

     134  

MANAGEMENT

     144  

EXECUTIVE AND DIRECTOR COMPENSATION

     151  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     158  

THE SPIN-OFF

     161  

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

     168  

MATERIAL VENEZUELA TAX CONSIDERATIONS

     170  

OWNERSHIP OF OUR STOCK

     171  

DESCRIPTION OF CAPITAL STOCK

     174  

SHARES ELIGIBLE FOR FUTURE SALE

     177  

INDEMNIFICATION OF DIRECTORS AND OFFICERS

     178  

AVAILABLE INFORMATION

     180  

INDEX TO FINANCIAL STATEMENTS

     F-1  

 

-i-

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SUMMARY

The following is a summary of some of the information contained in this information statement. In addition to this summary, we urge you to read this entire information statement carefully, especially the risks discussed under “Risk Factors” and our financial statements and related notes.

For all historical periods described, we have separately reported our financial condition and results of operations and other financial data, including certain ratios and information calculated for bank regulatory purposes as of and for the periods shown herein. The historical financial information presented may not be indicative of our future operating results or financial condition as a stand-alone public company.

About Our Company

Who We Are

We are a bank holding company headquartered in Coral Gables, Florida, with $8.4 billion in assets, $6.3 billion in deposits, $712.3 million in common equity and $1.7 billion assets under management or custody as of March 31, 2018. We provide individuals and businesses a comprehensive array of deposit, credit, investment, wealth management and fiduciary services, both in the United States and to select international customers. These services are offered primarily through Mercantil Bank, N.A., or the Bank.

The Bank was founded in 1979 and is the fifth largest bank headquartered in Florida. The Bank’s primary markets are South Florida, where it operates 15 banking centers in Miami-Dade, Broward and Palm Beach counties; the greater Houston, Texas area where it has seven banking centers in Harris and Montgomery counties; and New York City where it has a loan production office in Midtown Manhattan. We are constructing an additional banking center in Katy, Texas. Our limited representative offices in Brazil and Colombia are being closed. Our previous representative office in Mexico was closed in 2017.

The Bank provides a variety of banking services through traditional channels, such as banking centers and ATMs, as well as via secure website, mobile devices and telephone. Investment, fiduciary and wealth management services are provided by the Bank’s national trust company subsidiary, which we refer to as the Trust Company, and the Bank’s securities broker-dealer subsidiary, which we refer to as Investment Services.

Our Achievements and Highlights

Our highlights and operational achievements include the following:

 

  •   Strong Reputation and Client Relationships . During our more than 30 years of operating the Bank, we have maintained an excellent long-term relationship with our customers and communities. We have developed deep ties to the South Florida communities that we serve and are quickly developing a reputation as a preferred financial services provider in the greater Houston, Texas communities that we serve. Similarly, in the greater New York City area, we are well regarded as a commercial real estate, or CRE, lender with the ability to underwrite and execute sophisticated CRE loans in the highly competitive greater New York City market.

 

  •   Diversified Markets . Unlike most banks that are headquartered in Florida, our markets are diversified across South Florida, the greater Houston, Texas area and the greater New York City area (especially the five New York City boroughs). Our markets are large urban areas with vibrant businesses and distinct economic centers. We believe that their diverse economies will help us mitigate the risks associated with economic downturns. We recently began lending in the Dallas and Austin, Texas markets, and are considering one or more loan production offices, or LPOs, to serve these areas.


 

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  •   Affinity for doing business with Latin American clients . Through our suite of bilingual electronic banking channels and our historical relationship with MSF, we have been able to provide our international customers with a wide variety of services. Also, our presence in the South Florida and greater Houston markets has positioned us to serve an established and expanding Latin American community. In particular, our banking centers in Doral, Weston, Cypress Creek and Coral Gables, Florida, and Katy, Texas, can draw from a growing number of Venezuelans and other local Latin Americans. Our officers and employees, many of whom are bilingual, are especially skilled at guiding and serving these clients as they, buy homes and establish businesses in our communities.

 

  •   Outstanding Employee Relations . The well-being, motivation, recognition and development of our employees are some of our long standing hallmarks. On average, our employees have worked for us for more than eight years and our executive officers have worked with us for more than 22 years. We strive to maintain superior employee relationships, and monitor our success by conducting annual evaluations with all employees to address areas where we can improve. Additionally, we frequently benchmark employee pay to compensate our employees fairly in light of the market, and therefore promote talent retention. As an independent public company, we plan to provide equity incentives to retain and attract talented personnel, reward our employees’ performance, and align their interests with our shareholders.

 

  •   Disciplined Culture . Our in-depth knowledge of our markets, credit approval processes and disciplined balance sheet growth strategies have allowed us to maintain our culture of soundness and compliance. We believe that the sophistication of our risk management practices is unique for a bank of our size. We strive to maintain our reputation above the interests of any particular officer or employee. As such, we believe that a commitment to strength and soundness, adherence to all applicable laws, and our code of ethics is the best way to ensure our continued strong reputation and success. We maintain a long-term focus on our financial performance by continually managing risk in our balance sheet with the goal of producing consistent results.

 

  •   Investment in Technology . We also maintain a long-term focus on our franchise and have made significant investments in our information technology infrastructure, personnel and our digital banking products and services. We believe that these investments have enabled us to more effectively compete with larger institutions while retaining our ability to offer customized, relationship-based services to our customers, and to more easily accommodate future growth and expansion.

Our Growth Strategy

We believe that the spin-off will speed our execution of a number of growth strategies. Our focus will be profitable growth and maximizing shareholder returns. As part of our transition to being a standalone company, we are currently engaged in a comprehensive strategic planning process with outside consultants to improve our business and performance. This process is not complete, and may change. Key strategic initiatives that we currently expect to implement are:

 

  •   Drive New Business Through Enhanced Customer Experience . We are actively working to enhance our customer service and overall customer experience. Our efforts include a new branch design and service model. Our next generation banking centers will increase staff interaction with customers with less focus on routine transactional activities. Our staff will be empowered to focus on identifying and addressing customers’ needs and problems. These additional interactions will enable us to promote the customers’ knowledge of and utilization of digital banking services, our broad product range and expand the service we provide to each household. Finally, we are completing the implementation of a new customer relationship management, or CRM, system that will allow us to proactively and efficiently identify customer needs, expand our services per household, and improve service quality and timeliness while reducing delivery costs.

 

  •  

Further Diversify Our Deposit Base . While we expect to continue to serve our valued foreign depositors, including our low-cost Venezuela deposits, we seek to continue to grow our domestic



 

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  deposit base. We believe that our branch network’s customer-service-oriented approach, and our attractive product offerings and pricing will help us capture deposit market share in our highly competitive markets. We may also seek to open additional banking centers in Florida and Texas and expand our online deposit gathering, to include nationwide deposit taking. The online channel is expected to allow us to more quickly raise or lower deposit balances in an opportunistic fashion without having to consider fixed branch investments.

In order to grow our core deposit balances, and contain our overall deposit costs, we plan to continue to develop new products and product suites that will address our customers’ varying needs, expand our cross selling success and increase customer loyalty.

 

  •   Further Diversify Our Wealth Management Offerings . The Bank offers brokerage, investment advisory and trust services through its wholly owned subsidiaries. Presently, our wealth management customer base is comprised almost entirely of wealthy foreign persons. We plan to use our qualified investment and trust staff, and extensive asset management infrastructure already in place, to seek additional domestic wealth management customers, including among our existing bank customers, increase fee revenues, and increase the member of services we offer per household and customer loyalty.

 

  •   Leverage Our Lending Strengths to Expand Other Lines of Business . We believe that we possess a competitive strength in CRE lending in our three primary markets. We are also very knowledgeable in serving the needs of commercial customers in our Florida and Texas markets. We seek to further leverage our expertise in lending transactions by cross-selling our borrower’s deposit, treasury management and other deposit and fee generating services.

 

  •   Seeking Continued Improvements in Operational Efficiency . As a MSF subsidiary, we offered certain products and services which we may not have offered as a standalone financial institution. Following the spin-off, we will evaluate the products and services we offer. As a result of this evaluation, certain of our products and services may be discontinued or modified due to risks or complexity, or insufficient volumes or profitability. We will also continue seeking operational efficiencies and other measures to improve our operating margins. We intend to improve operational efficiency by simplifying our business and enhancing our electronic banking services and customers’ utilization of more of our services. We seek further automation of our manual customer service and back office processes.

Recent and Other Developments

The Distribution approved by MSF required that the Distributed Shares be distributed on a one-for-one basis to holders of MSF Shares of record, and that MSF maintain a 19.9% ownership stake in us, following the Distribution. In February 2018 we exchanged 100% of our Company Shares, held by MSF in certificated form, for 74,212,408 shares of Class A common stock and 53,253,157 shares of Class B common stock, all in uncertificated form. We refer to this exchange as the Exchange. The sole purpose of the Exchange was to provide the appropriate number of Distributed Shares and Retained Shares for the spin-off. MSF owned 100% of the outstanding Company Shares before and after the Exchange.

On March 13, 2018, prior to all of the Company Shares being placed into the Trust, we paid a special one-time dividend of $40.0 million to MSF, which we refer to as the 2018 Special Dividend. Aside from the 2018 Special Dividend, we have paid a total of $2.7 million to MSF in three dividends since 1987.

We are evaluating a possible underwritten, initial public offering, or IPO, to sell newly issued shares of our common stock, along with a portion of the Retained Shares held by MSF. See “Certain Relationships and Related Party Transactions — Registration Rights Agreement.” Any decision to undertake the IPO will be subject to market conditions, and other factors, many of which are outside of our control, and the IPO will not price prior to the 90 th day following the Distribution Date.



 

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4

MSF indirectly owns 100% of Mercantil Bank and Trust Limited (Cayman), a bank in the Cayman Islands, which we refer to as the Cayman Bank. The Cayman Bank is operated and managed by us, and serves a number of our trust and wealth management customers. We, intend to acquire the Cayman Bank for its book value (approximately $13.8 million), plus a premium reflecting its fair value in excess of book value. This acquisition is subject to the negotiation of a definitive agreement and the receipt of necessary regulatory approvals.

We are contemplating an internal reorganization, or Reorganization, involving a merger with a newly formed subsidiary of the Company following the Distribution to reduce the number of our shareholders and related shareholder maintenance costs. Presently, we contemplate that the Reorganization will provide that holders of less than approximately 300 shares of our Class A common stock or less than approximately 300 shares of our Class B common stock will receive solely the right to receive cash instead of fractional shares as a result of the Reorganization. The Reorganization may be subject to Federal Reserve approvals or waivers.

The Reorganization will be subject to the execution of a definitive agreement and necessary corporate and regulatory approvals or waivers, and a determination of the price to be paid for fractional shares resulting from the Reorganization. Such price may be based on the price of common stock realized in any IPO which we determine to conduct, or a volume weighted average price in the market prior to the Reorganization or after any IPO, or other value we may determine as appropriate. We do not expect that our shareholders will have any rights of dissent or appraisal in connection with the Reorganization. See “Risk Factors — Persons who trade in Company Shares between the Distribution and the Reorganization prior to any IPO, may realize significantly differed prices from those that may result from any Reorganization or potential IPO.”

Following the Reorganization, we plan to declare a stock split to bring the expected value of a share of our Class A common stock and a share of our Class B common stock to estimated values that we believe would improve their market liquidity.



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The Spin-off

Please see “The Spin-off” for a more detailed description of the matters described below.

 

Distributing Company

Mercantil Servicios Financieros, C.A., or MSF.

 

Distributed Company

Mercantil Bank Holding Corporation, or the Company.

 

Distribution Trust

MSF has deposited 74,212,408 shares of Company Class A common stock, and 53,253,157 shares of Company Class B common stock, representing all outstanding Company Shares into a Florida, nondiscretionary grantor trust, established by the Distribution Trust Agreement, dated as of March 12, 2018, as amended by Amendment No. 1, dated as of June 12, 2018, together the Distribution Trust Agreement. We call this trust the Distribution Trust or the Trust.

 

Distribution Trustee

TMI Trust Company, a Texas trust company.

 

Distribution Ratio

Each registered holder of MSF common stock will receive one share of our Class A common stock for each share of MSF class A common stock held as of the record date, and one share of our Class B common stock for each share of MSF class B common stock held as of the record date. As of February 28, 2018, there were 59,444,975 shares of MSF class A common stock and 42,655,787 shares of MSF class B common stock issued and outstanding, including 1,435,954 MSF class A shares and 1,224,245 MSF class B shares held by MSF subsidiaries.

 

Distributed Shares

A total of 60,880,929 shares of our Class A common stock and 43,880,032 shares of our Class B common stock will be distributed to MSF shareholders of record as of the record date. The Distributed Shares will constitute 80.1% of outstanding Company Shares immediately after the Distribution. MSF shareholders will not be required to pay for shares received by them in the Distribution or to surrender or exchange shares of MSF common stock to receive Company Shares. The Distribution will not affect the number of MSF Shares you hold.

 

  The Distributed Shares will be held in the Distribution Trust pending distribution for the benefit of MSF shareholders as of the record date.

 

MSF Cash Dividend

At the same time as MSF approved the Distribution, it declared an aggregate cash dividend of 2.6 billion Bolivars payable on the Distribution Date to holders of record of MSF Shares, which has been paid.

 

Retained Shares

The Trust will retain, for the benefit of MSF, 14,767,433 shares of our Class A common stock, and 10,597,370 shares of our Class B common stock, which is 19.9% of the total shares of each class outstanding. The Company Shares retained in the Trust after the Distribution, or the Retained Shares, will represent 19.9% of our outstanding shares of Class A and Class B common stock, respectively. The 19.9% of the Company Shares retained by MSF as a



 

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beneficiary of the Trust include any Company Shares held as of the recorded data by MSF subsidiaries. MSF has advised us that it intends to sell or dispose of these shares within two years following the spin-off, subject to market conditions and regulatory requirements, beginning no sooner than 90 days after the date of the Distribution, or Distribution Date.

 

  During the Distribution Trust’s term the Retained Shares will be held in the Distribution Trust for the benefit of MSF, subject to sale or disposition. In the event of a change in control of MSF, the beneficial ownership of the Retained Shares will change to the Company in the form of a contribution of capital. See “Risk Factors—A change in control of MSF while it controls us would adversely affect us, our business and the Company Shares” and “The Spin-off—Retained Shares.”

 

Reasons for the Spin-off

MSF believes that the spin-off will protect and enhance value for its shareholders by creating opportunities and benefits, including:

 

  •   simplification of the Company’s and MSF’s businesses and regulation as well as focusing on their respective strategies, core competencies and markets;

 

  •   reduced economic and political risks to our subsidiaries and our shareholders;

 

  •   creation of new capital raising opportunities in the U.S.;

 

  •   improved shareholder liquidity resulting from holding U.S. listed Company Shares directly; and

 

  •   reduced regulatory uncertainty for MSF and us.

 

Conditions to the Distribution

The Distribution is subject to the following customary conditions, which may be waived, to the extent permitted by law:

 

  •   All third party consents as to material contracts, and governmental and regulatory approvals or actions have been received, and all conditions incident thereto have been satisfied or waived.

 

  •   MSF and the Company shall have received the opinion of Jones Day, counsel to us, confirming that the Distribution should qualify as a tax-free distribution under Section 355 of the Internal Revenue Code of 1986, as amended, or the Code, for U.S. federal income tax purposes.

 

  •   The Spin-off Registration Statement shall have been declared effective by the SEC and no-stop orders are in effect.

 

  See “Certain Relationships and Related Party Transactions” and “The Spin-off” for a description of the transaction documents.

 

Distribution Agent, Transfer Agent and Registrar for the Shares

Computershare, Inc. and Computershare Trust Company, N.A. will be the distribution agent for the Distribution, and the transfer agent for Company Shares.


 

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7

Effecting the Distribution

To effect the Distribution, the distribution agent will distribute the shares of our common stock to MSF shareholders through direct registration book-entry on the transfer agent’s books and records rather than delivery of physical stock MSF shareholder should contact the appropriate persons under “Inquiries” at the beginning of this Information Statement. MSF shareholders who hold MSF common stock through a broker or other nominee may contact their broker or other nominee to confirm for the transfer of Company Shares received in the Distribution to their brokerage account. Please see “The Spin-off — Direct Registration System” for a more detailed description of the direct registration system and how shares of our common stock may be transferred to a brokerage account, and sold and transferred. No physical certificates representing our stock will be issued or delivered.

 

Record Date

The record date is April 2, 2018. Following the record date, holders of MSF common stock may trade any shares of MSF common stock they hold. As a result, holders of shares of MSF common stock as of the record date who sell their shares following the record date will receive Company Shares on the Distribution Date. Holders of shares of MSF common stock who acquire shares following the record date will not receive Company Shares on the Distribution Date with respect to MSF Shares acquired subsequent to the record date.

 

Expected Distribution Date From the Trust to MSF Shareholders

On or about             , 2018.

 

Material U.S. Federal Income Tax Considerations

MSF shareholders are not expected to recognize any gain or loss, or include any amount in income, for U.S. Federal income tax purposes as a result of the Distribution. See “Material U.S. Federal Income Tax Considerations” for a more detailed description of the U.S. Federal income tax consequences of the Distribution.

 

  Each shareholder is urged to consult his, her or its tax advisor as to the specific tax consequences of the Distribution to that shareholder, including the effect of any U.S. federal, state, or local, or other income tax consequences of the Distribution.

 

Material Venezuela Income Tax Considerations

MSF has determined that the distribution of our Company Shares to MSF shareholders will be taxable to persons subject to Venezuela income taxation, including holders in the United States that are not Venezuela citizens. MSF has advised us that Venezuela income tax generally is computed in cases such as this at 34% of the taxable amount of the dividend decreed that is calculated based on the value that the Company Shares are carried on MSF’s books, or approximately 50.8 Bolivars per MSF Share, and an aggregate of 1.8 billion Bolivars.

 

 

At the same time as it approved the Distribution, MSF declared an aggregate cash dividend of 2.6 billion Bolivars, payable in Bolivars to holders of MSF Shares on the record date for the Distribution. This



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dividend, which has been paid, is subject to a 34% tax rate on persons subject to Venezuela income taxation, including holders in the United States that are not Venezuela citizens.

 

  Under the treaty to avoid double taxation between Venezuela and the United States, U.S. shareholders may be subject to lower taxes in Venezuela, and may be able to deduct the tax as a credit against the United States tax on income. Since shareholders’ particular facts may differ, you are strongly encouraged to consult your own tax accountants or advisors to determine the Venezuela tax consequences to you, and properly pay such taxes when due. Neither we nor MSF have any obligations to pay any taxes that MSF shareholders may incur in connection with the spin-off, or to otherwise withhold any amounts with respect to any such tax obligations.

 

Stock Exchange Listing

There is no current market for our Company Shares. We intend to list our Class A common stock on the Nasdaq Stock Market under the symbol “MBNAA” and intend to list our Class B common stock on the Nasdaq Stock Market under the symbol “MBNAB.” There is no assurance that an active market for Company Shares will develop, and if it develops, its depth or whether it will continue. Because of its limited voting rights, our Class B common stock may trade at a discount to our Class A common stock.

 

Relationship Among MSF, Its Affiliates and Us after the Spin-off

We have operated separately from our non-U.S. affiliates, and following the spin-off, we will be a separate public company, and MSF will own 19.9% of the outstanding Company Shares. Three common directors of MSF and the Company are proposed to continue to serve as Company directors. We expect that as a result of its ownership in the Company and the interlocking directors, MSF will continue to be deemed to “control” the Company under the U.S. Bank Holding Company Act of 1956, or the BHC Act, and other U.S. banking laws.

 

 

We and MSF have entered into the amended and restated Separation Agreement, or Separation Agreement, for the purpose of accomplishing the spin-off. The Separation Agreement generally separates the Company and its subsidiaries from MSF, which is consistent with the basis of presentation of our historical financial statements, and sets forth the procedures for the spin-off, including the Distribution. Among other things, the Separation Agreement also includes noncompetition and nonsolicitation covenants that prevent MSF from competing with our business or soliciting our employees, customers, or vendors, and grants the Company a license to use the “Mercantil” name and marks until we develop a new name and marks. The Separation Agreement continues certain services and consulting arrangements from us to MSF for limited periods as part of separating from MSF. See “Risk Factors — The Bank has agreed to continue to provide certain services to MSF’s subsidiaries after the spin-off, which could present regulatory and operational risks to us.”



 

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and “Certain Relationships and Related Party Transactions” for a more detailed description of these agreements.

 

Dividend Policy

We do not anticipate paying any dividends on Company Shares in the foreseeable future, and will retain earnings to support our business
 

plan, including cash payable in our proposed Reorganization and the proposed purchase of the Cayman Bank, as described in this Information Statement. The declaration and payment of dividends, if any, will be subject to our board of directors’ discretion, and our earnings, liquidity and capital adequacy.

 

Anti-Takeover Effects

Some provisions of our amended and restated articles of incorporation, our amended and restated bylaws, Florida law, and U.S. Federal banking and income tax laws may have the effect of making more difficult an acquisition of control of us in a transaction not approved by our board of directors. See “Description of Capital Stock.”

 

Risk Factors

Our securities involve certain risks. MSF shareholders should carefully consider the matters discussed under “Risk Factors.”

 

Our Principal Executive Offices

220 Alhambra Circle, Coral Gables, FL 33134.

Emerging Growth Company Status

We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the JOBS Act. As such, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. If some investors find our securities less attractive as a result, the trading market for our securities may be reduced, and the prices of our securities may be traded at lower prices and experience greater volatility.

In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We intend to take advantage of the benefits of this extended transition period, for as long as it is available.

We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act and (b) in which we have total annual gross revenue of at least $1.07 billion, (2) the date on which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently complete second fiscal quarter, and (3) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three year period. References herein to “emerging growth company” have the meaning provided in the JOBS Act.



 

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Non-GAAP Financial Measures

This information statement contains non-generally accepted accounting principles in the U.S., or GAAP, financial measures within the meaning of Regulation G promulgated by the SEC and includes a reconciliation of these non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with GAAP.

We use certain non-GAAP financial measures, many of which are included in this information statement, both to explain our results to stockholders and the investment community and in the internal evaluation and management of our businesses. Our management believes that these non-GAAP financial measures and the information they provide are useful to investors since these measures permit investors to view our performance using the same tools that our management uses to evaluate our past performance, reportable business segments and prospects for future performance, especially in light of the additional costs we have incurred in 2017 and 2018 in connection with the spin-off and related transactions.

While we believe that these non-GAAP financial measures are useful in evaluating our performance, this information should be considered as supplemental in nature and not as a substitute for or superior to the related financial information prepared in accordance with GAAP. Additionally, these non-GAAP financial measures may differ from similar measures presented by other companies.



 

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Summary Historical Financial Information

The following table sets forth summary historical financial information derived from our unaudited interim consolidated financial statements as of March 31, 2018 and for the three months ended March 31, 2018 and 2017, and our audited consolidated financial statements as of December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015. The financial information as of December 31, 2015 has been derived from our audited consolidated financial statements not included herein. The unaudited summary historical financial information may not reflect our results of operations for our fiscal year ended, or financial condition as of, December 31, 2018, or any other period of time or date. The summary historical financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our unaudited interim consolidated financial statements and our audited consolidated financial statements and corresponding notes included elsewhere in this information statement.

Our historical consolidated financial data included in this information statement does not necessarily reflect the financial condition, results of operations or cash flows we would have achieved as a standalone company during the periods presented or those we will achieve in the future. See “Risk Factors — Our historical consolidated financial data are not necessarily representative of the results we would have achieved as a separate company and may not be a reliable indicator of our future results.”

 

    March 31,     December 31,  
    2018     2017     2016     2015  
    (In thousands)  

Consolidated Balance Sheet

       

Total assets

  $ 8,423,594     $ 8,436,767     $ 8,434,264     $ 8,162,844  

Total investments

    1,827,477       1,846,951       2,182,737       2,106,015  

Total loan portfolio  (1)

    5,950,450       6,066,225       5,764,761       5,623,222  

Allowance for loan losses

    72,118       72,000       81,751       77,043  

Total deposits

    6,280,206       6,322,973       6,577,365       6,519,674  

Securities sold under agreements to repurchase

    —         —         50,000       73,488  

Junior subordinated debentures

    118,110       118,110       118,110       118,110  

Advances from the FHLB and other borrowings

    1,233,000       1,173,000       931,000       722,250  

Stockholders’ equity

    712,272       753,450       704,737       682,403  

 

    March 31,     December 31,  
    2018     2017     2017     2016     2015  

Consolidated Results of Operations Measures

  (In thousands, except per share amounts and percentages)  

Net interest income

  $ 52,633     $ 48,351     $ 209,710     $ 191,933     $ 172,285  

Provision for (reversal of) loan losses

    —         4,097       (3,490 )      22,110       11,220  

Noninterest income

    13,945       14,217       71,485       62,270       54,756  

Noninterest expense

    55,645       49,148       207,636       198,303       192,262  

Net income

    9,429       6,507       43,057       23,579       15,045  

Basic and diluted income per common share  (2)

    0.07       0.05       0.34       0.18       0.12  

Cash dividend declared per common share  (2)

    0.31       —         —         —         —    

Other Financial and Operating Data (3)

         

Profitability Indicators (%)

         

Net interest income / Average total interest earning assets (NIM)  (4)

    2.70 %      2.44 %      2.63 %      2.48 %      2.26 % 

Net income / Average total assets (ROA)  (5)

    0.45 %      0.31 %      0.51 %      0.29 %      0.19 % 

Net income / Average stockholders’ equity (ROE)  (6)

    5.04 %      3.66 %      5.62 %      3.29 %      2.14 % 

Capital Adequacy Indicators (%)

         

Total capital ratio  (7)

    12.94 %      13.00 %      13.31 %      13.05 %      12.91 % 

Tier I capital ratio  (8)

    11.87 %      11.85 %      12.26 %      11.86 %      11.78 % 

Tier I leverage ratio  (9)

    9.77 %      9.64 %      10.15 %      9.62 %      9.88 % 

Common equity tier I capital ratio (CET1)  (10)

    10.29 %      10.25 %      10.68 %      10.25 %      10.12 % 


 

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    March 31,     December 31,  
    2018     2017     2017     2016     2015  

Consolidated Results of Operations Measures

  (In thousands, except per share amounts and percentages)  

Asset Quality Indicators (%)

         

Non-performing assets / Total assets  (11)

    0.39 %      0.74 %      0.32 %      0.85 %      0.95 % 

Non-performing loans / Total loan portfolio  (1) (12)

    0.54 %      1.06 %      0.44 %      1.23 %      1.38 % 

Allowance for loan losses / Total non-performing
loans  (12) (13)

    223.92 %      127.75 %      267.18 %      115.25 %      99.55 % 

Allowance for loan losses / Total loan portfolio  (1) (13)

    1.21 %      1.35 %      1.19 %      1.42 %      1.37 % 

Net charge-offs (recoveries) / Average total loan portfolio  (14)

    NM       0.11 %      0.11 %      0.32 %      (0.01 )% 

Efficiency Indicators

         

Noninterest expense / Average total assets (5)

    2.65 %      2.31 %      2.45 %      2.41 %      2.41 % 

Personnel expense / Average total assets (5)

    1.62 %      1.52 %      1.55 %      1.58 %      1.53 % 

Efficiency ratio  (15)

    83.58 %      78.55 %      73.84 %      78.01 %      84.68 % 

 

     March 31,     December 31,
2017 		 

Adjusted Selected Consolidated Results of Operations and Other Data (16) (17)

   2018    
  

(In thousands, except per share

amounts and percentages)

 
    

Adjusted noninterest expense

   $ 52,807     $ 202,391  

Adjusted net income before income tax

     13,771       82,294  

Adjusted net income

     11,876       45,988  

Adjusted basic and diluted income per common share

     0.09       0.36  

Adjusted net income / Average total assets (ROA) (5)

     0.57 %      0.54 % 

Adjusted net income / Average stockholders’ equity (ROE) (6)

     6.35 %      6.00 % 

Adjusted noninterest expense / Average total assets (5)

     2.51 %      2.38 % 

Adjusted efficiency ratio (18)

     79.32 %      71.98 % 

 

(1) Outstanding loan principal balance net of deferred loan fees and costs, excluding the allowance for loan losses.
(2) The earnings per share reflect the Exchange that changed the number of Company Shares held by MSF without changing its 100% ownership of the Company.
(3) Operating data for the three months ended March 31, 2018 and 2017 have been annualized.
(4) Net interest margin is defined as net interest income divided by average interest-earning assets, which are loans, securities available for sale, deposits with banks and other financial assets which, yield interest or similar income.
(5) Calculated based upon the average daily balance of total assets, excluding assets under management and custody.
(6) Calculated based upon the average daily balance of equity.
(7) Total Capital divided by total risk-weighted assets, calculated according to the standardized capital ratio calculations.
(8) Tier 1 capital divided by total risk-weighted assets.
(9) Tier 1 capital divided by fourth quarter’s average assets. Tier 1 capital is composed of Common Equity Tier 1 capital plus outstanding Qualifying Trust Preferred Securities of $109.8 million at March 31, 2018, $110.1 million at March 31, 2017, $109.9 million at December 31, 2017, $110.1 million at December 31, 2016 and $110.4 million at December 31, 2015.
(10) Common Equity Tier 1 capital divided by total risk-weighted assets.
(11) Non-performing assets include all non-performing loans and OREO properties acquired through or in lieu of foreclosure.
(12) Non-performing loans include all accruing loans past due by more than 90 days, and all non-accrual loans. Non-performing loans were $32.2 million, $62.1 million, $27.0 million, $70.9 million and $77.4 million, as of March 31, 2018 and 2017 and as of December 31, 2017, 2016 and 2015, respectively.
(13) Allowance for loan losses was $72.1 million, $79.4 million, $72.0 million, $81.8 million and $77.0 million, as of March 31, 2018 and 2017 and December 31, 2017, 2016 and 2015, respectively. See Note 4 of our audited consolidated financial statements and Note 4 of our unaudited interim consolidated financial statements for more details on our impairment models.
(14) Calculated based upon the average daily balance of the outstanding loan principal balance net of deferred loan fees and costs, excluding the allowance for loan losses.
(15) Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income and net interest income.


 

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13

(16) This presentation contains financial information determined by methods other than GAAP. The following table reconciles these non-GAAP financial measurements to the comparable GAAP financial measurements as of and for periods presented:

 

     Three Months
Ended
March 31, 		    Year Ended
December 31, 		 
             2018                     2017          
    

(In thousands, except per share

amounts and percentages)

 

Total noninterest expenses

   $ 55,645     $ 207,636  
  

 

 

   

 

 

 

Less spin-off costs:

    

Accounting and consulting fees

     1,294       2,400  

Legal fees

     1,000       2,000  

Other expenses

     544       845  
  

 

 

   

 

 

 

Total spin-off costs

     2,838       5,245  
  

 

 

   

 

 

 

Adjusted noninterest expenses

   $ 52,807     $ 202,391  
  

 

 

   

 

 

 

Total net income before income tax

   $ 10,933     $ 77,049  

Plus: Total spin-off costs

     2,838       5,245  
  

 

 

   

 

 

 

Adjusted net income before income tax

   $ 13,771     $ 82,294  
  

 

 

   

 

 

 

Total net income

   $ 9,429     $ 43,057  
  

 

 

   

 

 

 

Plus after-tax total spin-off costs:

    

Total spin-off costs before income tax benefit

     2,838       5,245  

Income tax benefit

     (391 )      (2,314 ) 
  

 

 

   

 

 

 

Total after-tax spin-off costs

     2,447       2,931  
  

 

 

   

 

 

 

Adjusted net income

   $ 11,876     $ 45,988  
  

 

 

   

 

 

 

Basic and diluted income per common share

   $ 0.07     $ 0.34  

Plus: after tax impact of total spin-off costs

     0.02       0.02  
  

 

 

   

 

 

 

Total adjusted basic and diluted income per common
share

   $ 0.09     $ 0.36  
  

 

 

   

 

 

 

Net income / Average total assets (ROA) (5)

     0.45 %      0.51 % 

Plus: after tax impact of total spin-off costs

     0.12 %      0.03 % 
  

 

 

   

 

 

 

Adjusted net income / Average total assets (ROA) (5)

     0.57 %      0.54 % 
  

 

 

   

 

 

 

Net income / Average stockholders’ equity (ROE) (6)

     5.04 %      5.62 % 

Plus: after tax impact of total spin-off costs

     1.31 %      0.38 % 
  

 

 

   

 

 

 

Adjusted net income / Average stockholders’ equity (ROE) (6)

     6.35 %      6.00 % 
  

 

 

   

 

 

 

Noninterest expense / Average total assets (5)

     2.65 %      2.45 % 

Plus: impact of total spin-off costs

     (0.14 )%      (0.07 )% 
  

 

 

   

 

 

 

Adjusted noninterest expense / Average total assets (5)

     2.51 %      2.38 % 
  

 

 

   

 

 

 

Efficiency ratio

     83.58 %      73.84 % 

Plus: impact of total spin-off costs

     (4.26 )%      (1.86 )% 
  

 

 

   

 

 

 

Adjusted efficiency ratio

     79.32 %      71.98 % 
  

 

 

   

 

 

 

 

(17) Non-GAAP financial measures are not included as of and for the periods ended March 31, 2017 and December 31, 2016 and 2015 because no spin-off costs existed for those periods.
(18) Adjusted efficiency ratio is the efficiency ratio plus the impact of total spin-off costs.

NM Not Meaningful



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RISK FACTORS

You should carefully consider the following risk factors and all the other information contained in this information statement in evaluating us and our Company Shares.

Risks Related to Our Business

Any of the following risks could harm our business, results of operations and financial condition and the value of an investment in our stock. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.

Market conditions and economic cyclicality may adversely affect our industry.

We are exposed to downturns in the U.S. economy and market conditions generally. We believe the following, among other things, may affect us in 2018 and beyond:

 

  •   We expect to face continued high levels of regulation of our industry as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, related rulemaking and other initiatives by the U.S. government and its regulatory agencies, including the Consumer Financial Protection Bureau, or the CFPB. Compliance with such laws and regulations may increase our costs, reduce our profitability, and limit our ability to pursue business opportunities and serve customers’ needs. Various pending bills in Congress and statements by our regulators may offer some regulatory relief for banking organizations of our size. We believe that comprehensive regulatory relief will be slow and contentious. We are uncertain about the scope, nature and timing of any regulatory relief, and its effect on us.

 

  •   Although unemployment nationally is low, the economy is growing relatively slowly. The Board of Governors of the Federal Reserve System, which we refer to as the Federal Reserve, adopted in September 2014, a normalization of monetary policy, or the Federal Reserve Normalization Policy, which includes gradually raising the Federal Reserve’s target range for the Federal Funds rate to more normal levels and gradually reducing the Federal Reserve’s holdings of U.S. government and agency securities. The Federal Reserve’s target Federal Funds rate has increased seven times since December 2015 in 25 basis point increments from 0.25% to 2.00% on June 13, 2018. Although the Federal Reserve considers the target Federal Funds rate its primary means of monetary policy normalization, in September 2017, it also began reducing its securities holding by not reinvesting the principal of maturing securities, subject to certain monthly caps on amounts not reinvested. Such reduction may also push interest rates higher and reduce liquidity in the financial system. We expect the Federal Reserve to continue to increase target rates at a moderate pace, subject to potential pauses due to any new domestic or global events. The nature and timing of any changes in monetary policies and their effect on us and the Bank cannot be predicted. The turnover of a majority of the Federal Reserve Board and the members of its Federal Open Market Committee, or FOMC, and the appointment of a new Federal Reserve Chairman may result in changes in policy and timing and amount of monetary policy normalization.

 

  •   Market developments, including employment and price levels, stock market volatility and declines, and tax changes, such as the Tax Cuts and Jobs Act of 2017, or the 2017 Tax Act, signed into law by the President on December 22, 2017, may affect consumer confidence levels from time to time in different directions, and may cause adverse changes in payment behaviors and payment rates, causing increases in delinquencies and default rates, which could affect our charge-offs and provisions for credit losses.

 

  •  

Our ability to assess the creditworthiness of our customers and those we do business with, and to estimate the values of our assets and collateral for loans may be impaired if the models and approaches we use become less predictive of future behaviors and valuations. The process we use to estimate losses inherent in our credit exposure, or estimate the value of certain assets, requires difficult,

 

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subjective, and complex judgments, including forecasts of economic conditions and how those economic predictions might affect the ability of our borrowers to repay their loans or the value of assets.

 

  •   The 2017 Tax Act substantially limits the deductibility of all state and local taxes for U.S. taxpayers, including property taxes, and lowers the cap on the amount of primary and secondary residential mortgage indebtedness for which U.S. taxpayers may deduct interest. These changes, together with increases in interest rates, generally, could have adverse effects on home sales, the volume of new mortgage and home equity loans and the values and salability of residences held as collateral for loans.

 

  •   Our ability to borrow from and engage in other business with other financial institutions on favorable terms, or at all, could be adversely affected by disruptions in the capital markets or other events, including, among other things, investor expectations and changes in regulations in the U.S. and foreign markets.

 

  •   Failures of other financial institutions in our markets and increasing consolidation of financial services companies as a result of market conditions could increase our deposits and assets and necessitate additional capital, and could have unexpected adverse effects upon us and our business.

 

  •   The “Volcker Rule,” including final regulations adopted in December 2013, may affect us adversely by reducing market liquidity and securities inventories at those institutions where we buy and sell securities for our portfolio and increasing the bid-ask spreads on securities we purchase or sell. These rules have decreased the range of permissible investments, such as certain collateralized loan obligation interests, which we could otherwise use to diversify our assets and for asset/liability management. Legislation that removed Volcker Rule restrictions on banks under $10 billion in assets was enacted on May 24, 2018. See “Supervision and Regulation — Other Legislative and Regulatory Changes.”

Our success depends on general and local economic conditions where we operate.

Our success depends on the economic conditions, generally, especially in the geographic markets we serve. The local economic conditions in our markets have a significant effect on our commercial, real estate and construction loans, the ability of borrowers to repay these loans and the value of the collateral securing these loans. Adverse changes in the economic conditions of the regions where our loans are originated, primarily South Florida, the greater Houston, Texas area and the greater New York City area, especially the five New York City boroughs, and secondarily in four Latin American countries with investment-grade sovereign ratings (Chile, Colombia, Mexico and Peru) and one without an investment-grade sovereign rating (Brazil) where we have trade financing and financial institution credits, could negatively affect our results of operations and our profitability. As of March 31, 2018 and December 31, 2017 we had $178.5 million and $182.7 million of consumer loans and residential mortgage loans secured by properties in the U.S. outstanding to Venezuelan persons, respectively. This exposure to Venezuelan borrowers includes $35.1 million and $37.6 million of other loans at March 31, 2018 and December 31, 2017, respectively. Further, our loan production, generally, is subject to seasonability, with the lowest volume typically in the first quarter of each year. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition.”

Nonperforming and similar assets take significant time to resolve and may adversely affect our results of operations and financial condition.

At March 31, 2018 and 2017, our nonperforming loans totaled $32.2 million and $62.1 million, respectively, or 0.54% and 1.06% of total loans, respectively. In addition, we had approximately $0.3 million and $0.4 million of OREO at March 31, 2018 and 2017, respectively. Our non-performing assets may adversely affect our net income in various ways. We do not record interest income on nonaccrual loans or OREO, and these assets require higher loan administration and other costs, thereby adversely affecting our income. Decreases in the value of these assets, or the underlying collateral, or in the related borrowers’ performance or financial condition, whether or not due to economic and market conditions beyond our control, could adversely affect our business,

 

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results of operations and financial condition. In addition, the resolution of nonperforming assets requires commitments of time from management, which can be detrimental to their other responsibilities. There can be no assurance that we will not experience increases in nonperforming loans, OREO and similar nonperforming assets in the future.

Our allowance for loan losses may prove inadequate or we may be negatively affected by credit risk exposures.

We periodically review our allowance for loan losses for adequacy considering economic conditions and trends, collateral values and credit quality indicators, including past charge-off experience and levels of past due loans and nonperforming assets. We cannot be certain that our allowance for loan losses will be adequate over time to cover credit losses in our portfolio because of unanticipated adverse changes in the economy, market conditions or events adversely affecting specific customers, industries or markets, and changes in borrower behaviors. Differences between our actual experience and assumptions and the effectiveness of our models may adversely affect our business, financial condition, including liquidity and capital, and results of operations. The Financial Accounting Standards Board, or FASB, adopted Accounting Standards Update, or ASU, No. 2016-13 “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” or CECL, on June 16, 2016, which changed the loss model to take into account current expected credit losses. This accounting pronouncement is expected to be applicable to us, as an emerging growth company, effective for our fiscal year beginning January 1, 2021, but we have not yet determined how it will affect our results of operations and financial condition.

Our valuation of securities and investments and the determination of the amount of impairments taken on our investments are subjective and, if changed, could materially adversely affect our results of operations or financial condition.

Fixed maturity securities, as well as short-term investments that are reported at estimated fair value, represent the majority of our total investments. We define fair value generally as the price that would be received in the sale of an asset or paid to transfer a liability. Considerable judgment is often required in interpreting market data to develop estimates of fair value, and the use of different assumptions or valuation methodologies may have a material effect on the estimated fair value amounts. During periods of market disruption, including periods of significantly rising or high interest rates, rapidly widening credit spreads or illiquidity, it may be difficult to value certain of our securities if trading becomes less frequent or market data becomes less observable. In addition, in times of financial market disruption, certain asset classes that were in active markets with significant observable data may become illiquid. In those cases, the valuation process includes inputs that are less observable and require more subjectivity and management judgment. Valuations may result in estimated fair values which vary significantly from the amount at which the investments may ultimately be sold. Further, rapidly changing and unprecedented credit and equity market conditions could materially affect the valuation of securities in our financial statements and the period-to-period changes in estimated fair value could vary significantly. Decreases in the estimated fair value of securities we hold may have a material adverse effect on our financial condition. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates.”

The determination of the amount of impairments varies by investment type and is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available. We reflect any changes in impairments in earnings as such evaluations are revised. However, historical trends may not be indicative of future impairments. In addition, any such future impairments or allowances could have a materially adverse effect on our earnings and financial position. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates.”

 

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If our business does not perform well, we may be required to recognize an impairment of our goodwill or other long-lived assets or to establish a valuation allowance against the deferred income tax asset, which could adversely affect our results of operations or financial condition.

We had goodwill of $19.2 million on March 31, 2018 and December 31, 2017. We perform our goodwill impairment testing annually using a process, which requires the use of estimates and judgment. The estimated fair value of the reporting unit is affected by the performance of the business, which may be especially diminished by prolonged market declines. If it is determined that the goodwill has been impaired, we must write down the goodwill by the amount of the impairment, with a corresponding charge to net income. Although we have had no goodwill write-downs historically, any such write-downs could have an adverse effect on our results of operations or financial position.

Long-lived assets, including assets such as real estate, also require impairment testing. This testing is done to determine whether changes in circumstances indicate that we will be unable to recover the carrying amount of these assets. Such write-downs could have a material adverse effect on our results of operations or financial position.

Deferred income tax represents the tax effect of the timing differences between financial accounting and tax reporting. Deferred tax assets, or DTAs, are assessed periodically by management to determine whether they are realizable. Factors in management’s determination include the performance of the business, including the ability to generate future taxable income. If, based on available information, it is more likely than not that the deferred income tax asset will not be realized, then a valuation allowance must be established with a corresponding charge to net income. Such charges could have a material adverse effect on our results of operations or financial position. In addition, changes in the corporate tax rates could affect the value of our DTAs and may require a write-off of some of those assets. The 2017 Tax Act reduced the U.S. corporate income tax rate to 21% effective for periods starting January 1, 2018, from a prior rate of 35%. At March 31, 2018, we had net DTAs with a book value of $24.5 million, based on a U.S. corporate income tax rate of 21%. In December 2017 we had a remeasurement of net DTAs and recorded $9.6 million in additional tax expense and a corresponding reduction in net income as a result of the 2017 Tax Act. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Critical Accounting Policies and Estimates.”

Defaults by or deteriorating asset quality of other financial institutions could adversely affect us.

We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, central clearinghouses, commercial banks, investment banks, hedge funds and investment funds, our correspondent banks and other financial institutions, especially those in the Latin American countries where we make such loans. Many of these transactions expose us to credit risk in the event of the default of our counterparty. In addition, with respect to secured transactions, credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices insufficient to recover the full amount of the loan or derivative exposure due to us. We also may have exposure to these financial institutions in the form of unsecured debt instruments, derivatives and other securities. Further, potential action by governments and regulatory bodies in response to financial crises affecting the global banking system and financial markets, such as nationalization, conservatorship, receivership and other intervention, whether under existing legal authority or any new authority that may be created, or lack of action by governments and central banks, as well as deterioration in the banks’ creditworthiness, could adversely affect the value and/or liquidity of these instruments, securities, transactions and investments or limit our ability to trade with them. Any losses or impairments to the carrying value of these investments or other changes may materially and adversely affect our results of operations and financial condition.

In addition we maintain credit relationships with large financial institutions that we believe are of the highest quality in Brazil, Chile, Colombia, Mexico and Peru. In addition to the risks posed by relationships with U.S. counterparty financial institutions, transactions with foreign financial institutions may be subject to currency

 

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and exchange rate controls, regulation, inflation or deflation, and fiscal and monetary policies in the foreign countries that are significantly different than in the U.S.

Our operations are subject to risk of loss from unfavorable fiscal, monetary and political developments in the U.S. and other countries where we do business.

Our businesses and earnings are affected by the fiscal, monetary and other policies and actions of various U.S. and non-U.S. governmental and regulatory authorities. Changes in these are beyond our control and are difficult to predict and, consequently, changes in these policies could have negative effects on our activities and results of operations.

Our businesses and revenue are subject to risks inherent in making loans and executing transactions with counterparties located in Latin America. Our domestic business, including loans, deposits and wealth management, services persons from or dependent upon businesses or wealth from Venezuela and other Latin American countries, and are, therefore, subject to risk inherent to those countries. These risks include, among others, effects from slow or negative growth or recessionary or worse economic conditions, inflation and hyper-inflation, currency controls and volatility, and the risk of loss from unfavorable political, legal or other developments, including social or political instability, in the countries or regions in which such counterparties operate, as well as the other risks and considerations as described further below.

Various countries or regions in which we, our counterparties or our customers operate or invest have in the past experienced severe economic disruptions particular to those countries or regions. In some cases, concerns regarding the fiscal condition of one or more countries and currency and exchange controls and other measures adopted by one country could cause other countries in the same region or beyond to experience a contraction of available credit, market and price volatility, illiquidity and reduced cross-border trading and financing activity.

Our results of operations from international activities and customers from other countries may be subject to adverse changes as a result of the above considerations, as well as possible governmental actions, including expropriation, nationalization, confiscation of assets, price controls, capital controls, exchange controls, and changes in laws and regulations. The effects of these changes could be magnified in smaller, less liquid and more volatile foreign markets.

Conducting business in countries and having customers in countries with less developed legal and regulatory regimes, or with currency controls often requires devoting significant additional resources to understanding, and monitoring changes in, local laws and regulations, as well as compliance with local laws and regulations and implementing and administering related risk policies and procedures. We can also incur higher costs, and face greater compliance risks, in structuring and operating our businesses outside the U.S. to comply with U.S. anti-corruption, anti-money laundering and other laws, regulations and sanctions. Failure to comply with such rules in our international activities could adversely affect our results of operations and regulatory relations in the U.S. and elsewhere.

Changes in the real estate markets, including the secondary market for residential mortgage loans, may adversely affect us.

The effects of the CFPB changes to mortgage and servicing rules effective at the beginning of 2014, the CFPB’s new unified Truth in Lending Act and the Real Estate Settlement Procedures Act, or RESPA, rules for closed end credit transactions secured by real property that became effective in October 2015, often called TRID rules, enforcement actions, reviews and settlements, changes in the securitization rules under the Dodd-Frank Act, including the risk retention rules that became effective December 24, 2016, and the Basel III Capital Rules ( see “Supervision and Regulation — Basel III Capital Rules”) could have serious adverse effects on the mortgage markets and our mortgage operations.

The TRID rules have affected our current and proposed mortgage business and have increased our costs as a result of our compliance efforts. In addition, the CFPB’s final regulations implementing the Dodd-Frank Act, which require that lenders determine whether a consumer has the ability to repay a mortgage loan, which became effective in January 2014, have limited the secondary market for and liquidity of many mortgage loans that are not “qualified mortgages.”

 

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Increasing interest rates and the 2017 Tax Act’s limitations on the deductibility of residential mortgage interest and state and local property and other taxes could adversely affect consumer behaviors and the volumes of housing sales, mortgage and home equity loan originations, as well as the value and liquidity of residential property held as collateral by lenders such as the Bank, and the secondary markets for residential loans. Acquisition, construction and development loans for residential development may be similarly adversely affected.

The Federal National Mortgage Association, or Fannie Mae, and the Federal Home Loan Mortgage Corporation, or Freddie Mac, have been in conservatorship since September 2008. Minimal capital at Fannie Mae and Freddie Mac, the levels of risky assets at the Federal Housing Administration, or the FHA, and its relatively low capital and reserves for losses, the current levels of home sales, and the risks of interest rates increasing materially from historically low levels, as well as the 2017 Tax Act, could also have serious adverse effects on the mortgage markets and our mortgage operations. Such adverse effects could include, among other things, price reductions in single family home values, further adversely affecting the liquidity and value of collateral securing commercial loans for residential acquisition, construction and development, as well as residential mortgage loans that we hold, mortgage loan originations and gains on sale of mortgage loans. In the event our allowance for loan losses is insufficient to cover such losses, if any, our earnings, capital and liquidity could be adversely affected.

Fannie Mae and Freddie Mac restructuring may adversely affect the mortgage markets and our sales of mortgages we originate.

Fannie Mae and Freddie Mac remain in conservatorship, and although legislation has been introduced at various times to restructure Fannie Mae and Freddie Mac to take them out of conservatorship and substantially change the way they conduct business in the future, no proposal has been enacted. Through 2017, all of Fannie Mae and Freddie Mac’s earnings above a specified capital reserve have been swept into the U.S. Department of the Treasury, or the Treasury Department, and have not been available to build Fannie Mae’s and Freddie Mac’s capital. At the end of 2017, the capital reserve was increased to $3 billion for each of Fannie Mae and Freddie Mac.

In February 2018 Fannie Mae reported that the 2017 Tax Act had reduced its DTAs, and that it had a net worth deficit of $3.7 billion as of December 31, 2017. To eliminate its net worth deficit, the Treasury Department provided Fannie Mae with $3.7 billion of capital in the first quarter of 2018. As a result, Fannie Mae reported that it had a net worth of $3.9 billion as of March 31, 2018. Freddie Mac had a net worth deficit of $312 million at December 31, 2017, and the Treasury Department provided Freddie Mac with $312 million of capital in the first quarter of 2018. As a result, Freddie Mac reported that it had a net worth of $2.2 billion as of March 31, 2018.

Since Fannie Mae and Freddie Mac dominate the residential mortgage markets, any changes in their structure and operations, as well as their respective capital, could adversely affect the primary and secondary mortgage markets, and our residential mortgage businesses, our results of operations and the returns on capital deployed in these businesses.

We may be contractually obligated to repurchase mortgage loans we sold to third-parties on terms unfavorable to us.

As a routine part of our business, we originate mortgage loans that we subsequently sell to investors. We do not currently originate mortgage loans for direct sale to any governmental agencies and government sponsored enterprises, or GSEs, such as Fannie Mae or Freddie Mac but expect to make such direct sales in the future. In connection with the sale of these loans to private investors and GSEs, we make customary representations and warranties, the breach of which may result in our being required to repurchase the loan or loans. Furthermore, the amount paid may be greater than the fair value of the loan or loans at the time of the repurchase. No mortgage

 

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loan repurchase requests have been made to us; however, if repurchase requests were made to us, we may have to establish reserves for possible repurchases, which could adversely affect our results of operations and financial condition.

Mortgage Servicing Rights, or MSRs, requirements may change and require us to incur additional costs and risks.

The CFPB adopted new residential mortgage servicing standards in January 2014 that add additional servicing requirements, increase our required servicer activities and delay foreclosures, among other things. These may adversely affect our costs to service residential mortgage loans, and together with the Basel III Capital Rules, may decrease the returns on our MSRs.

The CFPB and the bank regulators continue to bring enforcement actions and develop proposals, rules and practices that could increase the costs of providing mortgage servicing. Historically, we have not serviced mortgage loans for others. However, if we were to provide servicing in the future, regulation of mortgage servicing could make it more difficult and costly to timely realize the value of collateral securing such loans upon a borrower default.

Our concentration of CRE loans could result in further increased loan losses, and adversely affect our business, earnings, and financial condition.

CRE is cyclical and poses risks of possible loss due to concentration levels and risks of the assets being financed, which include loans for the acquisition and development of land and residential construction. The federal bank regulators released guidance in 2006 on “Concentrations in Commercial Real Estate Lending.” The guidance defines CRE loans as exposures secured by raw land, land development and construction (including 1-4 family residential construction), multi-family property, and non-farm nonresidential property, where the primary or a significant source of repayment is derived from rental income associated with the property (that is, loans for which 50% or more of the source of repayment comes from third-party, non-affiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property. Loans to real-estate investment trusts, or REITs, and unsecured loans to developers that closely correlate to the inherent risks in CRE markets would also be considered CRE loans under the guidance. Loans on owner occupied CRE are generally excluded.

The Bank’s portfolio of CRE loans was 333.47% of its risk-based capital, or 48.24% of its total loans, as of March 31, 2018 compared to 317.39% of its risk-based capital, or 46.03% of its total loans, as of March 31, 2017. The banking regulators continue to scrutinize CRE lending and further addressed their concerns over CRE activity in December 2016, requiring banks with higher levels of CRE loans to implement more robust underwriting, internal controls, risk management policies and portfolio stress testing, as well as higher levels of allowances for possible losses and capital levels as a result of CRE lending growth and exposures. Lower demand for CRE, and reduced availability of, and higher costs for, CRE lending could adversely affect our CRE loans and sales of our OREO, and therefore our earnings and financial condition, including our capital and liquidity.

As of March 31, 2018, approximately 53.3% of total CRE loans were in Miami-Dade, Broward and Palm Beach counties, Florida, 17.6% were in the greater Houston, Texas area, and 24.4% were in the greater New York City area, including all five boroughs. Our CRE loans are affected by economic conditions in those markets.

Our profitability and liquidity may be affected by changes in interest rates and interest rate levels, the shape of the yield curve and economic conditions.

Our profitability depends upon net interest income, which is the difference between interest earned on assets, such as loans and investments, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Net interest income will be adversely affected by market interest rates changes where the interest we

 

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pay on deposits and borrowings increases faster than the interest earned on loans and investments. Interest rates, and consequently our results of operations, are affected by general economic conditions (domestic and international) and fiscal and monetary policies, as well as expectations of these rates and policies, and the shape of the yield curve.

Our balance sheet is asset sensitive. Therefore, a decrease in interest rates or a flattening of the yield curve could adversely affect us, generally.

Our income is primarily driven by the spread between these rates. As a result, a steeper yield curve, meaning long-term interest rates are significantly higher than short-term interest rates, would provide the Bank with a better opportunity to increase net interest income. Conversely, a flattening U.S. yield curve could pressure our net interest margin as our cost of funds increases relative to the spread we can earn on our assets. In addition, net interest income could be affected by asymmetrical changes in the different interest rate indexes, given that not all of our assets or liabilities are priced with the same index. The Federal Reserve Normalization Policy, which is gradually increasing the Federal Reserve’s target Federal Funds rates and decreasing the Federal Reserve’s holdings of securities, may have unpredictable effects on the shape of the yield curve and longer term interest rates.

The production of mortgages and other loans and the value of collateral securing our loans, are dependent on demand within the markets we serve, as well as interest rates. Increases in interest rates generally decrease the market values of fixed-rate, interest-bearing investments and loans held, the value of mortgage and other loans produced and the value of loans sold, mortgage loan activities and the collateral securing our loans, and therefore may adversely affect our liquidity and earnings, to the extent not offset by potential increases in our net interest margin.

The 2017 Tax Act, including its fiscal stimulus, limitations on the deductibility of residential mortgage interest and business interest expenses and other changes, could have mixed effects on economic activity and reduce the demand for loans and increase competition among lenders for loans. This act could also promote inflation and higher interest rates.

Many of our loans and our obligations for borrowed money are priced based on variable interest rates tied to the London Interbank Offering Rate, or LIBOR. We are subject to risks that LIBOR may no longer be available as a result of the United Kingdom’s Financial Conduct Authority ceasing to require the submission of LIBOR quotes in 2021.

The potential cessation of LIBOR quotes in 2021 creates substantial risks to the banking industry, including us. Unless alternative rates can be negotiated, our floating rate loans, funding and derivative obligations that specify the use of a LIBOR index, will no longer adjust and may become fixed rate instruments at the time LIBOR ceases to exist. This would adversely affect our asset/liability management and could lead to more asset and liability mismatches and interest rate risk unless LIBOR alternatives are developed. It could also cause confusion that could disrupt the capital and credit markets as a result of confusion or uncertainty.

The Federal Reserve has sponsored the Alternative Reference Rates Committee, or ARRC, which serves as a forum to coordinate and track planning as market participants currently using LIBOR consider (a) transitioning to alternative reference rates where it is deemed appropriate and (b) addressing risks in legacy contracts language given the possibility that LIBOR might stop. On April 3, 2018 the Federal Reserve began publishing three new reference rates, including the Secured Overnight Financing Rate, or SOFR. ARRC has recommended SOFR as the alternative to LIBOR. The Financial Stability Board has taken an interest in LIBOR and possible replacement indices. The International Organisation of Securities Commissions, or IOSCO, has been active in this area and is expected to call on market participants to have backup options if a reference rate, such as LIBOR, ceases publication. It cannot be predicted whether SOFR or another index or indices will become a market standard that replaces LIBOR, and if so, the effects on our customers, or our future results of operations or financial condition.

 

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Liquidity risks could affect operations and jeopardize our financial condition.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, proceeds from loan repayments or sales, and other sources could have a substantial negative effect on our liquidity. Our funding sources include Federal Funds purchased, securities sold under repurchase agreements, core and non-core deposits (domestic and foreign), and short-and long-term debt. We maintain a portfolio of securities that can be used as a source of liquidity. We are also members of the Federal Home Loan Bank of Atlanta, or FHLB, and the Federal Reserve Bank of Atlanta, where we can obtain advances collateralized with eligible assets. There are other sources of liquidity available to us or the Bank should they be needed, including our ability to acquire additional non-core deposits (such as reciprocal deposit programs such as CDARs, and brokered deposits). We may be able, depending upon market conditions, to otherwise borrow money or issue and sell debt and preferred or common securities in public or private transactions. Our access to funding sources in amounts adequate to finance or capitalize our activities on terms which are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or the economy in general. Our ability to borrow or obtain funding, if needed, could also be impaired by factors that are not specific to us, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.

The Company is an entity separate and distinct from the Bank. The Federal Reserve Act, Section 23A, limits our ability to borrow from the Bank, and the Company generally relies on dividends paid from the Bank for funds to meet its obligations, including under its outstanding trust preferred securities. The Bank’s ability to pay dividends is limited by law, and may be limited by regulatory action to preserve the Bank’s capital adequacy. Any such limitations could adversely affect the Company’s liquidity.

Certain funding sources may not be available to us and our funding sources may prove insufficient and/or costly to replace.

Although we have historically been able to replace maturing deposits and advances, we may not be able to replace these funds in the future if our financial condition or general market conditions change. The use of brokered deposits has been particularly important for the funding of our operations. If we are unable to issue brokered deposits, or are unable to maintain access to other funding sources, our results of operations and liquidity would be adversely affected. Our ability to accept, renew or replace brokered deposits without prior regulatory approval will be limited if the Bank does not remain well-capitalized.

Alternative funding to deposits may carry higher costs than sources currently utilized. If we are required to rely more heavily on more expensive and potentially less stable funding sources, profitability and liquidity could be adversely affected. We may determine to seek debt financing in the future to achieve our long-term business objectives. Any Company or Bank debt that is to be treated as capital for bank regulatory purposes requires prior Federal Reserve approval, which the Federal Reserve may not grant. Additional borrowings, if sought, may not be available to us, or if available, may not be on acceptable terms. The availability of additional financing will depend on a variety of factors such as market conditions, the general availability of credit, our credit ratings and our credit capacity. In addition, the Bank may seek to sell loans as an additional source of liquidity. If additional financing sources are unavailable or are not available on acceptable terms, our profitability and future prospects could be adversely affected.

Our Venezuelan deposit concentration means conditions in Venezuela could adversely affect our operations.

At March 31, 2018, 47.5% of our deposits, or approximately $3.0 billion, were from Venezuelans. The Bank’s Venezuelan deposits declined 23.9% from December 31, 2015 to March 31, 2018. These declines were due in part to actions by the Company to reduce its compliance costs and from economic conditions in Venezuela that adversely affected our Venezuelan customers wealth and use of deposits to fund living expenses. All of the Bank’s deposits are denominated in Dollars. Adverse economic conditions in Venezuela may continue to adversely affect our Venezuelan deposit base and our ability to retain and grow these relationships, as customers

 

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rely on their Dollar deposits to spend without being able to earn additional Dollars. Venezuela’s currency controls and its official currency exchange rates for converting Bolivars into Dollars diverge widely from open market exchange rates. According to the International Monetary Fund’s World Economic Outlook, Venezuela’s annual inflation rate is projected to exceed 13,000% in 2018 and more recent estimates are substantially higher. All of these factors greatly influence our Venezuelan customers’ access to Dollars and their ability to replenish the Dollars they consume.

Foreign deposits require additional scrutiny and higher costs to originate and maintain than domestic deposits in the U.S. The Bank has adopted strategies to manage and retain its foreign deposits consistent with U.S. anti-money laundering laws. If these strategies are unsuccessful, or economic conditions or other conditions worsen in Venezuela or our regulators restrict the Bank from taking its customers’ deposits, our volume of deposits from Venezuelan sources may decline further. A significant or sudden decline in our deposits from Venezuelan customers could adversely affect our results of operations, and financial condition, including liquidity.

Our brokered deposits and wholesale funds increase our liquidity risks, and could increase our deposit insurance costs.

Our brokered deposits at March 31, 2018 were 11.5% of total deposits. Wholesale funding, including FHLB advances and brokered deposits represented 27.2% of our funding at March 31, 2018 and increased 16.0% since 2016. The Federal Deposit Insurance Corporation, or FDIC, adjusts its deposit insurance assessments by up to 10 basis points annually for institutions that have brokered deposits exceeding 10% of total deposits where the bank also exceeds a certain risk level. More rigorous standards may also apply to banks with more than $10 billion in assets. In addition, excessive reliance on brokered deposits and wholesale funding is viewed by the regulators as potentially risky for all institutions, and may adversely affect our liquidity and the regulatory views of our liquidity. 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.”

Our cost of funds may increase as a result of general economic conditions, interest rates, inflation and competitive pressures.

Although the Federal Reserve has raised the target Federal Funds rate seven times between December 2015 and June 2018, the Federal Reserve has kept interest rates low over recent years, and the Federal government continues large deficit spending. Our costs of funds may increase as a result of general economic conditions, interest rates and competitive pressures, and potential inflation resulting from government deficit spending and the effects of the 2017 Tax Act and monetary policies. Traditionally, we have obtained funds principally through deposits, including deposits from foreign persons, and borrowings from other institutional lenders. Generally, we believe deposits are a cheaper and more stable source of funds than borrowings because interest rates paid for deposits are typically lower than interest rates charged for borrowings from other institutional lenders. We expect that our future growth will depend on our ability to retain and grow a strong, low-cost deposit base from U.S. domiciled persons. Increases in interest rates could also cause consumers to shift their funds to more interest bearing instruments and to increase the competition for funds. While the Federal Reserve has stated it intends to gradually increase interest rates, interest rates could increase more or more quickly than anticipated, and the competition for deposits could increase. If customers reduce the mix of their interest bearing and noninterest bearing deposits, or move money to higher rate deposits or other interest bearing assets offered by competitors or from transaction deposits to higher interest bearing time deposits, we could lose a relatively low cost source of funds, increasing our funding costs and reducing our net interest income and net income. Additionally, any such loss of funds could result in lower loan originations and growth, which could materially and adversely affect our results of operations and financial condition, including liquidity.

 

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Our investment advisory and trust businesses could be adversely affected by conditions affecting our Venezuelan customers.

A significant portion of our revenue from trust, brokerage and investment advisory services is dependent on business from Venezuelan customers. Economic conditions in Venezuela may adversely affect the amounts of assets we manage or custody, and the trading volumes of our Venezuelan customers, reducing fees and commissions we earn from these businesses.

Our future success is dependent on our ability to compete effectively in highly competitive markets.

The banking markets in which we do business are highly competitive and 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. Marketplace lenders operating nationwide over the internet are also growing rapidly. 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. The Dodd-Frank Act allows others to branch into our markets more easily from other states. Failures of other banks with offices in our markets and small institutions wishing to sell or merge due to cost pressures, could also lead to the entrance of new, stronger competitors in our markets.

Technological changes affect our business, and we may have fewer resources than many competitors to invest in technological improvements.

The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services, and a growing demand for mobile and other phone and computer banking applications. In addition to allowing us to service our clients better, the effective use of technology may increase efficiency and may enable financial institutions to reduce costs and the risks associated with fraud and other operational risks. Largely unregulated “fintech” businesses have increased their participation in the lending and payments businesses, and have increased competition in these businesses. Our future success will depend, in part, upon our ability to use technology to provide products and services that meet our customers’ preferences and which create additional efficiencies in operations, while avoiding cyber-attacks and disruptions, and data breaches. We may need to make significant additional capital investments in technology, including cyber and data security, and we may not be able to effectively implement new technology-driven products and services, or such technology may prove less effective than anticipated. 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. See “— Operational risks are inherent in our businesses.”

Our derivative instruments may expose us to certain risks.

We use the payments we receive from counterparties pursuant to derivative instruments we have entered into to offset current or future changes in cash flows of certain of our FHLB Advances. In addition, we enter into matched offsetting derivative transactions in order to manage credit exposure arising from derivative transactions with customers. We may enter into a variety of derivative instruments, including options, futures, forwards, and interest rate and credit default swaps with a number of counterparties. Amounts that we expect to collect under current and future derivatives are subject to counterparty risk. Our obligations under our products are not changed by our hedging activities and we are liable for our obligations even if our derivative counterparties do not pay us. Such defaults could have a material adverse effect on our financial condition and results of operations. Substantially all of our derivatives require us to pledge or receive collateral or make payments related to any decline in the net estimated fair value of such derivatives executed through a specific broker at a

 

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clearinghouse or entered into with a specific counterparty on a bilateral basis. In addition, ratings downgrades or financial difficulties of derivative counterparties may require us to utilize additional capital with respect to the impacted businesses.

Changes in accounting rules applicable to banks could adversely affect our financial conditions and results of operations.

From time to time, the FASB and the SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be difficult to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in us restating prior period financial statements. For example, the FASB’s new requirements under ASU No. 2016-13, or CECL, includes significant changes to the manner in which banks’ allowance for loan losses will be calculated at the effective date for such guidance for us. See Note 1 to our audited consolidated financial statements, “Allowance for Loan Losses.” Instead of using historical losses, the new guidance will require forward looking analysis with respect to expected losses over the life of loans and other instruments, and could materially affect our results of operations and financial condition.

The 2017 Tax Act may have adverse effects on certain of our customers and our businesses.

The 2017 Tax Act will benefit us by reducing the maximum U.S. corporate income tax rate on its taxable income from 35% to 21%. This benefit may be diminished by the complexity, uncertainty and possible adverse effects of this legislation on certain of our borrowers, including limitations on the deductibility of:

 

  •   residential mortgage interest;

 

  •   state and local taxes, including property taxes; and

 

  •   business interest expenses.

These changes may adversely affect borrowers’ cash flows and the values and liquidity of collateral we hold to secure our loans. Fewer borrowers may be able to meet the CFPB’s “ability to repay” standards, which include the borrower’s ability to pay taxes and assessments. Demand for loans by qualified borrowers could be reduced, and therefore competition among lenders could increase. Customer behaviors toward incurring and repaying debt could also change as a result of the 2017 Tax Act. As a result, the 2017 Tax Act could materially and adversely affect our business and results of operations, at least before taking into account our lower U.S. corporate income tax rate.

Operational risks are inherent in our businesses.

Operational risks and losses can result from internal and external fraud; gaps or weaknesses in our risk management or internal audit procedures; errors by employees or third-parties; failure to document transactions properly or to obtain proper authorization; failure to comply with applicable regulatory requirements and conduct of business rules in the various jurisdictions where we do business or have customers; failures in the models we generate and rely on; equipment failures, including those caused by natural disasters or by electrical, telecommunications or other essential utility outages; business continuity and data security system failures, including those caused by computer viruses, cyber-attacks, unforeseen problems encountered while implementing major new computer systems or, upgrades to existing systems or inadequate access to data or poor response capabilities in light of such business continuity and data security system failures; or the inadequacy or failure of systems and controls, including those of our suppliers or counterparties. Additionally, providing services outside the U.S. to non-U.S. persons, including MSF, may involve greater complexity and risks than providing such services in our primary U.S. markets. Although we have implemented risk controls and loss mitigation actions, and substantial resources are devoted to developing efficient procedures, identifying and

 

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rectifying weaknesses in existing procedures and training staff, there is no assurance that such actions will be effective in controlling all of the operational risks faced by us. See “— The Bank has agreed to continue to provide certain services to MSF’s subsidiaries after the spin-off, which could present additional regulatory and operational risks to us.”

Potential gaps in our risk management policies and internal audit procedures may leave us exposed to unidentified or unanticipated risk, which could negatively affect our business.

Our enterprise risk management and internal audit program is designed to mitigate material risks and loss to us. We have developed and continue to develop risk management and internal audit policies and procedures to reflect ongoing reviews of our risks and expect to continue to do so in the future. Nonetheless, our policies and procedures may not identify every risk to which we are exposed, and our internal audit process may fail to detect such weaknesses or deficiencies in our risk management framework. Many of our methods for managing risk and exposures are based upon the use of observed historical market behavior to model or project potential future exposure. Models used by our business are based on assumptions and projections. These models may not operate properly or our inputs and assumptions may be inaccurate, or may not be adopted quickly enough to reflect changes in behavior, markets or technology. As a result, these methods may not fully predict future exposures, which can be significantly different and greater than historical measures indicate. Other risk management methods depend upon the evaluation of information regarding markets, customers, or other matters that are publicly available or otherwise accessible to us. This information may not always be accurate, complete, up-to-date or properly evaluated. Furthermore, there can be no assurance that we can effectively review and monitor all risks or that all of our employees will closely follow our risk management policies and procedures, nor can there be any assurance that our risk management policies and procedures will enable us to accurately identify all risks and limit timely our exposures based on our assessments. In addition, we may have to implement more extensive and perhaps different risk management policies and procedures under pending regulations. All of these could adversely affect our financial condition and results of operations.

Any failure to protect the confidentiality of customer information could adversely affect our reputation and have a material adverse effect on our business, financial condition and results of operations.

Various federal, state and foreign laws enforced by the bank regulators and other agencies, protect the privacy and security of customers’ non-public personal information. Many of our employees have access to, and routinely process sensitive personal customer information, including through information technology systems. We rely on various internal processes and controls to protect the confidentiality of client information that is accessible to, or in the possession of, us and our employees. It is possible that an employee could, intentionally or unintentionally, disclose or misappropriate confidential client information or our data could be the subject of a cybersecurity attack. Such personal data could also be compromised by third-party hackers via intrusions into our systems or those of service providers or persons we do business with such as credit bureaus, data processors and merchants who accept credit or debit cards for payment. If we fail to maintain adequate internal controls, or if our employees fail to comply with our policies and procedures, misappropriation or intentional or unintentional inappropriate disclosure or misuse of client information could occur. Such internal control inadequacies or non-compliance could materially damage our reputation, lead to civil or criminal penalties, or both, which, in turn, could have a material adverse effect on our business, financial condition and results of operations.

Our information systems may experience interruptions and security breaches.

We rely heavily on communications and information systems, including those provided by third-party service providers, to conduct our business. Any failure, interruption, or security breach of these systems could result in failures or disruptions which could affect our customers’ privacy and our customer relationships, generally. Our systems and networks, as well as those of our third-party service providers, are subject to security risks and could be susceptible to cyber-attacks, such as denial of service attacks, hacking, terrorist activities or identity theft. Although we are not aware that we or our third-party service providers have been subject to a

 

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cyberattack, other financial services institutions and their service providers have reported breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks, including use of stolen access credentials, malware, ransomware, phishing, structured query language injection attacks, and distributed denial-of-service attacks, among others. Such cyber-attacks may also be directed at disrupting the operations of public companies or their business partners, which are intended to effect unauthorized fund transfers obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage systems, often through the introduction of computer viruses or malware, cyberattacks and other means. Denial of service attacks have been launched against a number of large financial services institutions, and we may be subject to these types of attacks in the future. Hacking and identity theft risks, in particular, could cause serious reputational harm. 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.

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. The techniques used by cyber criminals change frequently, may not be recognized until launched and can originate from a wide variety of sources, including outside groups such as external service providers, organized crime affiliates, terrorist organizations or hostile foreign governments or agencies. These risks may increase in the future as the use of mobile banking and other internet-based products and services continues to grow.

Security breaches or failures may have serious adverse financial and other consequences, including significant legal and remediation costs, disruption of operations, misappropriation of confidential information, damage to systems operated by us or our third-party service providers, as well as damaging our customers and our counterparties. 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 civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

Severe weather, natural disasters, acts of war or terrorism, theft, government expropriation or other external events could have significant effects on our business.

Severe weather and natural disasters, including hurricanes, tornados, earthquakes, fires, droughts and floods, acts of war or terrorism, theft, government expropriation, condemnation or other external events 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, result in loss of revenue and/or cause us to incur additional expenses. Although management has established disaster recovery and business continuity policies and procedures, the occurrence of any such event could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations. Our business is concentrated in three markets — South Florida, the greater Houston, Texas area and the greater New York City area, which may increase our risks from storms. For example, in Fall 2017, both the greater Houston, Texas area and South Florida were struck by major hurricanes within days of each other.

Future acquisitions and expansion activities may disrupt our business, dilute shareholder value and adversely affect our operating results.

While we seek continued organic growth, we may consider the acquisition of other businesses. To the extent that we grow through acquisitions, we cannot assure you that we will be able to adequately or profitably manage this growth. Acquiring other banks, banking centers, or businesses, as well as other geographic (domestic and international) and product expansion activities, involve various risks including:

 

  •   risks of unknown or contingent liabilities;

 

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  •   unanticipated costs and delays;

 

  •   risks that acquired new businesses will not perform consistent with our growth and profitability expectations;

 

  •   risks of entering new markets (domestic and international) or product areas where we have limited experience;

 

  •   risks that growth will strain our infrastructure, staff, internal controls and management, which may require additional personnel, time and expenditures;

 

  •   exposure to potential asset quality issues with acquired institutions;

 

  •   difficulties, expenses and delays in integrating the operations and personnel of acquired institutions;

 

  •   potential disruptions to our business;

 

  •   possible loss of key employees and customers of acquired institutions;

 

  •   potential short-term decreases in profitability; and

 

  •   diversion of our management’s time and attention from our existing operations and business.

Attractive acquisition opportunities may not be available to us in the future.

We expect that other banking and financial companies, many of which have significantly greater resources, will compete with us to acquire financial services businesses. This competition could increase prices for potential acquisitions that we believe are attractive. Also, acquisitions are subject to various regulatory approvals. If we fail to receive the appropriate regulatory approvals, we will not be able to consummate an acquisition that we may believe is in our best interests. Additionally, regulatory approvals could contain conditions that reduce the anticipated benefits of a contemplated transaction. Among other things, our regulators consider our capital levels, liquidity, profitability, regulatory compliance, including anti-money laundering efforts, levels of goodwill and intangibles, management and integration capacity when considering acquisition and expansion proposals. Any acquisition could be dilutive to our earnings and shareholders’ equity per share of our common stock.

Litigation and regulatory investigations are increasingly common in our businesses and may result in significant financial losses and/or harm to our reputation.

We face risks of litigation and regulatory investigations and actions in the ordinary course of operating our businesses, including the risk of class action lawsuits. Plaintiffs in class action and other lawsuits against us may seek very large and/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. We do not have any material pending litigation or regulatory matters affecting us.

A substantial legal liability or a significant federal, state or other regulatory action against us, as well as regulatory inquiries or investigations, could harm our reputation, result in material fines or penalties, result in significant legal costs, divert management resources away from our business, and otherwise have a material adverse effect on our ability to expand on our existing business, financial condition and results of operations. Even if we ultimately prevail in the litigation, regulatory action or investigation, our ability to attract new customers, retain our current customers and recruit and retain employees could be materially and 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.

Our associates may take excessive risks which could negatively affect our financial condition and business.

As a banking enterprise, we are in the business of accepting certain risks. The associates who conduct our business, including executive officers and other members of management, sales intermediaries, investment

 

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professionals, product managers, and other associates, do so in part by making decisions and choices that involve risks. We endeavor, in the design and implementation of our compensation programs and practices, to avoid giving our associates incentives to take excessive risks; however, associates may take such risks regardless of the structure of our compensation programs and practices. Similarly, although we employ controls and procedures designed to monitor associates’ business decisions and prevent them from taking excessive risks, and to prevent employee misconduct, these controls and procedures may not be effective. If our associates take excessive risks or avoid our policies and internal controls, their actions could have a material adverse effect on our reputation, financial condition and business operations.

We may be unable to attract and retain key people to support our business.

Our success depends, in large part, on our ability to attract and retain key people. We compete with other financial services companies for people primarily on the basis of compensation, support services and financial position. Intense competition exists for key employees with demonstrated ability, and we may be unable to hire or retain such employees. Effective succession planning is also important to our long-term success. The unexpected loss of services of one or more of our key personnel and failure to effectively transfer knowledge and smooth transitions involving key personnel could have material adverse effects on our business due to loss of their skills, knowledge of our business, their years of industry experience and the potential difficulty of timely finding qualified replacement employees. We do not currently anticipate any significant changes to our senior management team following the completion of the spin-off. However, there may be new positions which we may need to fill to operate as an independent public company. We may not be able to attract and retain qualified people to fill these open positions or replace or succeed members of our senior management team or other key personnel following the completion of the spin-off. Rules implementing the executive compensation provisions of the Dodd-Frank Act may limit the type and structure of compensation arrangements into which we may enter with certain of our employees and officers. In addition, proposed rules under the Dodd-Frank Act would prohibit the payment of “excessive compensation” to our executives. Our regulators may also restrict compensation through rules and practices intended to avoid risks. These restrictions could negatively affect our ability to compete with other companies in recruiting and retaining key personnel.

We are subject to extensive regulation that could limit or restrict our activities and adversely affect our earnings.

Following the spin-off, we and our subsidiaries will be regulated by several regulators, including the Federal Reserve, the Office of the Comptroller of the Currency, or OCC, the FDIC, the SEC, and the Financial Industry Regulatory Authority, Inc., or FINRA. Our success is affected by regulations affecting banks and bank holding companies, and the securities markets, and our costs of compliance could adversely affect our earnings. Banking regulations are primarily intended to protect depositors and the FDIC Deposit Insurance Fund, not shareholders. The financial services industry also is subject to frequent legislative and regulatory changes and proposed changes. In addition, the interpretations of regulations by regulators may change and statutes may be enacted with retroactive impact. From time to time, regulators raise issues during examinations of us that could, if not determined satisfactorily, have a material adverse effect on us. Compliance with applicable laws and regulations is time consuming and costly.

The current President and the majority party in both houses of Congress promote and support enacting regulatory relief for the banking industry. The nature, effects and timing of administrative and legislative change, including the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, or the 2018 Growth Act, that was enacted on May 24, 2018, cannot be predicted. The federal bank regulators and the Treasury Department, as well as the Congress and the President, are evaluating the regulation of banks, other financial services providers and the financial markets and such changes, if any, could require us to maintain more capital and liquidity, and restrict our activities, which could adversely affect our growth, profitability and financial condition. Our consumer finance products, including residential mortgage loans, are subject to CFPB regulations and evolving standards reflecting CFPB releases, rule-making and enforcement actions. If our assets grow to $10 billion or more, we will become subject to direct CFPB examination.

 

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We are subject to capital adequacy and liquidity standards, and if we fail to meet these standards our financial condition and operations would be adversely affected.

We are regulated as a bank holding company and are subject to consolidated regulatory capital requirements and liquidity requirements administered by the Federal Reserve. The Bank is subject to similar capital and liquidity requirements, administered by the OCC. The Basel III Capital Rules have increased capital requirements for banking organizations such as us. The Basel III Capital Rules include a new minimum ratio of Common Equity Tier 1 capital, or CET1, to risk-weighted assets of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets. The Basel III Capital Rules phase in over time and will become fully effective on January 1, 2019. See “Supervision and Regulation — Basel III Capital Rules” We have established capital ratio targets that align with U.S. regulatory expectations under the fully phased-in Basel III Capital Rules. Although we currently have capital ratios that exceed these minimum levels and a strategic plan to maintain these levels, we or the Bank may be unable to continue to satisfy the capital adequacy requirements for the following reasons:

 

  •   losses, and/or increases in our and the Bank’s credit risk assets and expected losses resulting from the deterioration in the creditworthiness of borrowers and the issuers of equity and debt securities;

 

  •   difficulty in refinancing or issuing instruments upon redemption or at maturity of such instruments to raise capital under acceptable terms and conditions;

 

  •   declines in the value of our securities portfolios;

 

  •   adverse changes in foreign currency exchange rates;

 

  •   revisions to the regulations or their application by our regulators that increase our capital requirements;

 

  •   reductions in the value of our DTAs; and other adverse developments; and

 

  •   unexpected growth and an inability to increase capital timely.

Our failure to remain “well capitalized,” including meeting the Basel III Capital Rules conservation buffer, could affect customer confidence, and our:

 

  •   ability to grow;

 

  •   costs of and availability of funds;

 

  •   FDIC deposit insurance premiums;

 

  •   ability to raise, rollover or replace brokered deposits;

 

  •   ability to make acquisitions or engage in new activities;

 

  •   flexibility if we become subject to prompt corrective action restrictions;

 

  •   ability to make discretionary bonuses to attract and retain quality personnel;

 

  •   ability to make payments of principal and interest on our capital instruments; and

 

  •   ability to pay dividends on our capital stock.

Our ability to pay dividends to shareholders in the future is subject to profitability, capital, liquidity and regulatory requirements and these limitations may prevent us from paying dividends in the future.

Cash available to pay our expenses and dividends to our shareholders is derived primarily from dividends paid to us by the Bank. The Bank’s ability to pay dividends, as well as our ability to pay dividends to our shareholders, will continue to be subject to and limited by the results of operations of our subsidiaries and our need to maintain appropriate liquidity and capital at all levels of our business consistent with regulatory requirements and the needs of our businesses. See “Supervision and Regulation” and “Dividend Policy.”

 

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The Dodd-Frank Act currently restricts our future issuance of trust preferred securities and cumulative preferred securities as eligible Tier 1 risk-based capital for purposes of the regulatory capital guidelines for bank holding companies.

Bank holding companies with assets of less than $15 billion as of December 31, 2009, including us, are permitted to include trust preferred securities that were issued before May 19, 2010 as Tier 1 capital under the Dodd-Frank Act. As of March 31, 2018 and December 31, 2017, we had $118.1 million of trust preferred securities outstanding that were issued before May 19, 2010, and that have maturity dates between 2028 and 2036.

Should we determine it is advisable, or should our regulators require us, to raise additional capital, we would not be able to issue additional trust preferred securities, as only bank holding companies with assets of less than $500 million are permitted to continue to issue trust preferred securities and include them as Tier 1 capital. Instead, we would have to issue noncumulative preferred stock or common equity, which are Tier 1 capital. Subordinated notes meeting Basel III Capital Rules may be issuable as Tier 2 capital. To the extent we issue new equity or securities convertible into Company Shares, it could dilute our existing shareholders. Dividends on any preferred stock we may issue, unlike distributions paid on trust preferred securities, would not be tax deductible, and the preferred stock would have a preference in liquidation and in dividends to our common stock. See “Supervision and Regulation.”

We may need to raise additional capital in the future, but that capital may not be available when it is needed or on favorable terms.

We anticipate that our current capital resources will satisfy our capital requirements for the foreseeable future under currently effective regulatory capital rules. We may, however, need to raise additional capital to support our growth or currently unanticipated losses, or to meet the needs of the communities we serve. Our ability to raise additional capital, if needed, will depend, among other things, on conditions in the capital markets at that time, which may be limited by events outside our control, and on our financial performance. If we cannot raise additional capital on acceptable terms when needed, our ability to further expand our operations through internal growth and acquisitions could be limited.

We will be subject to heightened regulatory requirements if our total assets grow and exceed $10 billion.

As of March 31, 2018 and December 31, 2017, our total assets were $8.4 billion. Based on our current total assets and growth strategy, we anticipate our total assets may exceed $10 billion within the next five years. In addition to our current regulatory requirements, banks with $10 billion or more in total assets are:

 

  •   examined directly by the CFPB with respect to various federal consumer financial laws;

 

  •   subject to reduced dividends on the Bank’s holdings of Federal Reserve Bank of Atlanta common stock;

 

  •   subject to limits on interchange fees pursuant to the “Durbin Amendment” to the Dodd-Frank Act;

 

  •   subject to enhanced prudential regulation, to the extent not reduced or eliminated as a result of the 2018 Growth Act,;

 

  •   subject to annual Dodd-Frank Act self-administered stress testing, or DFAST tests, to the extent not reduced or eliminated as a result of the 2018 Growth Act; and

 

  •   no longer treated as a “small institution” for FDIC deposit insurance assessment purposes.

Compliance with these additional ongoing requirements may necessitate additional personnel, the design and implementation of additional internal controls, or the incurrence of other significant expenses, any of which could have a material adverse effect on our business, financial condition or results of operations. Compliance

 

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with the annual DFAST requirements, part of which must be publicly disclosed, may also be misinterpreted by the market generally or our customers and, as a result, may adversely affect our stock price or our ability to retain our customers or effectively compete for new business opportunities. To ensure compliance with these heightened requirements when they become applicable to us, our regulators have requested us to comply with certain of these requirements and incur costs to prepare for compliance even before we or our Bank crosses the $10 billion in total assets mark. Our regulators may also consider our preparation for compliance with these regulatory requirements in the course of examining our operations generally or when considering any request from us or the Bank. It is unclear how these expectations may change as a result of the 2018 Growth Act.

The Federal Reserve may require us to commit capital resources to support the Bank.

As a matter of policy, the Federal Reserve, which examines us, expects a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. The Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank. In addition, the Dodd-Frank Act amended the Federal Deposit Insurance Corporation Act to require that all companies that control a FDIC-insured depository institution serve as a source of financial strength to the depository institution. Under this requirement, we could be required to provide financial assistance to the Bank should it experience financial distress, even if further investment was not otherwise warranted. See “Supervision and Regulation.”

We may face higher risks of noncompliance with the Bank Secrecy Act and other anti-money laundering statutes and regulations than other financial institutions.

The U.S. Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. The Federal Financial Crimes Enforcement Network, or FinCEN, was established as part of the Treasury Department to combat money laundering, is authorized to impose significant civil money penalties for violations of anti-money laundering rules. FinCEN has engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, or DOJ, Drug Enforcement Administration, and U.S. Internal Revenue Service, which we refer to as the IRS.

There is also regulatory scrutiny of compliance with the rules of the Treasury Department’s Office of Foreign Assets Control, or OFAC. OFAC administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals, including sanctions against foreign countries, regimes and individuals, terrorists, international narcotics traffickers, and those involved in the proliferation of weapons of mass destruction. Executive Orders have sanctioned the Venezuelan government and entities it owns, and certain Venezualan persons. In addition, the OCC has broad authority to bring enforcement action and to impose monetary penalties if it determines that there are deficiencies in the Bank’s compliance with anti-terrorism financing laws.

Monitoring compliance with anti-money laundering and OFAC rules is complex and expensive. The risk of noncompliance with such rules can be more acute for financial institutions like us that have a significant number of customers from, or which do business in, Latin America. As of March 31, 2018, $3.0 billion, or 47.5%, of our total deposits were from residents of Venezuela. Our total loan exposure to international markets, primarily financial institutions in Brazil, Chile, Colombia, Mexico and Peru, was $686.9 million, or 11.54%, of our total loans, at March 31, 2018.

In recent years, we have expended significant management and financial resources to further strengthen our anti-money laundering compliance program. Although we believe our anti-money laundering and OFAC compliance programs, and our current policies and procedures and staff dedicated to these activities, are

 

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sufficient to comply with applicable rules and regulations, we cannot guarantee that our program will prevent all attempts by customers to utilize the Bank in money laundering or financing impermissible under current sanctions and OFAC rules, or sanctions against Venezuela, and certain persons there. If our policies, procedures and systems are deemed deficient or the policies, procedures and systems of the financial institutions that we may acquire in the future are deficient, we would be subject to liability, including fines and formal regulatory enforcement actions, including possible cease and desist orders, restrictions on our ability to pay dividends, regulatory limitations on implementing certain aspects of our business plan, including acquisitions or banking center expansion, and require us to expend additional resources to cure any deficiency, which could materially and adversely affect us.

Risks Related to Our Spin-off from, and Continuing Relationships with, MSF

In connection with the spin-off, we expect, after a transition period, to cease using the “Mercantil” brand, which could adversely affect our business and profitability.

Since 2007, we have marketed our products and services using variations of MSF’s “Mercantil” brand name and logo.

We believe the association with MSF has provided us with greater name recognition among our customers from Latin America, including those with homes or businesses in the U.S. MSF’s reputation and financial strength has benefitted us historically. Because it will reduce any potential confusion between us and MSF following the spin-off, the use of a different name and logo may be required by our bank regulators. We expect to license the Mercantil name and brand from MSF for a transition period following the spin-off to facilitate the transition. The use of another name and logo will result in additional costs, such as signage, and may result in potential loss of customer recognition and business. See “Certain Relationships and Related Party Transactions” and “Supervision and Regulation.”

We expect to incur incremental costs as a separate, public company.

Although we maintain separate systems and conduct operations largely with our own staff separate from MSF and its other affiliates, the spin-off will require us to incur additional personnel and other expenses as a standalone public company. Such expenses include, but are not limited to, SEC reporting, additional internal controls testing and reporting, and investor relations. These initiatives will involve additional management attention and costs, including the hiring and integration of certain new employees and changes in the manner of conducting certain functions. We may be unable to make the changes required in a timely manner and without unexpected costs, including possible diversion of management from our day-to-day operations, which could have a material adverse effect on our business, results of operations and financial condition.

As a separate, public company, we expect to expend additional time and resources to comply with rules and regulations that previously did not apply to us.

As a separate, public company, the various rules and regulations of the SEC, as well as the listing standards of the Nasdaq Stock Market, where we intend to list Company Shares, will require us to implement additional corporate governance practices and adhere to a variety of reporting requirements. Compliance with these public company obligations will increase our legal and financial compliance costs and place additional demands on our finance, legal and accounting staff and on our financial, accounting and information systems.

In particular, as a separate, public company, our management will be required to conduct an annual evaluation of our internal controls over financial reporting and include a report of management on our internal controls starting with our second annual report filed with the SEC on Form 10-K. For as long as we are an emerging growth company, we will not be required to have our independent registered public accounting firm attest to the effectiveness of our internal controls over financial reporting pursuant to Auditing Standard No. 5. If

 

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we are unable to conclude that we have effective internal controls over financial reporting, investors could lose confidence in the reliability of our financial statements, which could adversely affect the price for our common stock.

Our historical consolidated financial data are not necessarily representative of the results we would have achieved as a separate company and may not be a reliable indicator of our future results.

Our historical consolidated financial data included in this information statement does not necessarily reflect the financial condition, results of operations or cash flows we would have achieved as a standalone company during the periods presented or those we will achieve in the future. In addition, significant increases may occur in our cost structure as a result of the spin-off, including costs related to public company reporting, investor relations and compliance with the Sarbanes-Oxley Act. Also, we anticipate incurring material expenses in connection with rebranding our business. We are engaged in a comprehensive strategic planning process to evaluate how we conduct business, including how to focus on our domestic United States business while better serving our valued foreign customers, reducing costs, and increasing core deposits, fee income, margins, and the number of services we provide per household and our profitability. As a result of these matters, among others, it may be difficult for investors to compare our future results to historical results or to evaluate our relative performance or trends in our business.

We expect to incur significant additional shareholder communication and maintenance expenses after the spin-off, unless our expense reduction measures, including the Reorganization, are completed. The Reorganization and related transactions may be subject to approvals or waivers by the Federal Reserve.

We expect to incur significant additional shareholder reporting, communication and maintenance expenses related to the approximately 20,000 shareholders we will have immediately following the spin-off. The large number of shareholders, most of whom are outside the United States, will cause these expenses to be higher than desirable. Although we will seek to reduce these expenses through electronic delivery consistent with SEC rules and shareholder consents, the Reorganization, which will reduce our total number of shareholders by approximately 16,000 to 17,000 persons, is the largest cost saving opportunity. The Reorganization may be subject to notices and approvals or waivers by the Federal Reserve, and there is no assurance that these will be received timely or in satisfactory form.

Our strategic plan and growth strategy may not be achieved as quickly or as fully as we seek.

Our strategies and plans include significant changes, which may require certain changes in our culture and personnel, as well as interacting better and on a broader relationship basis with our customers. We want to serve our customers’ needs better and more broadly, including our valued foreign customers. We will shrink our LATAM lending businesses, while seeking higher margin domestic lending opportunities in our markets. Our strategic planning is not finished. Our plans may take longer than we anticipate and the results we achieve may not be as successful as we seek, all of which could adversely affect our results of operations, liquidity and financial condition.

MSF’s planned sales of the 19.9% of our Class A common stock and Class B common stock it will hold as Retained Shares after the spin-off may adversely affect the trading price of our common stock, presents risks, and may otherwise adversely affect us.

MSF currently expects to dispose of the 19.9% of our Class A and Class B common stock held as Retained Shares in the Trust during the two years beginning March 15, 2018. We have agreed to file one or more registration statements with the SEC following the spin-off, which may include an IPO of Company Shares, to facilitate such resales in public offerings and have agreed to cooperate in any such resales at MSF’s expense. MSF may also sell those shares from time to time in other transactions, including transactions exempt from registration under the Securities Act, provided that no one buyer acquires 2% or more of our Class A common stock in a transaction with MSF.

 

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The disposition by MSF of its remaining ownership interest in us may be subject to various conditions, including receipt of any necessary regulatory and other approvals, and satisfactory market conditions. There is currently no market for our common stock and it is unknown whether one will develop, with or without an IPO by the Company, or be sufficiently liquid to absorb MSF’s contemplated sales outside a public offering by us that includes some or all of MSF’s Retained Shares. The existence of the Retained Shares and the intended resales of such shares could adversely affect the market prices for both classes of our common stock.

MSF operates in a hyperinflationary economy subject to currency controls and is subject to regulation by the Federal Reserve and Venezuela authorities. Accordingly, the timing and amounts of MSF’s disposition of the Retained Shares, and the prices it realizes from such sales could be affected by events beyond MSF’s or our control, which could adversely affect the Company and the market for Company Shares.

After the spin-off, certain of our directors and officers may have actual or potential conflicts of interest because of their MSF equity ownership or their positions with MSF and us.

MSF is expected to have three common directors, one of which is also a common officer, with us after the spin-off. Combined, these shared persons will beneficially own, immediately following the Distribution, approximately 16.23% and 12.36% of the total outstanding shares of our Class A and Class B common stock, respectively. These persons’ families will control additional Company Shares. These relationships and financial interests may create actual or perceived conflicts of interest when these directors and officers are faced with decisions that could have different implications for MSF and us. For example, potential conflicts of interest could arise in connection with the resolution of any dispute that may arise between MSF and us regarding the spin-off or the disposition of the Retained Shares by MSF. See “Risks Related to Ownership of Our Common Stock — Our shares will be eligible for future sale, which may cause our stock price to decline.” and “Ownership of our Stock.”

The Bank has agreed to continue to provide certain services to MSF’s subsidiaries after the spin-off, which could present additional regulatory and operational risks to us.

The Bank, the Trust Company and Investment Services have historically provided certain services to MSF’s international subsidiaries, including accounting and financial reporting, administration, operations and technology, planning and budgeting, human resources, vendor administration and management, trust administration, market risk assessment, operational risk and physical security, credit risk, loan review, technology infrastructure, treasury, and customer referral services. Pursuant to the Separation Agreement, we have agreed that the Bank will continue to provide certain of these services on a transitional basis after the spin-off, on the same terms (including pricing) in effect as of the spin-off, and which are compliant with Federal Reserve Regulation W. This contractual obligation could present future regulatory and operational risks to us, including with respect to compliance with U.S. anti-money laundering laws and Federal Reserve Regulation W. The terms of these arrangements may also be changed if the Federal Reserve or OCC view these arrangements as inappropriate, including under their policy statement on parallel-owned banking organizations.

MSF is likely to be deemed to retain “control” over us and the Bank for Federal Reserve and BHC Act purposes, which, together with the controlling shareholder base we have in common with MSF, likely will lead to restrictions and limitations upon the relationships and transactions between MSF and us, which may adversely affect our business and results of operations.

Following the spin-off, we expect that MSF will be deemed by the Federal Reserve to retain control of us due to its Retained Shares and interlocking directors and officer. This control may end when the Federal Reserve determines that sufficient Retained Shares have been sold and if the interlocking directors and officers are not deemed to have control over our management or policies. Until that time, Federal Reserve Regulation W will limit transactions between the Bank and the MSF organization similar to restrictions that have been applicable before the spin-off. In addition, other transactions and relationships between MSF, and its subsidiaries, on the

 

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one hand, and us and the Bank, on the other, which we or the Bank may deem desirable and in our mutual best interest, may be restricted by the Federal Reserve or the OCC under their policy statement on parallel-owned banking organizations. These restrictions could limit our operating flexibility and increase our costs, which would have a material adverse effect on our business and result of operations. See “Supervision and Regulation.”

We and the Company Shares could be affected adversely by events and regulations affecting MSF while it is deemed to “control” us following the spin-off.

The scope of the Federal Reserve’s regulation of MSF following the Distribution and during the time that MSF is deemed to “control” us is uncertain. For example, the Venezuela official exchange rate mandated for use in preparing MSF’s financial statement has previously caused MSF to be in excess of $50 billion in total assets and has enabled MSF to comply with Federal Reserve requirements as a “qualified foreign banking organization,” or QFBO. As a result of changes to Venezuela exchange rates and inflation, MSF is currently expected to lose QFBO status at the beginning of 2020. If MSF is deemed to “control” us at that time, the scope and nature of the adverse effects on us cannot be predicted, since there is little or no historical precedent for such an event. If this event occurs before MSF’s sale or disposition of sufficient Company Shares to eliminate MSF’s control of us, a forced disposition of MSF’s remaining Company Shares may result. A forced disposition could be at a time, and on prices and terms, and to persons, that could adversely affect us and our other shareholders.

A change in control of MSF while it controls us would likely adversely affect us, our business and the Company Shares.

A change in control of MSF while it controls us could adversely affect relations between MSF and us, could subject us to possible sanctions, and adversely affect market perceptions and the values of the Company Shares. The Separation Agreement and Distribution Trust Agreement, accordingly provide that upon a “change in control” of MSF, including an expropriation or takeover of MSF’s Retained Shares, beneficial ownership of such Retained Shares in the Distribution Trust will be delivered to and vest in us immediately prior to the change in control. A successful challenge to such terms could adversely affect us and the Company Shares.

We may find it desirable to include Retained Shares and/or to repurchase Company Shares from MSF, reducing proceeds to us from any IPO or other offering.

We and MSF have entered into a registration rights agreement with respect to MSF’s Retained Shares, including piggyback registration rights in the event of an IPO or other public offering. We are well capitalized, and believe that an important reason to consider an IPO is to increase market liquidity for our Class A common stock, generally, and to significantly reduce MSF’s ownership of Company Shares and eliminate its “control” of us for BHC Act purposes. We are only considering the possible public offering of Class A common stock, which is our only voting security, which the Federal Reserve scrutinizes most closely in “control” determinations under the BHC Act. If MSF cannot sell all its Class A Retained Shares in a potential IPO by us, we may find it desirable to repurchase the remaining Class A Retained Shares. Similarly, we may determine to repurchase Class B Retained Shares with proceeds from an IPO or other offering of our Class A common stock. These scenarios will reduce the proceeds of any offering to us and may require offering proceeds to be used for Retained Share repurchases, instead of our strategic growth and cost reduction initiatives. All repurchases of Retained Shares will be subject to prior notice to, and approval by, the Federal Reserve.

The exact terms of the spin-off, including the Distribution, and our relationship with MSF, are subject to change as a result of discussions with, and requirements of, our regulators, including the Federal Reserve and the OCC.

The exact terms of the spin-off, including the Distribution, and our relationship with MSF generally following the Distribution, including the interlocking directors or officers and transition services, and our

 

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continued “control” by MSF under the BHC Act, among other things, are subject to change as a result of ongoing discussions with, and requirements of, our regulators, including the Federal Reserve and the OCC. Furthermore, the Federal Reserve, the OCC and the other bank regulators may require us to make commitments or change conditions that could adversely affect the terms of the spin-off, our relationships with MSF or its affiliates, and MSF’s and our businesses following the spin-off.

Certain U.S. Federal Income and Other Tax Risks

We have not received a determination from the IRS as to the tax-free nature of the spin-off for U.S. federal income tax purposes, and there is a risk that they may disagree with our determination.

We have not sought or received a determination from the IRS that the Distribution will be tax-free to the shareholders of MSF who receive shares of our common stock in the Distribution. We and MSF expect to receive an opinion from Jones Day confirming that the Distribution should be tax-free for U.S. federal income tax purposes, which we refer to as the tax opinion. However, the tax opinion of Jones Day is not binding upon the IRS. If the IRS took the view that the Distribution was not tax-free for U.S. federal income tax purposes, MSF shareholders subject to U.S. income taxes could face, among potentially other risks and depending upon their individual situations, some or all of the income tax risks described below.

If the Distribution is determined to be taxable for U.S. federal income tax purposes, then our shareholders that are subject to U.S. federal income tax could incur significant U.S. federal income tax liabilities

The receipt of the tax opinion is a condition to the Distribution that must be either satisfied or waived by MSF. The opinion will rely on certain facts and assumptions and certain representations and undertakings from us and MSF regarding the past and future conduct of our respective businesses and other matters. Notwithstanding the tax opinion, the IRS could determine on audit that the Distribution should be treated as a taxable transaction if it determines that any of these facts, assumptions, representations or undertakings relied upon to render the tax opinion are not correct or has been breached, or that the Distribution should be taxable for other reasons, including as a result of significant changes in stock or asset ownership after the spin-off. An opinion of counsel represents counsel’s best legal judgment, is not binding on the IRS or the courts, and the IRS or the courts may not agree with the opinion. In addition, the tax opinion will be based on current law, and cannot be relied upon if current law changes with retroactive effect. If the Distribution ultimately is determined to be taxable, the Distribution could be treated as a taxable dividend or capital gain to MSF shareholders for U.S. federal income tax purposes, and MSF shareholders subject to U.S. federal income tax could incur significant U.S. federal income tax liabilities, including penalties.

We expect to agree to certain restrictions to preserve the tax-free treatment of the Distribution for U.S. federal income tax purposes, which may reduce our strategic and operating flexibility

The Separation Agreement contains various restrictions on our relationships and transactions with MSF, and our relations with our shareholders, such as certain limitations on our repurchases of Company Shares, which, in part are needed to preserve the tax-free treatment of the Distribution for U.S. federal income tax purposes.

Recipients of our common stock may be subject to Venezuelan tax obligations as a result of the Distribution

MSF has determined that the distribution of our shares to MSF shareholders will be taxable to persons subject to Venezuela income taxation, including holders in the United States that are not Venezuelan citizens. MSF has advised us that Venezuela income tax generally is computed in cases such as this as 34% of the taxable amount of the dividend decreed, which is calculated based on the value that the Company Shares that are carried on MSF’s books, or 59 Bolivars per share. Under the treaty to avoid double taxation between Venezuela and the United States, U.S. shareholders may be subject to lower taxes in Venezuela, and may be able to deduct the tax as a credit against the United States tax on income. Since your particular facts may differ, you are strongly encouraged to consult your own tax accountants or advisors to determine the Venezuela income tax

 

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consequences to you, and properly pay such taxes when due. Neither we nor MSF have any obligations to pay any taxes that MSF shareholders may incur in connection with the spin-off, or to otherwise withhold any amounts with respect to any such tax obligations. MSF declared aggregate cash dividends of 2.6 billion Bolivars payable at the Distribution Date to record holders of all MSF Shares as of the record date, which has been paid.

Risks Related to Ownership of Our Common Stock

The Trust does not permit the sale or transfer of any shares of our common stock or any interest therein held in the Trust prior to the Distribution.

The Trust holds 80.1% of the outstanding shares of our common stock placed in trust for the benefit of the MSF shareholders of record on the record date. The Trust holds the remaining 19.9% for the benefit of MSF that were record holders. No shares of common stock held in the Trust or any interest in such shares may be transferred, pledged, hypothecated, sold or disposed of other than in the Distribution itself. Retained Shares cannot generally be sold or disposed of for 90 days following the Distribution. The value of those shares could change significantly due to the spin-off and during the time that they are held in the Trust pending the Distribution, which will not occur until the SEC declares the Spin-off Registration Statement to be effective.

Our shares will be eligible for future sale, which may cause our stock price to decline.

Any sales of substantial amounts of our common stock in the public market, and the perception that such sales, including expected sales by MSF of the Retained Shares, may cause the market price of our common stock to decline. Upon completion of the spin-off, we will have outstanding an aggregate of 59,444,975 shares of our Class A common stock and 42,655,787 shares of our Class B common stock, not including the Retained Shares. Distributed Shares will be freely tradeable without restriction or further registration under the Securities Act upon and following the Distribution, except for shares held by our “affiliates.”

In addition, 14,767,433 shares of our Class A common stock and 10,597,370 shares of our Class B common stock will be held as Retained Shares in the Trust. MSF has advised us that it intends to sell or dispose of such Retained Shares within two years following the Distribution.

The principal shareholders of MSF, who will beneficially own approximately 37.51% of our Class A common stock and approximately 15.07% of our Class B common stock will be deemed to be our affiliates, together with our directors and executive officers. Such persons have indicated their intent not to dispose of their Company Shares until MSF is deemed by the Federal Reserve to no longer control us as a result of MSF’s ownership of our Company Shares. No market exists for our Company Shares at the time of the spin-off, and it is uncertain whether one will develop or have the depth to absorb resales by MSF or our other shareholders without adverse effects on the price or price volatility of such shares.

If we determine to make a registered offering of our Company Shares, we have granted MSF “piggyback” registration rights that would require us to include certain of its Retained Shares of our common stock on the same registration statement we use for our own offering. The sales of significant amounts of shares of our Company Shares or the perception in the market that this may occur may reduce the market price of our Company Shares.

No market exists for Company Shares. An active trading market may not develop or continue for the Company Shares, which could adversely affect the market price and market volatility of those shares.

Your ability to sell or purchase our common stock depends upon the existence of an active trading market for our common stock. Although we have applied to list our Company Shares on the Nasdaq Stock Market, our shares have not previously been publicly held or traded, there is currently no market for shares of our Class A or Class B common stock and there is no assurance that an active market will develop or be sustained following the Distribution. The concentration of ownership of Company Shares by shareholders in Venezuela and Venezuela

 

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currency controls and the difficulty Venezuelans establishing U.S. Dollar accounts, may limit Venezuelans’ ability to buy or sell Company Shares, and the development of an active market prior to our IPO. We intend to list shares of our Class A common stock on the Nasdaq Stock Market under the symbol “MBNAA” and intend to list shares of our Class B common stock on the Nasdaq Stock Market under the symbol “MBNAB.” If an active trading market does not develop, you may be unable to sell or purchase shares of our common stock at the volume, price and time that you desire.

Whether or not the purchase or sale prices of our common stock reflect a reasonable valuation of our common stock may depend on an active trading market developing, and thus the price you receive for a thinly-traded stock such as our common stock, may not reflect its true or intrinsic value. A limited trading market for our common stock may cause fluctuations in the market value of our common stock to be exaggerated from time to time, leading to price volatility in excess of that which would occur in a more active trading market.

Efforts to facilitate sales sought by Venezuela shareholders may be unsuccessful.

Persons in Venezuela may experience greater difficulty in buying or selling Company Shares due to currency controls and other factors. We have been investigating possible alternatives that would help our shareholders in Venezuela buy or sell their Company Shares following the Distribution. If these efforts are unsuccessful, the liquidity and market prices for our Common Shares may be adversely affected.

Persons who trade in Company Shares between the Distribution and the Reorganization, and prior to any potential IPO, may realize significantly different prices from those that may result from any Reorganization or potential IPO.

The prices which we may pay for Company Shares in the Reorganization or at which we may offer Common Shares for sale in a potential IPO, may be more or less (on an equivalent share basis) than investors could realize by selling in the market, including as a result of changes in market conditions at these various times. The price paid by us for Company Shares in any Reorganization may be based on (i) prices realized for Class A common stock in an IPO, if one occurs, (ii) volume weight average market prices or (iii) such other values we may determine is appropriate. Although we anticipate a more liquid market for Class A common stock if we conduct an IPO of Class A common stock, there is no assurance that an active market will develop or continue, or as to the effects of any IPO of Class A common stock on the market for shares of Class B common stock.

Shares of our Class B common stock may trade at a discount to shares of our Class A common stock.

Class B common stock has limited voting rights and therefore may trade less frequently and/or at a discount to voting Class A common stock. We have no current intent to issue more shares of Class B common stock, except as a result of any stock split following the Reorganization.

We expect to issue more Class A common stock in the future which may increase the market for, and liquidity of, Class A common stock compared to Class B common stock.

Federal Reserve policy requires bank holding companies’ capital to be comprised predominantly of voting common stock. Class B common stock is not voting common stock for Federal Reserve purposes, therefore we expect future issuances of Company Shares will be Class A common stock. These new issuances of Class A common stock, as well as their voting rights, may increase the market for, and liquidity of, our Class A common stock generally, as compared to the market for, and liquidity of, our Class B common stock.

Class B common stock is not convertible into or exchangeable for Class A common stock.

Holders of Class B common stock have no rights to convert or exchange Class B common stock into Class A common stock. We do not intend currently to convert Class A common stock into Class B common stock by amending our amended restated articles of incorporation or other action.

 

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Our dual classes of Company Shares may limit investments by investors using index-based strategies.

Certain major providers of securities indices have determined to exclude shares of companies with classes of common stock with different voting rights. These actions may limit investment in Company Shares by mutual funds, exchange traded funds, or ETFs and other investors basing their strategies on such securities indices, which could adversely affect the value and liquidity of Company Shares.

Holders of Class B common stock have limited voting rights. As a result, holders of Class B common stock will have limited ability to influence stockholder decisions.

Our Class B common stock has no voting rights, except as required by the Florida Business Corporation Act or as a voting group or any amendment, alteration or repeal of our articles of incorporation, including any such events as a result of a merger, consolidation or otherwise that significantly and adversely affects the rights or voting powers of our Class B common stock. Generally, such shares will be entitled to one-tenth of a vote, together with our Class A common stock holders on a combined basis, on the matter of approval of our auditors for a given fiscal year, if we present such a proposal for shareholder consideration. If the matter of approval of our auditors for a given fiscal year is submitted to our common stock holders, each share of Class B common stock will be entitled to one-tenth of a vote per share. As a result, virtually all matters submitted to our stockholders will be decided by the vote of holders of our Class A common stock and the market price of our Class B common stock could be adversely affected.

We have the ability to issue additional equity securities, which would lead to dilution of our issued and outstanding Company Shares.

The issuance of additional equity securities or securities convertible into equity securities would result in dilution of our existing shareholders’ equity interests. In addition, we are authorized to issue up to 400 million shares of our Class A common stock and up to 100 million shares of our Class B common stock. We are authorized to issue, without shareholder approval, up to 50 million shares of preferred stock in one or more series, which may give other shareholders dividend, conversion, voting, and liquidation rights, among other rights, that may be superior to the rights of holders of our common stock. We are authorized to issue, without shareholder approval, except as required by law or the Nasdaq Stock Market, securities convertible into either common stock or preferred stock. Furthermore, we have adopted an equity compensation program for our employees, which also could result in dilution of our existing shareholders’ equity interests.

Certain provisions of our amended and restated articles of incorporation and amended and restated bylaws, Florida law, and U.S. banking laws could have anti-takeover effects by delaying or preventing a change of control that you may favor.

Certain provisions of our amended and restated articles of incorporation and amended and restated bylaws, as well as Florida law, and the BHC Act, and Change in Bank Control Act, could delay or prevent a change of control that you may favor.

Our amended and restated articles of incorporation and amended and restated bylaws include certain provisions, that could delay a takeover or change in control of us, including:

 

  •   the exclusive right of our board to fill any director vacancy;

 

  •   advance notice requirements for shareholder proposals and director nominations;

 

  •   provisions limiting the shareholders’ ability to call special meetings of shareholders or to take action by written consent; and

 

  •   the ability of our board to designate the terms of and issue new series of preferred stock without shareholder approval, which could be used, among other things, to institute a rights plan that would have the effect of significantly diluting the stock ownership of a potential hostile acquirer, likely preventing acquisitions that have not been approved by our board.

 

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See “Description of Capital Stock” for a more detailed description.

The Florida Business Corporation Act contains a control-share acquisition statute that provides that a person who acquires shares in an “issuing public corporation,” as defined in the statute, in excess of certain specified thresholds generally will not have any voting rights with respect to such shares, unless such voting rights are approved by the holders of a majority of the votes of each class of securities entitled to vote separately, excluding shares held or controlled by the acquiring person.

The Florida Business Corporation Act also provides that an “affiliated transaction” between a Florida corporation with an “interested shareholder,” as those terms are defined in the statute, generally must be approved by the affirmative vote of the holders of two-thirds of the outstanding voting shares, other than the shares beneficially owned by the interested shareholder. The Florida Business Corporation Act defines an “interested shareholder” as any person who is the beneficial owner of 10% or more of the outstanding voting shares of the corporation.

Furthermore, the BHC Act and the Change in Bank Control Act impose notice, application and approvals and ongoing regulatory requirements on any shareholder or other party that seeks to acquire direct or indirect “control” of bank holding companies, such as ourselves.

We are an “emerging growth company,” and, as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we intend to take advantage of some of the exemptions from reporting requirements that are afforded to emerging growth companies including, but not limited to, exemption from the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we intend to rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock prices may become more volatile. We may take advantage of these exemptions until we are no longer an emerging growth company.

Our stock price may fluctuate significantly.

We cannot predict the prices at which our Company Shares may trade after the Distribution. The market prices of our Company Shares may fluctuate widely, depending on many factors, some of which may be beyond our control, including:

 

  •   actual or anticipated fluctuations in our operating results due to factors related to our business;

 

  •   the success or failure of our business strategies;

 

  •   quarterly or annual earnings and earnings expectations for our industry, and for us;

 

  •   our ability to obtain financing as needed;

 

  •   our announcements or our competitors’ announcements regarding new products or services, enhancements, significant contracts, acquisitions or strategic investments;

 

  •   changes in accounting standards, policies, guidance, interpretations or principles;

 

  •   changes in tax laws, including the 2017 Tax Act;

 

  •   the failure of securities analysts to cover our Company Shares after the Distribution;

 

  •   changes in earnings estimates by securities analysts;

 

  •   the operating and stock price performance of other comparable companies;

 

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  •   investor perception of our company and the banking industry;

 

  •   our profile, dividend policy or market capitalization may not fit the investment objectives of MSF’s current shareholders;

 

  •   events affecting MSF, including hyperinflation and currency controls, and government regulation of MSF in the U.S., Venezuela and other countries where MSF conducts business;

 

  •   the timing and amounts of MSF’s planned dispositions of our Company Shares;

 

  •   the intent of MSF shareholders who receive Company Shares in the Distribution to hold or sell such shares;

 

  •   fluctuations in the stock markets or in the values of financial institution stocks, generally;

 

  •   changes in laws, rules and regulations, including banking laws and regulations, affecting our business; and

 

  •   general economic conditions and other external factors.

Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations could also adversely affect the trading price of our Company Shares.

We, particularly as a newly independent company, face strategic risks.

As a newly independent company, and our history as part of MSF, we face strategic risk. Strategic risk is the risk to current or anticipated earnings, capital, liquidity, or franchise or enterprise value arising from adverse business decisions, poor implementation of business decisions, or lack of responsiveness to changes in the competitive landscape that is the banking and financial services industries in which we operate. We may have insufficient capital and insufficiently qualified personnel or culture to implement, as quickly as we seek, our strategy changes, including core deposit and fee income growth, improved margins, broader service to our customers, cost reductions and profitability increases.

 

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FORWARD-LOOKING STATEMENTS

Any statements in this information statement about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “believe,” “will,” “expect,” “anticipate,” “seek,” “estimate,” “intend,” “indicate,” “designed,” “contemplate,” “plan,” “future,” “considered,” “management’s opinion,” “would,” and “should,” “could,” “continue,” “predict,” “target,” “strategies” and similar words and expressions of the future. For example, statements concerning financial condition, possible or assumed future results of operations, growth opportunities, industry ranking, plans and objectives of management, markets for our common stock and future management and organizational structure are all forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and assumptions, including the risks outlined under “Risk Factors” and elsewhere in this information statement, that may cause actual results, levels of activity, performance or achievements to differ materially from any results, levels of activity, performance or achievements expressed or implied by any forward-looking statement.

Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance or achievement. We are not under any duty to update any of the forward-looking statements after the date of this information statement to conform these statements to actual results, unless required by law.

 

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DIVIDEND POLICY

We do not anticipate paying any dividends on Company Shares in the foreseeable future because we expect to retain earnings to support our business plan, including cash payable in our proposed Reorganization and the proposal purchase of the Cayman Bank, as described in this Information Statement. The declaration and payment of dividends, if any, however, will be subject to our board of directors’ discretion and will depend, among other things, upon our results of operations, financial condition, capital adequacy, cash requirements, prospects, regulatory limitations, and other factors that our board of directors may deem relevant.

 

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SELECTED FINANCIAL INFORMATION

The following table sets forth selected financial information derived from our unaudited interim consolidated financial statements as of March 31, 2018 and for the three months ended March 31, 2018 and 2017, and our audited consolidated financial statements as of December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015. The financial information as of December 31, 2015 has been derived from our audited consolidated financial statements not included herein. The unaudited selected financial information may not reflect our results of operations for our fiscal year ended, or financial condition as of, December 31, 2018, or any other period of time or date. The selected historical financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our unaudited interim consolidated financial statements and our audited consolidated financial statements and the corresponding notes included elsewhere in this information statement.

Our historical consolidated financial data included in this information statement does not necessarily reflect the financial condition, results of operations or cash flows we would have achieved as a standalone company during the periods presented or those we will achieve in the future. See “Risk Factors — Our historical consolidated financial data are not necessarily representative of the results we would have achieved as a separate company and may not be a reliable indicator of our future results.”

 

    March 31,     December 31,  
    2018     2017     2016     2015  
    (In thousands)  

Consolidated Balance Sheet

       

Total assets

  $ 8,423,594     $ 8,436,767     $ 8,434,264     $ 8,162,844  

Total investments

    1,827,477       1,846,951       2,182,737       2,106,015  

Total loan portfolio  (1)

    5,950,450       6,066,225       5,764,761       5,623,222  

Allowance for loan losses

    72,118       72,000       81,751       77,043  

Total deposits

    6,280,206       6,322,973       6,577,365       6,519,674  

Securities sold under agreements to repurchase

    —         —         50,000       73,488  

Junior subordinated debentures

    118,110       118,110       118,110       118,110  

Advances from the FHLB and other borrowings

    1,233,000       1,173,000       931,000       722,250  

Stockholders’ equity

    712,272       753,450       704,737       682,403  

 

    March 31,     December 31,  

Consolidated Results of Operations Measures

  2018     2017     2017     2016     2015  
  (In thousands, except per share amounts and percentages)  

Net interest income

  $ 52,633     $ 48,351     $ 209,710     $ 191,933     $ 172,285  

Provision for (reversal of) loan losses

    —         4,097       (3,490 )      22,110       11,220  

Noninterest income

    13,945       14,217       71,485       62,270       54,756  

Noninterest expense

    55,645       49,148       207,636       198,303       192,262  

Net income

    9,429       6,507       43,057       23,579       15,045  

Basic and diluted income per common share  (2)

    0.07       0.05       0.34       0.18       0.12  

Cash dividend declared per common share  (2)

    0.31       —         —         —         —    

Other Financial and Operating Data (3)

         

Profitability Indicators (%)

         

Net interest income / Average total interest earning assets (NIM)  (4)

    2.70 %      2.44 %      2.63 %      2.48 %      2.26 % 

Net income / Average total assets (ROA)  (5)

    0.45 %      0.31 %      0.51 %      0.29 %      0.19 % 

Net income / Average stockholders’ equity (ROE)  (6)

    5.04 %      3.66 %      5.62 %      3.29 %      2.14 % 

Capital Adequacy Indicators (%)

         

Total capital ratio  (7)

    12.94 %      13.00 %      13.31 %      13.05 %      12.91 % 

Tier I capital ratio  (8)

    11.87 %      11.85 %      12.26 %      11.86 %      11.78 % 

Tier I leverage ratio  (9)

    9.77 %      9.64 %      10.15 %      9.62 %      9.88 % 

Common equity tier I capital ratio (CET1)  (10)

    10.29 %      10.25 %      10.68 %      10.25 %      10.12 % 

Asset Quality Indicators (%)

         

Non-performing assets / Total assets  (11)

    0.39 %      0.74 %      0.32 %      0.85 %      0.95 % 

Non-performing loans / Total loan portfolio  (1) (12)

    0.54 %      1.06 %      0.44 %      1.23 %      1.38 % 

Allowance for loan losses / Total non-performing loans  (12) (13)

    223.92 %      127.75 %      267.18 %      115.25 %      99.55 % 

Allowance for loan losses / Total loan portfolio  (1) (13)

    1.21 %      1.35 %      1.19 %      1.42 %      1.37 % 

Net charge-offs (recoveries) / Average total loan portfolio  (14)

    NM       0.11 %      0.11 %      0.32 %      (0.01 )% 

 

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    March 31,     December 31,  

Consolidated Results of Operations Measures

  2018     2017     2017     2016     2015  
  (In thousands, except per share amounts and percentages)  

Efficiency Indicators

         

Noninterest expense / Average total assets (5)

    2.65 %      2.31 %      2.45 %      2.41 %      2.41 % 

Personnel expense / Average total assets (5)

    1.62 %      1.52 %      1.55 %      1.58 %      1.53 % 

Efficiency ratio  (15)

    83.58 %      78.55 %      73.84 %      78.01 %      84.68 % 

 

    March 31,     December 31,  
Adjusted Selected Consolidated Results of Operations and Other Data  (16) (17)   2018     2017  
 

(In thousands, except per share

amounts and percentages)

 

Adjusted noninterest expense

  $ 52,807     $ 202,391  

Adjusted net income before income tax

    13,771       82,294  

Adjusted net income

    11,876       45,988  

Adjusted basic and diluted income per common share

    0.09       0.36  

Adjusted net income / Average total assets (ROA) (5)

    0.57 %      0.54 % 

Adjusted net income / Average stockholders’ equity (ROE) (6)

    6.35 %      6.00 % 

Adjusted noninterest expense / Average total assets (5)

    2.51 %      2.38 % 

Adjusted efficiency ratio (18)

    79.32 %      71.98 % 

 

(1) Outstanding loan principal balance net of deferred loan fees and costs, excluding the allowance for loan losses.
(2) The earnings per share reflect the Exchange that changed the number of Company Shares held by MSF without changing its 100% ownership of the Company.
(3) Operating data for the three months ended March 31, 2018 and 2017 have been annualized.
(4) Net interest margin is defined as net interest income divided by average interest-earning assets, which are loans, securities available for sale, deposits with banks and other financial assets which, yield interest or similar income.
(5) Calculated based upon the average daily balance of total assets, excluding assets under management and custody.
(6) Calculated based upon the average daily balance of equity.
(7) Total Capital divided by total risk-weighted assets, calculated according to the standardized capital ratio calculations.
(8) Tier 1 capital divided by total risk-weighted assets.
(9) Tier 1 capital divided by fourth quarter’s average assets. Tier 1 capital is composed of Common Equity Tier 1 capital plus outstanding Qualifying Trust Preferred Securities of $109.8 million at March 31, 2018, $110.1 million at March 31, 2017, $109.9 million at December 31, 2017, $110.1 million at December 31, 2016 and $110.4 million at December 31, 2015.
(10) Common Equity Tier 1 capital divided by total risk-weighted assets.
(11) Non-performing assets include all non-performing loans and OREO properties acquired through or in lieu of foreclosure.
(12) Non-performing loans include all accruing loans past due by more than 90 days, and all non-accrual loans. Non-performing loans were $32.2 million, $62.1 million, $27.0 million, $70.9 million and $77.4 million, as of March 31, 2018 and 2017 and as of December 31, 2017, 2016 and 2015, respectively.
(13) Allowance for loan losses was $72.1 million, $79.4 million, $72.0 million, $81.8 million and $77.0 million, as of March 31, 2018 and 2017 and December 31, 2017, 2016 and 2015, respectively. See Note 4 of our audited consolidated financial statements and Note 4 of our unaudited interim consolidated financial statements for more details on our impairment models.
(14) Calculated based upon the average daily balance of the outstanding loan principal balance net of deferred loan fees and costs, excluding the allowance for loan losses.
(15) Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income and net interest income.

 

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(16) This presentation contains financial information determined by methods other than GAAP. The following table reconciles these non-GAAP financial measurements to the comparable GAAP financial measurements as of and for periods presented:

 

    Three Months Ended
March 31, 		    Year Ended
December 31, 		 
        2018             2017      
   

(In thousands, except per share

amounts and percentages)

 

Total noninterest expenses

  $ 55,645     $ 207,636  
 

 

 

   

 

 

 

Less spin-off costs:

   

Accounting and consulting fees

    1,294       2,400  

Legal fees

    1,000       2,000  

Other expenses

    544       845  
 

 

 

   

 

 

 

Total spin-off costs

    2,838       5,245  
 

 

 

   

 

 

 

Adjusted noninterest expenses

  $ 52,807     $ 202,391  
 

 

 

   

 

 

 

Total net income before income tax

  $ 10,933     $ 77,049  

Plus: Total spin-off costs

    2,838       5,245  
 

 

 

   

 

 

 

Adjusted net income before income tax

  $ 13,771     $ 82,294  
 

 

 

   

 

 

 

Total net income

  $ 9,429     $ 43,057  
 

 

 

   

 

 

 

Plus after-tax total spin-off costs:

   

Total spin-off costs before income tax benefit

    2,838       5,245  

Income tax benefit

    (391 )      (2,314 ) 
 

 

 

   

 

 

 

Total after-tax spin-off costs

    2,447       2,931  
 

 

 

   

 

 

 

Adjusted net income

  $ 11,876     $ 45,988  
 

 

 

   

 

 

 

Basic and diluted income per common share

  $ 0.07     $ 0.34  

Plus: after tax impact of total spin-off costs

    0.02       0.02  
 

 

 

   

 

 

 

Total adjusted basic and diluted income per common share

  $ 0.09     $ 0.36  
 

 

 

   

 

 

 

Net income / Average total assets (ROA) (5)

    0.45 %      0.51 % 

Plus: after tax impact of total spin-off costs

    0.12 %      0.03 % 
 

 

 

   

 

 

 

Adjusted net income / Average total assets (ROA) (5)

    0.57 %      0.54 % 
 

 

 

   

 

 

 

Net income / Average stockholders’ equity (ROE) (6)

    5.04 %      5.62 % 

Plus: after tax impact of total spin-off costs

    1.31 %      0.38 % 
 

 

 

   

 

 

 

Adjusted net income / Average stockholders’ equity (ROE) (6)

    6.35 %      6.00 % 
 

 

 

   

 

 

 

Noninterest expense / Average total assets (5)

    2.65 %      2.45 % 

Plus: impact of total spin-off costs

    (0.14 )%      (0.07 )% 
 

 

 

   

 

 

 

Adjusted noninterest expense / Average total assets (5)

    2.51 %      2.38 % 
 

 

 

   

 

 

 

Efficiency ratio

    83.58 %      73.84 % 

Plus: impact of total spin-off costs

    (4.26 )%      (1.86 )% 
 

 

 

   

 

 

 

Adjusted efficiency ratio

    79.32 %      71.98 % 
 

 

 

   

 

 

 

 

(17) Non-GAAP financial measures are not included as of and for the periods ended March 31, 2017 and December 31, 2016 and 2015 because no spin-off costs existed for those periods.
(18) Adjusted efficiency ratio is the efficiency ratio plus the impact of total spin-off costs.

NM Not Meaningful

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the “Selected Financial Information,” our audited consolidated financial statements, our unaudited interim consolidated financial statements and related notes included elsewhere in this information statement. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Certain risks, uncertainties and other factors, including but not limited to those set forth under “Cautionary Note Regarding Forward-Looking Statements,” “Risk Factors” and elsewhere in this information statement, may cause actual results to differ materially from those projected in the forward looking statements.

Our historical consolidated financial data included in this information statement does not necessarily reflect the financial condition, results of operations or cash flows we would have achieved as a standalone company during the periods presented or those we will achieve in the future including as a result of changes in our strategy and our current strategic planning work, where we seek to operate as a simpler, more profitable business. See “Risk Factors — Our historical consolidated financial data are not necessarily representative of the results we would have achieved as a separate company and may not be a reliable indicator of our future results.”

Overview

Our Company

We are a bank holding company headquartered in Coral Gables, Florida. We provide individuals and businesses a comprehensive array of deposit, credit, investment, wealth management and fiduciary services, both in the United States and to select international customers. These services are offered primarily through the Bank and its subsidiaries, the Trust Company and Investment Services. The Bank’s primary markets are South Florida, where it operates 15 banking centers in Miami-Dade, Broward and Palm Beach counties; the greater Houston, Texas area where it has seven banking centers in Harris and Montgomery counties; and the New York City area where it has a loan production office in Midtown Manhattan. We are constructing an additional banking center in Katy, Texas. Our limited representative offices in Brazil and Colombia are being closed. Our previous representative office in Mexico was closed in 2017.

We report our results of operations through four segments: Personal and Commercial Banking, Corporate LATAM, Treasury and Institutional. Our Personal and Commercial Banking segment, which we refer to as PAC, delivers the Bank’s core services and product offerings to domestic personal and commercial business customers and international customers, which are primarily personal customers. Our Corporate LATAM segment serves financial institution clients and large companies in Latin America. Our Treasury segment manages our securities portfolio, and supports Company-wide initiatives for increasing profitability of other financial assets and liabilities. Our Institutional segment is comprised of balances and results of Investment Services and the Trust Company, as well as general corporate activities not reflected in our other three segments.

Primary Factors Used to Evaluate Our Business

Results of Operations.  In addition to net income, the primary factors we use to evaluate and manage our results of operations include net interest income and return on equity.

Net Interest Income.  Net interest income represents interest income less interest expense. We generate interest income from interest, dividends and fees received on interest-earning assets, including loans and investment securities we own. We incur interest expense from interest paid on interest-bearing liabilities, including interest-bearing deposits, and borrowings such as junior subordinated debentures and other forms of indebtedness. Net interest income typically is the most significant contributor to our revenues and net income. To evaluate net interest income, we measure and monitor: (i) yields on our loans and other interest-earning assets; (ii) the costs of our deposits and other funding sources; (iii) our net interest spread; (iv) our net interest margin;

 

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and (v) our provisions for loan losses. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated by dividing net interest income for the period by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders’ equity, also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources of funds.

Changes in market interest rates and interest we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities and shareholders’ equity, usually have the largest impact on periodic changes in our net interest spread, net interest margin and net interest income. We measure net interest income before and after the provision for loan losses.

Noninterest Income.  Noninterest income consists of, among other things: (i) deposit and service fees; (ii) brokerage, advisory and fiduciary activities; (iii) benefits from and changes in cash surrender value of bank-owned life insurance, or BOLI, policies; (iv) card and trade finance servicing fees, (v) data processing, rental income and fees for other services provided to related parties, (vi) securities gains or losses, and (vii) other noninterest income.

Our income from service fees on deposit accounts is largely impacted by the volume, growth and type of deposits we hold, which are impacted by prevailing market conditions for deposit products, our marketing efforts and other factors.

Our income from brokerage, advisory and fiduciary activities consists of brokerage commissions related to the dollar amount of customers’ trading volume of transactions, fiduciary, investment advisory fees and account administrative services generally based on a percentage of the average value of assets managed during the contractual period.

Income from changes in the cash surrender value of our BOLI policies represents the amount that may be realized under the contracts with the insurance carriers, which are nontaxable.

Card servicing fees include credit card issuance and credit and debit cards interchange fees. Credit card issuance fees are generally recognized over the period in which the cardholders are entitled to use the cards. Interchange fees are recognized when earned. Trade finance servicing fees, which primarily include commissions on letters of credit, are generally recognized over the service period on a straight line basis.

We have historically provided certain administrative services to non-U.S. affiliates under certain service agreements with arms-length terms and charges. Income from this source changes based on changes to the direct costs associated with providing the services and based on changes to the amount and scope of services provided which are reviewed periodically.

Our gains on sales of securities is income from the sale of securities within our securities portfolio and is primarily dependent on changes in U.S. Treasury interest rates and asset liability management activities. As U.S. Treasury rates increase, our securities portfolio decreases in market value, and as U.S. Treasury rates decrease, our securities portfolio increases in value.

Gain or losses on sale of property and equipment are recorded at the date of the sale and presented as other noninterest income or expense in the period they occur.

Noninterest Expense.  Noninterest expense includes, among other things: (i) salaries and employee benefits; (ii) occupancy and equipment; (iii) professional and other services fees; (iv) insurance and regulatory assessments; (v) telecommunication and data processing; (vi) depreciation and amortization; and (vii) other operating expenses.

Salaries and employee benefits include compensation, employee benefits and employer tax expenses for our personnel.

 

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Occupancy expense includes lease expense on our leased properties and other occupancy-related expenses. Equipment expense includes furniture, fixtures and equipment related expenses.

Professional and other services fees include legal, accounting and consulting fees, card processing fees, and other fees related to our business operations, and include director’s fees and OCC fees.

Insurance and regulatory assessments include FDIC insurance and corporate insurance premiums.

Telecommunication and data processing expenses include expenses paid to our third-party data processing system providers and other telecommunication and data service providers.

Depreciation and amortization expense includes the value associated with the depletion of the value on our owned properties, including leasehold improvements made to our leased properties.

Other operating expenses will include the incremental cost associated with servicing the large number of shareholders we will have post-spin-off.

Noninterest expenses generally increase as we grow our business and whenever necessary to implement or enhance policies and procedures for regulatory compliance.

Primary Factors Used to Evaluate Our Financial Condition

The primary factors we use to evaluate and manage our financial condition include asset quality, capital and liquidity.

Asset Quality.  We manage the diversification and quality of our assets based upon factors that include the level, distribution and severity of the deterioration in asset quality. Problem assets may be categorized as classified, delinquent, nonaccrual, nonperforming and restructured assets. We also manage the adequacy of our allowance for loan losses, or the allowance, the diversification and quality of loan and investment portfolios, the extent of counterparty risks, credit risk concentrations and other factors.

Capital.  Financial institution regulators have established guidelines for minimum capital ratios for banks, thrifts and bank holding companies. In 2016, we adopted the new Basel III regulatory capital framework as approved by federal banking agencies, which is subject to a multi-year phase-in period. The adoption of this new framework modified the calculation of the various capital ratios, added a new ratio, CET1, and revised the adequately and well capitalized thresholds. In addition, Basel III establishes a new capital conservation buffer of 2.5% of risk-weighted assets, which is phased-in over a four-year period beginning January 1, 2016. Our capital ratios at March 31, 2018, December 31, 2017, 2016 and 2015 exceeded all minimum regulatory requirements to be “well-capitalized” on a current as well as fully phased-in basis.

We manage capital based upon factors that include: (i) the level and quality of capital and our overall financial condition; (ii) the trend and volume of problem assets; (iii) the adequacy of reserves; (iv) the level and quality of earnings; (v) the risk exposures in our balance sheet under various scenarios, including stressed; (vi) the levels of Tier 1 and total capital; (vii) the Tier 1 capital ratio, the total capital ratio, the Tier 1 leverage ratio, and the Common Equity Tier 1 capital ratio; and (viii) other factors.

Liquidity.  Our deposit base consists primarily of personal and commercial accounts maintained by individuals and businesses in our primary markets. In recent years, we have increased our access to fully-insured time deposits under $250,000 brokered by third-party financial firms in the U.S. We manage liquidity based upon factors that include the amount of core deposit relationships as a percentage of total deposits, the level of diversification of our funding sources, the allocation and amount of our deposits among deposit types, the short-term funding sources used to fund assets, the amount of non-deposit funding used to fund assets, the availability

 

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of unused funding sources, off-balance sheet obligations, the availability of assets to be readily converted into cash without undue loss, the amount of cash and liquid securities we hold, the re-pricing characteristics and maturities of our assets when compared to the re-pricing characteristics of our liabilities and other factors.

Material Trends and Developments

Economic and Interest Rate Environment.  The results of our operations are highly dependent on economic conditions in the markets we serve, and U.S. market interest rates. Beginning in 2007, turmoil in the financial sector resulted in a reduced level of confidence in financial markets among borrowers, lenders and depositors, as well as extreme volatility in the capital and credit markets. In response to these conditions, the Federal Reserve began decreasing short-term interest rates, with eleven consecutive decreases totaling 525 basis points between September 2007 and December 2008. Since the recession ended in 2009, the economic conditions in the U.S. and our primary market areas have improved. Economic growth has been modest, the real estate market continues to recover and unemployment rates in the U.S. and our primary markets have significantly improved.

The Federal Reserve’s Normalization Policy adopted in September 2014 included gradually raising the Federal Reserve’s target range for the Federal Funds rate to more normal levels and gradually reducing the Federal Reserve’s holdings of U.S. government and agency securities. The Federal Reserve’s target Federal Funds rate has increased seven times since December 2015 in 25 basis point increments from 0.25% to 2.00% on June 13, 2018.

General and Administrative Expenses.  We expect to continue incurring increased noninterest expenses related to building out and modernizing our operational infrastructure, marketing and other administrative expenses to execute our strategic initiatives, costs associated with establishing de novo banking centers, expenses to hire additional personnel and other costs required to continue our growth.

Credit Reserves.  We seek a level of loan reserves against probable losses commensurate with the credit risks inherent in our loan portfolio. These reserves are used to cover a number of factors associated with probable loan losses, including bad loans, customer defaults and renegotiated terms of a loan that incur lower than previously estimated payments. Management periodically evaluates the adequacy of these reserves to ensure that they are maintained at a reasonable level to provide for recognized and unrecognized but inherent losses in the loan portfolio.

Regulatory Environment.  As a result of regulatory changes, including the Dodd-Frank Act and Basel III, as well as regulatory changes resulting from becoming a publicly traded company, we expect to be subject to more restrictive capital requirements, more stringent asset concentration and growth limitations and new and potentially heightened examination and reporting requirements. We also expect to face a more challenging environment for customer loan demand due to the increased costs that could ultimately be borne by borrowers, and to incur higher costs to comply with these new regulations. This uncertain regulatory environment could have a detrimental impact on our ability to manage our business consistent with historical practices and cause difficulty in executing our growth plan. See “Risk Factors — Risks Related to Our Business” and “Supervision and Regulation.”

 

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Discussion and Analysis of the Years Ended December 31, 2017, 2016 and 2015

Average Balance Sheet, Interest and Yield/Rate Analysis

The following tables present average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the years ended December 31, 2017, 2016 and 2015. The average balances for loans include both performing and nonperforming balances. Interest income on loans includes the effects of discount accretion and the amortization of net deferred loan origination costs accounted for as yield adjustments. Average balances represent the daily average balances for the years presented.

 

    2017     2016     2015  
    Average
Balances 		    Income/
Expense 		    Yield/
Rates 		    Average
Balances 		    Income/
Expense 		    Yield/
Rates 		    Average
Balances 		    Income/
Expense 		    Yield/
Rates 		 
    (In thousands, except percentages)  

Interest-earning assets:

                 

Loans portfolio, net (1)

  $ 5,849,117     $ 223,765       3.83 %    $ 5,363,732     $ 188,526       3.51 %    $ 5,253,467     $ 160,893       3.06 % 

Securities available for
sale (2)

    1,871,377       44,162       2.36 %      2,155,589       46,962       2.18 %      2,148,323       44,550       2.07 % 

Securities held to maturity  (3)

    24,813       582       2.35 %      —         —         —         —         —         —   % 

Federal Reserve Bank and Federal Home Loan Bank stock

    61,100       3,169       5.19 %      50,191       2,533       5.05 %      47,959       2,348       4.89 % 

Deposits with banks

    153,370       1,642       1.07 %      165,072       806       0.49 %      165,455       408       0.25 % 
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-earning assets

    7,959,777       273,320       3.43 %      7,734,584       238,827       3.09 %      7,615,204       208,199       2.73 % 
   

 

 

       

 

 

       

 

 

   

Total non-interest-earning assets less allowance for loan losses

    527,508           461,939           356,154      
 

 

 

       

 

 

       

 

 

     

Total Assets

  $ 8,487,285         $ 8,196,523         $ 7,971,358      
 

 

 

       

 

 

       

 

 

     

Interest-bearing liabilities:

                 

Checking and saving accounts —

                 

Interest bearing DDA (NOW)

  $ 1,627,546     $ 394       0.02 %    $ 1,811,316     $ 653       0.04 %    $ 2,054,565     $ 1,187       0.06 % 

Money market

    1,312,252       8,780       0.67 %      1,390,574       8,187       0.59 %      1,431,664       7,257       0.51 % 

Savings

    474,569       76       0.02 %      511,576       119       0.02 %      546,131       169       0.03 % 
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total checking and saving accounts

    3,414,367       9,250       0.27 %      3,713,466       8,959       0.24 %      4,032,360       8,613       0.21 % 

Time deposits

    2,031,970       26,787       1.32 %      1,638,051       16,576       1.01 %      1,082,885       8,016       0.74 % 
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total Deposits

    5,446,337       36,037       0.66 %      5,351,517       25,535       0.48 %      5,115,245       16,629       0.33 % 

Federal funds purchased and securities sold under repurchase agreements

    36,447       1,882       5.16 %      63,515       3,259       5.13 %      71,021       3,630       5.11 % 

Advances from the FHLB  (4)

    968,187       18,235       1.88 %      712,374       10,971       1.54 %      650,841       8,787       1.35 % 

Junior subordinated debentures

    118,110       7,456       6.31 %      118,110       7,129       6.04 %      118,110       6,868       5.81 % 
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing liabilities

    6,569,081       63,610       0.97 %      6,245,516       46,894       0.75 %      5,955,217       35,914       0.60 % 
   

 

 

       

 

 

       

 

 

   

Total non-interest-bearing liabilities

    1,152,121           1,233,280           1,311,918      
 

 

 

       

 

 

       

 

 

     

Total liabilities

    7,721,202           7,478,795           7,267,135      

Stockholders’ equity

    766,083           717,727           704,223      
 

 

 

       

 

 

       

 

 

     

Total liabilities and stockholders’ equity

  $ 8,487,285         $ 8,196,523         $ 7,971,358      
 

 

 

       

 

 

       

 

 

     

Excess of average interest- earning assets over average interest-bearing

  $ 1,390,696         $ 1,489,068         $ 1,659,987      
 

 

 

       

 

 

       

 

 

     

Net interest income

    $ 209,710         $ 191,933         $ 172,285    
   

 

 

       

 

 

       

 

 

   

Net interest rate spread

        2.46 %          2.34 %          2.13 % 

Effect of non-interest-bearing sources

        0.17 %          0.14 %          0.13 % 
     

 

 

       

 

 

       

 

 

 

Net interest margin  (5)

        2.63 %          2.48 %          2.26 % 
     

 

 

       

 

 

       

 

 

 

Ratio of average interest-earning assets to average interest-bearing liabilities

    121.17 %          123.84 %          127.87 %     
 

 

 

       

 

 

       

 

 

     

 

(1) Average non-performing loans of $46.1 million, $63.5 million and $65.3 million in 2017, 2016, and 2015, respectively, are included in the average loans portfolio, net balance.

 

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(2) Includes nontaxable securities with an average balance of $164 million, $136 million and $36 million in 2017, 2016 and 2015, respectively. The tax equivalent yield for available for sale securities for 2017, 2016 and 2015 was 3.86%, 3.66% and 3.72%, respectively, using an assumed 35% tax rate and dividing the actual yield by .65.
(3) Includes nontaxable securities with an average balance of $25 million in 2017. The tax equivalent yield for held to maturity securities for 2017 was 3.61%, using an assumed 35% tax rate and dividing the actual yield by .65.
(4) The terms of the advance agreement require the Bank to maintain certain qualified investment securities and/or loans as collateral for these advances.
(5) Net interest margin is defined as net interest income divided by average interest-earning assets, which are loans, securities available for sale, deposits with banks and other financial assets which, yield interest or similar income.

Interest Rates and Operating Interest Differential

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. In this table we present for the periods indicated, the changes in interest income and the changes in interest expense attributable to the changes in interest rates and the changes in the volume of interest-earning assets and interest-bearing liabilities. For each category of assets and liabilities, information is provided on changes attributable to: (i) change in volume (change in volume multiplied by prior year rate); (ii) change in rate (change in rate multiplied by prior year volume); and (iii) change in both volume and rate which is allocated to rate. See “Risk Factors — Our profitability and liquidity may be affected by changes in interest rates and interest rate levels, the shape of the yield curve and economic conditions.”

 

     Increase (Decrease) in Net Interest Income  
     2017 vs 2016     2016 vs 2015  
     Attributable To     Attributable To  
     Volume     Rate     Total     Volume     Rate     Total  
     (In thousands)  

Interest income attributable to:

 

Loans portfolio, net

   $ 17,037     $ 18,202     $ 35,239     $ 3,374     $ 24,259     $ 27,633  

Securities available for sale

     (6,196 )      3,396       (2,800 )      150       2,262       2,412  

Securities held to maturity

     582       —         582       —         —         —    

Federal Reserve Bank and Federal Home Loan Bank stock

     551       85       636       108       77       185  

Deposits with banks

     (57 )      893       836       (1 )      399       398  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

   $ 11,917     $ 22,576     $ 34,493     $ 3,631     $ 26,997     $ 30,628  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense attributable to:

 

Checking and saving accounts:

 

Interest bearing DDA (NOW)

   $ (74 )    $ (185 )    $ (259 )    $ (146 )    $ (388 )    $ (534 ) 

Money market

     (462 )      1,055       593       (210 )      1,140       930  

Savings

     (7 )      (36 )      (43 )      (10 )      (40 )      (50 ) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total checking and saving accounts

     (543 )      834       291       (366 )      712       346  

Time deposits

     3,979       6,232       10,211       4,108       4,452       8,560  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

     3,436       7,066       10,502       3,742       5,164       8,906  

Securities sold under repurchase agreements

     (1,389 )      12       (1,377 )      (384 )      13       (371 ) 

Advances from the FHLB

     3,940       3,324       7,264       831       1,353       2,184  

Junior subordinated debentures

     —         327       327       —         261       261  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

   $ 5,987     $ 10,729     $ 16,716     $ 4,189     $ 6,791     $ 10,980  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in net interest income

   $ 5,930     $ 11,847     $ 17,777     $ (558 )    $ 20,206     $ 19,648  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

In 2017, the decrease in securities available for sale was attributable to an asset mix rebalance where the reduction of investments was used to fund new loan production.

 

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In 2017 and 2016, the decrease in interest expense attributable to checking and saving accounts was due to lower volume and migration to time deposit products. Given current interest rate levels, clients are inclined to seek higher rate products such as time deposits. The lower volume primarily resulted from a reduction of interest bearing transactional accounts from international customers, which also contributed to reducing the concentration of large fund providers. A significant amount of the decrease was offset by an increase in time deposits and brokered certificates of deposits.

Results of Operations

Comparison of Results of Operations for the Years Ended December 31, 2017, 2016 and 2015

The table below sets forth certain results of operations data for the years ended December 31, 2017, 2016 and 2015.

 

    Year ended December 31,     Change  
    2017     2016     2015     2017 vs 2016     2016 vs 2015  
    (In thousands, except per share amounts and percentages)  

Net interest income

  $ 209,710     $ 191,933     $ 172,285     $ 17,777       9.26 %    $ 19,648       11.40 % 

(Reversal of) provision for loan losses

    (3,490 )      22,110       11,220       (25,600 )      (115.78 )%      10,890       97.06 % 
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Net interest income after (reversal of) provision for loan losses

    213,200       169,823       161,065       43,377       25.54 %      8,758       5.44 % 

Noninterest income

    71,485       62,270       54,756       9,215       14.80 %      7,514       13.72 % 

Noninterest expense

    207,636       198,303       192,262       9,333       4.71 %      6,041       3.14 % 
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Net Income before income tax

    77,049       33,790       23,559       43,259       128.02 %      10,231       43.43 % 

Income tax

    (33,992 )      (10,211 )      (8,514 )      (23,781 )      232.90 %      (1,697 )      19.93 % 
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Net Income

  $ 43,057     $ 23,579     $ 15,045     $ 19,478       82.61 %    $ 8,534       56.72 % 
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Basic and diluted earnings per share  (1)

  $ 0.34     $ 0.18     $ 0.12     $ 0.16       $ 0.06    
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

(1) We have no outstanding dilutive instruments issued. Consequently, the basic and diluted earnings per share are equal in each of the periods presented.

We attribute the significant improvements in our consolidated results experienced in the past three years to our concerted efforts to increase loan volumes, improve the mix and overall asset quality of the loan portfolio, making the necessary investments in human and technical resources to continue enhancing customer experience and operations while keeping operational costs under control.

Results of Operations for 2017 compared to Results of Operations for 2016

The following discussion of our results of operations compares the years ended December 31, 2017 and 2016.

Net income . Net income of $43.1 million and $0.34 basic and diluted earnings per share for the year 2017 represents an improvement of $19.5 million, or 82.61%, from net income of $23.6 million and $0.18 basic and diluted earnings per share reported in 2016. We attribute this increase primarily to improved credit quality across all loan classes, the improved interest rate environment and higher loan volumes. There were other non-recurrent items that also impacted results in 2017 with respect to 2016 further discussed below.

Net interest income improved from $191.9 million in 2016 to $209.7 million in 2017, an increase of $17.8 million, or 9.26%, primarily due to higher average interest-earnings asset volumes and yields, partially

 

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offset by higher average interest-bearing liability volumes and yields. As a result of improved credit trends across all our loan portfolios, there was a reversal of allowance for loan losses of $3.5 million in 2017, which compared to a provision to the allowance of $22.1 million recorded in 2016, contributing $25.6 million to the increase in net income in 2017 with respect to 2016. There were also improvements in our noninterest income, which increased by $9.2 million in 2017, or 14.80%, over 2016, including a one-time gain of $10.5 million on the sale of the Bank’s building in New York City.

These positive results were partially offset by an increase in noninterest expense of $9.3 million, or 4.71%, primarily attributable to the costs of professional services incurred in connection with the spin-off and higher salary and employee benefit costs, which reflects our growing business and investments in operational enhancements. In addition, we remeasured net DTAs and recorded approximately $9.6 million in additional tax expense resulting from the reduction in federal corporate income tax rates under the 2017 Tax Act signed into law on December 22, 2017. The 2017 Tax Act reduced the federal corporate income tax rate to 21% compared to 35%. We believe this reduction in tax rate will benefit us in 2018 and later years.

Net interest income . In the year ended December 31, 2017, we generated $209.7 million of net interest income, which was an increase of $17.8 million, or 9.26%, from the $191.9 million of net interest income in the year ended December 31, 2016. The increase in net interest income was due primarily to an increase of 2.91% in the average balance of interest-earning assets, coupled with a 34 basis point improvement in the average yield on interest-earning assets. For the years ended December 31, 2017 and 2016, our reported net interest margin was 2.63% and 2.48%, respectively, an improvement of 15 basis points.

Interest income. Total interest income was $273.3 million for the year ended December 31, 2017 compared to $238.8 million for the comparable period of 2016. The $34.5 million, or 14.4%, increase in total interest income was primarily due to increases in average balances of loans and average yield earned on those loan balances, securities and other earning assets. These improvements were partially offset by a decrease in average securities volumes in 2017 as compared to 2016, primarily due to the redeployment of those funds into better yielding loan products.

Interest income on loans for the year ended December 31, 2017 was $223.8 million compared to $188.5 million for the comparable period of 2016. The $35.2 million, or 18.69%, increase was primarily due to a 32 basis point increase in average yield on loans and a 9.05% increase in the average balance of loans outstanding, mainly the result of growing the loan portfolio of PAC, which includes real estate loans. This loan growth was offset in part by a reduction of the Corporate LATAM loan portfolio as the Company continues its efforts to grow higher-yield loan portfolios in its domestic markets.

Interest income on our securities portfolio decreased $1.6 million, or 3.20%, to $47.8 million in the year ended December 31, 2017 compared to $49.5 million in the comparable period of 2016. This decrease is primarily attributable to a decline of 13.18% in the average volume of securities available for sale, the proceeds of which were primarily redeployed to loan production, partially offset by higher average yields of securities available for sale, which increased an average of 18 basis points in 2017 as compared to 2016.

Interest expense.  Interest expense on interest-bearing liabilities increased $16.7 million, or 35.65%, to $63.6 million for the year ended December 31, 2017 as compared to $46.9 million in the comparable period of 2016, primarily due to increases in average deposit balances and advances from the FHLB, and the higher average interest rate on those funding sources, partially offset by the maturity in 2017 of all outstanding securities sold under agreements to repurchase at the close of 2016.

Interest expense on deposits increased to $36.0 million for the year ended December 31, 2017 as compared to $25.5 million for the comparable period of 2016. The $10.5 million, or 41.13%, increase was primarily due to an 18 basis point increase in the average rate paid, combined with the average balance of deposits increasing 1.77%. The increase in the average balance of deposits resulted primarily from increases in time deposits,

 

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partially offset by decreases in lower-cost demand, money market and saving deposits, as retail customers were attracted to higher interest rates offered in time deposit products. The increase in the average rate paid was primarily due to the impact of higher market interest rates on time deposits and, to a lesser extent, competitive pricing paid on money market accounts.

Interest expense on advances from the FHLB increased $7.3 million, or 66.21%, in 2017 with respect to the same in 2016. This increase is the result of an increase of 35.91% in the average balance outstanding of advances, which contributed $3.9 million of the increase, along with an increase of 34 basis points in the average rate paid on those advances, which contributed $3.3 million of the increase.

Results of Operations for 2016 compared to Results of Operations for 2015

The following discussion of our results of operations compares the years ended December 31, 2016 and 2015.

Net income . Net income of $23.6 million and $0.18 basic and diluted earnings per share for the year 2016 represents an improvement from net income of $15.0 million and $0.12 basic and diluted earnings per share reported in 2015. The main driver contributing to this result was an increase in net interest income, which improved from $172.3 million in 2015 to $191.9 million in 2016, an increase of $19.7 million or 11.40%, mainly related to higher average yields and increases in interest-earning asset volume. There were also improvements in our noninterest income, which increased by $7.5 million in 2016 or 13.72% over 2015. These positive trends were partially offset by an increase in the provision for loan losses of $10.9 million, or 97.06% compared to 2015, primarily related to increased loan volume and specific loan charge-offs. Additionally, there was an increase in noninterest expense of $6.0 million, or 3.14%, primarily attributable to higher salary and employee benefit costs, which reflects our growing business and investments in operational enhancements.

Net interest income . In the year ended December 31, 2016, we generated $191.9 million of net interest income, which was an increase of $19.6 million, or 11.40%, from the $172.3 million of net interest income in the year ended December 31, 2015. The increase in net interest income was due primarily to a 1.57% increase in the average balance of interest-earning assets, coupled with a 36 basis point improvement in their average yield. For the years ended December 31, 2016 and 2015, our reported net interest margin was 2.48% and 2.26%, respectively.

Interest income. Total interest income was $238.8 million for the year ended December 31, 2016 compared to $208.2 million for the comparable period of 2015. The $30.6 million, or 14.7%, increase in total interest income was primarily due to increases in average balances of loans and securities as well as the average yield earned on those assets.

Interest income on loans for the year ended December 31, 2016 was $188.5 million compared to $160.9 million for the comparable period of 2015. The $27.6 million, or 17.17%, increase was primarily due to a 45 basis point increase in average yield on loans and to a lesser extent, a 2.10% increase in the average balance of loans outstanding.

Interest income on our securities portfolio increased $2.6 million, or 5.54%, to $49.5 million in the year ended December 31, 2016 compared to $46.9 million in the comparable period of 2015. This increase is primarily attributable to higher average outstanding balances of securities available for sale along with higher average yields, which increased an average of 11 basis points in 2016 with respect to 2015 mainly due to longer duration in the securities portfolio.

Interest expense.  Interest expense on interest-bearing liabilities increased $11.0 million, or 30.57%, to $46.9 million for the year ended December 31, 2016 as compared to $35.9 million in the comparable period of 2015, primarily due to increases in average deposit balances and advances from the FHLB, and the higher average interest rate on those funding sources.

 

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Interest expense on deposits increased to $25.5 million for the year ended December 31, 2016 as compared to $16.6 million for the comparable period of 2015. The $8.9 million, or 53.6%, increase was primarily due to the average balance of deposits increasing 4.62%, combined with a 15 basis point increase in the average rate paid. The increase in the average balance of deposits resulted primarily from increases in time deposits, partially offset by decreases in lower-costing demand, money market and saving deposits. The increase in the average rate paid was primarily due to the impact of higher market interest rates on certain deposit classes.

Provision for Loan Losses

Set forth in the table below are the changes in the allowance for loan losses for each of the years in the 5-year period ended December 31, 2017.

 

     As of December 31,  
     2017     2016     2015     2014     2013  
     (In thousands)  

Balance at the beginning of the period

   $ 81,751     $ 77,043     $ 65,385     $ 60,468     $ 67,289  

Charge-offs

          

Domestic Loans:

          

Real Estate Loans

          

Commercial Real Estate (CRE)

          

Non-owner occupied

     (97 )      (94 )      —         (602 )      (886 ) 

Multi-family residential

     —         —         (197 )      (116 )      —    

Land development and construction loans

     —         —         —         (218 )      (2,121 ) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (97 )      (94 )      (197 )      (936 )      (3,007 ) 

Single-family residential

     (130 )      (195 )      (157 )      (287 )      (6,581 ) 

Owner occupied

     (25 )      (24 )      (98 )      (988 )      (503 ) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (252 )      (313 )      (452 )      (2,211 )      (10,091 ) 

Commercial

     (1,907 )      (1,305 )      (1,515 )      (4,953 )      (1,697 ) 

Consumer and others

     (341 )      (196 )      (4 )      (95 )      (64 ) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (2,500 )      (1,814 )      (1,971 )      (7,259 )      (11,852 ) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

International Loans: (1)

          

Commercial

     (6,166 )      (19,610 )      (73 )      —         (126 ) 

Consumer and others

     (757 )      (1,186 )      (300 )      (281 )      (149 ) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (6,923 )      (20,796 )      (373 )      (281 )      (275 ) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Charge-offs

   $ (9,423 )    $ (22,610 )    $ (2,344 )    $ (7,540 )    $ (12,127 ) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Recoveries

          

Domestic Loans:

          

Real Estate Loans

          

Commercial Real Estate (CRE)

          

Non-owner occupied

   $ 717     $ 2,639     $ 56     $ 587     $ 360  

Multi-family residential

     —         1       148       103       252  

Land development and construction loans

     178       1,267       595       589       3,184  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     895       3,907       799       1,279       3,796  

Single-family residential

     1,205       105       252       403       620  

Owner occupied

     445       32       560       723       66  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,545       4,044       1,611       2,405       4,482  

Commercial

     221       84       1,064       1,914       275  

Consumer and others

     2       11       6       —         7  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2,768       4,139       2,681       4,319       4,764  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     As of December 31,  
     2017     2016     2015      2014     2013  
     (In thousands)  

International Loans: (1)

           

Real Estate Loans

           

Single-family residential

   $ 10     $ 21     $ 98      $ 150     $ 225  

Commercial

     297       1,000       —          —         —    

Consumer and others

     87       48       3        17       28  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     394       1,069       101        167       253  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Recoveries

   $ 3,162     $ 5,208     $ 2,782      $ 4,486     $ 5,017  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net (charge-offs) recoveries

     (6,261 )      (17,402 )      438        (3,054 )      (7,110 ) 

(Reversal of) provision for loan losses

     (3,490 )      22,110       11,220        7,971       289  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance at the end of the period

   $ 72,000     $ 81,751     $ 77,043      $ 65,385     $ 60,468  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Includes transactions in which the debtor or the customer is domiciled outside the U.S., even when the collateral is located in the U.S.

2017 compared to 2016

In 2017 charge-offs declined to $9.4 million from $22.6 million in 2016. Charge-offs in 2017 primarily included $6.0 million charge-off related to a loan to a Latin American primary products company, and $0.8 million of credit card charge-offs. The remaining $2.5 million of charge-offs were due to domestic loans. As a result, the ratio of net charge-offs over the average total loan portfolio in 2017 improved to 0.11%, 21 basis points lower than in 2016.

We reversed $3.5 million from the allowance for loan losses in 2017, a favorable difference of $25.6 million versus the provision recorded in 2016. This reversal was primarily the result of continued improvements in the economic conditions in the U.S. domestic markets where we do business, the resulting positive impact those conditions have in credit quality across all major loan portfolios we originate, along with our continued reduction in exposure to Latin American loans.

2016 compared to 2015

Total charge-offs increased to $22.6 million in 2016 compared to $2.3 million in the previous year. The large increase was due to higher loan losses experienced in the Latin American commercial loan portfolio resulting from the rapidly deteriorating financial condition of certain non-government customers in the oil industry that were impacted by the decline in commodity prices, in general, and in oil prices, in particular. These lower commodity prices affected companies in many regions, particularly in countries in Latin America such as Chile, Brazil, Colombia and Venezuela, whose economies depend to a large extent on commodity prices. The increase in losses we experienced in 2016 were incurred on loans to entities in Colombia and Brazil. The 2016 increase in charge-offs was due primarily to the $19.6 million charge-off of a loan to a Canadian oil and gas company operating in Colombia. Also, $1.2 million of credit card loans to Venezuelan borrowers were charged off. The balance of $1.8 million were U.S. loan charge-offs. We had no loans outstanding to the private and public oil sectors in Venezuela in 2017, 2016 and 2015. Total recoveries increased by $2.4 million, or 87.2%, compared to the amounts recovered in 2015.

Our provision for loan losses totaled $22.1 million for the year ended December 31, 2016, an increase of 97.1% from $11.2 million recorded in 2015. This increase reflected the 2016 charge-offs and estimated loss reserves in other loans, including the loan to the Latin American primary products company ultimately charged-off in 2017.

Significantly higher net charge-offs, partially offset by a higher average loan portfolio balance, contributed to the deterioration in the ratio of net charge-offs to over average total loan portfolio in 2016. This ratio was 0.32% in 2016, 33 basis points higher than in 2015, when recoveries slightly exceeded charge-offs.

 

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Noninterest income

The table sets forth a comparison for each of the categories of non-interest income for the periods presented.

 

    Years ended December 31     Change  
    2017     2016     2015     2017 vs 2016     2016 vs 2015  
    (In thousands, except percentages)  

Deposits and service fees

  $ 19,560       27.36 %    $ 20,928       33.61 %    $ 21,147       38.62 %    $ (1,368 )      (6.54) %    $ (219 )      (1.04 )% 

Brokerage, advisory and fiduciary activities

    20,626       28.85 %      20,282       32.57 %      19,047       34.79 %      344       1.70 %      1,235       6.48 % 

Change in cash surrender value of BOLI (1)

    5,458       7.64 %      4,422       7.10 %      438       0.80 %      1,036       23.43 %      3,984       909.59 % 

Cards and trade finance servicing fees

    4,589       6.42 %      4,250       6.83 %      5,175       9.45 %      339       7.98 %      (925 )      (17.87 )% 

Data processing, rental income and fees for other services to related parties

    3,593       5.03 %      4,409       7.08 %      4,342       7.93 %      (816 )      (18.51 )%      67       1.54 % 

Securities (losses) gains, net

    (1,601 )      (2.24 )%      1,031       1.66 %      1,062       1.94 %      (2,632 )      (255.29 )%      (31 )      (2.92 )% 

Other noninterest income

    19,260       26.94 %      6,948       11.16 %      3,545       6.47 %      12,312       177.20 %      3,403       95.99 % 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   
  $ 71,485       100.00 %    $ 62,270       100.00 %    $ 54,756       100.00 %    $ 9,215       14.80 %    $ 7,514       13.72 % 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

(1) Changes are not taxable.

2017 compared to 2016

Noninterest income increased $9.2 million, or 14.80% in 2017 compared to 2016. In August 2017, the Bank sold its New York City building and later relocated its New York City based loan production office to new leased space. The loan production office’s new offices are located two blocks from the Bank’s former location and are expected to increase the efficiency of our New York City operation. As a result of this sale in 2017, the Bank realized a one-time gain of $10.5 million recorded as other noninterest income. Other positive factors leading to the improvement in noninterest income in 2017 with respect to 2016 included an increase of $1.0 million, or 23.43%, in the cash surrender value of BOLI policies, and increases in brokerage, advisory and fiduciary activities, as well as in debit and credit cards fees.

Offsetting these positive trends in noninterest income were a decline of $1.4 million, 6.54%, in deposit and service fees, and net gains/losses on securities which decreased to a net loss of $1.6 million, compared to a net gain of $1.0 million in 2016. This resulted from the execution of a strategy to mitigate the potential negative impact on yields and fair values of certain securities, which were previously held as available for sale, from expected future increases in market interest rates. There was also a decline of $0.8 million, or 18.51%, in income from services provided to related parties, as a result of a periodic review of the services and associated costs related to our service arrangements with non-U.S. affiliates of the MSF group.

2016 compared to 2015

Noninterest income increased $7.5 million, or 13.72% in 2016 compared to 2015. The main factors leading to this result was an increase of $4.0 million in income derived from the change in the cash surrender value of BOLI policies, an increase of 6.48% in brokerage, advisory and fiduciary activities, and an increase of $3.4 million in other noninterest income, primarily rental income from the lease of office space at our Coral Gables, Florida headquarters building to third-parties. These increases were partially offset primarily by a decline of 17.87% in credit cards and trade financing servicing fees. Deposit and service fees, and brokerage, advisory and fiduciary activities represented 66.18% of total noninterest income as of December 31, 2016, compared to 73.41% in 2015, as the positive change in cash surrender value of bank-owned policies and higher other income during the year increased their contribution to total noninterest income.

 

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Noninterest Expense

The table below presents a comparison for each of the categories of non-interest expense for the periods presented.

 

    Year ended December 31,     Change  
    2017     2016     2015     2017 vs 2016     2016 vs 2015  
    (In thousands, except percentages)                          

Salaries and employee benefits

  $ 131,800       63.48 %    $ 129,681       65.40 %    $ 122,230       63.57 %    $ 2,119       1.63 %    $ 7,451       6.10 % 

Occupancy and equipment

    17,381       8.37 %      18,368       9.26 %      16,441       8.55 %      (987 )      (5.37 )%      1,927       11.72 % 

Professional and other services

    16,399       7.90 %      11,937       6.02 %      16,892       8.79 %      4,462       37.38 %      (4,955 )      (29.33 )% 

FDIC assessments and insurance

    7,624       3.67 %      7,131       3.60 %      7,579       3.94 %      493       6.91 %      (448 )      (5.91 )% 

Telecommunications and data processing

    9,825       4.73 %      8,392       4.23 %      7,494       3.90 %      1,433       17.08 %      898       11.98 % 

Depreciation and amortization

    9,040       4.35 %      9,130       4.60 %      8,381       4.36 %      (90 )      (0.99 )%      749       8.94 % 

Other operating expenses

    15,567       7.50 %      13,664       6.89 %      13,245       6.89 %      1,903       13.93 %      419       3.16 % 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   
  $ 207,636       100.00 %    $ 198,303       100.00 %    $ 192,262       100.00 %    $ 9,333       4.71 %    $ 6,041       3.14 % 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

2017 compared to 2016

Noninterest expense increased $9.3 million, or 4.71%, in 2017 primarily as a result of higher professional fees, along with higher salary and employment benefits and other expenses. These increases were partially offset by a 5.37% reduction in occupancy and equipment-related costs mainly associated with ongoing efforts to optimize our banking center network, along with physical and technology improvements aimed at optimizing customer service and support operations.

Professional and other services fees increased $4.5 million, or 37.38%, primarily due to accrued external legal and consulting fees associated with the spin-off from MSF. We expect to record an undetermined amount of additional legal and other fees in 2018 in connection with this transaction.

The increase in salaries and employment benefits of $2.1 million, or 1.63%, mainly reflects annual salary increases, partially offset by the expenses accrued for in 2016 associated with early retirement buyout packages with certain employees, and lower headcount at the end of 2017 compared to the previous year, as a result of the Bank’s ongoing efforts to operate more efficiently.

2016 compared to 2015

Noninterest expense increased $6.0 million, or 3.14% in 2016 primarily as a result of higher salaries and employment benefits, occupancy-related costs, and telecommunications and data processing expenses. These increases were partially offset by a 29.33% reduction in other professional service fees.

The increase in salaries and employment benefits of $7.5 million, or 6.10%, reflects annual salary increases and $2.7 million corresponding to one-time expenses accrued during the year for individuals that opted to receive an early retirement buyout package. These increases were partially offset by a lower headcount at the end of the year compared to the previous year. This reduction was the result of the Bank’s ongoing efforts to operate more efficiently.

Occupancy-related costs increased $2.7 million, or 10.78%, compared to 2015. These costs were mainly the result of our ongoing efforts to optimize our banking center network, including relocations, banking center mergers and physical improvements to optimize customer experience.

 

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Telecommunication and data processing expenses increased $0.9 million in 2016, mainly attributed to computer software consulting services. Professional and other service fees were $5.0 million, or 29.33%, lower than in 2015, primarily due to lower legal and other consultancy expenses. Noninterest expense in 2015 included professional services fees and expenses incurred in connection with enhancements to regulatory compliance programs.

Income Taxes

The table below sets forth information related to our income taxes for the periods presented.

 

     Year ended December 31,     Change  
     2017     2016     2015     2017 vs 2016     2016 vs 2015  
     (In thousands, except effective tax rates and percentages)  

Current tax expense:

              

Federal

   $ 19,194     $ 10,981     $ 9,095     $ 8,213       74.79 %    $ 1,886       20.74 % 

State

     1,763       844       782       919       108.89 %      62       7.93 % 
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   
     20,957       11,825       9,877       9,132       77.23 %      1,948       19.72 % 

Impact of lower rate under the 2017 Tax Act

              

Remeasurement of net deferred tax assets, other loan balances corresponding to items in AOCI

     8,470       —       —       8,470       100.00 %      —       — % 

Remeasurement of net deferred tax assets corresponding to items in AOCI

     1,094       —       —       1,094       100.00 %      —       — % 

Deferred tax expense (benefit)

     3,471       (1,614 )      (1,363 )      5,085       (315.06 )%      (251 )      18.42 % 
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   
   $ 33,992     $ 10,211     $ 8,514     $ 23,781       232.90 %    $ 1,697       19.93 % 
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Effective income tax rate

     44.12 %      30.22 %      36.14 %      13.90 %      45.99 %      (5.92 )%      (16.38 )% 
              

2017 compared to 2016

We recorded income tax expense of $34.0 million in 2017, $23.8 million higher than the amount recorded in 2016. This increase is the result of higher taxable income during the year, the impact of the 2017 Tax Act, and a deferred tax expense in 2017 compared to a deferred tax benefit in 2016.

The increase in current tax expense during the year resulted from higher taxable income from operations, partially offset by higher tax benefits associated with differences between the tax basis of certain assets and liabilities and their corresponding book basis compared to 2016. These differences in tax basis primarily include the provision for loan losses, net unrealized losses in other comprehensive income, deferred executive compensation, dividend income, goodwill and depreciation and amortization of properties and equipment.

In 2017, we wrote-off a total of $9.6 million of net DTAs resulting from the reduction in federal corporate income tax rates under the 2017 Tax Act signed into law on December 22, 2017. The 2017 Tax Act reduced the federal corporate income tax rate to 21%, which was effective as of January 1, 2018, compared to 35% in prior periods. The write-off included $1.1 million of net DTAs associated with accumulated unrealized losses on securities available for sale and other items, which are recorded as accumulated other comprehensive income, or AOCI, in shareholder’s equity. Generally accepted accounting principles in the U.S., or GAAP, at the close of 2017 required the write-off associated with those items to be recorded against results of operations of 2017, as opposed to accumulated other comprehensive income. In February 2018, GAAP was amended and enabled companies to retrospectively reclassify the impact of these items from AOCI into retained earnings. We adopted this guidance effective in 2017 as permitted by the transition guidance.

 

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The increase in the effective rate in 2017 from 30.22% in 2016 to 44.12% in 2017 is primarily due to the write-off of net DTAs as a result of the 2017 Tax Act, partially offset by an increase of non-taxable income related to our investments in tax-exempt municipal bonds, as well as an increase in nontaxable income from the change in the cash surrender value of BOLI policies during the year.

2016 compared to 2015

We had income tax expense of $10.2 million in 2016, $1.7 million higher than the amount recorded in 2015. This change is primarily the result of higher current tax expense partially offset by an 18.4% increase in deferred tax benefits recorded in 2016 compared to the previous year.

The increase in current tax expense during the year resulted from higher taxable income from operations, partially offset by higher tax benefits associated with differences between the tax basis of certain assets and liabilities and their corresponding book basis compared to 2015. These differences in tax bases primarily include the provision for loan losses, net unrealized losses in other comprehensive income, deferred compensation, dividend income, goodwill and depreciation and amortization of properties and equipment.

The decrease in the effective rate from 36.14% in 2015 to 30.22% in 2016 is the result of an increase of non-taxable income related to our investments in tax-exempt municipal bonds, as well as an increase in nontaxable income from the change in the cash surrender value of BOLI policies during the year.

 

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Segment Results and Balances

The following tables summarize certain financial information for our reportable segments as of and for the periods indicated.

 

    PAC     Corporate
LATAM 		    Treasury     Institutional     Total  
For the year ended December 31, 2017   (In thousands)  

Income Statement:

         

Net interest income

  $ 182,872     $ 9,514     $ 6,649     $ 10,675     $ 209,710  

(Reversal of) provision for loan losses

    42       (3,879 )      (1,547 )      1,894       (3,490 ) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after (reversal of) provision for loan losses

    182,830       13,393       8,196       8,781       213,200  

Noninterest income

    26,468       509       8,920       35,588       71,485  

Noninterest expense

    161,002       4,894       11,256       30,484       207,636  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income before income tax:

         

Banking

    48,296       9,008       5,860       13,885       77,049  

Non-banking contribution (1)

    4,788       55       —       (4,843 )      —  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    53,084       9,063       5,860       9,042       77,049  

Income tax (expense) benefit

    (18,784 )      (3,207 )      1,106       (13,107 )      (33,992 ) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss)

  $ 34,300     $ 5,856     $ 6,966     $ (4,065 )    $ 43,057  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of December 31, 2017

         

Loans, net (2)(3)

  $ 5,542,545     $ 521,616     $ —     $ (64,325 )    $ 5,999,836  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deposits

  $ 5,454,216     $ 18,670     $ 779,969     $ 70,118     $ 6,322,973  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the year ended December 31, 2016

         

Income Statement:

         

Net interest income

  $ 157,325     $ 15,302     $ 12,586     $ 6,720     $ 191,933  

(Reversal of) provision for loan losses

    5,795       13,620       (1,069 )      3,764       22,110  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after (reversal of) provision for loan losses

    151,530       1,682       13,655       2,956       169,823  

Noninterest income

    26,461       843       7,808       27,158       62,270  

Noninterest expense

    156,146       8,295       9,041       24,821       198,303  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) before income tax:

         

Banking

    21,845       (5,770 )      12,422       5,293       33,790  

Non-banking contribution (1)

    5,136       (124 )      —       (5,012 )      —  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    26,981       (5,894 )      12,422       281       33,790  

Income tax (expense) benefit

    (10,068 )      2,200       (1,473 )      (870 )      (10,211 ) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss)

  $ 16,913     $ (3,694 )    $ 10,949     $ (589 )    $ 23,579  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of December 31, 2016

         

Loans, net (2)(3)

  $ 5,163,655     $ 601,016     $ —     $ (81,661 )    $ 5,683,010  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deposits

  $ 5,728,228     $ 68,332     $ 691,000     $ 89,805     $ 6,577,365  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the year ended December 31, 2015

         

Income Statement:

         

Net interest income

  $ 127,148     $ 22,334     $ 17,474     $ 5,329     $ 172,285  

(Reversal of) provision for loan losses

    9,263       1,059       (223 )      1,121       11,220  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after (reversal of) provision for loan losses

    117,885       21,275       17,697       4,208       161,065  

Noninterest income

    24,512       1,588       2,631       26,025       54,756  

Noninterest expense

    142,845       10,344       7,150       31,923       192,262  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) before income tax:

         

Banking

    (448 )      12,519       13,178       (1,690 )      23,559  

Non-banking contribution (1)

    4,256       (197 )      —       (4,059 )      —  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    3,808       12,322       13,178       (5,749 )      23,559  

Income tax (expense) benefit

    (1,457 )      (4,715 )      (4,254 )      1,912       (8,514 ) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss)

  $ 2,351     $ 7,607     $ 8,924     $ (3,837 )    $ 15,045  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of December 31, 2015

         

Loans net (2)(3)

  $ 4,525,302     $ 1,105,139     $ —     $ (74,530 )    $ 5,555,911  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deposits

  $ 5,673,119     $ 53,156     $ 535,963     $ 257,436     $ 6,519,674  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Non-banking contribution reflects allocations of the net results of the Trust Company and Investment Services to the customers’ primary business unit.

 

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(2) Provisions for the periods presented are allocated to each applicable reportable segment. The allowance for loan losses is reported entirely within Institutional. Unearned deferred loan costs and fees are included in Institutional.
(3) Balances include loans held for sale which are allocated to PAC.

Personal and Commercial Banking (PAC)

The Personal and Commercial Banking segment, which we refer to as PAC, represents the largest contributor to our results in terms of loan and deposit volumes and income, representing, among others, the following business units: CRE, middle market, commercial (both domestic and international), small business and personal clients, which are supported by the Bank’s banking center network and a wide array of products and services offered by the Bank. It provides a range of products to serve both domestic and international clients, including those in Latin America, and its geographic footprint is concentrated in South Florida, the greater Houston, Texas area and New York area, through the Bank’s 15 banking centers in Miami-Dade, Broward and Palm Beach counties, seven banking centers in Harris and Montgomery counties in the greater Houston, Texas area and its loan production office in midtown Manhattan. In addition, PAC, in conjunction with our Treasury segment, participates in the sourcing and management of syndicated and purchased accounts receivable loans.

2017 compared to 2016

PAC reported a net income of $34.3 million in 2017, which represents a 102.80% increase from $16.9 million in 2016. This increase was primarily attributable to higher net interest income together with lower provision for loan losses, which offset increased noninterest expense as well as lower non-banking contribution and higher income tax expenses. Non-banking contribution refers generally to the impact attributable to a segment from the Trust Company and Investment Services.

Net interest income increased 16.24% to $182.9 million, from $157.3 million in 2016, primarily due to a $378.9 million, or 7.34%, expansion in PAC’s loan portfolio, as part of the continued focus on U.S. loan growth and credit quality strategies, combined with enhanced spreads as a result of an improved interest rate environment. The above growth in PAC’s loan portfolio was primarily driven by a $431.6 million, or 19.85%, increase in real estate loans to $2,605.3 million at the end of 2017 from $2,173.8 million at the end of 2016. Total real estate portfolio represented 47.01% of PAC’s loan portfolio in 2017 compared to 42.10% in 2016.

PAC’s loan loss provision decreased 99.28% to $42,000 in 2017 from $5.8 million in 2016. This lower loan loss provision, despite PAC’s loan portfolio expansion, resulted from a continued asset quality improvement in PAC’s loan portfolio primarily due to overall lower losses and lower risk factors influencing reserve requirements as well as loan upgrades and recoveries specifically in the personal and real estate portfolios.

Noninterest expense increased 3.11% to $161.0 million in 2017 from $156.1 million in 2016, primarily due to higher product support expense allocations from those units supporting PAC’s sustained loan portfolio expansion.

Non-banking contribution, primarily from PAC customer brokerage and advisory activities, decreased 6.78% to $4.8 million in 2017 from $5.1 million in 2016.

PAC reported income tax expense of $18.8 million in 2017, an 86.57% increase from income tax expense of $10.1 million in 2016, which was directly attributed to PAC’s higher pre-tax income from operations.

2016 compared to 2015

PAC generated net income of $16.9 million in 2016, which represents a 619.40% increase from $2.4 million in 2015. This increase was primarily attributable to higher net interest income combined with lower provision for loan losses, as well as increased noninterest income and non-banking contribution. These increases were partially offset by a higher level of noninterest and income tax expenses.

 

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Net interest income increased 23.73% to $157.3 million, from $127.1 million in 2015, primarily as a result of a $638.4 million expansion in PAC’s loan portfolio as part of the Bank’s continued focus during 2016 on improving the risk/return mix, which led to an increase of $536.7 million in real estate loans across all of our markets. During 2016, the Bank continued its geographic expansion strategy by adding two new banking centers in Houston, Texas and relocating and replacing Florida banking centers with better locations as well as opening a hub facility in Doral, Florida, to capture new clients and to increase its share of loan and deposit portfolios in those markets. In this regard, from December 31, 2015 to December 31, 2016, PAC’s domestic customer deposits grew 18.67%, while PAC’s international customer deposits decreased 5.14%. The growth in domestic customer deposits was primarily attributable to the execution of strategies designed to enhance collaboration between business units to further improve existing relationships and leverage those relationships to generate new ones, together with periodic new deposit campaigns focused on U.S. customers.

The lower level of loan loss provision of $5.8 million in 2016, a 37.44% decrease from 2015, was primarily attributable to lower loss and risk factor requirements on personal, commercial, and middle market portfolios combined with certain recoveries in our real estate portfolio. This decrease was partially offset by higher generic provisions resulting from higher real estate loan volume.

Noninterest income increased 7.95% to $26.5 million in 2016 from $24.5 million in 2015, which was primarily attributable to a gain on the sale of former banking center properties amounting to $1.7 million. Noninterest expense increased 9.31% to $156.1 million in 2016 from $142.9 million in 2015, primarily as the result of higher product support expense allocations, in particular from those units supporting PAC’s loan portfolio growth and banking center expansion. Additionally, non-banking contribution, mainly from PAC customer’s brokerage and advisory activities, increased 20.68% to $5.1 million during 2016.

Corporate LATAM

Corporate LATAM serves leading financial institutions and a select number of large corporate clients in Brazil, Chile, Colombia, Mexico and Peru, generally with over $1 billion in annual sales in several large industries. These industries include: (i) financial and insurance; (ii) chemical, mineral, and plastics; (iii) primary metal and machinery; (iv) food and beverage; and (v) mining, quarrying, oil and gas extraction. The results of this segment are primarily driven by changes in short-term interest rates, the credit quality of its loan portfolio and the impact of the economic environment on borrower performance. Additionally, the majority of these industries focus on extraction, manufacturing and export to the U.S., Europe and China, which exposes these industries to fluctuations in commodity prices.

2017 compared to 2016

Corporate LATAM reported net income of $5.9 million in 2017, a $9.6 million, or a 258.53%, increase from a net loss of $3.7 million in 2016. This higher net income was primarily attributable to a reversal in the allowance for loan losses together with lower noninterest expense and higher non-banking contribution, which offset decreased net interest and noninterest income as well as higher income tax expenses.

The 37.83%, or $5.8 million, decrease in net interest income to $9.5 million in 2017 from $15.3 million in 2016 was primarily attributable to a $79.4 million, or 13.21%, reduction in the Corporate LATAM’s loan portfolio as part of our continued diversification strategy to mitigate risk in the Bank’s loan portfolio.

The $3.9 million reversal in the allowance for loan losses in 2017, which compared to a $13.6 million charge, mainly related to charge offs of a certain impaired loan in 2016, was primarily attributed to the reduction in the loan portfolio together with lower losses and lower credit risk factors.

Noninterest income decreased 39.62% to $0.5 million in 2017 from $0.8 million in 2016, primarily due to a lower level of wire transfers and letter of credit activities. The 41.00% reduction in noninterest expense to

 

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$4.9 million in 2017 from $8.3 million in 2016 was primarily the result of lower operating expenses and allocation expenses from product support units as part of the continued segment downsizing due to the Bank’s loan portfolio diversification strategy.

Non-banking contribution, primarily from Corporate LATAM customer brokerage and advisory activities, increased 144.35% to $0.05 million in 2017 from a $0.1 million loss in 2016.

2016 compared to 2015

Corporate LATAM had a net loss of $3.7 million in 2016, compared to the net income of $7.6 million recorded in 2015. The decrease in net income is primarily attributable to a reduction in net interest income, which decreased by $7.0 million or 31.49% in 2016, compared to the previous year, from $22.3 million in 2015 to $15.3 million in 2016, accompanied by: an increase in the provision for loan losses of $12.5 million, or 1,186.12%, from $1.1 million in 2015 to $13.6 million in 2016, and a reduction in noninterest income and noninterest expenses of $0.7 million and $2.0 million from 2015 to 2016, respectively.

The 31.49% decrease in net interest income in 2016, or $7.0 million, is primarily attributable to a $504.1 million reduction in Corporate LATAM’s loan portfolio as part of our diversification strategy to mitigate credit risk in the Bank’s portfolio. The higher provision for loan losses in 2016, from $1.1 million in 2015 to $13.6 million in 2016, is primarily attributable to charge offs corresponding to a specific impaired loan. The 19.81% decrease in noninterest expenses in 2016, or $2.0 million, was primarily the result of a lower level of personnel expenses arising from the segment downsizing as part of the diversification strategy.

The Bank’s diversification strategy is managed through policies that limit exposure to individual or related debtors, collateral type and location, and economic activity of the debtors. During 2016, the Bank continued its focus on improving the risk/return mix resulting in an increase in real estate loans, and a decrease in commercial loans and other loans compared to the prior year. Loans to financial institutions in this segment represented 7.70% of the total loans at the close of 2016, a decrease from 13.21% reported at the end of 2015.

Treasury

Treasury manages the Bank’s balance sheet, including the securities portfolio, the level and quality of liquidity, overall duration, economic value of equity and asset-liability position. Therefore, it derives a significant portion of its results from its securities portfolio management activities. These activities seek to maintain an adequate combination of profitability, liquidity, interest risk and credit risk in the management of the Bank’s investment portfolio in order to support the Bank’s overall strategic goals, including capital preservation. Through the timing of its purchases and sales to achieve these objectives, Treasury historically has also provided a source of revenue to us amid a highly volatile and constantly changing economic environment. In addition, Treasury participates in the sourcing and management of syndicated and purchased accounts receivable loans, in conjunction with PAC.

Net interest income includes credits and charges to Treasury as follows: (i) credit for interest income earned on all interest-earning assets, excluding loans other than those it co-manages with PAC, (ii) the net amount of funds transfer pricing derived from credits for funds sold to the business segments, primarily to fund loans, and charges for funds purchased from the business segments that generate deposits and (iii) interest expense for professional funding, which is primarily comprised of brokered certificates of deposits and FHLB advances.

2017 compared to 2016

Treasury reported a net income of $7.0 million in 2017, which represents a 36.38% decrease from $11.0 million in 2016. This decrease was primarily the result of lower net interest income combined with higher noninterest expense, and was partially offset by a higher reversal of loan loss reserve, increased noninterest income and lower taxes primarily as the result of higher tax-free income.

 

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The decrease in Treasury’s net interest income to $6.6 million in 2017 from $12.6 million in 2016 was primarily attributable to a decreased interest income combined with an increase in interest expense. The decline in interest income resulted from a lower return on investments due to a reduction of $436.1 million in the securities available for sale that was partially offset by an increase of $89.9 million in securities held to maturity and improved yields. The increased interest expense resulted from higher interest expense on our FHLB advances and other borrowings due to an increase in volume of $242.0 million as compared to 2016 together with higher interest expense on brokered certificates of deposits as a result of an increase in volume of $89.0 million as compared to 2016. The funds obtained as a result of the above reduction in securities, together with the increases in professional funding were primarily used to support PAC’s continued loan growth during 2017.

The higher loan loss provision reversal of $0.5 million in 2017 as compared to 2016 primarily resulted from overall lower losses, and lower risk factors as well as a reduction in the balance of syndicated and purchased accounts receivable loans. Syndicated and accounts receivable loans are co-managed by Treasury and PAC, whereby Treasury originates, pre-screens, and executes the transactions, while PAC serves as a liaison with credit analysis for the underwriting and performs portfolio management. Although these loans are booked in PAC, both segments monitor and share the allocation of income and expense, as well as the loan loss provision associated with such loans.

Noninterest income increased $1.1 million, or 14.24%, to $8.9 million in 2017 from $7.8 million in 2016, primarily due to non-taxable increases in the cash surrender value of BOLI policies together with swap valuation income. Noninterest expense increased $2.3 million, or 24.50%, to $11.3 million in 2017 from $9.0 million in 2016, primarily as the result of overall higher operating and allocated expenses.

Treasury reflected an income tax credit of $1.1 million in 2017 versus an income tax expense of $1.5 million in 2016. Income from BOLI and tax-free municipal bonds is excluded from Treasury’s pre-tax income when income tax is calculated and allocated to the business segments. On this basis, Treasury realized a net loss before income tax of $3.1 million in 2017 versus a net profit before income tax of $4.9 million in 2016.

2016 compared to 2015

Treasury generated net income of $10.9 million in 2016, a $2.0 million, or 22.69%, increase from $8.9 million of net income in 2015. This increase in net income from 2015 to 2016 was primarily the result of higher noninterest income of $5.2 million and a lower income tax expense of $2.8 million, which was partially offset by a reduction in net interest income of $4.9 million and an increase in noninterest expense of $1.9 million.

Treasury’s $4.9 million, or 27.97%, reduction in net interest income to $12.6 million in 2016 from $17.5 million in 2015, primarily resulted from the implementation of a strategy to lock-in longer term funding at historically low interest rates. This strategy resulted in increases in interest expense on our FHLB advances and brokered deposits of $2.2 million and $3.1 million, respectively.

Noninterest income was $7.8 million in 2016, representing a $5.2 million, or 196.77%, increase from 2015. The increase was primarily attributable to net gains on sale of securities as well as tax-free increases in the cash surrender value of BOLI policies. In 2016 and 2015, the Bank purchased $60.0 million and $100.0 million in BOLI policies, respectively. We record as noninterest income the change in the cash surrender value of these policies, which guarantee a minimum return on investment and serve to fund additional post-retirement benefits to selected employees. Income earned on these charges is not taxable and such income related to the change in cash surrender value is not adjusted to be on a tax equivalent basis. Noninterest expense increased 26.45% to $9.0 million from $7.2 million the prior year, primarily as a result of higher personnel expenses and operating expenses.

 

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Institutional

Results and balances of this segment correspond to institutional or corporate overhead activities, including those of the Trust Company and Investment Service, the unallocated cost of support and operations units to other business units, the funds transfer pricing credit received for capital which is not allocated to other segments, the excess or deficit between the estimated level of provision for loan losses recorded versus the allocation made to each business unit, and accruals and provisions made at the Bank level before the details of the impact on each business unit is known.

Net interest income represents credits and charges, which are not allocated to the operating segments, primarily composed of credit for funds provided through shareholders’ equity and other non-interest-bearing liabilities, and interest expense arising from our junior subordinated debentures associated with our outstanding trust preferred securities.

Noninterest income and noninterest expense represent mainly noninterest income and expenses from Investment Services and the Trust Company, which are allocated out to the business segments as non-banking contribution, fees charged to non-consolidated affiliates for services provided by support units under service agreements, and unallocated corporate overhead expenses.

2017 compared to 2016

Institutional incurred a net loss of $4.1 million in 2017 versus a net loss of $0.6 million in 2016, which was primarily due to higher noninterest expense as well as an increase in income tax expense to $13.1 million in 2017, representing a $12.2 million increase from the $0.9 million income tax reported in 2016. This increase was primarily the result of the one-time effect on income tax expense attributable to the 2017 Tax Act, which was not allocated to the other segments. The above increases were partially offset by higher net interest income together with lower provision for loan losses and increased noninterest income in 2017 from 2016.

Net interest income increased 58.85%, or $4.0 million, to $10.7 million in 2017 from $6.7 million in 2016, primarily due to the effect of lower funds transfer pricing charges for total other assets and higher funds transfer pricing credit received for capital.

Institutional reported a 49.68% reduction in loan loss provision to $1.9 million in 2017 from $3.8 million in 2016. A reversal of $3.5 million of loan loss reserve was reflected at the Bank level in 2017 compared to a $22.1 million loan loss provision expense in 2016. As a result of overall improved asset quality and lower risk factors influencing reserve requirements, business segments were allocated a reversal of $5.4 million in 2017, which is $1.9 million greater than the $3.5 million reversal recorded at the total Bank level. Therefore, any difference between the provision for loan losses recorded at the Bank level, versus the one allocated to each business segment, is reflected under Institutional.

Noninterest income increased $8.4 million, or 31.04%, to $35.6 million in 2017 from $27.2 million in 2016, primarily attributable to a one-time gain of $10.6 million related to the sale of the Bank’s building in New York City and subsequent relocation of its loan production office to a new space two blocks from the Bank’s former location. Noninterest expense increased $5.7 million, or 22.82%, to $30.5 million in 2017 from $24.8 million in 2016, mainly due to overall lower allocation of operating expenses from support units to business segments.

2016 compared to 2015

Institutional reported a net loss of $0.6 million in 2016 compared to a net loss of $3.8 million in 2015. The smaller loss was primarily attributable to higher net interest income of $1.4 million in 2016 as compared to 2015, combined with increased noninterest income of $1.1 million from 2015 to 2016 and lower noninterest expense of $7.1 million in 2016 as compared to 2015. The increase was partially offset by an increase in the loan loss provision, which represents the difference between the estimated level of provision for loan losses versus the allocation made to each business unit, of $2.6 million in 2016 as compared to 2015.

 

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Net interest income increased 26.10% to $6.7 million in 2016, or by $1.4 million from the previous year. This increase was primarily the result of higher funds transfer pricing credit received for capital, which was $18.9 million in 2016 compared to $18.2 million in 2015, and was partially offset by increased interest expense of $0.2 million paid on five of our floating rate junior subordinated debentures, as a result of interest rate increases.

Institutional reflected $3.8 million in the loan loss provision in 2016, a $2.6 million, or 235.77% increase as compared to 2015. Our provision for loan losses totaled $22.1 million in 2016 compared to $11.2 million in 2015 and business segments were allocated $18.3 million versus $10.1 million, respectively.

Noninterest income increased $1.1 million, or 4.35%, to $27.2 million during 2016 as compared to 2015, primarily due to higher commission income from Investment Services.

The noninterest expenses of $24.8 million, which was 22.25% lower than in 2015, resulted primarily from a higher allocation of operating expenses to the other business segments.

Financial Condition

Assets. Total assets were $8.4 billion as of December 31, 2017, relatively unchanged compared to December 31, 2016. In 2016, the Company executed actions to continue to rebalance the composition of its balance sheet following its strategic plan. These actions were aimed at further improving the operating results of the Company, which resulted in a change in the mix of interest-earning assets and liabilities in 2017 compared to 2016.

Total assets were $8.4 billion as of December 31, 2016. Total assets increased $271.4 million, or 3.33%, to $8.4 billion at December 31, 2016 as compared to $8.2 billion at December 31, 2015. This increase in total assets was primarily due to loan and investments growth, funded with higher deposits and advances from the FHLB.

Loans. The loan portfolio is the largest category of our earning assets. The table below depicts the trends for loans as a percentage of total assets and allowance for loan losses as a percentage of total loans for the three-year period ended December 31, 2017.

 

     As December 31  
     2017     2016     2015  
     (In thousands, except for percentages)  

Total loans , gross

   $ 6,066,255     $ 5,764,761     $ 5,623,222  

Total loans, gross / total assets

     71.90 %      68.34 %      68.89 % 

Allowance for loan losses

   $ 72,000     $ 81,751     $ 77,043  

Allowance for loan losses / total loan portfolio  (1)(2)

     1.19 %      1.42 %      1.37 % 

 

(1) Outstanding loan principal balance net of deferred loan fees and costs, excluding the allowance for loan losses.
(2) Allowance for loan losses was $72.0 million, $81.8 million and $77.0 million, as of December 31, 2017, 2016 and 2015, respectively. See Note 4 of our audited consolidated financial statements and Note 4 of our unaudited interim consolidated financial statements for more details on our impairment models.

 

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The table below summarizes the composition of our loan portfolio by type of loans as of the end of each period presented. International Loans include transactions in which the debtor or customer is domiciled outside the U.S., even when the collateral is property located in the United States.

 

     As December 31  
     2017      2016      2015      2014      2013  
     (In thousands)  

Domestic Loans:

              

Real Estate Loans

              

Commercial real estate (CRE)

              

Non-owner occupied

   $ 1,745,839      $ 1,445,243      $ 1,105,884      $ 741,196      $ 591,847  

Multi-family residential

     795,912        669,659        457,934        239,170        163,950  

Land development and construction loans

     421,285        429,085        332,493        210,312        114,520  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     2,963,036        2,543,987        1,896,311        1,190,678        870,317  

Single-family residential

     362,524        321,999        285,201        236,411        179,280  

Owner occupied

     429,803        463,040        483,031        463,259        450,251  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     3,755,363        3,329,026        2,664,543        1,890,348        1,499,848  

Commercial loans

     1,460,278        1,503,907        1,512,991        1,486,229        1,499,613  

Loans to depository institutions and acceptances

     16,443        9,330        16,305        7,002        —    

Consumer loans and overdrafts

     78,872        74,558        69,165        57,910        30,421  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Domestic Loans

     5,310,956        4,916,821        4,263,004        3,441,489        3,029,882  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

International Loans:

              

Real Estate Loans (1)

              

Single-family residential

     152,713        154,841        144,107        130,592        116,049  

Owner occupied

     —          —          9        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     152,713        154,841        144,116        130,592        116,049  

Commercial loans

     69,294        238,285        469,653        926,479        764,535  

Loans to depository institutions and acceptances

     481,183        406,963        688,545        739,314        860,970  

Consumer loans and overdrafts

     52,079        47,851        57,904        60,456        39,174  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total International Loans

     755,269        847,940        1,360,218        1,856,841        1,780,728  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loan Portfolio

   $ 6,066,225      $ 5,764,761      $ 5,623,222      $ 5,298,330      $ 4,810,610  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Secured by real estate properties located in the U.S.

In 2017, the loan portfolio increased $301.5 million, or 5.23%, to $6.1 billion at December 31, 2017, as compared to 2016, where the loan portfolio increased $141.5 million, or 2.52%, to $5.8 billion as compared to 2015. From 2015, we implemented a strategy to reduce our international loan exposure, which is primarily in Latin America. As a result, loans to international customers decreased $92.7 million, or 10.93%, as of December 31, 2017, as compared to December 31, 2016, and also decreased $512.3 million, or 37.66%, as of December 31, 2016, as compared to December 31, 2015. As part of the strategy, we accelerated our efforts to increase our domestic lending activities, primarily in CRE non-owner occupied loans and multi-family residential. These efforts resulted in an increase of $394.1 million, or 8.02%, as of December 31, 2017 compared to December 31, 2016, and an increase of $653.8 million, or 15.34%, as of December 31, 2016 compared to December 31, 2015, in loans to domestic borrowers. This growth was primarily comprised of $639.9 million ($300.6 million during 2017 and $339.4 million during 2016) of commercial non-owner occupied real estate loans, $338.0 million ($126.3 million in 2017 and $211.7 million in 2016) of commercial multi-family residential loans, and $88.8 million (a decrease of $7.8 million in 2017 and an increase of $96.6 million in 2016) of land development and construction loans.

The following is a brief description of the composition of our loan classes:

Commercial Real Estate (CRE) loans. We provide a mix of variable and fixed rate CRE loans. These are loans secured by non-owner occupied real estate properties and land development and construction loans.

 

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Loans secured by non-owner occupied real estate properties are generally granted to finance the acquisition or operation of CRE properties, with terms similar to the properties’ useful lives or the operating cycle of the businesses. The main source of repayment of these real estate loans is derived from cash flows or conversion of productive assets and not from the income generated by the disposition of the property held as collateral. These mainly include rental apartments (multifamily) properties, office, retail, warehouses and industrial, and hospitality (hotels and motels) properties in South Florida, the greater Houston, Texas area and the greater New York City area especially the five New York City boroughs. Concentrations in these non-owner occupied CRE loans are subject to heightened regulatory scrutiny. See “Risk Factors — Our concentration of CRE loans could result in further increased loan losses, and adversely affect our business, earnings, and financial condition.”

Land development and construction loans includes loans for land acquisition, land development, and construction (single or multiple-phase development) of single residential or commercial buildings, loans to reposition or rehabilitate commercial properties, and bridge loans in the South Florida, the greater Houston, Texas area and the greater New York City area, especially the five New York City boroughs. Typically, construction lines of credit are funded based on construction progress and generally have a maturity of three years or less.

Owner-occupied. Loans secured by owner-occupied properties are typically working capital loans made to businesses in the South Florida and the greater Houston, Texas markets. The source of repayment of these commercial owner-occupied loans primarily comes from the cash flow generated by the occupying business and real estate collateral serves as an additional source of repayment. These loans are assessed, analyzed, and structured essentially in the same manner as commercial loans.

Single-Family Residential. These loans include loans to domestic and foreign individuals primarily secured by their personal residence in the U.S. including first mortgage, home equity and home improvement loans, mainly in South Florida and the greater Houston, Texas markets. These loans have terms common in the industry. However, loans to foreign clients have more conservative underwriting criteria and terms.

Commercial loans. We provide a mix of variable and fixed rate commercial and industrial loans. These loans are made to a diverse range of businesses sizes, from the small-to-medium-sized to middle market and large companies. These businesses cover a diverse range of economic sectors, including manufacturing, wholesale, retail, primary products and services. We provide loans and lines of credit for working capital needs, business expansions and for international trade financing. These loans include working capital loans, asset-based lending, participations in shared national credits (loans of $20 million or more that are shared by two or more institutions), purchase receivables and Small Business Administration loans, among others. The tenors may be either short term (one year or less) or long term, and they may be secured, unsecured, or partially secured. Typically, lines of credit have a maturity of one year or less, and term loans have maturities of five years or less.

Commercial loans to borrowers in similar businesses or products with similar characteristics or specific credit requirements are generally evaluated under a standardized commercial credit program. Commercial loans outside the scope of those programs are evaluated on a case-by-case basis, with consideration of any exposure under an existing commercial credit program. The Bank maintains several commercial credit programs designed to standardize underwriting guidelines, and risk acceptance criteria, in order to streamline the granting of credits to businesses with similar characteristics and common needs. Some programs also allow loans that deviate from credit policy underwriting requirements and allocate maximum exposure buckets to those loans. Loans originated through a program are monitored regularly for performance over time and to address any necessary modifications.

Loans to financial institutions and acceptances. These loans primarily include trade financing facilities through letters of credits, bankers’ acceptances, pre and post-export financing, and working capital loans, among others. These loans are generally granted for terms not exceeding one year and on an unsecured basis under the limits of an existing credit program, primarily to the largest financial institutions that we believe are very credit-worthy in Brazil, Chile, Colombia, Mexico and Peru, as well as other countries in Latin America.

 

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Consumer loans and overdrafts. These loans include open and closed-end loans extended to domestic and foreign individuals for household, family and other personal expenditures. These loans include automobile loans, personal loans, or loans secured by cash or securities and revolving credit card agreements. These loans have terms common in the industry for these types of loans, except that loans to foreign clients have more conservative underwriting criteria and terms.

The table below sets forth the unpaid principal balance of loans by type, by interest rate type (fixed-rate and variable-rate) and by original contractual loan maturities as of December 31, 2017:

 

     As of December 31, 2017  
     Due in
one year or
less 		     Due after
one year
through five 		     Due
after five
years 		     Total  
     (In thousands)  

Fixed-Rate Loans

           

Real Estate Loans

           

Commercial real estate (CRE)

           

Non-owner Occupied

   $ 96,404      $ 428,240      $ 623,517      $ 1,148,161  

Multi-family Residential

     8,145        311,252        167,706        487,103  

Land Development and Construction Loans

     —          —          215        215  
  

 

 

    

 

 

    

 

 

    

 

 

 
     104,549        739,492        791,438        1,635,479  

Single-family residential

     5,916        23,587        101,958        131,461  

Owner occupied

     5,646        65,026        177,059        247,731  
  

 

 

    

 

 

    

 

 

    

 

 

 
     116,111        828,105        1,070,455        2,014,671  

Commercial loans

     305,970        135,668        128,781        570,419  

Loans to financial institutions and acceptances

     167,241        —          —          167,241  

Consumer loans and overdrafts

     27,208        4,604        207        32,019  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 616,530      $ 968,377      $ 1,199,443      $ 2,784,350  
  

 

 

    

 

 

    

 

 

    

 

 

 

Variable-Rate Loans

           

Real estate loans

           

Commercial real estate (CRE)

           

Non-owner occupied

   $ 93,671      $ 242,345      $ 261,662      $ 597,678  

Multi-family residential

     56,984        209,910        41,915        308,809  

Land development and construction loans

     258,634        148,091        14,345        421,070  
  

 

 

    

 

 

    

 

 

    

 

 

 
     409,289        600,346        317,922        1,327,557  

Single-family residential

     14,129        43,589        326,058        383,776  

Owner occupied

     14,060        28,936        139,076        182,072  
  

 

 

    

 

 

    

 

 

    

 

 

 
     437,478        672,871        783,056        1,893,405  

Commercial loans

     336,153        493,857        129,143        959,153  

Loans to financial institutions and acceptances

     285,942        35,000        9,443        330,385  

Consumer loans and overdrafts

     98,932        —          —          98,932  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,158,505      $ 1,201,728      $ 921,642      $ 3,281,875  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Loan Portfolio

           

Real Estate Loans

           

Commercial real estate (CRE)

           

Non-owner occupied

   $ 190,075      $ 670,585      $ 885,179      $ 1,745,839  

Multi-family residential

     65,129        521,162        209,621        795,912  

Land development and construction loans

     258,634        148,091        14,560        421,285  
  

 

 

    

 

 

    

 

 

    

 

 

 
     513,838        1,339,838        1,109,360        2,963,036  

Single-family residential

     20,045        67,176        428,016        515,237  

Owner occupied

     19,706        93,962        316,135        429,803  
  

 

 

    

 

 

    

 

 

    

 

 

 
     553,589        1,500,976        1,853,511        3,908,076  

Commercial loans

     642,123        629,525        257,924        1,529,572  

Loans to financial institutions and acceptances

     453,183        35,000        9,443        497,626  

Consumer loans and overdrafts

     126,140        4,604        207        130,951  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,775,035      $ 2,170,105      $ 2,121,085      $ 6,066,225  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Foreign Outstanding.

The table below summarizes the composition of our international loan portfolio by country of risk for the periods presented.

 

     As of December 31  
     2017     2016     2015  
     Net
Exposure  (1) 		     %
Total Assets 		    Net
Exposure  (1) 		     %
Total Assets 		    Net
Exposure  (1) 		     %
Total Assets 		 
     (In thousands, except percentages)  

Brazil

   $ 141,088        1.67 %    $ 234,221        2.78 %    $ 387,696        4.75 % 

Venezuela (2)

     182,678        2.17 %      184,148        2.18 %      185,874        2.28 % 

Chile

     94,543        1.12 %      41,632        0.49 %      58,848        0.72 % 

Colombia

     63,859        0.76 %      107,388        1.27 %      136,290        1.67 % 

Panama

     51,557        0.61 %      58,776        0.70 %      99,892        1.22 % 

Peru

     70,088        0.83 %      51,524        0.61 %      115,111        1.41 % 

Mexico

     18,274        0.22 %      45,811        0.54 %      141,590        1.73 % 

Costa Rica

     43,844        0.52 %      16,350        0.19 %      85,035        1.04 % 

Other (3)

     89,338        1.06 %      108,090        1.28 %      149,882        1.84 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 755,269        8.95 %    $ 847,940        10.05 %    $ 1,360,218        16.66 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Outstanding principal amounts, net of collateral of cash, cash equivalents or other financial instruments totaling $31.9 million in 2017, $63.2 million in 2016 and $47.7 million in 2015.
(2) Includes mortgage loans for single-family residential properties located in the U.S. of $145.1 million in 2017, $147.0 million in 2016 and $138.4 million in 2015.
(3) Includes loans to borrowers in other countries which do not individually exceed 1 percent of total assets in any of the reported periods.

During the three-years ended December 31, 2017, we continued the strategy to reduce the international loan exposure. As a result, loans to international customers, mainly companies and financial institutions in Brazil, Chile, Colombia, Costa Rica, Mexico, Panama and Peru, decreased $92.7 million, or 10.93%, in 2017 compared to 2016, and decreased $512.3 million, or 37.66%, in 2016 compared to December 31, 2015.

 

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Loans by Economic Sector

The table below summarizes the concentration in our loan portfolio by economic sector as of the end of the periods presented. Loan balances exclude unamortized deferred loan fees and costs.

 

     As of December 31,  
     2017     2016     2015  
     (In thousands except percentages)  
            % of
Total 		           % of
Total 		           % of
Total 		 

Financial Sector (1)

   $ 545,609        8.99 %    $ 481,794        8.36 %    $ 796,333        14.16 % 

Construction and Real Estate (2)

     3,116,648        51.38 %      2,638,147        45.76 %      1,975,316        35.13 % 
               

Manufacturing:

               

Foodstuffs, Apparel

     81,920        1.35 %      108,729        1.89 %      139,842        2.49 % 

Metals, Computer, Transportation and Other

     270,736        4.46 %      384,206        6.66 %      442,716        7.87 % 

Chemicals, Oil, Plastics, Cement and Wood/Paper

     99,417        1.64 %      154,938        2.69 %      244,267        4.34 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     452,073        7.45 %      647,873        11.24 %      826,825        14.70 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Wholesale

     542,521        8.94 %      508,218        8.82 %      448,398        7.97 % 

Retail Trade

     291,707        4.81 %      346,264        6.01 %      347,399        6.18 % 
               

Services:

               

Non-Financial Public

   $ —          —   %    $ —          —   %    $ 3,423        0.07 % 

Communication, Transportation, Health and Other

     291,095        4.80 %      348,717        6.05 %      369,847        6.58 % 

Accommodation, Restaurants, Entertainment

     229,023        3.78 %      210,629        3.65 %      211,591        3.76 % 

Electricity, Gas, Water, Supply and Sewage

     25,053        0.41 %      19,895        0.34 %      37,030        0.66 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 545,171        8.99 %    $ 579,241        10.04 %    $ 621,891        11.07 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Primary Products:

               

Agriculture, Livestock, Fishing and Forestry

     1,678        0.03 %      8,168        0.14 %      11,955        0.21 % 

Mining

     6,752        0.11 %      12,108        0.21 %      86,077        1.53 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     8,430        0.14 %      20,276        0.35 %      98,032        1.74 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
               

Other Loans (3)

     564,066        9.30 %      542,948        9.42 %      509,028        9.05 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 6,066,225        100.00 %    $ 5,764,761        100.00 %    $ 5,623,222        100.00 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Consists mainly of trade finance facilities granted to Latin American banks.
(2) Comprised mostly of CRE loans throughout South Florida, greater Houston, Texas area, and New York.
(3) Primarily loans belonging to industrial sectors not included in the above sectors, which do not individually represent more than 1 percent of the total loan portfolio, and consumer loans.

Loan Quality

We use what we believe is a comprehensive methodology to monitor credit quality and prudently manage credit concentrations within our loan portfolio. Our underwriting policies and practices govern the risk profile and credit and geographic concentrations of our loan portfolio. We also have what we believe to be a comprehensive methodology to monitor our intrinsic credit quality metrics, including a risk classification system that identifies potential problem loans based on risk characteristics by loan type as well as the early identification of deterioration at the individual loan level.

 

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Analysis of the Allowance for Loan Losses

Allowance for loan losses.  The allowance for loan losses represents our estimate of the probable and reasonably estimable credit losses inherent in loans held for investment as of the respective balance sheet dates.

Our methodology for assessing the appropriateness of the allowance for loan losses includes a general allowance for performing loans, which are grouped based on similar characteristics, and a specific allowance for individual impaired loans or loans considered by management to be in a high-risk category. General allowances are established based on a number of factors, including historical loss rates, an assessment of portfolio trends and conditions, accrual status and general economic conditions.

A loan is considered impaired when, based on current information and events, it is more likely than not that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. The amount of impairment is based on an analysis of the most probable source of repayment, including the present value of the loan’s expected future cash flows, the estimated market value or the fair value reduced by the cost to sell the underlying collateral. Interest income on impaired loans is included in the results of operations as collected, unless the loan is placed on nonaccrual status, in which case the payment is applied to principal.

Loans may be classified but not considered impaired due to one of the following reasons: (1) we have established minimum dollar amount thresholds for loan impairment testing, which results in loans under those thresholds being excluded from impairment testing and therefore not included in impaired loans and; (2) classified loans may be considered nonimpaired because, despite evident weaknesses, collection of all amounts due is considered probable.

Problem Loans. Loans are considered delinquent when principal or interest payments are past due 30 days or more. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Once a loan to a single borrower has been placed in nonaccrual status, management reviews all loans to the same borrower to determine their appropriate accrual status. When a loan is placed in nonaccrual status, accrual of interest and amortization of net deferred loan fees or costs are discontinued, and any accrued interest receivable is reversed against interest income. Typically, the accrual of interest on loans is discontinued when principal or interest payments are past due 90 days or when, in the opinion of management, there is a reasonable doubt as to collectability in the normal course of business. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent that cash is received and the loan’s principal balance is deemed collectible. Loans are restored to accrual status when loans become well-secured and management believes full collectability of principal and interest is probable.

A loan is considered impaired when, based on current information and events, it is more likely than not that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans include loans on nonaccrual status and performing restructured loans. A loan is placed in nonaccrual status when management believes that collection in full of the principal amount of the loan or related interest is in doubt. Management considers that collectability is in doubt when any of the following factors is present, among others: (1) there is a reasonable probability of inability to collect principal, interest or both, on a loan for which payments are current or delinquent for less than ninety days; and (2) when a required payment of principal, interest or both is delinquent for ninety days or longer, unless the loan is considered well secured and in the process of collection in accordance with regulatory guidelines. Income from loans on nonaccrual status is recognized to the extent cash is received and when the loan’s principal balance is deemed collectible. Depending on a particular loan’s circumstances, we measure impairment of a loan based upon either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent. A loan is considered collateral dependent when repayment of the loan is based solely on the liquidation of the collateral. Fair value, where possible, is determined by independent appraisals, typically on an annual basis. Between appraisal periods, the fair value may be adjusted based on specific events, such as if deterioration of quality of the collateral comes to our attention as part of our problem loan monitoring process, or if discussions with the borrower lead us to

 

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believe the last appraised value no longer reflects the actual market for the collateral. The impairment amount on a collateral-dependent loan is charged-off to the allowance for loan losses if deemed not collectible and the impairment amount on a loan that is not collateral-dependent is set up as a specific reserve.

In cases where a borrower experiences financial difficulties and we make certain concessionary modifications to contractual terms, the loan is classified as a troubled debt restructuring, or TDR. These concessions may include a reduction of the interest rate, principal or accrued interest, extension of the maturity date or other actions intended to minimize potential losses. Loans restructured at a rate equal to or greater than that of a new loan with comparable risk at the time the loan is modified may be excluded from restructured loan disclosures in years subsequent to the restructuring if the loans are in compliance with their modified terms. A restructured loan is considered impaired despite its accrual status and a specific reserve is calculated based on the present value of expected cash flows discounted at the loan’s effective interest rate or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent.

Allocation of Allowance for Loan Losses

In the following table, we present the allocation of the allowance for loan losses by loan segment at the end of the years presented. The amounts shown in this table should not be interpreted as an indication that charge-offs in future periods will occur in these amounts or percentages. These amounts represent our best estimates of losses incurred, but not yet identified, at the reported dates, derived from the most current information available to us at those dates and, therefore, do not include the impact of future events that may or not confirm the accuracy of those estimates at the dates reported. We also show the percentage of each loan class, which includes loans in nonaccrual status.

 

    As of December 31,  
    2017     2016     2015     2014     2013  
    Allowance     % of Loans
in Each
Category
to Total
Loans 		    Allowance     % of
Loans in
Each
Category
to Total
Loans 		    Allowance     % of
Loans in
Each
Category
to Total
Loans 		    Allowance     % of
Loans in
Each
Category
to Total
Loans 		    Allowance     % of
Loans in
Each
Category
to Total
Loans 		 
    (In thousands, except percentages)  

Domestic Loans

                   

Real estate

  $ 30,246       46.45 %    $ 31,055       41.72 %    $ 19,253       32.36 %    $ 17,591       21.09 %    $ 14,779       17.33 % 

Commercial

    31,826       34.97 %      29,875       37.89 %      29,750       38.13 %      23,567       39.11 %      22,099       41.83 % 

Financial institutions

    31       0.27 %      56       0.16 %      50       0.29 %      —         0.13 %      —         —   % 

Consumer and others (1)

    60       5.86 %      1,063       5.57 %      1,182       5.03 %      481       4.62 %      2,292       3.82 % 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    62,163       87.55 %      62,049       85.34 %      50,235       75.81 %      41,639       64.95 %      39.170       62.98 % 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

International Loans  (2)

                   

Commercial

    1,905       1.14 %      10,680       4.13 %      14,062       7.68 %      10,782       16.12 %      9,655       15.68 % 

Financial institutions

    4,331       7.93 %      5,248       7.06 %      9,176       12.92 %      9,849       15.32 %      10,034       18.11 % 

Consumer and others (2)

    3,601       3.38 %      3,774       3.47 %      3,570       3.59 %      3,115       3.61 %      1,609       3.23 % 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    9,837       12.45 %      19,702       14.66 %      26,808       24.19 %      23,746       35.05 %      21,298       37.02 % 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Allowance for Loan Losses

  $ 72,000       100.00 %    $ 81,751       100.00 %    $ 77,043       100.00 %    $ 65,385       100.00 %    $ 60,468       100.00 % 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Total Loans

    1.19 %        1.42 %        1.37 %        1.23 %        1.26 %   

 

(1) Includes residential loans
(2) Includes transactions in which the debtor or customer is domiciled outside the U.S., even when the collateral is located in the U.S.

The loan composition changes explained in prior sections, primarily the increase in real estate loans and the decrease in Corporate LATAM loans, resulted in the shift in the allocation of the allowance for loan losses evidenced in the table.

 

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Loan Quality

In the following table, we present a summary of our non-performing assets by loan class, which includes non-performing loans by portfolio segment, both domestic and international, and other real estate properties owned at the dates presented. Non-performing loans consist of (1) nonaccrual loans, those on which the accrual of interest has been discounted; (2) accruing loans more than ninety days contractually past due as to interest or principal; and (3) restructured loans meeting the definition of a trouble debt restructuring. Generally, we place loans on nonaccrual status when there have been more than three missed payments in accordance with the OCC guidelines. When a loan is placed on nonaccrual status, we reverse all accrued and uncollected interest since the last payment.

 

     As December 31  
     2017      2016      2015      2014      2013  
     (In thousands)  

Non-Accrual Loans (1)

              

Domestic Loans:

              

Real Estate

              

Commercial real estate (CRE)

              

Non-owner occupied

   $ 162      $ 1,169      $ 1,813      $ 930      $ 5,177  

Multi-family residential

     —          9,265        —          —          493  

Land development and construction loans

     —          2,719        4,161        4,161        4,921  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     162        13,153        5,974        5,091        10,591  

Single-family residential

     4,277        7,917        6,463        6,115        6,476  

Owner occupied

     10,398        17,090        19,508        13,682        10,335  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     14,837        38,160        31,945        24,888        27,402  

Commercial loans

     4,656        12,860        17,390        12,437        2,014  

Consumer loans and overdrafts

     9        46        63        23        16  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Domestic

   $ 19,502      $ 51,066      $ 49,398      $ 37,348      $ 29,432  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

International Loans: (2)

              

Real Estate

              

Single-family residential

   $ 727      $ 976      $ 1,448      $ 948      $ 2,439  

Commercial loans

     6,447        18,376        25,685        2,589        3,058  

Consumer loans and overdrafts

     46        28        55        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total International

   $ 7,220      $ 19,380      $ 27,188      $ 3,537      $ 5,497  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Accrual Loans

   $ 26,722      $ 70,446      $ 76,586      $ 40,885      $ 34,929  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Past Due Accruing Loans (3)

              

Domestic Loans:

              

Real Estate

              

Commercial real estate (CRE)

              

Multi-family residential

   $ —        $ —        $ —        $ —        $ 403  

Single-family residential

     112        116        —          —          —    

Owner occupied

     —          —          —          164        —    

Consumer loans and overdrafts

     —          —          —          —          2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Domestic

   $ 112      $ 116      $ —        $ 164      $ 405  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

International Loans: (2)

              

Real Estate

              

Single-family residential

   $ 114      $ —        $ —        $ —        $ —    
              

Consumer loans and overdrafts

     —          370        809        221        189  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Past Due Accruing Loans

   $ 226      $ 486      $ 809      $ 385      $ 594  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total International

   $ 114      $ 370      $ 809      $ 221      $ 189  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Performing Loans

     26,948        70,932        77,395        41,270        35,523  

Other Real Estate Owned

     319        386        384        3,024        12,650  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Performing Assets

   $ 27,267      $ 71,318      $ 77,779      $ 44,294      $ 48,173  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

 

(1) Includes loan modifications that met the definition of trouble debt restructuring which may be performing in accordance with their modified loan terms.
(2) Includes transactions in which the debtor or customer is domiciled outside the U.S. even when the collateral is located in the U.S.
(3) Loans past due ninety days or more but still accruing.

We did not recognize any interest income on nonaccrual loans during the periods ended December 31, 2017, 2016 and 2015. Additional interest income that we would have recognized on these loans had they been current in accordance with their original terms was $2.8 million, $5.0 million and $7.3 million in 2017, 2016 and 2015, respectively. We recognized interest income on commercial and CRE loans modified under troubled debt restructurings of $0.6 million, $3.0 million and $4.3 million during the periods ended December 31, 2017, 2016 and 2015, respectively.

We utilize an asset risk classification system in compliance with guidelines established by the U.S. federal banking regulators as part of our efforts to monitor and improve asset quality. In connection with examinations of insured institutions, examiners have the authority to identify problem assets and, if appropriate, classify them or require a change to the rating assigned by our risk classification system. There are four classifications for problem assets: “special mention,” “substandard,” “doubtful,” and “loss.” Special mention loans are loans identified as having potential weakness that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects of the loan. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full questionable and there is a high probability of loss based on currently existing facts, conditions and values. An asset classified as loss is not considered collectable and is of such little value that the continuance of carrying a value on the books is not warranted.

The following table presents the recorded investment of potential problem loans by loan category at the dates indicated. We have no purchased-credit-impaired loans.

 

    December 31, 2017     December 31, 2016     December 31, 2015  
    Special
Mention 		    Substandard     Doubtful     Loss     Special
Mention 		    Substandard     Doubtful     Loss     Special
Mention 		    Substandard     Doubtful     Loss  
    (In thousands)  

Real Estate Loans

                       

Commercial Real Estate (CRE)

                       

Non-Owner Occupied

  $ 1,499     $ 162     $ —       $ —       $ 18,090     $ 4,095     $ —       $ —       $ 3,321     $ 4,376     $ —       $ —    

Multi-family residential

    —         —         —         —         37       9,406       —         —         —         145       —         —    

Land development and construction loans

    —         —         —         —         15,264       2,719       —         —         —         4,161       —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    1,499       162       —         —         33,391       16,220       —         —         3,321       8,682       —         —    

Single-family residential

    —         5,869       —         —         383       9,009       —         —         —         8,002       —         —    

Owner occupied

    3,572       12,109       —         —         2,055       20,969       —         —         4,239       27,293       —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    5,071       18,140       —         —         35,829       46,198       —         —         7,560       43,977       —         —    

Commercial loans

    6,100       16,197       —         —         29,775       31,798       —         —         14,554       45,871       —         —    

Consumer loans and overdrafts

    —         5,189       —         —         —         5,220       —         —         —         137       —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 11,171     $ 39,526     $ —       $ —       $ 65,604     $ 83,216     $ —       $ —       $ 22,114     $ 89,985     $ —       $ —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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During 2017, overall problem loans decreased significantly when compared to 2016, specifically real estate loans decreased by $58.8 million, or 71.70%, and commercial loans decreased by $39.3 million, or 63.79%. This improvement contrasts with the increase in problem loans during 2016, when compared to 2015, specifically real estate loans classified as special mention increased by $28.3 million, or 373.93%.

The real estate portfolio showed a decrease in problem loans during 2017 of $58.8 million. The majority of special mention loans that in management’s opinion, suffered from operational conditions deemed temporary during 2016, were in fact resolved during 2017. Improved conditions included replacement of lost tenants and improvement of unit absorptions on income-producing properties.

The commercial loan portfolio showed a decrease in problem loans of $39.3 million during 2017 due to the combined effect of the previously mentioned charge-offs, payoffs and resolution of previously classified loans resulting from the deteriorating financial conditions of certain non-government customers in the oil industry, attributed to the decline in commodity prices in general and in oil production and processing in particular, which impacted companies in many regions, particularly in Latin America.

Consistent with industry practice since late 2016, credit cards held by Venezuelans with outstanding balances above the corresponding customer’s average compensatory deposit balances were classified substandard at December 31, 2017. This resulted in approximately $4.1 million in credit card balance classified substandard at December 31, 2017 as compared to $5.1 million at December 31, 2016.

Securities.  Our investment decision process is based on an approved investment policy and investment program. The ultimate goal is to seek a consistent risk adjusted return through consideration of the following four principles:

 

  •   safety of the instrument,

 

  •   liquidity requirements,

 

  •   interest-rate risk sensitivity, and

 

  •   potential returns on investment.

The Bank’s board of directors approves the Bank’s asset-liability committee, or ALCO, investment policy and investment programs, which ultimately govern the investment process. The oversight of the investment process is performed by ALCO, which monitors compliance to approved limits and targets. Treasury has the authority to invest in securities within specified policy guidelines and procedures. Investment decisions are based on the above-mentioned four principles, other factors considered relevant to particular investments and strategies, market conditions and the Bank’s overall balance sheet position. Treasury performs several analyses to ensure that new investments perform as expected and remain in compliance with approved limits and targets.

 

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The following table sets forth the book value and percentage of each category of securities at December 31, 2017, 2016 and 2015. The book value for securities classified as available for sale represents fair value and the book value for securities classified as held to maturity represents amortized cost.

 

     As of December 31,  
     2017     2016     2015  
     (In thousands, except percentages)  

Securities held to maturity

               

U.S. Government agency debt

   $ 3,034        0.16 %    $ —          —   %    $ —          —   % 

U.S. Government sponsored enterprise debt

     86,826        4.70 %      —          —   %      —          —   % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 89,860        4.86 %    $ —          —   %    $ —          —   % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Securities available for sale

               

U.S. Government agency debt

   $ 291,385        15.78 %    $ 549,084        25.16 %    $ 752,487        35.73 % 

U.S. Government sponsored enterprise debt

     875,666        47.41 %      1,004,463        46.02 %      519,408        24.66 % 

Corporate debt (1)

     313,392        16.97 %      371,254        17.01 %      647,190        30.73 % 

Foreign sovereign debt (2)

     —          —   %      5,237        0.24 %      15,733        0.75 % 

U.S. Treasury debt

     2,701        0.15 %      2,705        0.12 %      12,765        0.61 % 

Mutual funds

     23,617        1.28 %      23,615        1.08 %      14,205        0.67 % 

Municipal bonds

     180,396        9.77 %      166,889        7.64 %      93,833        4.45 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 1,687,157        91.36 %    $ 2,123,247        97.27 %    $ 2,055,621        97.60 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Other securities (3) :

               

Federal Home Loan Bank stock

   $ 13,010        0.70 %    $ 13,010        0.60 %    $ 13,010        0.62 % 

Federal Reserve Bank stock

     56,924        3.08 %      46,480        2.13 %      37,384        1.78 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 69,934        3.78 %    $ 59,490        2.73 %    $ 50,394        2.40 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 1,846,951        100.00 %    $ 2,182,737        100.00 %    $ 2,106,015        100.00 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) In 2017, includes $24.3 million in obligations issued by corporate entities from Panama, Europe, and Japan in three different economic sectors. In 2016, includes $26.2 million in obligations issued by corporate entities from Panama, Europe and others in three different economic sectors. In 2015, includes $35.0 million in obligations issued by corporate entities from Panama and others in three different economic sectors. These investments do not represent a significant exposure with respect to our total assets at the reported dates.
(2) In 2016 and 2015, includes debt securities issued or guaranteed by the governments of Latin American countries. None of the balances represent a significant exposure with respect to our total assets at the reported dates.
(3) Amounts correspond to original cost at the date presented. Original cost approximates fair value because of the nature of these investments.

 

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The following table sets forth the book value, scheduled maturities and weighted average yields for our securities portfolio at December 31, 2017. Similar to the table above, the book value for securities classified as available for sale is equal to fair market value and the book value for securities classified as held to maturity is equal to amortized cost.

 

    Total     Less than a
year 		    One to five
years 		    Five to ten
years 		    Over ten years     No maturity  
    Amount     Yield     Amount     Yield     Amount     Yield     Amount     Yield     Amount     Yield     Amount     Yield  
    (In thousands, except percentages)  

Securities Held To Maturity (Amortized Cost)

                       

U.S. Government agency debt

  $ 3,034       2.73 %    $ —         —   %    $ —         —   %    $ —         —   %    $ 3,034       2.73 %    $ —         —   % 

U.S. Government sponsored enterprise debt

    86,826       2.87 %      —         —   %      —         —   %      —         —   %      86,826       2.87 %      —         —   % 
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   
  $ 89,860       2.87 %    $ —         —   %    $ —         —   %    $ —         —   %    $ 89,860       2.87 %    $ —         —   % 
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Securities Available For Sale (Fair Value)

                       

U.S. Government agency debt securities

  $ 291,385       2.14 %    $ 206       3.11 %    $ 15,352       2.91 %    $ 32,149       2.45 %    $ 243,678       2.05 %    $ —         —   % 

U.S. Government sponsored enterprise debt securities

    875,666       2.36 %      2,168       1.65 %      44,275       2.00 %      100,602       2.13 %      728,621       2.42 %      —         —   % 

Corporate debt —domestic

    289,075       2.67 %      1,662       2.46 %      205,425       2.62 %      81,988       2.81 %      —         —   %      —         —   % 

Corporate debt —foreign

    24,317       4.48 %      —         —   %      8,431       2.77 %      15,886       5.39 %      —         —   %      —         —   % 

U.S. Treasury debt securities

    2,701       1.02 %      2,701       1.02 %      —         —   %      —         —   %      —         —   %      —         —   % 

Mutual funds

    23,617       1.03 %      —         —   %      —         —   %      —         —   %      —         —   %      23,617       1.03 % 

Municipal bonds

    180,396       2.92 %      —         —   %      —         —   %      21,690       2.36 %      158,706       3.00 %      —         —   % 
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   
  $ 1,687,157       2.44 %    $ 6,737       1.64 %    $ 273,483       2.54 %    $ 252,315       2.62 %    $ 1,131,005       2.42 %    $ 23,617       1.03 % 
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Other Securities (Original Cost)

                       

Federal Home Loan Bank stock

  $ 13,010       5.13 %    $ —         —   %    $ —         —   %    $ —         —   %    $ —         —   %    $ 13,010       5.13 % 

Federal Reserve Bank stock

    56,924       5.89 %      —         —   %      —         —   %      —         —   %      —         —   %      56,924       5.89 % 
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   
  $ 69,934       5.75 %    $ —         —   %    $ —         —   %    $ —         —   %    $ —         —   %    $ 69,934       5.75 % 
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   
  $ 1,846,951       2.59 %    $ 6,737       1.64 %    $ 273,483       2.54 %    $ 252,315       2.62 %    $ 1,220,865       2.45 %    $ 93,551       4.56 % 
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

The investment portfolio’s average duration was 3.3, 3.1, and 2.5 years as of December 31, 2017, 2016 and 2015, respectively. These estimates are computed using multiple inputs that are subject, among other things, to changes in interest rates and other factors that may affect prepayment speeds. Contractual maturities of investment securities are adjusted for anticipated prepayments of amortizing U.S. Government sponsored agency debt and enterprise debt securities, which shorten the average life of the investments.

 

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Management evaluates securities for other-than-temporary impairment, or OTTI, on at least a semi-annual basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as an impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: OTTI related to credit losses, which must be recognized in the income statement; and OTTI related to other factors, such as interests rate changes which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

Cash and Cash Equivalents. Cash and cash equivalents increased to $153.4 million as of December 31, 2017 from $135.0 million at December 31, 2016 after decreasing slightly from $138.3 million at December 31, 2015.

Cash and cash equivalents increased $18.4 million, or 13.67%, to $153.4 million as of December 31, 2017 as compared to December 31, 2016. The cash flows provided by operating activities were $73.3 million in 2017, primarily due to net income during the year, and higher accounts payable, accrued liabilities and other liability balances, partially offset by increases in the loans held for sale and accrued interest receivable and other assets.

In 2017, cash flows from investing activities provided us with $7.6 million, while in 2016 we used $322.2 million in investing activities. This change in cash flows from investing activities was primarily due to a decrease of $852.4 million, or 78.63%, used in the purchase of investment securities, a decrease of $30.0 million used for the purchase of BOLI, and an increase of $22.6 million in net proceeds from the sale of premises and equipment and others, partially offset by a decrease of $330.7 million in maturities, sales and calls of investment securities, an increase of $133.7 million, or 51.44%, in net cashed used in loan activities, and $90.2 million used for the purchase of held to maturity securities.

In 2017, we used $62.4 million in cash flows from financing activities, compared to $243.7 million provided by financing activities in 2016. This change is mainly the result of a decrease of $467.5 million, or 24.64%, in proceeds from advances from the FHLB and other banks, a decrease of $275.1 million, or 70.79%, in demand, savings and money market account balances, partially offset by $500.0 million less, or 24.64%, in repayments of advances from the FHLB and other banks.

Cash and cash equivalents decreased $3.3 million, or 2.38%, to $135.0 million as of December 31, 2016 as compared to December 31, 2015. The cash flows provided by operating activities were $75.3 million in 2016, compared to $63.6 million in 2015. The increase of $11.6 million, or 18.28%, in cash flows provided by operating activities was primarily due to the increase in net income in 2016 with respect to 2015. Cash flows used in investing activities decreased $50.7 million, or 13.59%, with respect to 2015. This decrease in cash flows used in investing activities was primarily due to lower purchases of BOLI, lower net increase in loans, and higher proceeds from loan sales and maturities, sales and calls of investment securities, partially offset by higher purchases of investment securities. Cash flows provided by financing activities were $243.7 million in 2016, compared to $258.7 million in 2015. The decrease of $15.0 million, or 5.81%, is primarily due to lower net increase in time deposits, and higher net decrease in other forms of deposits, partially offset by higher net proceeds from advances from the FHLB and other banks.

Goodwill. Goodwill was $19.2 million at December 31, 2017, 2016 and 2015. Goodwill represents the excess of consideration paid over the fair value of the net assets acquired of a personal and commercial banking business acquired in 2006.

Liabilities. Total liabilities decreased $46.2 million to $7.7 billion at December 31, 2017 as compared to $7.73 billion at December 31, 2016. This decrease was primarily due to a decrease in total deposits and the

 

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maturity in 2017 of all outstanding securities sold under agreements to repurchase outstanding at the close of 2016, partially offset by an increase of time deposits and a higher outstanding balance of advances from the FHLB and other banks.

Total liabilities increased $249.1 million to $7.73 billion at December 31, 2016 as compared to December 31, 2015. This increase was primarily due to increased net funding from advances from the FHLB and other borrowings and a modest increase in deposits, partially offset by a decrease in securities sold under agreements to repurchase primarily due to maturities of prior year’s contracts.

Deposits. Total deposits decreased $254.4 million to $6.3 billion at December 31, 2017 as compared to $6.6 billion at December 31, 2016. In 2017, an increase in time deposits of $409.2 million partially offset decreases of $211.1 million, $239.4 million and $213.1 million in noninterest bearing, interest bearing, and savings and money market account balances, respectively. The increase of $409.2 million in time deposits includes $320.2 million in retail time deposits, and an increase of $89.0 million in brokered deposits. In 2017, the deposits of customers domiciled in Venezuela decreased by $530.1 million, or 14.41%, and deposits from other countries, mainly in Latin America and the Caribbean, decreased $63.7 million, or 15.32%. These decreases were partially offset by an increase of $339.4 million, or $13.67%, in balances from U.S. customer deposits. The trend in higher retail time deposits balances in 2017 is mainly the result of campaigns aimed at capturing these types of longer duration deposits at current market rates, as part of the strategy to position the balance sheet to benefit from expected future increases in market interest rates. The trend of higher balances from U.S. customer deposits reflects the Company’s focus on increasing its visibility to U.S. domestic customers, on reducing its perceived reliance on customer deposits from foreign sources, on minimizing its concentration of large fund providers, and actively managing potential regulatory risks associated with its deposits.

Total deposits increased $57.7 million to $6.6 billion at December 31, 2016 as compared to $6.5 billion at December 31, 2015. This increase primarily resulted from a $446.2 million increase, or 32.08%, in time deposits compared to 2015, partially offset by an $82.3 million decrease in noninterest bearing account balances, $225.3 million decrease in interest bearing account balances, and $80.9 million decrease in savings and money market account balances. This shift in deposit composition is mainly the result of a strategy designed to capture longer-term deposit balances at current rates by offering highly competitive rates with respect to other institutions in our markets. As of December 31, 2017, total deposits were comprised of 14.17% noninterest-bearing demand accounts, 23.67% interest-bearing transaction accounts, 26.63% savings and money market accounts, and 35.53% of time deposits. As of December 31, 2016, total deposits were comprised of 16.83% noninterest-bearing demand accounts, 26.40% interest-bearing transaction accounts, 28.84% savings and money market accounts, and 27.93% of time deposits. As of December 31, 2015, total deposits were comprised of 18.24% noninterest-bearing demand accounts, 30.09% interest-bearing transaction accounts, 30.34% saving and money market accounts, and 21.34% of time deposits.

The Bank uses the Federal Financial Institutions Examination Council’s, or FFIEC’s, Uniform Bank Performance Report definition of core deposits, which consists of all relationships under $250,000. This definition of core deposits excludes brokered time deposits.

As of December 31, 2017, 2016 and 2015 our large depositors, defined as third-party customer relationships with balances of over $10 million, included 4, 17 and 12 deposit relationships, respectively, with a total balance of $59.1 million, $311.1 million and $283.5 million, respectively. As of December 31, 2017, 2016 and 2015 deposits from MSF or its non-U.S. affiliates totaled $49.5 million, $76.3 million and $247.4 million, respectively.

 

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Deposits by Type: Average Balances and Average Rates Paid

The following table sets forth the average daily balance amounts and the average rates paid on our deposits for the periods presented.

 

     Year ended December 31,  
     2017     2016     2015  
     Amount      Rates     Amount      Rates     Amount      Rates  
     (In thousands, except percentages)  

Non-interest bearing demand deposits

   $ 1,078,225        —   %    $ 1,147,520        —   %    $ 1,212,175        —   % 
  

 

 

      

 

 

      

 

 

    

Interest bearing deposits:

               

Checking and saving accounts:

               

NOW

     1,627,546        0.02 %      1,811,316        0.04 %      2,054,565        0.06 % 

Money market

     1,312,252        0.67 %      1,390,574        0.59 %      1,431,664        0.51 % 

Savings

     474,569        0.02 %      511,576        0.02 %      546,131        0.03 % 

Time Deposits

     2,031,970        1.32 %      1,638,051        1.01 %      1,082,885        0.74 % 
  

 

 

      

 

 

      

 

 

    
     5,446,337        0.66 %      5,351,518        0.48 %      5,115,245        0.33 % 
  

 

 

      

 

 

      

 

 

    
   $ 6,524,562        0.55 %    $ 6,499,038        0.39 %    $ 6,327,420        0.26 % 
  

 

 

      

 

 

      

 

 

    

Large Time Deposits by Maturity

The following table sets forth the maturities of our time deposits with individual balances equal to or greater than $100,000 as of the dates presented.

 

     December 31,  
     2017     2016     2015  
     (In thousands, except percentages)  

Less than 3 months

   $ 301,872        25.56 %    $ 216,742        23.50 %    $ 176,945        26.01 % 

3 to 6 months

     220,862        18.70 %      188,956        20.49 %      103,285        15.18 % 

6 to 12 months

     324,011        27.44 %      277,810        30.12 %      262,505        38.58 % 

1 to 3 years

     197,119        16.69 %      230,068        24.94 %      126,736        18.63 % 

Over 3 years

     137,088        11.61 %      8,810        0.95 %      10,907        1.60 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,180,952        100.00 %    $ 922,386        100.00 %    $ 680,378        100.00 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Short-Term Borrowings. In addition to deposits, we use short-term borrowings, such as FHLB advances and advances from other banks, as a source of funding to meet the daily liquidity needs of our customers and fund growth in earning assets. We define short-term borrowings as borrowings having maturities of 12 months or less as of the reported period-end. The majority of our outstanding short-term borrowings at December 31, 2017, 2016 and 2015 corresponded to FHLB advances and, to a lesser extent, included borrowings from other banks. There were $50.0 million and $20.0 million in outstanding repurchase agreements, as of December 31, 2016 and 2015, respectively. There were no repurchase agreements outstanding as of December 31, 2017.

 

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The following table sets forth information about the outstanding amounts of our short-term borrowings at the close of and for the periods presented.

 

     As of and for the years ended December 31,  
           2017                 2016                 2015        
     (In thousands, except percentages)  

Outstanding at period-end

   $ 567,000     $ 505,000     $ 416,250  

Average amount

     460,708       379,833       376,979  

Maximum amount outstanding at any month-end

     567,000       545,250       605,000  

Weighted average interest:

      

During period

     1.43 %      0.92 %      0.42 % 

End of period

     1.43 %      1.22 %      0.76 % 

Return on Equity and Assets

The following table shows the return on average assets, return on average equity, and average equity to average assets ratio for the periods presented.

 

     For the years ended December 31,  
     2017     2016     2015  
    

(In thousands, except percentages and

per share data)

 

Net income

   $ 43,057     $ 23,579     $ 15,045  

Basic and diluted earnings per common share  (1)

     0.34       0.18       0.12  

Average total assets

     8,487,285       8,196,523       7,971,358  

Average stockholders’ equity

     766,083       717,727       704,223  

Net income / Average total assets (ROA)

     0.51 %      0.29 %      0.19 % 

Net income / Average stockholders’ equity (ROE)

     5.62 %      3.29 %      2.14 % 

Average equity / Average assets ratio

     9.03 %      8.76 %      8.83 % 

 

(1) None of our outstanding obligations are exchangeable for or convertible into equity securities. Consequently, our basic and diluted earnings per common share are equal in each of the periods presented.

During the years ended December 31, 2017 and 2016, basic and diluted earnings per share increased as a result of higher net income during the years.

Capital Resources and Liquidity Management

Capital Resources.  Stockholders’ equity is influenced primarily by earnings, dividends, if any, and changes in accumulated other comprehensive income caused primarily by fluctuations in unrealized holding gains or losses, net of taxes, on available for sale investment securities.

Shareholder’s equity increased $48.7 million, or 6.91%, to $753.5 million as of December 31, 2017 as compared to December 31, 2016, primarily due to $43.1 million net income, and a net increase in other comprehensive income of $5.6 million recorded during the year.

Shareholder’s equity increased $22.3 million, or 3.27%, to $704.7 million as of December 31, 2016 as compared to December 31, 2015 primarily due to $23.6 million net income, partially offset by a $1.2 million decrease in accumulated other comprehensive income recorded during the year.

Liquidity Management.  Liquidity refers to the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs, all at a reasonable cost. We continuously monitor our liquidity position to ensure that assets and liabilities are

 

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managed in a manner that will meet all short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders.

Our liquidity position is supported by management of liquid assets and liabilities and access to alternative sources of funds. Liquid assets include cash, interest-bearing deposits in banks, available-for-sale securities, and maturing or prepaying balances in our securities and loan portfolios. Liquid liabilities include core deposits, and advances from the FHLB and other borrowings at their contractual maturities. Other potential sources of liquidity include the sale of loans, the ability to acquire additional national market noncore deposits, and the issuance of additional collateralized borrowings such as FHLB advances. Our short-term and long-term liquidity requirements are primarily to fund on-going operations, including payment of interest on deposits and debt, extensions of credit to borrowers and capital expenditures. These liquidity requirements are met primarily through cash flow from operations, redeployment of prepaying and maturing balances in our loan and investment portfolios, advances from the FHLB and other borrowings, and increases in customer deposits including time deposits. For additional information regarding our operating, investing and financing cash flows, see the consolidated statements of cash flows provided in our consolidated financial statements.

Integral to our liquidity management is the administration of short-term borrowings. To the extent we are unable to obtain sufficient liquidity through core deposits, we will seek to meet our liquidity needs through wholesale funding or other borrowings on either a short- or long-term basis.

At December 31, 2017 we had $1,173.0 million of outstanding advances from the FHLB and other borrowings. Other borrowings consisted of $12 million of short-term advances from other banks which matured in January 2018. At December 31, 2017, advances from the FHLB and other borrowings had maturities through 2021 with interest rates ranging from 0.90% to 3.86 %, and an average rate of 1.88%.

At December 31, 2016 we had $931.0 million of outstanding advances from the FHLB and other borrowings. Other borrowings consist of $10 million of short-term advances from other banks which matured in January 2017. At December 31, 2016, advances from the FHLB had maturities through 2021 with interest rates ranging from 0.37% to 2.50%, and average rate of 1.54%.

Based on the values of securities and loans pledged and remaining available as eligible collateral, we had $2.5 billion, $1.6 billion and $891.3 million of additional borrowing capacity with the FHLB as of December 31, 2017, 2016 and 2015, respectively. We also maintain relationships in the capital markets with brokers and dealers to issue FDIC-insured certificates of deposits. In addition, we also have access to available credit lines with other recognized financial institutions in the U.S. and in Latin America.

We are a corporation separate and apart from the Bank and, therefore, must provide for our own liquidity. Our main source of funding is dividends declared and paid to us by the Bank. Additionally, our subsidiary Mercantil Florida Bancorp Inc., or Mercantil Florida, considered an intermediary bank holding corporation and which holds the Company’s junior subordinated debt, held cash and cash equivalents of $39.1 million as of December 31, 2017. There are statutory and regulatory limitations that affect the ability of the Bank to pay us dividends. Management believes that these limitations will not impact our ability to meet our ongoing short-term cash obligations.

Regulatory Capital Requirements

We are subject to various regulatory capital requirements administered by the Federal Reserve and OCC. Failure to meet regulatory capital requirements may result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our business, financial condition and results of operation. Under capital adequacy guidelines and the regulatory framework for “prompt corrective action”, we must meet specific capital guidelines that involve quantitative measures of our

 

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assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting policies. Our capital amounts and classification are also subject to qualitative judgments by the regulators, including anticipated capital needs. Supervisory assessments of capital adequacy may differ significantly from conclusions based solely upon the regulations risk-based capital ratios. Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum CET1, Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios. Management believes, as of December 31, 2017, 2016 and 2015 that we meet all capital adequacy requirements to which we are subject. See “Supervision and Regulation — Capital” for more information regarding regulatory capital.

As of December 31, 2017, 2016 and 2017, the Company and the Bank exceeded the minimum requirements to be “well capitalized” for bank regulatory purposes.

Our actual capital amounts and ratios are presented in the following table:

 

     Actual     Required for Capital
Adequacy Purposes 		    Regulatory Minimums To
be Well Capitalized 		 
   Amount      Ratio         Amount              Ratio             Amount              Ratio      
     (In thousands, except percentages)  

December 31, 2017

               

Total capital ratio

   $ 926,049        13.31 %    $ 556,578        8.00 %    $ 695,722        10.00 % 

Tier 1 capital ratio

     852,825        12.26 %      417,433        6.00 %      556,578        8.00 % 

Tier 1 leverage ratio

     852,825        10.15 %      335,647        4.00 %      419,559        5.00 % 

Common Equity Tier 1

     753,545        10.68 %      313,075        4.50 %      452,220        6.50 % 

December 31, 2016

               

Total capital ratio

   $ 890,147        13.05 %    $ 545,727        8.00 %    $ 682,159        10.00 % 

Tier 1 capital ratio

     809,167        11.86 %      409,295        6.00 %      545,727        8.00 % 

Tier 1 leverage ratio

     809,167        9.62 %      328,392        4.00 %      410,490        5.00 % 

Common Equity Tier 1

     699,046        10.25 %      306,971        4.50 %      443,403        6.50 % 

December 31, 2015

               

Total capital ratio

   $ 861,549        12.91 %    $ 533,854        8.00 %    $ 667,318        10.00 % 

Tier 1 capital ratio

     785,917        11.78 %      400,391        6.00 %      533,854        8.00 % 

Tier 1 leverage ratio

     785,917        9.88 %      318,250        4.00 %      397,812        5.00 % 

Common Equity Tier 1

     675,538        10.12 %      300,293        4.50 %      433,757        6.50 % 

The Bank’s actual capital amounts and ratios are presented in the following table:

 

     Actual     Required for Capital
Adequacy Purposes 		    Regulatory Minimums
To be Well Capitalized 		 
       Amount              Ratio             Amount              Ratio             Amount              Ratio      
     (In thousands, except percentages)  

December 31, 2017

               

Total capital ratio

   $ 885,855        12.70 %    $ 556,446        8.00 %    $ 695,557        10.00 % 

Tier 1 capital ratio

     812,631        11.70 %      417,334        6.00 %      556,446        8.00 % 

Tier 1 leverage ratio

     812,631        9.70 %      335,600        4.00 %      419,500        5.00 % 

Common Equity Tier 1

     812,631        11.70 %      313,001        4.50 %      452,112        6.50 % 

December 31, 2016

               

Total capital ratio

   $ 848,029        12.40 %    $ 545,608        8.00 %    $ 682,010        10.00 % 

Tier 1 capital ratio

     767,048        11.30 %      409,206        6.00 %      545,608        8.00 % 

Tier 1 leverage ratio

     767,048        9.20 %      326,305        4.00 %      407,881        5.00 % 

Common Equity Tier 1

     767,048        11.30 %      306,905        4.50 %      443,307        6.50 % 

December 31, 2015

               

Total capital ratio

   $ 817,728        12.30 %    $ 533,741        8.00 %    $ 667,177        10.00 % 

Tier 1 capital ratio

     742,096        11.10 %      400,306        6.00 %      533,741        8.00 % 

Tier 1 leverage ratio

     742,096        9.40 %      317,126        4.00 %      396,408        5.00 % 

Common Equity Tier 1

     742,096        11.10 %      300,230        4.50 %      433,665        6.50 % 

 

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The Basel III Capital Rules revised the definition of capital and describe the capital components and eligibility criteria for Common Equity Tier 1 capital, additional Tier 1 capital and Tier 2 capital. Although trust preferred securities issued after May 19, 2010 no longer qualify as Tier 1 capital, our existing $114.1 million aggregate outstanding trust preferred securities are grandfathered, and continue to qualify as Tier 1 capital.

Effects of Inflation and Changing Prices

The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with GAAP and practices within the banking industry which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation.

Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation. However, inflation affects a financial institution by increasing its cost of goods and services purchased, as well as the cost of salaries and benefits, occupancy expense, and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings, and shareholders’ equity. Loan originations and re-financings also tend to slow as interest rates increase, and higher interest rates may reduce a financial institution’s earnings from such origination activities.

Off-Balance Sheet Arrangements

We may engage in a variety of financial transactions in the ordinary course of business that, under GAAP, may not be recorded on the balance sheet. Those transactions may include contractual commitments to extend credit in the ordinary course of our business activities to meet the financing needs of customers. Such commitments involve, to varying degrees, elements of credit, market and interest rate risk in excess of the amount recognized in the balance sheets. These commitments are legally binding agreements to lend money at predetermined interest rates for a specified period of time and generally have fixed expiration dates or other termination clauses. We use the same credit and collateral policies in making these credit commitments as we do for on-balance sheet instruments.

We evaluate each customer’s creditworthiness on a case-by-case basis and obtain collateral, if necessary, based on our credit evaluation of the borrower. In addition to commitments to extend credit, we also issue standby letters of credit that are commitments in specified amounts to a third-party of payment or performance, if our customer fails to meet its contractual obligation to the third-party. The credit risk involved in the underwriting of letters of credit is essentially the same as that involved in extending credit to customers.

The following table shows the outstanding balance of our off-balance sheet arrangements as of the end of the periods presented. Except as disclosed below, we are not involved in any other off-balance sheet contractual relationships that are reasonably likely to have a current or future material effect on our financial condition, a change in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

     As of December 31,  
     2017      2016      2015  
     (In thousands)  

Commitments to extend credit

   $ 762,437      $ 916,724      $ 900,382  

Credit card facilities

     266,799        216,881        199,040  

Letters of credit

     18,350        16,492        41,400  
  

 

 

    

 

 

    

 

 

 
   $ 1,047,586      $ 1,150,097      $ 1,140,822  
  

 

 

    

 

 

    

 

 

 

 

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Contractual Obligations

In the normal course of business, we and our subsidiaries enter into various contractual obligations that may require future cash payments. Significant commitments for future cash obligations include capital expenditures related to real estate and equipment operating leases and other borrowing arrangements.

The table below summarizes, by remaining maturity, our significant contractual cash obligations as of December 31, 2017. Amounts in this table reflect the minimum contractual obligation under legally enforceable contracts with terms that are both fixed and determinable. Our operating lease obligations are not reflected in our consolidated balance sheets in accordance with current accounting guidance. All other contractual cash obligations on this table are reflected in our consolidated balance sheet.

 

            Payments Due Date  
     Total      Less than one
year 		     One to three
years 		     Four to five
years 		     More than
five years 		 
     (In thousands)  

Operating lease obligations

   $ 70,776      $ 5,582      $ 16,053      $ 9,102      $ 40,039  

Borrowings:

              

FHLB advances and other borrowings

     1,173,000        567,000        556,000        50,000        —    

Junior subordinated debentures

     118,110        —          —          —          118,110  

Contractual interest payments (1)

     147,935        24,481        46,129        16,644        60,681  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,509,821      $ 597,063      $ 618,182      $ 75,746      $ 218,830  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Calculated assuming a constant interest rate as of December 31, 2017.

We believe that we will be able to meet our contractual obligations as they come due through the maintenance of adequate cash levels. We expect to maintain adequate cash levels through the results of operations, loan and securities repayments and maturity activity and continued deposit gathering activities. We also have in place various borrowing mechanisms to satisfy both short-term and long-term liquidity needs.

Quantitative and Qualitative Disclosures about Market Risk

The Bank’s market risk is monitored by the Market Risk Management unit which reports to the Bank’s Chief Risk Officer. The unit’s primary responsibilities are identifying, measuring, monitoring and controlling interest rate and liquidity risks and balance sheet asset/liability management, or ALM. In addition, it also assesses and monitors the price risk of the Bank’s investment activities, which represents the risk to earnings and capital arising from changes in the fair market value of our investment portfolio.

The Market Risk Management unit performs the following functions:

 

  •   maintains a comprehensive market risk and ALM framework;

 

  •   measures and monitors market risk and ALM across the organization to ensure that they are within approved risk limits and reports to ALCO and to the board of directors; and

 

  •   recommends changes to risk limits to the board of directors.

The Bank enforces its ALM strategies through the monthly ALCO meetings. The business line participates in the ALCO. In the ALCO, the Bank discusses, analyzes and decides on the best course of action to implement the strategies designed as part of the ALM process.

We centralize all the market risks taken by the Bank into the Treasury segment. This is primarily achieved by Treasury purchasing funds from deposit-gathering units and selling funds to asset-generating units at the corresponding terms and yield curve rates. Therefore, the risk inherent in term and rate mismatches between

 

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financial assets and liabilities are reflected in the Treasury segment. Treasury manages this risk using the appropriate mix of marketable securities, wholesale funding and derivatives contracts, while allowing our external business segments to focus their efforts on satisfying their customers’ financial needs, and building strong customer relationships.

Market Risk Measurement

ALM

We use sensitivity analyses as the primary tool to monitor and evaluate market risk, which is comprised of interest rate risk and price risk. Exposures are managed to a set of limits previously approved by our board of directors and monitored by ALCO.

Sensitivity analyses are based on changes in interest rates (both parallel yield curve changes as well as non-parallel), are performed for several different metrics, and include three types of analyses consistent with industry practices:

 

  •   earnings sensitivity;

 

  •   economic value of equity, or EVE; and

 

  •   available for sale portfolio mark-to-market exposure.

Earnings Sensitivity

In this method, the financial instruments (assets, liabilities, on and off-balance sheet positions) generate interest rate risk exposure from mismatches in maturity and/or repricing given financial instruments’ characteristics or cash flow behaviors such as pre-payment speed. This method measures the potential change in the Bank’s net interest income over the next 12 months, which illustrates short term interest rate risk. This analysis subjects a static balance sheet to instantaneous rate shocks to the different yield curves that affect the Bank’s net interest income. We compare on a monthly basis the effect of the analysis on the Bank’s net interest income over a one-year period against limits established by our board of directors.

In the following table we show the sensitivity of our net interest income as a function of modeled interest rate changes:

 

     Change in net interest income  (1)
As of December 31, 		 

Change in Interest Rates

            2017                        2016           
(Basis points)    (In thousands)  

Increase of 200

   $ 33,631      $ 33,148  

Increase of 100

     19,585        19,778  

Decrease of 25

     (5,399 )       (5,431 ) 

Decrease of 50

     (11,664 )       (11,369 ) 

 

(1) Represents the amounts by which net interest income would change over the next 12 months assuming that total balances are kept constant in time and rate shocks are instant and parallel in shape.

Net interest income exposure was practically unchanged at December 31, 2017 from 2016. The Bank continues to be asset sensitive, therefore income is expected to improve when interest rates move higher.

Economic Value of Equity Analysis

The Bank uses Economic Value of Equity analysis, or EVE, to measure the potential change in the fair value of its asset and liability positions, and the subsequent potential effects on the Bank’s economic capital. In

 

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the EVE analysis, we calculate the fair value of all assets and liabilities, including off-balance sheet instruments, based on different rate environments (i.e. fair value at current rates against the fair value based on parallel yield-curve shifts). This analysis measures the long term interest rate risk of the balance sheet.

The increase in EVE exposure during 2017 for the 100 and 200 basis point increased rate scenarios is mostly attributed to slightly higher duration on the asset side and less value stemming from the decrease in transactional accounts, primarily from international customers. For the down scenarios the result is practically unchanged given the de minimis interest currency paid on such deposits. In 2017 the EVE remained well under the established market risk limits.

In the following table we show the sensitivity of our economic equity as a function of interest rate changes as of the end of the past two year-ends:

 

     Change in equity  (1)
As of December 31, 		 

Change in Interest Rates

     2017         2016    

(Basis points)

      

Increase of 200

     (2.50 )%      (1.89 )% 

Increase of 100

     0.04 %      0.46 % 

Decrease of 25

     (0.57 )%      (0.67 )% 

Decrease of 50

     (1.22 )%      (1.22 )% 

 

(1) Represents the percentage of equity change in a static balance sheet analysis assuming rate shocks are instant and parallel in shape

Available For Sale Portfolio mark-to-market exposure

In this analysis, the Bank measures the potential change in the market price of its available for sales securities, and the subsequent potential change on our equity. This table shows the result of this test at the end of the periods presented.

 

     Change in market value  
     As of December 31,  

Change in Interest Rates

   2017      2016  
(Basis points)    (In thousands)  

Increase of 200

   $ (85,575 )     $ (108,263 ) 

Increase of 100

     (40,042 )       (53,129 ) 

Decrease of 25

     7,723        12,618  

Decrease of 50

     15,192        24,695  

The average duration of the investment portfolio increased in 2017 from 2016, to 3.3 years from 3.1 years as of December 31, 2017 and 2016, respectively. However, the increase in duration was accompanied by the purchase of interest rate swaps which reduce the overall interest rate risk exposure in base and rate shock scenarios. We monitor these exposures, and contrast them against limits established by our board of directors. Those limits correspond to the capital level and the capital leverage ratio that we would report taking into consideration the interest rate increase scenarios modeled. Notwithstanding that we model the market price risk of the available for sale portfolio, and its projected impact on AOCI (a component of stockholders’ equity), the Bank made an irrevocable election in 2015 to exclude the effects of AOCI in the calculation of its regulatory capital ratios, in connection with the adoption of Basel III Capital Rules in the U.S.

Limits Approval Process

The ALCO is responsible for the management of market risk exposures and meets monthly. The ALCO monitors all the Bank’s exposures, compares them against specific limits, and takes actions to modify any

 

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exposure that the ALCO considers inappropriate based on market expectations or new business strategies, among other factors. The ALCO reviews and recommends market risk limits to our board of directors. These limits are reviewed annually or as more frequently as believed appropriate, based on various factors, including capital levels and earnings.

The Market Risk Management unit supports the ALCO in the monitoring of market risk exposures and balance sheet management.

The following table sets forth information regarding our interest rate sensitivity as of December 31, 2017. This information may not be indicative of our interest rate sensitivity position at other points in time. In addition, the distribution of amounts indicated in the table considers the maturity date of fixed-rate instruments, the repricing frequency of variable-rate financial assets and liabilities, and anticipated prepayments on amortizing financial instruments.

 

     As of December 31, 2017  
     Total      Less than
one year 		    One to three
years 		    Four to
five years 		    More than
five years 		    Non-rate  
     (In thousands except percentages)  

Assets

             

Cash and cash equivalents

   $ 153,445      $ 108,914     $ —       $ —       $ —       $ 44,531  

Interest earning deposits with banks, with original maturities in excess of 90 days

             

Securities

          —         —         —         —    

Available for sale

     1,687,157        520,387       347,954       275,220       520,221       23,375  

Held to maturity

     89,860        —         —         —         89,860       —    

Federal Reserve Bank and Federal Home Loan Bank stock

     69,934        56,924       —         —         —         13,010  

Loans held for sale

     5,611        5,611       —         —         —         —    

Loans portfolio-performing (1)

     6,039,551        4,101,988       907,914       585,075       444,573       —    
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earning assets

   $ 8,045,557      $ 4,793,824     $ 1,255,869     $ 860,294     $ 1,054,655     $ 80,915  

Liabilities

             

Demand:

             

Interest bearing

   $ 1,496,749      $ 1,496,749     $ —       $ —       $ —       $ —    

Saving and money market

     1,684,080        1,684,080       —         —         —         —    

Time deposits

     2,246,434        1,350,784       525,690       210,331       159,629       —    

FHLB advances and other borrowings

     1,173,000        592,000       341,000       240,000       —         —    

Junior subordinated debentures

     118,110        64,178       —         —         53,932       —    
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest bearing liabilities

   $ 6,718,373      $ 5,187,791     $ 866,690     $ 450,331     $ 213,561     $ —    

Interest rate sensitivity gap

        (393,967 )      389,179       409,964       841,094       80,915  

Cumulative interest rate sensitivity gap

        (393,967 )      (4,789 )      405,175       1,246,269       1,327,184  

Earnings assets to interest bearing liabilities (%)

        92.41 %      144.90 %      191.04 %      493.84 %      n/m  
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

n/m= not meaningful

 

(1) “Loan portfolio-performing” excludes non-performing loans in the amount of $27.0 million.

 

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Discussion and Analysis of the Quarters ended March 31, 2018 and 2017

Results of Operations

Net income

The table below sets forth certain results of operations data for the three-month periods ended March 31, 2018 and 2017:

 

     Three Months Ended March 31,     Change  
     2018     2017     2018 vs 2017  
     (In thousands, except per share amounts and percentages)  

Net interest income

   $ 52,633     $ 48,351     $ 4,282       8.86 % 

Provision for loan losses

     —         4,097       (4,097 )      (100.00 )% 
  

 

 

   

 

 

   

 

 

   

Net interest income after provision for loan losses

     52,633       44,254       8,379       18.93 % 

Noninterest income

     13,945       14,217       (272 )      (1.91 )% 

Noninterest expense

     55,645       49,148       6,497       13.22 % 
  

 

 

   

 

 

   

 

 

   

Net income before income tax

     10,933       9,323       1,610       17.27 % 

Income tax

     (1,504 )      (2,816 )      1,312       (46.59 )% 
  

 

 

   

 

 

   

 

 

   

Net income

   $ 9,429     $ 6,507     $ 2,922       44.91 % 
  

 

 

   

 

 

   

 

 

   

Basic and diluted earnings per share (1)

   $ 0.07     $ 0.05     $ 0.02    
  

 

 

   

 

 

   

 

 

   

 

(1) At March 31, 2018 and 2017, we had no outstanding dilutive instruments issued. Consequently, the basic and diluted earnings per share are equal in each of the periods presented.

Net income of $9.4 million and $0.07 basic and diluted earnings per share in the first three months of 2018 represents an improvement of $2.9 million, or 44.91%, from net income of $6.5 million and $0.05 basic and diluted earnings per share reported in the same quarter of 2017. This increase mainly resulted from improved credit quality and higher yields on interest-earning assets. Provisions for the costs associated with the spin-off totaling $2.8 million, and other expenses associated with ongoing operational enhancements, offset those results. Without such expenses, net income for the first quarter of 2018 would have been $11.9 million, or $0.09 per basic and diluted share, or 82.51% higher than the same quarter in 2017.

Net interest income after provision for loan losses improved from $44.3 million in the first quarter of 2017 to $52.6 million in the first quarter of 2018, an increase of $8.4 million, or 18.93%, primarily due to higher average yields on interest-earnings assets. As a result of improved credit trends in certain loan portfolio segments, no provision was recorded in the first quarter of 2018, compared to a provision to the allowance of $4.1 million in 2017.

These positive results were partially offset by an increase in noninterest expense of $6.5 million, or 13.22%, primarily attributable to the spin-off related expenses, higher salary and employee benefit costs and telecommunications and data processing expenses.

Net interest income

In the first quarter of 2018, we earned $52.6 million of net interest income, an increase of $4.3 million, or 8.86%, from the $48.4 million of net interest income earned in the same period of 2017. The increase in net interest income was due primarily to a 51 basis points improvement in the average yield on interest-earning assets, partially offset by a 1.44% decrease in the average balance of interest-earning assets. In addition, average interest-bearing liabilities showed a 1.76% increase accompanied by a 26 basis points increase in average rates paid. Net interest margin improved 26 basis points from 2.44% in the first quarter of 2017 to 2.70% in the first quarter of 2018.

 

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Interest Income. Total interest income was $71.9 million in the first quarter of 2018 compared to $63.0 million for the same period of 2017. The $8.9 million, or 14.14%, increase in total interest income was primarily due to higher average balances in loans and securities held to maturity, as well as higher average yields earned on all interest-earning assets. These improvements were partially offset by a decrease in the average balance of available for sale securities during the first quarter of 2018 with respect to the same period of 2017, in part due to the partial migration of funds into loans.

Interest income on loans in the first quarter of 2018 was $59.7 million compared to $50.1 million for the comparable period of 2017. The $9.6 million, or 19.15%, increase was primarily due to a 55 basis points increase in average yields and a 3.44% increase in the average balance of loans in the first quarter of 2018 over the same period in 2017, mainly the result of growth in the commercial real estate loan portfolio.

Interest income on the available for sale securities portfolio decreased $1.5 million, or 12.90%, to $10.3 million in the first quarter of 2018 compared to $11.8 million in the comparable period of 2017. This decrease is primarily attributable to a decline of 18.05% in the average volume of securities available for sale, the proceeds of which were partially reallocated to loan production. Higher yields of securities available for sale, which increased an average of 15 basis points in the first quarter of 2018 with respect to the same quarter in 2017, partially compensated the effect of lower volume.

Interest Expense.  Interest expense on interest-bearing liabilities increased $4.6 million, or 31.57%, to $19.3 million in the first quarter of 2018 compared to $14.7 million in the comparable period of 2017, primarily due to higher average advances from the FHLB balances, and higher average interest rates on all funding sources, partially offset by lower average total deposits.

Interest expense on deposits increased to $11.4 million in the first quarter of 2018 compared to $8.0 million for the comparable period of 2017. The $3.4 million, or 42.98%, increase was primarily due to a 26 basis point increase in the average rate paid on total deposits primarily caused by the 18.53% increase in average time deposit balance, and the lower average total checking and saving account balances which decreased 12.52%. The increase of $355.7 million, or 18.53%, in average total time deposit balances is primarily the result of promotions geared towards attracting customers to longer-duration time deposit products offered at current market rates. The decrease of $448.8 million, or 12.52%, in average total checking and saving account balances is primarily the result of a decline of $521.9 million, or 15.97%, in the average balance of international accounts. This decline includes $270.6 million, or 38.49%, in commercial accounts and $251.3 million, or 9.79%, in personal accounts. The decline in the commercial accounts average resulted primarily from the closure of Venezuelan customer accounts exceeding our risk thresholds. The decline in the personal accounts average is primarily due to our Venezuelan customers’ inability to replace the deposits they consume.

Interest expense on advances from the FHLB increased $1.7 million, or 40.97%, in the first quarter of 2018 with respect to the same period of 2017. This increase is the result of an increase of 27.91% in the average balance outstanding of advances, along with an increase of 19 basis points in the average rate paid on those advances. Advances from the FHLB are actively used to manage our funding profile, and bear fixed interest rates from 1.00% to 3.86%, and variable interest rates based on 3-month LIBOR which increased to 2.31% at March 31, 2018 from 1.15% at March 31, 2017. We have designated certain interest rate swaps as cash flow hedges to manage this variable interest rate exposure.

The increase in the average rates paid across all interest-bearing liabilities was primarily due to the impact of higher market interest rates.

 

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Average Balance Sheet, Interest and Yield/Rate Analysis

The following tables present average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the three months ended March 31, 2018 and 2017. The average balances for loans include both performing and nonperforming balances. Interest income on loans includes the effects of discount accretion and the amortization of net deferred loan origination costs accounted for as yield adjustments. Average balances represent the daily average balances for the years presented.

 

     Quarter ended March 31,  
     2018     2017  
     Average
Balances 		    Income/
Expense 		     Yield/
Rates 		    Average
Balances 		    Income/
Expense 		     Yield/
Rates 		 
     (In thousands, except percentages)  

Interest-earning assets:

              

Loans portfolio, net (1)

   $ 5,914,869     $ 59,670        4.10 %    $ 5,718,208     $ 50,080        3.55 % 

Securities available for sale (2)

     1,676,668       10,292        2.48 %      2,045,940       11,816        2.33 % 

Securities held to maturity (3)

     89,523       510        2.30 %      —         —          NM  

Federal Reserve Bank and Federal Home Loan Bank stock

     70,351       939        5.45 %      59,319       750        5.15 % 

Deposits with banks

     138,278       520        1.51 %      181,265       373        0.83 % 
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     7,889,689       71,931        3.70 %      8,004,733       63,019        3.19 % 
    

 

 

        

 

 

    

Total non-interest-earning assets less allowance for loan losses

     516,692            493,268       
  

 

 

        

 

 

      

Total Assets

   $ 8,406,382          $ 8,498,001       
  

 

 

        

 

 

      

Interest-bearing liabilities:

              

Checking and saving accounts -

              

Interest bearing DDA

   $ 1,476,586     $ 89        0.02 %    $ 1,701,566     $ 100        0.02 % 

Money market

     1,213,839       2,566        0.85 %      1,395,971       2,176        0.62 % 

Savings

     445,730       18        0.02 %      487,384       18        0.01 % 
  

 

 

   

 

 

      

 

 

   

 

 

    

Total checking and saving accounts

     3,136,155       2,673        0.34 %      3,584,921       2,294        0.26 % 

Time deposits

     2,275,443       8,700        1.54 %      1,919,697       5,660        1.18 % 
  

 

 

   

 

 

      

 

 

   

 

 

    

Total Deposits

     5,411,598       11,373        0.84 %      5,504,618       7,954        0.58 % 

Securities sold under agreements to repurchase

     —         —          —   %      50,000       641        5.23 % 

Advances from the FHLB and other
borrowings (4)

     1,186,564       5,990        2.03 %      927,659       4,249        1.84 % 

Junior subordinated debentures

     118,110       1,935        6.72 %      118,110       1,824        6.32 % 
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     6,716,272       19,298        1.15 %      6,600,387       14,668        0.89 % 
    

 

 

        

 

 

    

Total non-interest-bearing liabilities

     942,122            1,185,878       
  

 

 

        

 

 

      

Total Liabilities

     7,658,394            7,786,265       

Stockholders’ Equity

     747,988            711,736       
  

 

 

        

 

 

      
   $ 8,406,382          $ 8,498,001       
  

 

 

        

 

 

      

Excess of average interest-earning assets over average interest-bearing liabilities

   $ 1,173,417          $ 1,404,346       
  

 

 

        

 

 

      

Net interest income

       52,633            48,351     
    

 

 

        

 

 

    

Net interest rate spread

          2.54 %           2.29 % 

Effect of non-interest-bearing sources

          0.15 %           0.14 % 
       

 

 

        

 

 

 

Net interest margin (5)

          2.70 %           2.44 % 
       

 

 

        

 

 

 

Ratio of average interest-earning assets to average interest-bearing liabilities

     117.47 %           121.28 %      
  

 

 

        

 

 

      

 

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(1) Average non-performing loans of $31.3 million and $68.0 million as of quarter ended in March 31, 2018 and 2017, respectively, are included in the average loans portfolio, net balance.
(2) Includes nontaxable securities with an average balance of $177 million and $169 million as of quarter ended in March 31, 2018 and 2017, respectively. The tax equivalent yield for available for sale securities for 2018 and 2017 was 4.39% and 3.93%, respectively.
(3) Includes nontaxable securities with an average balance of $89 million in March 2018. The tax equivalent yield for held to maturity securities for March 2018 was 3.57%.
(4) The terms of the advance agreement require the Bank to maintain certain investment securities or loans as collateral for these advances.
(5) Net interest margin is defined as net interest income divided by average interest-earning assets, which are loans, securities available for sale, deposits with banks and other financial assets which, yield interest or similar income.
NM Not meaningful.

 

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Provision for Loan Losses

Set forth in the table below are the changes in the allowance for loan losses for each of the periods presented.

 

     Three Months Ended March 31,  
     2018     2017  
     (In thousands)  

Balance at the beginning of the period

   $ 72,000     $ 81,751  
  

 

 

   

 

 

 

Charge-offs

    

Domestic Loans:

    

Real Estate

    

Commercial Real Estate (CRE)

    

Non-owner occupied

     —         (97 ) 
  

 

 

   

 

 

 
     —         (97 ) 

Single-family residential

     —         (130 ) 

Owner occupied

     —         (25 ) 
  

 

 

   

 

 

 
     —         (252 ) 

Commercial

     (381 )      (247 ) 

Consumer and others

     (20 )      (29 ) 
  

 

 

   

 

 

 
     (401 )      (528 ) 
  

 

 

   

 

 

 

International Loans: (1)

    

Commercial

     —         (5,899 ) 

Consumer and others

     (400 )      (219 ) 
  

 

 

   

 

 

 
     (400 )      (6,118 ) 
  

 

 

   

 

 

 

Total Charge-offs

   $ (801 )      (6,646 ) 
  

 

 

   

 

 

 

Recoveries

    

Domestic Loans:

    

Real Estate Loans

    

Commercial Real Estate (CRE)

    

Non-owner occupied

   $ 1     $ 53  

Land development and construction loans

     33       9  
  

 

 

   

 

 

 
     34       62  

Single-family residential

     4       45  

Owner occupied

     788       4  
  

 

 

   

 

 

 
     826       111  

Commercial

     44       38  

Consumer and others

     6       —    
  

 

 

   

 

 

 
     876       149  
  

 

 

   

 

 

 

International Loans: (1)

    

Real Estate

    

Single-family residential

     —         2  
  

 

 

   

 

 

 
     —         2  

Consumer and others

     43       10  
  

 

 

   

 

 

 
     43       12  
  

 

 

   

 

 

 

Total Recoveries

   $ 919     $ 161  
  

 

 

   

 

 

 

Net recoveries (charge-offs)

     118       (6,485 ) 

Provision for loan losses

     —         4,097  
  

 

 

   

 

 

 

Balance at the end of the period

   $ 72,118     $ 79,363  
  

 

 

   

 

 

 

 

(1) Includes transactions in which the debtor or customer is domiciled outside the U.S. and all collateral is located in the U.S.

 

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Set forth in the table below is the composition of international loans charge offs by country for each of the periods presented.

 

     Three Months Ended March 31,  
     2018      2017  
     (In thousands)  

Commercial loans

     

Brazil

   $ —        $ 5,899  

Consumer loans and overdrafts

     

Venezuela

     400        219  
  

 

 

    

 

 

 

Total charge offs

   $ 400      $ 6,118  
  

 

 

    

 

 

 

During the first quarter of 2018, charge-offs declined to $801 thousand from $6.65 million during the same period of the prior year. The decrease is primarily attributable to the $6.0 million charge-off in first quarter of 2017 related to a loan to a Latin American primary products company that did not recur in 2018. Additionally, recoveries increased to $919 thousand during the first quarter of 2018, compared to $161 thousand during the first quarter of 2017, mainly attributable to a $788 thousand recovery related to a commercial owner-occupied real estate loan. As a result, the ratio of net charge-offs over the average total loan portfolio during the first quarter of 2018 improved compared to the same period in 2017.

Noninterest income

The table below sets forth a comparison for each of the categories of non-interest income for the periods presented.

 

     Three Months Ended March 31,     Change  
     2018     2017     2018 over 2017  
     Amount      %     Amount      %     Amount     %  
     (In thousands, except percentages)  

Deposits and service fees

   $ 4,582        32.86 %    $ 4,906        34.51 %    $ (324 )      (6.60 )% 

Brokerage, advisory and fiduciary activities

     4,415        31.66 %      5,261        37.00 %      (846 )      (16.08 )% 

Change in cash surrender value of bank owned life insurance (1)

     1,444        10.35 %      1,245        8.76 %      199       15.98 % 

Cards and trade finance servicing fees

     1,062        7.62 %      1,071        7.53 %      (9 )      (0.84 )% 

Data processing, rental income and fees for other services to related parties

     881        6.32 %      583        4.10 %      298       51.11 % 

Other noninterest income

     1,561        11.19 %      1,151        8.10 %      410       35.62 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
   $ 13,945        100.00 %    $ 14,217        100.00 %    $ (272 )      (1.91 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) Changes are not taxable.

Total noninterest income remained relatively flat in the first quarter of 2018 compared to the same period in 2017. There was a net increase in fees for services to related parties driven largely by higher management fees from an affiliate which are determined periodically based on certain predetermined metrics of performance, and in compliance with the requirements of Federal Reserve Regulation W. The increase in other noninterest income is primarily comprised of higher valuation income on the investment balances held in the non-qualified deferred compensation plan. Conversely, other noninterest expense includes a charge for the same amount to increase the liability to the plan participants. There was a decrease in brokerage, advisory and fiduciary activities as the result of lower volume of customer trading activities handled through our Investment Services subsidiary.

 

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Noninterest Expense

The table below presents a comparison for each of the categories of non-interest expense for the periods presented.

 

     Three Months Ended March 31,     Change  
     2018     2017     2018 vs 2017  
     Amount      %     Amount      %     Amount     %  
     (In thousands, except percentages)  

Salaries and employee benefits

   $ 34,041        61.18 %    $ 32,308        65.74 %    $ 1,733       5.36 % 

Occupancy and equipment

     3,715        6.68 %      4,709        9.58 %      (994 )      (21.11 )% 

Professional and other services fees

     6,444        11.58 %      2,657        5.41 %      3,787       142.53 % 

FDIC assessments and insurance

     1,447        2.60 %      1,963        3.99 %      (516 )      (26.29 )% 

Telecommunications and data processing

     3,084        5.54 %      1,752        3.56 %      1,332       76.03 % 

Depreciation and amortization

     2,141        3.85 %      2,427        4.94 %      (286 )      (11.78 )% 

Other operating expenses

     4,773        8.57 %      3,332        6.78 %      1,441       43.25 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
   $ 55,645        100.00 %    $ 49,148        100.00 %    $ 6,497       13.22 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Noninterest expense increased $6.5 million, or 13.22%, in the first quarter of 2018 compared to the same period in 2017, primarily as a result of higher professional fees, along with higher salary and employment benefits and other expenses. These increases were partially offset by lower occupancy and equipment-related costs.

The increase of $3.8 million in professional and other services fees during the first quarter of 2018 compared to the same period last year is mainly the result of a $2.8 million provision for legal and consulting fees associated with the spin-off. The increase in salaries and employment benefits of $1.7 million, or 5.36%, mainly reflects annual salary increases stemming from inflation and performance adjustments and higher insurance benefit expenses. Other expenses increased mainly due to larger marketing expenses during the quarter in comparison to the same period last year stemming from a more active deposit-capture campaign in 2018.

Income Taxes

The table below sets forth information related to our income taxes for the periods presented.

 

     Three Months Ended March 31,     Change  
     2018     2017     2018 vs 2017  
     (In thousands, except effective tax rates and percentages)  

Current tax expense:

        

Federal

   $ 6,287     $ 1,598     $ 4,689       293.43 % 

State

     1,082       168       914       544.05 % 
  

 

 

   

 

 

   

 

 

   

 

 

 
     7,369       1,766       5,603       317.27 % 

Deferred tax (benefit) expense

     (5,865 )      1,050       (6,915 )      (658.57 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 1,504     $ 2,816     $ (1,312 )      (46.59 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Effective income tax rate

     13.76 %      30.20 %      (16.44 )%      (54.42 )% 

The net decrease in tax expense reflects the impact of the lower federal income tax rate under the 2017 Tax Act which, beginning January 1, 2018, decreased the federal income tax rate to 21% compared to 35% in the same period last year, and impacted our estimated effective rate for the first quarter. Higher taxable income during the quarter ended March 31, 2018 compared to the same period last year, partially offset the positive effects of the lower tax rate this quarter. The federal tax expense includes $1.6 million attributable to the gain on the sale in February 2018 of our G200 Leasing, LLC subsidiary, which was fully offset by a corresponding deferred tax benefit.

 

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Segment Information

The following tables summarize certain financial information for our reportable segments as of and for the periods indicated.

 

     Personal and
Commercial
Banking
(“PAC”) 		    Corporate
LATAM 		    Treasury     Institutional     Total  
     (In thousands)  

For Three Months Ended March 31, 2018

          

Income Statement:

          

Net interest income

   $ 46,681     $ 1,480     $ 956     $ 3,516     $ 52,633  

(Reversal of) provision for loan losses

     (2,139 )      (719 )      (117 )      2,975       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after (reversal of) provision for loan losses

     48,820       2,199       1,073       541       52,633  

Noninterest income

     5,708       109       1,950       6,178       13,945  

Noninterest expense

     40,014       1,175       2,962       11,494       55,645  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income before income tax:

          

Banking

     14,514       1,133       61       (4,775 )      10,933  

Non-banking contribution (1)

     50       (11 )      —         (39 )      —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     14,564       1,122       61       (4,814 )      10,933  

Income tax (expense) benefit

     (2,221 )      (171 )      312       576       (1,504 ) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 12,343     $ 951     $ 373     $ (4,238 )     $ 9,429  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of March 31, 2018

          

Loans, net (2)

   $ 5,488,648     $ 461,151     $ —       $ (71,467 )     $ 5,878,332  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deposits

   $ 5,450,118     $ 19,191     $ 724,916     $ 85,981     $ 6,280,206  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     PAC     Corporate
LATAM 		    Treasury     Institutional     Total  
     (In thousands)  

For Three Months Ended March 31, 2017

          

Income Statement:

          

Net interest income

   $ 41,388     $ 2,564     $ 2,325     $ 2,074     $ 48,351  

Provision for (reversal of) loan losses

     1,131       2,203       (75 )      838       4,097  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for (reversal of) loan losses

     40,257       361       2,400       1,236       44,254  

Noninterest income

     6,083       127       1,180       6,827       14,217  

Noninterest expense

     39,877       1,382       2,749       5,140       49,148  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income before income tax:

          

Banking

     6,463       (894 )      831       2,923       9,323  

Non-banking contribution (1)

     1,086       (2 )      —         (1,084 )      —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     7,549       (896 )      831       1,839       9,323  

Income tax (expense) benefit

     (2,729 )      324       387       (798 )      (2,816 ) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 4,820     $ (572 )     $ 1,218     $ 1,041     $ 6,507  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of December 31, 2017

          

Loans, net (2) (3)

   $ 5,542,545     $ 521,616     $ —       $ (64,325 )     $ 5,999,836  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deposits

   $ 5,454,216     $ 18,670     $ 779,969     $ 70,118     $ 6,322,973  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Non-banking contribution reflects allocations of the net results of the Trust and Broker Dealer subsidiaries to the customers’ primary business unit.

 

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(2) Provisions for the periods presented are allocated to each applicable reportable segment. The allowance for loan losses is reported entirely within Institutional. Unearned deferred loan costs and fees are included in Institutional.
(3) Balances include loans held for sale which are allocated to PAC.

Personal and Commercial Banking (PAC)

PAC generated net income of $12.3 million for the first quarter of 2018, which represents a 156.08% increase from $4.8 million in the same period in 2017. This increase is mainly attributable to higher net interest income combined with a reversal in the allowance for loan losses.

Net interest income increased 12.79% to $46.7 million from $41.4 million in first quarter 2017, primarily due to PAC’s $274.6 million higher loan portfolio average balance for the three months ended March 31, 2018, as part of the continued focus on domestic loan growth. This higher loan portfolio average balance was mainly driven by an increase in the commercial real estate loan portfolio.

For the first quarter of 2018, PAC reflected a $2.1 million reversal in the allowance for loan losses, compared to a loan loss provision of $1.1 million in the same period 2017. This reversal was mainly the result of overall improvement of credit quality on the commercial real estate and middle market portfolios combined with recoveries.

Noninterest income and noninterest expense remained substantially unchanged during the first quarter 2018 compared to the same period in 2017. Noninterest income decreased 6.16% to $5.7 million and noninterest expense increased 0.34% to $40.0 million.

Non-banking contribution decreased 95.4% to $50 thousand in the first quarter of 2018 from $1.1 million in the same period in 2017. The decrease is largely the result of lower volume of customer brokerage activity through our Investment Services subsidiary.

Corporate LATAM

Corporate LATAM had $1.0 million of net income for the first quarter of 2018, compared to a net loss of $0.6 million recorded in the same period in 2017. The increase in net income is primarily attributable to a reversal in the allowance for loan losses.

The 42.28%, or $1.1 million, decrease in net interest income to $1.5 million from $2.6 million in first quarter 2017 was primarily the result of Corporate LATAM’s $112.7 million smaller loan portfolio average balance for the three months ended March 31, 2018, as part of our continued diversification strategy and domestic lending.

The $0.7 million reversal in the allowance for loan losses, which compared to a $2.2 million charge in 2017 is mainly attributed to a reduction in Corporate LATAM’s loan portfolio together with lower provision requirements. Additionally, the provision charge in the first quarter of 2017 was principally attributed to the charge off of impaired loans during that quarter.

Treasury

For the three months ended March 31, 2018, Treasury reported a net income of $0.4 million, which represents a 69.38% decrease from $1.2 million for the same period in 2017. This decrease was primarily the result of lower net interest income combined with higher noninterest expense, and was partially offset by a higher reversal of loan loss reserve and increased noninterest income.

The 58.88% decrease in net interest income to $1.0 million in the first quarter 2018 from $2.3 million in the same period in 2017 was attributable first to a $369.3 million lower average balance in the securities available for

 

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sale portfolio, partially offset by improved yields, and second to higher interest expense on our FHLB advances and other borrowings as well as on our brokered certificates of deposits. In the first quarter of 2018, FHLB advances and other borrowings reflected a $258.9 million higher average balance coupled with a higher average balance of brokered certificates of deposits of $37.3 million, or 5.13%, compared to the same period in 2017.

For the first quarter 2018, noninterest income increased $0.8 million, or 65.25%, to $2.0 million, primarily due to non-taxable increases in the cash surrender value of bank-owned life insurance policies, interest rate swap valuation income and higher management fees from an affiliate. Noninterest expense increased 7.75% to $3.0 million for the first quarter 2018 from $2.7 million for the same period in 2017, primarily as the result of overall higher operating expenses.

Institutional

For the first quarter of 2018, Institutional reported a net loss of $4.2 million compared to a net profit of $1.0 million in the first quarter of 2017, which was mainly attributable to higher noninterest expense combined with a higher provision for loan losses, partially offset by higher net interest income.

Net interest income increased 69.53%, or $1.4 million, to $3.5 million in the first quarter of 2018 from $2.1 million in the same quarter of 2017, primarily due to the effect of lower funds transfer pricing charges for total other assets and higher fund transfer pricing credit received for the Bank’s capital.

For the first quarter of 2018, Institutional reported a 255.01% increase in loan loss provision to $3.0 million from $0.8 million for the same period of 2017. Any difference between the provision for loan losses recorded at the company level, versus a provision allocable to reportable segments, is reflected under Institutional.

Noninterest income decreased 9.51% to $6.2 million for the first quarter of 2018 from $6.8 million for the same quarter of 2017, primarily due to lower commissions from Investment Services. Noninterest expense increased $6.4 million, or 123.62%, to $11.5 million for the first quarter of 2018 from $5.1 million for the same period of 2017, mainly the result of a $2.8 million provision for legal and consulting fees associated with the spin-off, and higher operating expenses related to ongoing software services.

Financial Condition—Comparison of Financial Condition as of March 31, 2018 and December 31, 2017

Assets. Total assets were $8.4 billion as of March 31, 2018, relatively flat compared to December 31, 2017. However, the composition of those assets changed with respect to the previous year. This is the result of strategic plan actions to align the composition of our balance sheet, which seek improved operating results from adjusting our mix of interest-earning assets and liabilities consistent with our expectations of a rising interest rate environment.

Cash and Cash Equivalents. Cash and cash equivalents increased to $265.7 million at March 31, 2018 from $153.4 million at December 31, 2017.

Cash flows provided by operating activities were $13.6 million in the quarter ended March 31 2018. This was primarily due to net income earned, $11.1 million higher accounts payable, accrued liabilities and other liability balances, partially offset by an increase of $6.7 million in accrued interest receivable and other assets. Cash flows from investing activities provided us with $121.3 million during the quarter ended March 31, 2018, primarily due to a net decrease in loans of $108.6 million, and maturities, sales and calls of securities available for sale totaling $57.0 million. These proceeds were offset by $60.8 million used for the purchase of securities available for sale. In addition, cash flows from investing activities during the quarter ended March 31, 2018, include $7.5 million in net proceeds from the sale of our G200 Leasing, LLC subsidiary.

In the first quarter of 2018, we used $22.8 million in financing activities. These activities included the payment of the 2018 special dividend of $40 million paid in March 12, 2018, $60.0 million net additional

 

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advances borrowed from the FLHB and others, and $96.8 million lower total demand, savings and money market deposits offset by a $54.0 million net increase in time deposit balances.

Loans.

Loans are our largest interest-earning assets. The table below depicts the trend of loans as a percentage of total assets and allowance for loan losses as a percentage of total loans for the periods presented.

 

     March 31, 2018     December 31, 2017  
     (In thousands, except percentages)  

Total loans, gross

   $ 5,950,450     $ 6,066,225  

Total loans, gross / total assets

     70.64 %      71.90 % 

Allowance for loan losses

   $ 72,118     $ 72,000  

Allowance for loan losses / total loan portfolio  (1)(2)

     1.21 %      1.19 % 

 

(1) Outstanding loan principal balance net of deferred loan fees and costs, excluding the allowance for loan losses.
(2) Allowance for loan losses was $72.1 million and $72.0 million, as of March 31, 2018 and December 31, 2017, respectively. See Note 4 of our audited consolidated financial statements and Note 4 of our unaudited interim consolidated financial statements for more details on our impairment models.

The table below summarizes the composition of our loan portfolio by type of loan as of the end of each period presented. International loans include transactions in which the debtor or customer is domiciled outside the U.S., even when the collateral is U.S. property or is located in the United States.

 

     March 31, 2018      December 31, 2017  
     (In thousands)  

Domestic Loans:

     

Real Estate Loans

     

Commercial Real Estate (CRE)

     

Non-owner occupied

   $ 1,699,494      $ 1,745,839  

Multi-family residential

     756,934        795,912  

Land development and construction loans

     414,028        421,285  
  

 

 

    

 

 

 
     2,870,456        2,963,036  

Single-family residential

     375,697        362,524  

Owner occupied

     449,005        429,803  
  

 

 

    

 

 

 
     3,695,158        3,755,363  

Commercial loans

     1,473,564        1,460,278  

Loans to depository institutions and acceptances

     16,472        16,443  

Consumer loans and overdrafts

     78,362        78,872  
  

 

 

    

 

 

 

Total Domestic Loans

     5,263,556        5,310,956  
  

 

 

    

 

 

 

International Loans:

     

Real Estate Loans (1)

     

Single-family residential

     150,309        152,713  
  

 

 

    

 

 

 
     150,309        152,713  

Commercial loans

     89,081        69,294  

Loans to depository institutions and acceptances

     398,008        481,183  

Consumer loans and overdrafts

     49,496        52,079  
  

 

 

    

 

 

 

Total International Loans

     686,894        755,269  
  

 

 

    

 

 

 

Total Loan Portfolio

   $ 5,950,450      $ 6,066,225  
  

 

 

    

 

 

 

 

(1) Secured by real estate properties located in the U.S.

 

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As of March 31, 2018, the loan portfolio decreased $115.8 million, or 1.91%, to $6.0 billion, as compared to $6.1 billion at December 31, 2017. Following our strategy, loans to international customers continued their decline by $68.4 million, or 9.05%, as of March 31, 2018, compared to December 31, 2017. Additionally, the domestic loan exposure also decreased $47.4 million, or 0.89%, as of March 31, 2018, compared to December 31, 2017. The reduction is mainly attributed to repayments on commercial real estate loans coupled with seasonally lower production.

Loan Quality

Allocation of Allowance for Loan Losses

In the following table, we present the allocation of the allowance for loan losses by loan segment at the end of the periods presented. The amounts shown in this table should not be interpreted as an indication that charge-offs in future periods will occur in these amounts or percentages. These amounts represent our best estimates of losses incurred, but not yet identified, at the reported dates, derived from the most current information available to us at those dates and, therefore, do not include the impact of future events that may or may not confirm the accuracy of those estimates at the dates reported. Our allowance for loan losses is established using estimates and judgments, which consider the views of our regulators in their periodic examinations. We also show the percentage of each loan class, which includes loans in nonaccrual status.

 

     March 31, 2018     December 31, 2017  
     Allowance     % of Loans in
Each Category
to Total Loans 		    Allowance     % of Loans in
Each Category
to Total Loans 		 
     (In thousands, except percentages)  

Domestic Loans

        

Real estate

   $ 29,416       45.56 %    $ 30,246       46.45 % 

Commercial

     32,907       36.49 %      31,826       34.97 % 

Financial institutions

     31       0.28 %      31       0.27 % 

Consumer and others (1)

     400       6.13 %      60       5.86 % 
  

 

 

   

 

 

   

 

 

   

 

 

 
     62,754       88.46 %      62,163       87.55 % 
  

 

 

   

 

 

   

 

 

   

 

 

 

International Loans (2)

        

Commercial

     1,852       1.47 %      1,905       1.14 % 

Financial institutions

     3,640       6.72 %      4,331       7.93 % 

Consumer and others (1)

     3,872       3.36 %      3,601       3.38 % 
  

 

 

   

 

 

   

 

 

   

 

 

 
     9,364       11.54 %      9,837       12.45 % 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Allowance for Loan Losses

   $ 72,118       100.00 %    $ 72,000       100.00 % 
  

 

 

   

 

 

   

 

 

   

 

 

 

% Total Loans

     1.21 %        1.19 %   

 

(1) Includes residential loans
(2) Includes transactions in which the debtor or customer is domiciled outside the U.S. and all collateral is located in the U.S.

 

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Loan Quality

In the following table, we present a summary of our non-performing assets by loan class, which includes non-performing loans by portfolio segment, both domestic and international, and other real estate properties owned at the dates presented. Non-performing loans consist of (i) nonaccrual loans where the accrual of interest has been discontinued; (ii) accruing loans more than 90 days contractually past due as to interest or principal; and (iii) restructured loans that are considered “trouble debt restructurings.”

 

     March 31, 2018      December 31, 2017  
     (In thousands)  

Non-Accrual Loans (1)

     

Domestic Loans:

     

Real Estate Loans

     

Commercial Real Estate (CRE)

     

Non-owner occupied

   $ 10,666      $ 162  
  

 

 

    

 

 

 
     10,666        162  

Single-family residential

     4,250        4,277  

Owner occupied

     7,288        10,398  
  

 

 

    

 

 

 
     22,204        14,837  

Commercial loans

     3,352        4,656  

Consumer loans and overdrafts

     4        9  
  

 

 

    

 

 

 

Total Domestic

     25,560        19,502  
  

 

 

    

 

 

 

International Loans: (2)

     

Real Estate Loans

     

Single-family residential

     922        727  
  

 

 

    

 

 

 
     922        727  

Commercial loans

     5,229        6,447  

Consumer loans and overdrafts

     21        46  
  

 

 

    

 

 

 

Total International

     6,172        7,220  
  

 

 

    

 

 

 

Total-Non-Accrual Loans

   $ 31,732      $ 26,722  
  

 

 

    

 

 

 

Past Due Accruing Loans (3)

     

Domestic Loans:

     

Real Estate Loans

     

Single-family residential

   $ —        $ 112  
  

 

 

    

 

 

 

Total Domestic

     —          112  
  

 

 

    

 

 

 

International Loans:

     

Real Estate Loans

     

Single-family residential

     —          114  

Consumer loans and overdrafts

     475        —    
  

 

 

    

 

 

 

Total International

     475        114  
  

 

 

    

 

 

 

Total Past Due Accruing Loans

   $ 475      $ 226  
  

 

 

    

 

 

 

Total Non-Performing Loans

     32,207        26,948  

Other Real Estate Owned

     319        319  
  

 

 

    

 

 

 

Total Non-Performing Assets

   $ 32,526      $ 27,267  
  

 

 

    

 

 

 

 

(1) Includes loan modifications that met the definition of trouble debt restructuring which may be performing in accordance with their modified loan terms.
(2) Includes transactions in which the debtor or customer is domiciled outside the U.S. and all collateral is located in the U.S.
(3) Loans past due ninety days or more but still accruing.

 

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During the three months ended March 31, 2018, non-performing assets increased $5.3 million, or 19.29%, compared to December 31, 2017. This is mainly due to one CRE loan totaling $10.67 million which was placed in non-accrual status during the period, and $475 thousand in credit cards balances that became 90 days past due during the period. These increases were primarily offset by loan repayments and paydowns.

We did not recognize any interest income on nonaccrual loans during the first quarter of 2018 or 2017. Additional interest income that we would have recognized on these loans had they been current in accordance with their original terms in the first quarter of 2018 and 2017 was $353 thousand and $837 thousand, respectively.

The following table presents the recorded investment of potential problem loans by loan category at the dates indicated. We have no purchased-credit-impaired loans.

 

    March 31, 2018     December 31, 2017  
    Special Mention     Substandard     Doubtful     Loss     Special Mention     Substandard     Doubtful     Loss  
    (In thousands)  

Real Estate Loans

               

Commercial Real Estate (CRE)

               

Non-owner occupied

  $ 9,994     $ 10,665     $ —       $ —       $ 1,499     $ 162     $ —       $ —    

Single-family residential

    —         5,172       —         —         —         5,869       —         —    

Owner occupied

    3,753       10,030       —         —         3,572       12,109       —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    13,747       25,867       —         —         5,071       18,140       —         —    

Commercial loans

    5,246       10,307       —         —         6,100       16,197       —         —    

Consumer loans and overdrafts

    —         4,194       —         —         —         5,189       —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 18,993     $ 40,368     $ —       $ —       $ 11,171     $ 39,526     $ —       $ —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During the first quarter of 2018, overall problem loans increased $8.7 million, or 17.09%, as compared to December 31, 2017. This was primarily attributed to three CRE loans totaling $19.4 million downgraded during the period. Two of those loans for a total of $8.8 million, which were downgraded to special mention, are under close monitoring and did not generate any additional provisions. The third loan for a total of $10.6 million was downgraded to substandard and placed in non-accrual status during the quarter. In April 2018, we agreed to restructuring this loan by extending its maturity date and adjusting the loan’s monthly payments. As a result of the modification, we determined that no additional impairment charges were necessary.

 

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Securities

The following table sets forth the book value and percentage of each category of securities at March 31, 2018 and December 31, 2017. The book value for securities classified as available for sale represents fair value and the book value for securities classified as held to maturity represents amortized cost.

 

     March 31, 2018     December 31, 2017  
     Amount      %     Amount      %  
     (In thousands, except percentages)  

Securities held to maturity

          

U.S. Government agency debt

   $ 2,982        0.16 %    $ 3,034        0.16 % 

U.S. Government sponsored enterprise debt

     86,312        4.72 %      86,826        4.70 % 
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 89,294        4.88 %    $ 89,860        4.86 % 
  

 

 

    

 

 

   

 

 

    

 

 

 

Securities available for sale:

          

U.S. Government agency debt

   $ 271,495        14.86 %    $ 291,385        15.78 % 

U.S. Government sponsored enterprise debt

     859,031        47 %      875,666        47.41 % 

Corporate debt (1)

     336,789        18.43 %      313,392        16.97 % 

US Treasury debt

     501        0.03 %      2,701        0.15 % 

Mutual funds

     23,241        1.27 %      23,617        1.28 % 

Municipal bonds

     174,640        9.56 %      180,396        9.77 % 
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 1,665,697        91.15 %    $ 1,687,157        91.36 % 
  

 

 

    

 

 

   

 

 

    

 

 

 

Other securities (2) :

          

Federal Home Loan Bank stock

   $ 13,010        0.71 %    $ 13,010        0.70 % 

Federal Reserve Bank stock

     59,476        3.25 %      56,924        3.08 % 
  

 

 

    

 

 

   

 

 

    

 

 

 
     72,486        3.96 %      69,934        3.78 % 
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 1,827,477        100.00 %    $ 1,846,951        100.00 % 
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) March 31, 2018 includes $43.9 millions in obligations issued by corporate entities from Panama, Europe, and Japan in three different sectors. In 2017, includes $24.3 millions in obligations issued by corporate entities from Panama, Europe and others in three different economic sectors.
(2) Amounts correspond to original cost at the date presented. Original cost approximates fair value because of the nature of these investments.

Liabilities

Total liabilities decreased $28.0 million to $7.711 billion at March 31, 2018 compared to $7.683 billion at December 31, 2017. This decrease was primarily due to a decrease in total deposits, partially offset by higher FHLB advances and other borrowings.

Deposits

Total deposits decreased $42.8 million to $6.280 billion at March 31, 2018 compared to $6.323 billion at December 31, 2017. In the first quarter of 2018, an increase in time deposits of $54.0 million partially offset decreases of $59.2 million in noninterest bearing transaction accounts, $24.8 million in interest bearing and $12.8 million in savings and money market account deposits. The increase of $54.0 million in time deposits include $109.1 million in retail time deposits, partially offset by a decrease of $55.1 million in brokered time deposits. The increase in retail time deposits reflects the impact of successful marketing campaigns launched during the period to increase these deposit products which are being offered at competitive market rates.

During the first quarter of 2018, deposits of customers domiciled in Venezuela decreased by $163.7 million, or 2.27%. This decrease was partially offset by an increase of $90.3 million, or 1.74%, in balances from

 

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domestic customer deposits, and a $30.7 million increase in balances from other countries. The trend of higher balances from U.S. customer deposits reflects our continued focus on preserving valued foreign customer relationships, while increasing our U.S. domestic customers and minimizing our concentration of large fund providers.

The Bank uses the Federal Financial Institutions Examination Council’s, or FFIEC’s, Uniform Bank Performance Report or UBPR definition of core deposits, which consists of all relationships under $250,000. Core deposits excludes brokered time deposits.

We utilize brokered deposits, as of March 31, 2018, we had $724,916 of brokered deposits, 12.0% of our total deposits.

Large Fund Providers

At March 31, 2018 and December 31, 2017 our large fund providers, defined as third-party customer relationships with balances of over $10 million, included five and four deposit relationships, respectively, with total balances of $68.8 million and $59.0 million, respectively. At March 31, 2018 and December 31, 2017 deposits from MSF or its non-U.S. affiliates totaled $66.2 million and $49.5 million, respectively, at such dates.

Large Time Deposits by Maturity

The following table sets forth the maturities of our time deposits with individual balances equal to or greater than $100,000 as of March 31, 2018.

 

     March 31, 2018  
     (In thousands, except percentages)  

Less than 3 months

   $ 282,776        22.26 % 

3 to 6 months

     359,117        28.27 % 

6 to 12 months

     296,255        23.32 % 

1 to 3 years

     204,250        16.08 % 

Over 3 years

     128,114        10.07 % 
  

 

 

    

 

 

 

Total

   $ 1,270,512        100.00 % 
  

 

 

    

 

 

 

Short-Term Borrowings

In addition to deposits, we use short-term borrowings, such as FHLB advances and advances from other banks, as a source of funds to meet the daily liquidity needs of our customers and fund growth in earning assets. Short-term borrowings have maturities of 12 months or less as of the reported period-end. The majority of our outstanding short-term borrowings at March 31, 2018 and December 31, 2017 corresponded to FHLB advances and, to a lesser extent, included borrowings from other banks.

The following table sets forth information about the outstanding amounts of our short-term borrowings at the close of and for the three months ended March 31, 2018 and for the year ended December 31, 2017.

 

     March 31,
2018 		    December 31,
2017 		 
     (In thousands, except percentages)  

Outstanding at period-end

   $ 482,000     $ 567,000  

Average amount

     477,000       460,708  

Maximum amount outstanding at any month-end

     487,000       567,000  

Weighted average interest rate:

    

During period

     1.73 %      1.43 % 

End of period

     1.93 %      1.43 % 

 

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Return on Equity and Assets

The following table shows annualized return on average assets, return on average equity, and average equity to average assets ratio for the periods presented.

 

     Three Months Ended March 31,  
     2018     2017  
     (In thousands, except percentages
and per share data) 		 

Net income

   $ 9,429     $ 6,507  

Basic and diluted earnings per common share

     0.07       0.05  

Average total assets

   $ 8,406,382     $ 8,498,001  

Average stockholders’ equity

     747,988       711,736  

Net income / Average total assets (ROA)

     0.45 %      0.31 % 

Net income / Average stockholder’s equity (ROE)

     5.04 %      3.66 % 

Average equity / Average assets ratio

     8.90 %      8.38 % 

Adjusted net income (1)

   $ 11,876     $ 6,507  

Adjusted basic and diluted earnings per common share (1)

     0.09       0.05  

Adjusted net income / Average total assets (ROA) (1)

     0.57 %      0.31 % 

Adjusted net income / Average stockholder’s equity (ROE) (1)

     6.35 %      3.66 % 

 

(1) See “Explanation of Certain Non-GAAP Measures”.

None of our outstanding obligations are exchangeable for or convertible into equity securities. Consequently, our basic and diluted earnings per common share are equal in each of the periods presented.

During the three months ended March 31, 2018 and 2017, basic and diluted earnings per share increased as a result of higher net income in 2018 compared to the same period of 2017.

Capital Resources and Liquidity Management

Capital Resources.

Stockholders’ equity is influenced primarily by earnings, dividends, if any, and changes in accumulated other comprehensive income or loss (AOCI/L) caused primarily by fluctuations in unrealized holding gains or losses, net of taxes, on available for sale investment securities.

Stockholders’ equity decreased $41.2 million, or 5.47%, to $712.3 million as of March 31, 2018 as compared to December 31, 2017, due to a special dividend of $40 million paid in March 2018 to MSF prior to the record date for the spin-off, $9.4 million net income in the quarter ended March 31, 2018 and an $10.6 million increase in AOCL mainly the result of the lower market values for securities available for sale compared to December 31, 2017. The lower securities market values were due primarily to increases in market interest rates.

 

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Liquidity Management.

At March 31, 2018, we had $1.233 billion of outstanding advances from the FHLB and other borrowings, compared to $1.173 billion at December 31, 2017. During the three months ended March 31, 2018, we repaid $370 million of outstanding advances and other borrowings, and obtained new borrowing proceeds of $430 million from these sources. Other borrowings as of March 31, 2018 consisted of $12 million of short-term Fed Funds purchased from other banks which mature in April 2018. The following table summarizes the composition of our FHLB advances and other borrowings by type of interest rate:

 

     March 31,
2018 		     December 31,
2017 		 
     (In thousands)  

Advances from the FHLB and other borrowings:

     

Fixed rate ranging from 1.00% to 3.86% (December 31, 2017—0.90% to 3.86%)

   $ 953,000      $ 918,000  

Floating rate three-month LIBOR ranging from 1.71% to 2.31% (December 31, 2017—1.23% to 1.71%) (1)

     280,000        255,000  
  

 

 

    

 

 

 
   $ 1,233,000      $ 1,173,000  
  

 

 

    

 

 

 

 

(1) We have designated certain interest rate swaps as cash flow hedges to manage this variable interest rate exposure.

At March 31, 2018, advances from the FHLB and other borrowings had maturities through 2022 with interest rates ranging from 1.00% to 3.86 %.

We are a corporation separate and apart from the Bank and, therefore, must provide for our own liquidity. Our main source of funding is dividends declared and paid to us by the Bank. Additionally, our subsidiary Mercantil Florida Bancorp Inc., or Mercantil Florida, which is an intermediate bank holding company corporation and the obligor on our junior subordinated debt, held cash and cash equivalents of $37.5 million as of March 31, 2018 and $39.1 million at December 31, 2017 in funds available to service this subordinated debt.

There are statutory and regulatory limitations that affect the ability of the Bank to pay us and Mercantil Florida dividends. Management believes that these limitations will not affect our ability to meet our ongoing short-term cash obligations.

Regulatory Capital Requirements

Our actual capital amounts and ratios are presented in the following table:

 

     Actual     Required for Capital
Adequacy Purposes 		    Regulatory Minimums
To be Well Capitalized 		 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  
     (In thousands, except percentages)  

March 31, 2018

               

Total capital ratio

   $ 896,469        12.94 %    $ 554,219        8.00 %    $ 692,774        10.00 % 

Tier I capital ratio

     822,367        11.87 %      415,665        6.00 %      554,219        8.00 % 

Tier I leverage ratio

     822,367        9.77 %      336,656        4.00 %      420,821        5.00 % 

Common Equity Tier I

     712,583        10.29 %      311,748        4.50 %      450,303        6.50 % 

December 31, 2017

               

Total capital ratio

   $ 926,049        13.30 %    $ 556,578        8.00 %    $ 695,722        10.00 % 

Tier I capital ratio

     852,825        12.30 %      417,433        6.00 %      556,578        8.00 % 

Tier I leverage ratio

     852,825        10.20 %      335,647        4.00 %      419,559        5.00 % 

Common Equity Tier I

     753,545        10.70 %      313,075        4.50 %      452,220        6.50 % 

 

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The Bank’s actual capital amounts and ratios are presented in the following table:

 

     Actual     Required for Capital
Adequacy Purposes 		    Regulatory Minimums
to be Well Capitalized 		 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  
     (In thousands, except percentages)  

March 31, 2018

               

Total capital ratio

   $ 860,779        12.43 %    $ 554,000        8.00 %    $ 692,500        10.00 % 

Tier I capital ratio

     786,677        11.36 %      415,500        6.00 %      554,000        8.00 % 

Tier I leverage ratio

     786,677        9.37 %      335,795        4.00 %      419,744        5.00 % 

Common Equity Tier I

     786,677        11.36 %      311,625        4.50 %      450,125        6.50 % 

December 31, 2017

               

Total capital ratio

   $ 885,855        12.70 %    $ 556,446        8.00 %    $ 695,557        10.00 % 

Tier I capital ratio

     812,631        11.70 %      417,334        6.00 %      556,446        8.00 % 

Tier I leverage ratio

     812,631        9.70 %      335,600        4.00 %      419,500        5.00 % 

Common Equity Tier I

     812,631        11.70 %      313,001        4.50 %      452,112        6.50 % 

Off-Balance Sheet Arrangements

The following table shows the outstanding balance of our off-balance sheet arrangements as of the end of the periods presented. Except as disclosed below, we are not involved in any other off-balance sheet contractual relationships that are reasonably likely to have a current or future material effect on our financial condition, a change in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

     March 31, 2018      December 31, 2017  
     (In thousands)  

Commitments to extend credit

   $ 836,309      $ 762,437  

Credit card facilities

     277,330        266,799  

Letters of credit

     20,073        18,350  
  

 

 

    

 

 

 
   $ 1,133,712      $ 1,047,586  
  

 

 

    

 

 

 

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements in accordance with GAAP requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under current circumstances, results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. We evaluate our estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.

Accounting policies, as described in detail in the notes to our consolidated financial statements, are an integral part of our financial statements. A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and our financial position. We believe that the critical accounting policies and estimates discussed below require us to make difficult, subjective or complex judgments about matters that are inherently uncertain. Changes in these estimates, that are likely to occur from period to period, or using different estimates that we could have reasonably used in the current period, would have a material impact on our financial position, results of operations or liquidity.

Securities. Securities generally must be classified as held to maturity, or HTM, available-for-sale, or AFS, or trading. Securities classified as HTM are securities we have both the ability and intent to hold until maturity and are carried at amortized cost. Trading securities, if we had any, would be held primarily for sale in the near term to generate income. Securities that do not meet the definition of trading or HTM are classified as AFS.

 

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The classification of investment securities is significant since it directly impacts the accounting for unrealized gains and losses on these securities. Unrealized gains and losses on trading securities, if we had any, would flow directly through earnings during the periods in which they arise. AFS securities are measured at fair value each reporting period. Unrealized gains and losses on AFS securities are recorded as a separate component of shareholders’ equity (accumulated other comprehensive income or loss) and do not affect earnings until realized or deemed to be OTTI. Investment securities that are classified as HTM are recorded at amortized cost, unless deemed to be OTTI.

We evaluate each AFS and HTM debt security when its fair value falls below the amortized cost basis to determine if it is other-than-temporary. When an investment security is considered to be OTTI, the cost basis of the individual investment security is written down through earnings by an amount that corresponds to the credit component of the OTTI. In determining whether an impairment is other than temporary, we consider the severity and duration of the decline in fair value, the length of time expected for recovery, the financial condition of the issuer, and other qualitative factors, as well as whether we either plan to sell the security or it is more-likely-than-not that we will be required to sell the security before recovery of the amortized cost. For AFS debt securities we intend to hold, an analysis is performed to determine how much of the decline in fair value maybe related to the issuer’s credit and how much is related to market factors (e.g., interest rates). If any of the decline in fair value is due to a deterioration in the issuer’s credit, an OTTI loss is recognized in the Consolidated Statements of Operations for that amount. If any of the decline in fair value is related to market factors, that amount remains in AOCI for AFS debt securities. In certain instances, the credit loss may exceed the total decline in fair value, in which case, the difference is due to market factors and is recognized as an unrealized gain in AOCI. If we intend to sell or believes it is more-likely-than-not that it will be required to sell the debt security, it is written down to fair value as an OTTI loss.

Fair Value of Financial Instruments. We are, under applicable accounting guidance, required to maximize the use of observable inputs and minimize the use of unobservable inputs in measuring fair value. We classify fair value measurements of financial instruments based on the three-level fair value hierarchy in the guidance. We carry AFS debt and other securities, BOLI policies and derivative assets and liabilities at fair value.

The fair values of assets and liabilities may include adjustments for various factors, such as market liquidity and credit quality, where appropriate. Valuations of products using models or other techniques are sensitive to assumptions used for the significant inputs. Where market data is available, the inputs used for valuation reflect that information as of our valuation date. Inputs to valuation models are considered unobservable if they are supported by little or no market activity. In periods of extreme volatility, lessened liquidity or in illiquid markets, there may be more variability in market pricing or a lack of market data to use in the valuation process. In keeping with the prudent application of estimates and management judgment in determining the fair value of assets and liabilities, we have in place various processes and controls including validation controls, for which we utilize both broker and pricing service inputs. Data from these services may include both market-observable and internally-modeled values and/or valuation inputs. Our reliance on this information is affected by our understanding of how the broker and/or pricing service develops its data with a higher degree of reliance applied to those that are more directly observable and lesser reliance applied to those developed through their own internal modeling. Similarly, broker quotes that are executable are given a higher level of reliance than indicative broker quotes, which are not executable. These processes and controls are performed independently of the business. For additional information, see Note 18 of our audited consolidated financial statements and Note 13 of our unaudited interim consolidated financial statements.

Allowance for Loan Losses. The allowance for loan losses represents an estimate of the current amount of principal that we will be unlikely to collect given facts and circumstances as of the evaluation date, and includes amounts arising from loans individually and collectively evaluated for impairment. Loan losses are charged against the allowance when we believe the un-collectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. We estimate the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors to ensure the current allowance balance is maintained at

 

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a reasonable level to provide for recognized and unrecognized but inherent losses in the loan portfolio. Allocations of the allowance are made for loans considered to be individually impaired, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. Amounts are charged-off when available information confirms that specific loans or portions thereof, are uncollectible. This methodology for determining charge-offs is applied consistently to each segment.

We determine a separate allowance for losses for each loan portfolio segment. The allowance for loan losses consists of specific and general reserves. Specific reserves relate to loans that are individually classified as impaired. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Factors considered in determining impairment include payment status, collateral value and the probability of collecting all amounts when due. Measurement of impairment is based on the excess of the carrying value of the loan over the present value of expected future cash flows at the measurement date, or the fair value of the collateral in the case where the loan is considered collateral-dependent. We select the measurement method on a loan-by-loan basis except that collateral-dependent loans for which foreclosure is probable are measured at the fair value of the collateral.

We recognize interest income on impaired loans based on our existing method of recognizing interest income on nonaccrual loans. Loans, generally classified as impaired loans, for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered TDRs with measurement of impairment as described above.

If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s effective interest rate or at the fair value of collateral if repayment is expected solely from the collateral.

General reserves cover non-individually-impaired loans and are based on historical loss rates for each loan portfolio segment, adjusted for the effects of qualitative factors that in management’s opinion are likely to cause estimated credit losses as of the evaluation date to differ from the portfolio segment’s historical loss experience. Qualitative factors include consideration of the following: changes in lending policies and procedures; changes in economic conditions, changes in the nature and volume of the portfolio; changes in the experience, ability and depth of lending management and other relevant staff; changes in the volume and severity of past due, nonaccrual and other adversely graded loans; changes in the loan review system; changes in the value of the underlying collateral for collateral-dependent loans; concentrations of credit and the effect of other external factors such as competition and legal and regulatory requirements.

Concentrations of credit risk can affect the level of the allowance and may involve loans to one borrower, borrowers engaged in or dependent upon the same industry, or a group of borrowers whose loans are predicated on the same type of collateral. Our most significant concentration of credit is CRE and commercial loans. At December 31, 2017, we had $2.96 billion in CRE loans and $1.96 billion in commercial loans (including commercial owner occupied loans), representing 48.84% and 32.30% of total loans, respectively. At March 31, 2018, we had $2.87 billion in CRE loans and $2.01 billion in commercial loans (including commercial owner occupied loans), representing 48.24% and 33.81% of total loans respectively. In addition, we are subject to a geographic concentration of credit because we primarily operate in South Florida, the greater Houston, Texas area and the New York City area.

Our estimate for the allowance for loan losses is sensitive to the loss rates from our loan portfolio segments. For each one-percent increase in the loss rates on loans collectively evaluated for impairment in our CRE loans and commercial loans portfolio segments, the allowance for loan losses at March 31, 2018 and December 31, 2017 would have increased by approximately $0.63 million.

These sensitivity analyses do not represent management’s expectations of the deterioration in risk ratings or the increases in loss rates but are provided as hypothetical scenarios to assess the sensitivity of the allowance for loan and lease losses to changes in key inputs. We believe the risk ratings and loss severities currently in use are

 

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appropriate and that the probability of the alternative scenarios outlined above occurring within a short period of time is remote.

The process of determining the level of the allowance for credit losses requires a high degree of judgment. It is possible that others, given the same information, may at any point in time reach different reasonable conclusions.

Goodwill. Goodwill is evaluated for impairment at least annually and on an interim basis if an event or circumstance indicates that it is likely an impairment has occurred.

Current accounting guidance requires that we determine, at least annually, the fair value of the reporting unit to which goodwill has been assigned, and compare the result of this valuation to the carrying amount of the reporting unit to determine if impairment exists at the reporting date (Step 1). If impairment exists, then all the assets and liabilities of the reporting unit are measured at their fair value to arrive at the intrinsic fair value of goodwill. The difference between the intrinsic values of goodwill and its carrying amount is used to determine the amount of impairment to be recorded, if the intrinsic value exceeds the carrying value (Step 2). We use valuation techniques to determine the fair value of PAC as one of our reporting units, which involves using certain significant assumptions which could differ from actual results. At December 31, 2017 and 2016, the fair value of PAC exceeded its carrying amount. As a result, no impairment existed and none was recorded.

We have applied significant judgment to arrive at the fair value of PAC for annual goodwill impairment testing purposes. The assumptions used in the valuation of PAC included: a) estimates of future cash flows, which are primarily dependent on growth estimates in the loan portfolio and deposit balances, net interest margin, operating expenses, credit losses and minimum capital necessary to meet regulatory capital requirements; and b) the cost of equity used to discount those cash estimated flows to a present value. Other significant assumptions include the determination of peer groups and the weight given to each valuation method used to arrive at a concluded value. Our Market Risk and Budget and Profitability units provide significant support for the development of the model used to estimate this fair value estimate. We evaluated the existence of events or circumstances that could indicate a potential impairment of goodwill during the quarter ended March 31, 2018. Based on this evaluation, we concluded there were no impairment indicators requiring Step 1 of the goodwill impairment analysis. As such, goodwill was not considered impaired as of March 31, 2018. We also considered that goodwill was not at risk of potential impairment as of December 31, 2017, 2016 and 2015. Future negative changes may result in potential impairments in future periods.

Determining the fair value of goodwill is considered a critical accounting estimate because it requires significant management judgment and the use of subjective measurements. Variability in the market and changes in assumptions or subjective measurements used to determine fair value are reasonably possible and may have a material impact on our financial position, liquidity or results of operations.

Deferred Income Taxes. We use the balance sheet method of accounting for income taxes as prescribed by GAAP. Under this method, DTAs and deferred tax liabilities, or DTLs, are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the DTAs and DTLs, a valuation allowance is established. DTAs and DTLs are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Accounting for deferred income taxes is a critical accounting estimate because we exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. Management’s determination of the realization of DTAs and DTLs is based upon management’s judgment of various future events and uncertainties, including the timing and amount of future income, reversing temporary differences which may offset, and the implementation of various tax plans to maximize realization of the DTAs. These judgments and estimates are inherently subjective and reviewed on a continual basis as regulatory and

 

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business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against our DTAs and DTLs. A DTA valuation allowance would result in additional income tax expense in such period, which would negatively affect earnings. Conversely, a valuation allowance to a DTL would result in lower tax expense.

Recently Issued Accounting Pronouncements. We have evaluated new accounting pronouncements that have recently been issued and have determined that certain of these new accounting pronouncements should be described in this section because, upon their adoption, there could be a significant impact to our operations, financial condition or liquidity in future periods. Please refer to Note 1 of our audited consolidated financial statements and Note 2 of our unaudited interim consolidated financial statements for a discussion of these recently issued accounting pronouncements that have been adopted by us that will require enhanced disclosures in our financial statements in future periods.

 

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SUPERVISION AND REGULATION

We and the Bank are extensively regulated under U.S. Federal and state laws applicable to financial institutions. Our supervision, regulation and examination, and that of the Bank are primarily intended to protect depositors, and maintain the safety and soundness of financial institutions and the federal deposit insurance system. Such supervision and regulation are not intended to protect the holders of our capital stock and other securities issued by us. Any change in applicable law or regulation may have a material effect on our business. The following discussion is qualified in its entirety by reference to the particular statutory and regulatory provisions referred to below.

Bank Holding Company Regulation

As a bank holding company, we are subject to supervision, regulation and examination by the Federal Reserve under the BHC Act. Bank holding companies generally are limited to the business of banking, managing or controlling banks, and certain related activities. We are required to file periodic reports and other information with the Federal Reserve. The Federal Reserve examines us and our non-bank subsidiaries.

The BHC Act requires prior Federal Reserve approval for, among other things, the acquisition by a bank holding company of direct or indirect ownership or control of more than 5% of the voting shares or substantially all the assets of any bank, or for a merger or consolidation of a bank holding company with another bank holding company. With certain exceptions, the BHC Act prohibits a bank holding company from acquiring direct or indirect ownership or control of voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in any activity other than banking or managing or controlling banks or performing services for its authorized subsidiaries. A bank holding company may, however, engage in or acquire an interest in a company that engages in activities that the Federal Reserve has determined by regulation, or order, to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

We are a legal entity separate and distinct from the Bank. Various legal limitations restrict the Bank from lending or otherwise supplying funds to us. We and the Bank are subject to Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Regulation W thereunder. The Federal Reserve has indicated that MSF will control us and the Bank following the Distribution Date due to MSF’s Retained Shares and the common directors shared by MSF and us. Accordingly, we expect that the Bank’s relationship with MSF and its subsidiaries will continue to be subject to Regulation W, until the Federal Reserve determines that MSF no longer controls us.

Section 23A defines “covered transactions,” which include extensions of credit, and limits a bank’s covered transactions with any affiliate to 10% of such bank’s capital and surplus. All covered and exempt transactions between a bank and its affiliates must be on terms and conditions consistent with safe and sound banking practices, and banks and their subsidiaries are prohibited from purchasing low-quality assets from the bank’s affiliates. Finally, Section 23A requires that all of a bank’s extensions of credit to its affiliates be appropriately secured by permissible collateral, generally U.S. government or agency securities. Section 23B of the Federal Reserve Act generally requires covered and other transactions among affiliates to be on terms and under circumstances, including credit standards, that are substantially the same as or at least as favorable to the bank or its subsidiary as those prevailing at the time for similar transactions with unaffiliated companies.

Federal Reserve policy requires a bank holding company to act as a source of financial and managerial strength to its FDIC-insured bank subsidiaries. The Federal Deposit Insurance Act was amended by the Dodd-Frank Act to require that any company controlling an FDIC-insured institution must act as a source of financial strength to such insured institution. These may require bank holding companies to support bank subsidiaries with additional investments, including in situations where additional investments in the bank subsidiary may not otherwise be warranted. In the event an FDIC-insured subsidiary becomes subject to a capital restoration plan with its regulators, the parent bank holding company is required to guarantee performance of such plan up to 5% of the bank’s assets, and such guarantee is given priority in bankruptcy of the bank holding company. In addition,

 

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where a bank holding company has more than one bank or thrift subsidiary, each of the bank holding company’s subsidiary depository institutions may be held responsible for any losses to the FDIC’s Deposit Insurance Fund, or DIF, if an affiliated depository institution fails. As a result, a bank holding company may be required to loan money to a bank subsidiary in the form of subordinate capital notes or other instruments which qualify as capital under bank regulatory rules. However, any loans from the holding company to such subsidiary banks likely will be unsecured and subordinated to such bank’s depositors and to other creditors of the bank. See “— Capital.”

Bank Regulation

As a national bank, the Bank is subject to regulation and regular examinations by the OCC. OCC regulations govern permissible activities, capital requirements, branching, dividend limitations, investments, loans and other matters. Under the Bank Merger Act, prior OCC approval is required for a national bank to merge or consolidate with, or purchase the assets or assume the deposits of, another bank. In reviewing applications to approve mergers and other acquisition transactions, the OCC is required to consider factors similar to the Federal Reserve under the BHC Act, including the applicant’s financial and managerial resources, competitive effects and public benefits of the transactions, the applicant’s performance in meeting community needs, and the effectiveness of the entities in combatting money laundering activities.

The Bank is a member of the FDIC’s DIF and its deposits are insured by the FDIC to the fullest extent permitted by law. As a result, it is subject to regulation and deposit insurance assessments by the FDIC. Under the Dodd-Frank Act, the Bank also is subject to regulations issued by the CFPB, with respect to consumer financial services and products. See “— FDIC Insurance Assessments”.

The OCC has adopted the FFIEC’s Uniform Financial Institutions Rating System, which assigns each financial institution a confidential composite “CAMELS” rating based on an evaluation and rating of six essential components of an institution’s financial condition and operations: C apital Adequacy, A sset Quality, M anagement, E arnings, L iquidity and S ensitivity to market risk, as well as the quality of risk management practices. For most institutions, the FFIEC has indicated that market risk primarily reflects exposures to changes in interest rates, and the ability to manage market risk.

Evaluations of the component areas take into consideration the institution’s size and sophistication, the nature and complexity of its activities, its risk profile, and the adequacy of its capital and earnings in relation to its level of market risk exposure. Market risk is rated based upon, but not limited to, an assessment of the sensitivity of the financial institution’s earnings or the economic value of its capital to adverse changes in interest rates, foreign exchange rates, commodity prices or equity prices, management’s ability to identify, measure, monitor, and control the risks of its operations and the nature and complexity of interest rate risk exposure arising from non-trading positions. The OCC considers anti-money laundering / Bank Secrecy Act, or AML/BSA, examination findings in a safety and soundness context when assigning the management component rating. Serious deficiencies in a bank’s AML/BSA compliance create a presumption that the management rating will be adversely affected because risk management practices are less than satisfactory.

Composite ratings are based on an evaluation of an institution’s managerial, operational, financial, and compliance performance. The composite CAMELS rating is not an arithmetical formula or rigid weighting of numerical component ratings. Elements of subjectivity and examiner judgment, especially as these relate to qualitative assessments, are important elements in assigning ratings.

The Gramm-Leach-Bliley Act, or the GLB Act, and related regulations require banks and their affiliated companies to adopt and disclose privacy policies, including policies regarding the sharing of personal information with third-parties. The GLB Act also permits bank subsidiaries to engage in “financial activities” similar to those permitted to financial holding companies.

The Bank maintains a loan production office in New York City. This office may only engage in certain functions on behalf of the Bank, such as soliciting loans (including assembling credit information, property

 

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inspections and appraisals, securing title information, preparing loan applications, solicitation loan servicing), and acting as a liaison with customers of the Bank. Loans and credit extensions cannot be approved by a loan production office. The loan production office is not a banking center of the Bank and cannot engage in general banking transactions, deposit taking and lending money. The loan production office is subject to supervision and examination by the OCC.

Supervision of Parallel Banking Organizations

The federal bank regulators view us and MSF as parallel banking organizations due to MSF’s Retained Shares, certain common directors of MSF and us, and the common principal shareholders of MSF and us. A parallel banking organization exists when at least one U.S. depository institution, such as the Bank, and one foreign bank or holding company of a foreign bank, such as MSF, are controlled either directly or indirectly by the same person or group of persons who are closely associated in their business dealings or are otherwise acting in concert. At the time of the spin-off, we and MSF will have virtually the same shareholders, including certain controlling shareholder groups

The fundamental risk presented by parallel banking organizations is that they may be acting as a de facto single organization, which, because it is not formalized, is not subject to comprehensive consolidated supervision. Consequently, relationships between the U.S. depository institution and other affiliates may be more difficult to understand and monitor. This raises numerous management and supervisory risks, including, among other things:

 

  •   officers and directors may not exercise independent control to ensure transactions with affiliates have legitimate business reasons and comply with applicable laws and regulations, including Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Regulation W thereunder;

 

  •   money laundering concerns may be heightened due to the potential lack of arms-length transactions between the U.S. depository institution and the foreign parallel bank;

 

  •   the home country of the foreign parallel bank may have insufficient mechanisms or authority to monitor changes in ownership or to ensure arms-length intercompany transactions between the foreign parallel bank and other members of the group; and

 

  •   political, legal or economic events in the foreign country may affect the U.S. depository institution.

To minimize such risks, the federal bank regulators will coordinate their supervision of a parallel-owned banking organization’s U.S. operations. The supervisory approach may include unannounced coordinated examination of us and our subsidiaries by the OCC and the Federal Reserve. Such examinations may be conducted if regulators suspect irregular transactions between parallel banks. The regulators will consider several factors in determining whether to conduct coordinated reviews of an organization’s U.S. operations, including political, legal or economic events in the foreign country, and compliance with commitments or representations made or conditions imposed by the banking agencies. The factors above are likely to especially influence our regulators and their requirements under the parallel banking policy statement.

In addition, we expect we may be requested to make various commitments to the Federal Reserve and the OCC in furtherance of their requirement that we minimize the risks associated with parallel-owned banking organizations, which may continue, even after MSF is no longer deemed in “control” of us.

We have also adopted policies and procedures that are designed to minimize risk and to provide guidance on how personnel should treat MSF and our other affiliates. The Bank’s relations with MSF and its subsidiaries are currently subject to Regulation W, and we believe our existing Regulation W policies and procedures will remain effective for compliance purposes after the spin-off.

Community Reinvestment Act and Consumer Laws

The Bank is subject to the Community Reinvestment Act, which we refer to as the CRA, and the OCC’s regulations thereunder. Under the CRA, all FDIC-insured institutions have a continuing and affirmative

 

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obligation, consistent with their safe and sound operation, to help meet the credit needs of their entire communities, including low- and moderate-income neighborhoods. The CRA requires a depository institution’s primary federal regulator, in connection with its examination of the institution, to assess the institution’s record of assessing and meeting the credit needs of the communities served by that institution, including low- and moderate-income neighborhoods. The bank regulatory agency’s assessment of the institution’s record is made available to the public. Further, such assessment is required of any institution that has applied to:

 

  •   charter a national bank;

 

  •   obtain deposit insurance coverage for a newly chartered institution;

 

  •   establish new branch offices (banking centers) that accept deposits;

 

  •   relocate an office; or

 

  •   merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution.

In the case of bank holding company applications to acquire a bank or other bank holding company, the Federal Reserve will assess the performance of each subsidiary depository institution of the applicant bank holding company, and such performance may be the basis for denying the application. A less than satisfactory CRA rating will slow, if not preclude, acquisitions, and new banking centers and other expansion activities and will prevent a company from becoming a financial holding company.

As a result of the GLB Act, CRA agreements with private parties must be disclosed and annual CRA reports must be made to a bank’s primary federal regulator. The Federal CRA regulations require that evidence of discriminatory, illegal or abusive lending practices be considered in the CRA evaluation.

The Bank is also subject to, among other things, fair lending laws, including the Equal Credit Opportunity Act, or ECOA, and the Fair Housing Act, or FHA, both of which prohibit discrimination based on race or color, religion, national origin, sex and familial status in any aspect of a consumer or commercial credit or residential real estate transaction. The DOJ and the federal bank regulators have issued an Interagency Policy Statement on Discrimination in Lending to provide guidance to financial institutions in determining whether discrimination exists, how the agencies will respond to lending discrimination, and what steps lenders might take to prevent discriminatory lending practices. The DOJ has increased its efforts to prosecute what it regards as violations of the ECOA and FHA, and the fair lending laws, generally.

The federal bank regulators have updated their guidance several times on how banks treat deposit account overdrafts, including overdrafts incurred at automated teller machines and point of sale terminals. Overdrafts have become a focus of the CFPB. Among other things, the federal regulators require banks to monitor accounts and to limit the use of overdrafts by customers as a form of short-term, high-cost credit, including, for example, giving customers who overdraw their accounts on more than six occasions where a fee is charged in a rolling 12 month period a reasonable opportunity to choose a less costly alternative and decide whether to continue with fee-based overdraft coverage. It also encourages placing appropriate daily limits on overdraft fees, and asks banks to consider eliminating overdraft fees for transactions that overdraw an account by a de minimis amount. Overdraft policies, processes, fees and disclosures are frequently the subject of litigation against banks in various jurisdictions. In May 2018, the OCC encouraged national banks to offer short-term, small-dollar installment lending.

The CFPB began exercising its regulatory authority upon the recess appointment of its director on January 4, 2012. The CFPB has the authority, previously exercised by the federal bank regulators, to adopt regulations and enforce various laws, including the ECOA, and other fair lending laws, the Trust in Lending Act, the Electronic Funds Transfer Act, mortgage lending rules, the Truth in Savings Act, Fair Credit Reporting and Privacy of Consumer Financial Privacy. Although the CFPB does not examine or supervise banks with less than $10 billion in assets, it exercises broad authority in making rules and providing guidance that affects bank

 

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regulation in these areas and the scope of bank regulators’ consumer regulation, examination and enforcement. Banks of all sizes are affected by the CFPB’s regulations, and the precedents set by CFPB enforcement actions and interpretations. The CFPB has focused on various practices to date, including revising mortgage lending rules, overdrafts, credit card add-on products, indirect automobile lending, student lending, and payday and similar short-term lending, and has a broad mandate to regulate consumer financial products and services, whether or not offered by banks or their affiliates.

Residential Mortgages

CFPB regulations that require lenders to determine whether a consumer has the ability to repay a mortgage loan became effective on January 10, 2014. These established certain minimum requirements for creditors when making ability to repay determinations, and provide certain safe harbors from liability for mortgages that are “qualified mortgages” and are not “higher-priced.” Generally, these CFPB regulations apply to all consumer, closed-end loans secured by a dwelling, including home-purchase loans, refinancing and home equity loans (whether first or subordinate lien). Qualified mortgages must generally satisfy detailed requirements related to product features, underwriting standards, and requirements where the total points and fees on a mortgage loan cannot exceed specified amounts or percentages of the total loan amount. Qualified mortgages must have: (1) a term not exceeding 30 years; (2) regular periodic payments that do not result in negative amortization, deferral of principal repayment, or a balloon payment; (3) and be supported with documentation of the borrower and his or her credit worthiness. We anticipate focusing our residential mortgage origination on qualified mortgages and those that meet our investors’ requirements, but we may make loans that do not meet the safe harbor requirements for “qualified mortgages.”

The 2018 Growth Act provides for certain residential mortgages held in portfolio by banks with less than $10 billion in consolidated assets to automatically be deemed “qualified mortgages.” This relieves such institutions from many of the requirements to satisfy the criteria listed above for “qualified mortgages.” Mortgages meeting the “qualified mortgage” safe harbor may not have negative amortization, must follow prepayment penalty limitations included in the Truth in Lending Act, and may not have fees greater than three percent of the total value of the loan.

The Bank generally services the loans it originates, excluding those it sells. The CFPB adopted mortgage servicing standards, effective in January 2014. These include requirements regarding force-placed insurance, certain notices prior to rate adjustments on adjustable rate mortgages, and periodic disclosures to borrowers. Servicers will be prohibited from processing foreclosures when a loan modification is pending, and must wait until a loan is more than 120 days delinquent before initiating a foreclosure action. Servicers must provide borrower’s direct and ongoing access to its personnel, and provide prompt review of any loss mitigation application. Servicers must maintain accurate and accessible mortgage records for the life of a loan and until one year after the loan is paid off or transferred. These new standards are expected to increase the cost and compliance risks of servicing mortgage loans, and the mandatory delays in foreclosures could result in loss of value on collateral or the proceeds we may realize from a sale of foreclosed property.

The FHFA updated Fannie Mae’s and Freddie Mac’s, which are GSEs, repurchase rules, including the kinds of loan defects that could lead to a repurchase request to, or alternative remedies with, the mortgage loan originator or seller. These rules became effective January 1, 2016. FHFA also has updated these GSEs’ representations and warranties framework and announced on February 2, 2016 an independent dispute resolution, or IDR, process to allow a neutral third-party to resolve demands after the GSEs’ quality control and appeal processes have been exhausted. The GSEs are expected to update their repurchase demand escalation and appeal processes later this year to resolve disputes before any independent dispute resolution process begins.

The CFPB’s TRID rules adversely affected our mortgage originations in 2016, while we revised our systems and processes to comply with these rules. Our residential mortgage strategy, product offerings, and profitability may change as these regulations are interpreted and applied in practice, and may also change due to any restructuring of Fannie Mae and Freddie Mac as part of the resolution of their conservatorships. The 2018

 

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Growth Act reduces TRID rules by eliminating the wait time for a mortgage, if an additional creditor offers a consumer a second offer with a lower annual percentage rate. Congress expressed its desire to provide better guidance on TRID in an effort to provide a clearer understanding for consumers and bankers alike. The new law also reduced reporting requirements under the Home Mortgage Disclosure Act (“HMDA”) for those banks with fewer than 500 closed-end mortgages and less than 500 open-end lines of credit in both of the preceding two years, provided the bank’s rating under the Community Reinvestment Act, or CRA, for the previous two years has been at least “satisfactory.”

Other Laws and Regulations

The International Money Laundering Abatement and Anti-Terrorism Funding Act of 2001 specifies new “know your customer” requirements that obligate financial institutions to take actions to verify the identity of the account holders in connection with opening an account at any U.S. financial institution. Bank regulators are required to consider compliance with this act’s anti-money laundering provisions before acting upon acquisition and merger proposals. Furthermore, sanctions for violations of this act can be imposed in an amount equal to twice the sum involved in the violating transaction, up to $1 million.

Additional FinCEN rules effective May 2018, require banks to know the beneficial owners of customers that are not natural persons, to update customer information to develop a customer risk profile, as well as to monitor such matters. Banks must comply with these new rules by May 11, 2018.

Under the USA PATRIOT Act, financial institutions are subject to prohibitions against specified financial transactions and account relationships as well as to enhanced due diligence and “know your customer” standards in their dealings with foreign financial institutions and foreign customers.

The USA PATRIOT Act requires financial institutions to establish anti-money laundering programs, and sets forth minimum standards, which the regulators refer to as pillars for these programs, including:

 

  •   the development of internal policies, procedures, and controls;

 

  •   the designation of a compliance officer;

 

  •   an ongoing employee training program;

 

  •   an independent audit function to test the programs; and

 

  •   ongoing customer due diligence and monitoring.

We will also be required to comply with various corporate governance and financial reporting requirements under the Sarbanes-Oxley Act, as well as new rules and regulations adopted by the SEC, the Public Company Accounting Oversight Board and the Nasdaq Stock Market. As a newly public company, and as an emerging growth company, we will not be required to comply with various provisions of the Sarbanes-Oxley Act. See “Summary — Emerging Growth Company Status.”

Payment of Dividends

We are a legal entity separate and distinct from the Bank. Our primary source of cash is dividends from the Bank. Prior regulatory approval is required if the total of all dividends declared by a national bank (such as the Bank) in any calendar year will exceed the sum of such bank’s net profits for the year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. During 2017, the Bank paid cash dividends of approximately $6.0 million to Mercantil Florida. At December 31, 2017, the Bank could have declared additional dividends of approximately $84.4 million, without prior OCC approval. After payment of the $40 million Special Dividend in March 2018, $57.0 million may be paid by the Bank as dividends as of March 31, 2018 without prior OCC approval.

In addition, we and the Bank are subject to various general regulatory policies and requirements relating to the payment of dividends, including requirements to maintain capital above regulatory minimums. The

 

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appropriate federal regulatory authorities are authorized to determine when the payment of dividends would be an unsafe or unsound practice, and may prohibit such dividends.

The Federal Reserve has indicated that paying dividends that deplete a bank holding company’s capital base to an inadequate level would be an unsafe and unsound banking practice. The Federal Reserve has indicated that depository institutions and their holding companies should generally pay dividends only out of current year’s operating earnings.

Under Federal Reserve Supervisory Letter SR-09-4 (February 24, 2009), as revised December 21, 2015, the board of directors of a bank holding company must consider different factors to ensure that its dividend level is prudent relative to maintaining a strong financial position, is not based on overly optimistic earnings scenarios, and the absence of potential events that could affect a company’s ability to pay a dividend while still maintaining a strong financial position. As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should consult with the Federal Reserve and eliminate, defer or significantly reduce the bank holding company’s dividends if:

 

  •   its net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends;

 

  •   its prospective rate of earnings retention is not consistent with its capital needs and overall current and prospective financial condition; or

 

  •   it will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.

When fully-phased in by 2019, the Basel III Capital Rules will further limit our permissible dividends, stock repurchases and discretionary bonuses, including those of the Bank, unless we and the Bank meet the fully phased-in capital conservation buffer requirement. The Company and the Bank meet the current capital conservation requirement. See “Basel III Capital Rules.”

Capital

The Federal Reserve has risk-based capital rules for bank holding companies and the OCC has similar rules for national banks, respectively. These guidelines required at year end 2017 a minimum ratio of capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) and capital conservation buffer of 9.25%. Tier 1 capital includes common equity and related retained earnings and a limited amount of qualifying preferred stock, less goodwill and certain core deposit intangibles. Voting common equity must be the predominant form of capital. Tier 2 capital consists of non-qualifying preferred stock, qualifying subordinated, perpetual, and/or mandatory convertible debt, term subordinated debt and intermediate term preferred stock, up to 45% of pre-tax unrealized holding gains on available for sale equity securities with readily determinable market values that are prudently valued, and a limited amount of general loan loss allowance. We collectively refer to Tier 1 capital and Tier 2 capital as Total risk based capital.

In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies which provide for a minimum leverage ratio of Tier 1 capital to total on-balance sheet assets equal to 4%. The guidelines also provide that institutions experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Higher capital may be required in individual cases and depending upon a bank holding company’s risk profile. All bank holding companies and banks are expected to hold capital commensurate with the level and nature of their risks, including the volume and severity of their problem loans. The level of Tier 1 capital to risk-adjusted assets is becoming more widely used by the bank regulators to measure capital adequacy. The Federal Reserve has not advised us or the Bank of any specific minimum leverage ratio or tangible Tier 1 leverage ratio applicable to them. Under Federal Reserve policies, bank holding companies are generally expected to operate with capital positions well above the minimum ratios. The Federal Reserve believes the risk-based ratios do not fully take into account the quality of capital and interest rate, liquidity, market and operational risks. Accordingly, supervisory assessments of capital adequacy may differ significantly from conclusions based solely on the level of an organization’s risk-based capital ratio.

 

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The Federal Deposit Insurance Corporation Improvement Act of 1991, or FDICIA, among other things, requires the federal bank regulators to take “prompt corrective action” regarding depository institutions that do not meet minimum capital requirements. FDICIA establishes five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare to various relevant capital measures and certain other factors, as established by regulation.

All of the federal bank regulators also have regulations establishing risk-adjusted measures and relevant capital levels which implement the “prompt corrective action” standards applicable to banks. The relevant capital measures are the total risk-based capital ratio, Tier 1 risk-based capital ratio, Common Equity Tier 1 capital ratio, as well as, the leverage capital ratio. Under the regulations, national banks will be:

 

  •   well-capitalized if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 8% or greater, a CET1 capital ratio of 6.5% or greater, a leverage capital ratio of 5% or greater and is not subject to any written agreement, order, capital directive or prompt corrective action directive by a federal bank regulatory agency to maintain a specific capital level for any capital measure;

 

  •   “adequately capitalized” if it has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 6% or greater, a CET1 capital ratio of 4.5% or greater, and generally has a leverage capital ratio of 4% or greater;

 

  •   “undercapitalized” if it has a total risk-based capital ratio of less than 8%, a Tier 1 risk-based capital ratio of less than 6%, a CET1 capital ratio of less than 4.5% or generally has a leverage capital ratio of less than 2%;

 

  •   “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 4%, a CET1 capital ratio of less than 3%, or a leverage capital ratio of less than 3%; or

 

  •   “critically undercapitalized” if its tangible equity is equal to or less than 2% to total assets.

The federal bank regulators have authority to require additional capital.

The Dodd-Frank Act significantly modified the capital rules applicable to us and call for increased capital, generally.

 

  •   the generally applicable prompt corrective action leverage and risk-based capital standards, or generally applicable standards, including the types of instruments that may be counted as Tier 1 capital, will be applicable on a consolidated basis to depository institution holding companies, as well as their bank and thrift subsidiaries.

 

  •   the generally applicable standards in effect prior to the Dodd-Frank Act will be “floors” for the standards to be set by the regulators.

 

  •   bank and thrift holding companies with assets of less than $15 billion as of December 31, 2009, will be permitted to include trust preferred securities that were issued before May 19, 2010, as Tier 1 capital, but trust preferred securities issued by a bank holding company after May 19, 2010 will no longer count as Tier 1 capital.

Information concerning our and the Bank’s regulatory capital ratios at March 31, 2018 and December 31, 2017 is included under the heading “Regulatory Capital Requirements” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Information Statement.

Depository institutions that are “adequately capitalized” for bank regulatory purposes must receive a waiver from the FDIC prior to raising or renewing brokered deposits, and cannot pay interest rates that significantly exceed market rates. FDICIA generally prohibits a depository institution from making any capital distribution (including paying dividends) or paying any management fee to its holding company, if the depository institution

 

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thereafter would be “undercapitalized.” Institutions that are “undercapitalized” are subject to prohibitions on brokered deposits, growth limitations and are required to submit a capital restoration plan for approval. A depository institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company is limited to the lesser of 5% of the depository institution’s total assets at the time it became undercapitalized and the amount necessary to bring the institution into compliance with applicable capital standards. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” If the controlling holding company fails to fulfill its obligations under FDICIA and files (or has filed against it) a petition under the Federal Bankruptcy Code, the claim against the holding company’s capital restoration obligation would be entitled to a priority in such bankruptcy proceeding over third-party creditors of the bank holding company. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized”, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.

The prompt corrective action rules have been conformed by the Basel III Capital Rules, as discussed below.

Basel III Capital Rules

The Federal Reserve, the OCC and the other bank regulators adopted in June 2013 final capital rules for bank holding companies and banks implementing the Basel Committee on Banking Supervision’s “Basel III: A Global Regulatory Framework for more Resilient Banks and Banking Systems.” These new U.S. capital rules are called the Basel III Capital Rules.

The Basel III Capital Rules limit Tier 1 capital to common stock and noncumulative perpetual preferred stock, as well as qualifying trust preferred securities and cumulative perpetual preferred stock issued before May 19, 2010, each of which are grandfathered in Tier 1 capital for bank holding companies with less than $15 billion in assets. A new capital measure, Common Equity Tier I Capital, or CET1 has been added by the Basel III Capital Rules. CET1 includes common stock and related surplus, retained earnings and, subject to certain adjustments, minority common equity interests in subsidiaries. CET1 is reduced by deductions for:

 

  •   goodwill and other intangibles, other than mortgage servicing assets, which are treated separately, net of associated DTLs;

 

  •   DTAs arising from operating losses and tax credit carryforwards net of allowances and DTLs;

 

  •   gains on sale from any securitization exposure; and

 

  •   defined benefit pension fund net assets (i.e., excess plan assets), net of associated DTLs.

Additional “threshold deductions” of the following that are individually greater than 10% of CET1 or collectively greater than 15% of CET1 (after the above deductions are also made):

 

  •   Mortgage service assets, net of associated DTLs;

 

  •   DTAs arising from temporary differences that could not be realized through net operating loss carrybacks, net of any valuation allowances and DTLs;

 

  •   significant common stock investments in unconsolidated financial institutions, net of associated DTLs; and

 

  •   Noncumulative perpetual preferred stock, Tier 1 minority interest not included in CET1, subject to limits, and current Tier 1 capital instruments issued to the U.S. Treasury, including shares issued pursuant to the TARP or SBLF programs, will qualify as additional Tier 1 capital (all other qualifying preferred stock, subordinated debt and qualifying minority interests will be included in Tier 2 capital).

 

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In addition to the minimum risk-based capital requirements, a new “capital conservation buffer” of CET1 capital of at least 2.5% of total risk-weighted assets, will be required. The capital conservation buffer will be calculated as the lowest of:

 

  •   the banking organization’s CET1 capital ratio minus 4.5%;

 

  •   the banking organization’s Tier 1 risk-based capital ratio minus 6.0%; and

 

  •   the banking organization’s total risk-based capital ratio minus 8.0%.

The capital conservation buffers and the related restrictions on permissible dividends, stock repurchases and discretionary bonuses were applicable for the first time in 2016. The capital conservation buffer of 0.625% or less became effective in 2016. In 2017, the capital conservation trigger is 1.25% or less.

Full compliance with the capital conservation buffer is required by January 1, 2019. When fully-phased in by 2019, permissible dividends, stock repurchases and discretionary bonuses will be limited to the following percentages based on the capital conservation buffer as calculated above, subject to any further regulatory limitations, including those based on risk assessments and enforcement actions:

 

Buffer%

   % Limit  

More than 2.50%

     None  

> 1.875% - 2.50%

     60.00 % 

> 1.250% - 1.875%

     40.00 % 

> 0.625% - 1.250%

     20.00 % 

< 0.625%

     -0-  

The various capital elements and total capital under the Basel III Capital Rules, at December 31, 2017, and when fully phased by January 1, 2019 are:

 

     December 31,
2017 		    Fully Phased In
January 1, 2019 		 

Minimum CET1

     4.50 %      4.50 % 

Capital Conservation Buffer

     1.25 %      2.50 % 

Total CET1

     5.75 %      7.00 % 

Deductions from CET1

     80.00 %      100.00 % 

Minimum Tier 1 Capital

     6.00 %      6.00 % 

Minimum Tier 1 Capital plus conservation buffer 1

     7.88 %      8.50 % 

Minimum Total Capital

     8.00 %      8.00 % 

Minimum Total Capital plus conservation buffer 1

     9.88 %      10.50 % 

 

1   For 2018.

Changes in Risk-Weightings

The Basel III Capital Rules significantly change the risk-weightings used to determine risk-weighted capital adequacy. Among various other changes, the Basel III Capital Rules apply a 250% risk-weighting to MSRs, DTAs that cannot be realized through net operating loss carry-backs and significant (greater than 10%) investments in other financial institutions. The proposal also would change the risk-weighting for residential mortgages, including mortgages sold. A new 150% risk-weighted category applies to “high volatility CRE loans,” which are credit facilities for the acquisition, construction or development of real property other than one-to-four family residential properties or commercial real projects where: (i) the loan-to-value ratio is not in excess of interagency real estate lending standards; and (ii) the borrower has contributed capital equal to not less than 15% of the real estate’s “as completed” value before the loan was made.

The Basel III Capital Rules also change some of the risk-weightings used to determine risk-weighted capital adequacy. Among other things, the Basel III Capital Rules:

 

  •   assign a 250% risk-weight to MSRs;

 

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  •   assign up to a 1,250% risk-weight to structured securities, including private label mortgage securities and asset backed securities;

 

  •   retain existing risk-weights for residential mortgages, but assign a 100% risk-weight to most CRE loans and a 150% risk-weight for “high volatility” CRE loans;

 

  •   assign a 150% risk-weight to past due exposures (other than sovereign exposures and residential mortgages);

 

  •   assign a 250% risk-weight to DTAs, to the extent not deducted from capital (subject to certain maximums);

 

  •   retain the existing 100% risk-weight for corporate and retail loans; and

 

  •   increase the risk-weight for exposures to qualifying securities firms from 20% to 100%.

Illustrative Changes to Prompt Corrective Action Rules

Under the Basel III Capital Rules, the prompt corrective action rules and categories changed as of January 1, 2015. The following illustrates the range of the changes from well capitalized, to undercapitalized, to critically undercapitalized categories. The adequately capitalized and significantly undercapitalized categories also were retained with appropriate changes, but are not included in the following illustration.

 

     Minimums
     Pre-2015   Basel III

Well capitalized

    

CET1

   —     6.5%

Tier 1 risk-based capital

   6.0%   8.0%

Total risk-based capital

   10.0%   10.0%

Tier 1 leverage ratio

   5.0%   5.0%

Undercapitalized

    

CET1

   —     < 4.5%

Tier 1 risk-based capital

   < 4.0%   £ 6.0%

Total risk-based capital

   < 8.0%   < 8.0%

Tier 1 leverage ratio

   < 5.0%   < 4.0%

Critically undercapitalized

   Tangible equity to total assets
£ 2.0% 		  Tier 1 capital plus non-Tier 1
perpetual preferred stock to total
assets £ 2.0%

Section 201 of the 2018 Growth Act, provides that banks and bank holding companies with consolidated assets of less than $10 billion that meet a “community bank leverage ratio,” established by the federal bank regulators between 8% and 10%, are deemed to satisfy applicable risk-based capital requirements necessary to be considered “well capitalized.” The federal banking agencies have the discretion to determine that an institution does not qualify for such treatment due to its risk profile. An institution’s risk profile may be assessed by its off-balance sheet exposure, trading of assets and liabilities, notional derivatives’ exposure, and other methods.

FDICIA

FDICIA directs that each federal bank regulatory agency prescribe standards for depository institutions and depository institution holding companies relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth composition, a maximum ratio of classified assets to capital, minimum earnings sufficient to absorb losses, a minimum ratio of market value to book value for publicly traded shares, safety and soundness, and such other standards as the federal bank regulators deem appropriate.

Enforcement Policies and Actions

The Federal Reserve and the OCC monitor compliance with laws and regulations. The CFPB monitors compliance with laws and regulations applicable to consumer financial products and services. Violations of laws and regulations, or other unsafe and unsound practices, may result in these agencies imposing fines, penalties

 

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and/or restitution, cease and desist orders, or taking other formal or informal enforcement actions. Under certain circumstances, these agencies may enforce similar remedies directly against officers, directors, employees and others participating in the affairs of a bank or bank holding company, including fines, penalties and the recovery, or claw-back, of compensation.

Fiscal and Monetary Policy

Banking is a business that depends on interest rate differentials. In general, the difference between the interest paid by a bank on its deposits and its other borrowings, and the interest received by a bank on its loans and securities holdings, constitutes the major portion of a bank’s earnings. Thus, our earnings and growth, and that of the Bank, as well as the values of, and earnings on, our assets and the costs of our deposits and other liabilities are subject to the influence of economic conditions generally, both domestic and foreign, and also to the monetary and fiscal policies of the U.S. and its agencies, particularly the Federal Reserve. The Federal Reserve regulates the supply of money through various means, including open market dealings in U.S. government securities, the setting of the discount rate at which banks may borrow from the Federal Reserve, and the reserve requirements on deposits.

The Federal Reserve has been paying interest on depository institutions’ required and excess reserve balances since October 6, 2008. The payment of interest on excess reserve balances was expected to give the Federal Reserve greater scope to use its lending programs to address conditions in credit markets while also maintaining the Federal Funds rate close to the target rate established by the Federal Open Market Committee, or FOMC. The Federal Reserve has indicated that it may use this authority to implement a mandatory policy to reduce excess liquidity, in the event of, or threat of, inflation.

On April 30, 2010, the Federal Reserve Board amended Regulation D (Reserve Requirements of Depository Institutions) authorizing the Reserve Banks to offer term deposits to certain institutions. Term deposits, which are deposits with specified maturity dates, will be offered through a Term Deposit Facility. Term deposits will be one of several tools that the Federal Reserve could employ to drain reserves when policymakers judge that it is appropriate to begin moving to a less accommodative stance of monetary policy.

In 2011, the Federal Reserve repealed its historical Regulation Q to permit banks to pay interest on demand deposits. The Federal Reserve also engaged in several rounds of quantitative easing, or QE, to reduce interest rates by buying bonds, and “Operation Twist” to reduce long term interest rates by buying long term bonds, while selling intermediate term securities. Beginning in December 2013, the Federal Reserve began to taper the level of bonds purchased in December 2013, but continued to reinvest the principal of its securities as these mature.

The Federal Reserve Normalization Policy adopted September 2014, includes gradually raising the Federal Reserve’s target range for the Federal Funds rate to more normal levels and gradually reducing the Federal Reserve’s holdings of U.S. government and agency securities. The Federal Reserve’s target Federal Funds rate has increased seven times since December 2015 in 25 basis point increments from 0.25% to 2.00% on June 13, 2018. Although the Federal Reserve considers the target Federal Funds rate its primary means of monetary policy normalization, in September 2017, it began reducing its securities holding by not reinvesting the principal of maturing securities, subject to certain monthly caps on amounts not reinvested.

The nature and timing of any changes in monetary policies and their effect on us and the Bank cannot be predicted. The turnover of a majority of the Federal Reserve Board and the members of its FOMC and the appointment of a new Federal Reserve Chairman may result in changes in policy and the timing and amount of monetary policy normalization.

 

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FDIC Insurance Assessments

The Bank’s deposits are insured by the FDIC’s Deposit Insurance Fund, or DIF, and the Bank is subject to FDIC assessments for its deposit insurance, as well as assessments by the FDIC to pay interest on Financing Corporation, or FICO, bonds.

Effective April 1, 2011, the FDIC began calculating assessments based on an institution’s average consolidated total assets less its average tangible equity, or FDIC Assessment Base, in accordance with changes mandated by the Dodd-Frank Act. The FDIC’s changes shifted part of the burden of deposit insurance premiums toward depository institutions relying on funding sources other than customer deposits.

Effective July 1, 2016, the FDIC again changed its deposit insurance pricing and eliminated all risk categories and now uses a “financial ratios method” based on CAMELS composite ratings to determine assessment rates for small established institutions with less than $10 billion in assets, or Small Banks. The financial ratios method sets a maximum assessment for CAMELS 1 and 2 rated banks, and sets minimum assessments for lower rated institutions. All basis points are annual amounts.

The following table shows the FDIC assessment schedule for 2017 applicable to Small Banks, such as the Bank.

 

    Established Small Institution CAMELS Composite
    1 or 2   3   4 or 5

Initial Base Assessment Rule

  3 to 16 basis points   6 to 30 basis points   16 to 30 basis points

Unsecured Debt Adjustment

  -5 to 0 basis points   -5 to 0 basis points   -5 to 0 basis points

Total Base Assessment Rate

  1.5 to 16 basis points   3 to 30 basis points   11 to 30 basis points

The FDIC’s “reserve ratio” of the DIF to total industry deposits reached its 1.15% target effective June 30, 2016. On March 15, 2016 the FDIC implemented Dodd-Frank Act provisions by raising the DIF’s minimum reserve ratio from 1.15% to 1.35%. The FDIC imposed a 4.5 basis point annual surcharge on insured depository institutions with total consolidated assets of $10 billion or more, or Large Banks. The new rules grant credits to smaller banks for the portion of their regular assessments that contribute to increasing the reserve ratio from 1.15% to 1.35%.

Prior to when the new assessment system became effective, the Bank’s overall rate for assessment calculations was 9 basis points or less, which was within the range of assessment rates for the lowest “risk category” under the former FDIC assessment rules. In 2017, 2016 and 2015, we recorded a FDIC insurance premium expense of $5.2 million, $5.1 million and $4.9 million, respectively.

In addition, all FDIC-insured institutions are required to pay a pro rata portion of the interest due on FICO bonds, which mature during 2017 through 2019. FICO assessments are set by the FDIC quarterly on each institution’s FDIC Assessment Base. The FICO assessment was 0.600 basis points in three quarters of 2015 and 0.580 basis points in one quarter of 2015, except for the third quarter of 2015, when the FICO assessment declined 140 basis points. The FICO assessment rate was 0.580 basis points in the first quarter of 2016, and 0.560 basis points for the remainder of that year. The FICO Assessment rate was 0.560 basis points in the first quarter of 2017, and 0.540 basis points through December 31, 2017. FICO assessments of less than $500 thousand were paid to the FDIC in 2015, 2016 and 2017, respectively. FICO assessments have been set at 0.460 basis points in the first quarter of 2018 and 0.440 basis points in the second quarter of 2018. The FICO assessments should continue to decline through 2019 when the last FICO bonds mature and such assessments end.

Lending Practices

The federal bank regulators released guidance in 2006 on “Concentrations in Commercial Real Estate Lending.” The guidance defines CRE loans as exposures secured by raw land, land development and construction

 

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(including 1-4 family residential construction), multi-family property, and non-farm nonresidential property where the primary or a significant source of repayment is derived from rental income associated with the property (that is, loans for which 50% or more of the source of repayment comes from third party, non-affiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of this property. Loans to REITs and unsecured loans to developers that closely correlate to the inherent risks in CRE markets would also be considered CRE loans under the guidance. Loans on owner occupied CRE are generally excluded.

The guidance requires that appropriate processes be in place to identify, monitor and control risks associated with real estate lending concentrations. This could include enhanced strategic planning, CRE underwriting policies, risk management, internal controls, portfolio stress testing and risk exposure limits as well as appropriately designed compensation and incentive programs. Higher allowances for loan losses and capital levels may also be required. The guidance is triggered when either:

 

  •   Total reported loans for construction, land development, and other land of 100% or more of a bank’s total capital; or

 

  •   Total reported loans secured by multifamily and nonfarm nonresidential properties and loans for construction, land development, and other land are 300% or more of a bank’s total risk-based capital.

This guidance was supplemented by the Interagency Statement on Prudent Risk Management for Commercial Real Estate Lending (December 18, 2015). The guidance also applies when a bank has a sharp increase in CRE loans or has significant concentrations of CRE secured by a particular property type.

The Bank monitors its concentration of CRE loans and its relationship to its Total Risk-based Capital. The following table depicts the exposure for the three months ending March 31, 2018 and 2017 and for the last three years ending December 31 2017, 2016 and 2015:

 

     As of March 31,     As of December 31,  
     2018     2017     2017     2016     2015  
     (In thousands except percentages)  

Commercial Real Estate (CRE)

          

Non-owner occupied

   $ 1,699,494     $ 1,528,870     $ 1,745,839     $ 1,445,243     $ 1,105,884  

Multi-family residential

     756,934       703,763       795,912       669,659       457,934  

Land development and construction loans

     414,028       473,288       421,285       429,085       332,493  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total CRE

   $ 2,870,456     $ 2,705,921     $ 2,963,036     $ 2,543,987     $ 1,896,311  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of Risk-based Capital

     333.47 %      317.39 %      334.48 %      299.99 %      231.90 % 

% of Total Loan Portfolio

     48.24 %      46.03 %      48.84 %      44.13 %      33.72 % 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Land development and construction loans

   $ 414,028     $ 473,288     $ 421,285     $ 429,085     $ 332,493  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of Risk-based Capital

     48.10 %      55.51 %      47.56 %      50.60 %      40.66 % 

% of Total Loan Portfolio

     6.96 %      8.05 %      6.94 %      7.44 %      5.91 % 

Total Risk-based Capital

   $ 860,779     $ 852,541     $ 885,855     $ 848,029     $ 817,728  

Total Loan Portfolio

   $ 5,950,450     $ 5,878,218     $ 6,066,225     $ 5,764,761     $ 5,623,222  

We have always had significant exposures to loans secured by CRE due to the nature of our markets and the loan needs of both our retail and commercial customers. We believe our long term experience in CRE lending, underwriting policies, internal controls, and other policies currently in place, as well as our loan and credit monitoring and administration procedures, are generally appropriate to manage our concentrations as required under the guidance.

The federal bank regulators continue to look at the risks of various assets and asset categories and risk management. In December 2015, the Federal Reserve and other bank regulators issued an interagency statement

 

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to highlight prudent risk management practices, within existing guidance, that regulated financial institutions should implement along with maintaining capital levels commensurate with the level and nature of their CRE concentration risk.

In 2013, the Federal Reserve and other banking regulators issued their “Interagency Guidance on Leveraged Lending” highlighting standards for originating leveraged transactions and managing leveraged portfolios, as well as requiring banks to identify their highly leveraged transactions, or HLTs. The Bank adjusted its lending practices to conform to the standards. As of March 31, 2018, HLTs represented $148.3 million, or 2.49% of total loans, compared to $141.3 million, or 2.33% of total loans, as of December 31, 2017 and $174.7 million, or 3.03% of total loans, as of December 31, 2016. The Government Accountability Office issued a statement on October 23, 2017 that this guidance constituted a “rule” for purposes of the Congressional Review Act, which provides Congress with the right to review the guidance and issue a joint resolution for signature by the President disapproving it. Such a disapproval would mean that the guidance has no further force and effect and is treated as if it never had any force or effect and (2) it cannot be reissued in substantially the same form, unless authorized by a later-enacted law.

Other Dodd-Frank Act Provisions

In addition to the capital, liquidity and FDIC deposit insurance changes discussed above, some of the provisions of the Dodd-Frank Act that we believe may affect us are set forth below.

Financial Stability Oversight Council

The Dodd-Frank Act created the Financial Stability Oversight Council, or FSOC, which is chaired by the Secretary of the Treasury and composed of representatives from various financial services regulators. The FSOC has responsibility for identifying risks and responding to emerging threats to financial stability.

Executive Compensation

The Dodd-Frank Act provides shareholders of all public companies with a say on executive pay. Under the Dodd-Frank Act, each company must give its shareholders the opportunity to vote on the compensation of its executives, on a non-binding advisory basis, at least once every three years. The Dodd-Frank Act also adds disclosure and voting requirements for golden parachute compensation that is payable to named executive officers in connection with sale transactions.

The SEC is required under the Dodd-Frank Act to issue rules obligating companies to disclose in proxy materials for annual shareholders meetings, information that shows the relationship between executive compensation actually paid to their named executive officers and their financial performance, taking into account any change in the value of the shares of a company’s stock and dividends or distributions. The Dodd-Frank Act also provides that a company’s compensation committee may only select a consultant, legal counsel or other advisor on matters of compensation after taking into consideration factors to be identified by the SEC that affect the independence of a compensation consultant, legal counsel or other advisor.

Section 954 of the Dodd-Frank Act added section 10D to the Exchange Act. Section 10D directs the SEC to adopt rules prohibiting a national securities exchange or association from listing a company unless it develops, implements, and discloses a policy regarding the recovery or “claw-back” of executive compensation in certain circumstances. The policy must require that, in the event an accounting restatement due to material noncompliance with a financial reporting requirement under the federal securities laws, we will recover from any current or former executive officer any incentive-based compensation (including stock options) received during the three year period preceding the date of the restatement, which is in excess of what would have been paid based on the restated financial statements. There is no requirement of wrongdoing by the executive, and the claw-back is mandatory and applies to all executive officers. Section 954 augments section 304 of the Sarbanes-Oxley Act, which requires the Chief Executive Officer and Chief Financial Officer to return any bonus or other

 

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incentive or equity-based compensation received during the 12 months following the date of similarly inaccurate financial statements, as well as any profit received from the sale of employer securities during the period, if the restatement was due to misconduct. Unlike section 304, under which only the SEC may seek recoupment, the Dodd-Frank Act requires us to seek the return of compensation.

The SEC adopted rules in September 2013 to implement pay ratios pursuant to Section 953 of the Dodd-Frank Act, beginning with fiscal year 2017 annual reports and proxy statements. The SEC proposed Rule 10D-1 under Section 954 on July 1, 2015 which would direct the Nasdaq Stock Market and the other national securities exchanges to adopt listing standards requiring companies to adopt policies requiring executive officers to pay back erroneously awarded incentive-based compensation. In February 2017, the acting SEC Chairman indicated interest in reconsidering the pay ratio rule.

The Dodd-Frank Act, Section 955, requires the SEC, by rule, to require that each company disclose in the proxy materials for its annual meetings whether an employee or board member is permitted to purchase financial instruments designed to hedge or offset decreases in the market value of equity securities granted as compensation or otherwise held by the employee or board member. The SEC proposed implementing rules in February 2015, though the rules have not been implemented to date.

Section 956 of the Dodd-Frank Act prohibits incentive-based compensation arrangements that encourage inappropriate risk taking by covered financial institutions, are deemed to be excessive, or that may lead to material losses. On June 21, 2010, the federal bank regulators adopted guidance on Sound Incentive Compensation Policies, which, although targeted to larger, more complex organizations than us, include principles that have been applied to smaller organizations similar to us. This guidance applies to incentive compensation to executives as well as employees, who, “individually or a part of a group, have the ability to expose a banking organization to material amounts of risk.” Incentive compensation should:

 

  •   provide employees incentives that appropriately balance risk and reward;

 

  •   be compatible with effective controls and risk-management; and

 

  •   be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

The federal bank regulators, the SEC and other regulators proposed regulations implementing Section 956 in April 2011, which would have been applicable to, among others, depository institutions and their holding companies with $1 billion or more in assets. An advance notice of a revised proposed joint rulemaking under Section 956 was published by the financial services regulators in May 2016, but these rules have not been adopted.

As an emerging growth company, we are eligible to take advantage of exemptions to some of the requirements detailed above that are imposed upon us a public company, including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirement to provide information on the relationship between executive compensation actually paid to our named executive officers and our financial performance, exemptions from the requirement to disclose the ratio of our Chief Executive Officer pay to the pay of our median employee, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

Other

The Dodd-Frank Act requires an estimated 240-300 rulemakings and an estimated 130 studies. Many of these rules and studies have been completed. Generally, the Dodd-Frank Act and the related rules are complex, have increased our compliance costs, as well as costs imposed on the markets and on others with whom we do business. Many of the rules still lack authoritative interpretative guidance from the applicable government agencies.

 

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Credit Ratings

The Dodd-Frank Act includes a number of provisions that are targeted at improving the reliability of credit ratings. The federal bank regulators and the SEC have adopted rules to implement the Securities Act’s requirement to delete references to rating agency ratings for various purposes, including “investment securities,” which are permissible bank investments.

Derivatives

The Dodd-Frank Act requires a new regulatory system for the U.S. market for swaps and other over-the counter derivatives, which includes strict capital and margin requirements, central clearing of standardized over-the-counter derivatives, and heightened supervision of over-the-counter derivatives dealers and major market participants. These rules likely have increased the costs and collateral required to utilize derivatives, that we may determine are useful to reduce our interest rate and other risks.

Other Legislative and Regulatory Changes

Various legislative and regulatory proposals, including substantial changes in banking, and the regulation of banks, thrifts and other financial institutions, compensation, and the regulation of financial markets and their participants and financial instruments, and the regulators of all of these, as well as the taxation of these entities, are being considered by the executive branch of the federal government, Congress and various state governments.

The President of the U.S. and the majority party in both houses of Congress appear committed to financial regulatory reform, including changes to the Dodd-Frank Act. The President has frozen new rulemaking generally, and on February 3, 2017 issued an executive order containing “Core Principles for Regulating the United States Financial System,” or the Core Principals. The executive order directs the Secretary of the Treasury to consult with heads of Financial Stability Oversight Council’s members and report to the President within 120 days and periodically thereafter on how laws and government policies promote the Core Principles and to identify laws, regulations, guidance and reporting that restrain financial services regulation in a manner consistent with the Core Principles. Another executive order requires the repeal of two existing rules for any new significant regulatory proposal. Although this executive order does not apply to the SEC, the federal bank regulators or the CFPB, these independent agencies are encouraged to seek cost savings that would offset the costs of new significant regulatory actions.

Congress is also considering re-examining regulations adopted by the prior administration since June 13, 2016 under the Congressional Review Act. More sweeping changes to the Dodd-Frank Act are expected to be introduced by the Chairman of the House Financial Services Committee similar to the Financial CHOICE Act legislation introduced in 2016. These may include proposals to reduce regulation on banks and their holding companies that are well capitalized, well managed, and less risky, and eliminate or reduce regulation based on asset size alone.

Certain of these proposals, if adopted, could significantly change the regulation or operations of banks and the financial services industry. New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of the nation’s financial institutions.

The 2018 Growth Act, which, as noted above, was enacted on May 24, 2018, amends the Dodd-Frank Act, the BHC Act, the Federal Deposit Insurance Act and other federal banking and securities laws to provide regulatory relief in these areas:

 

  •   Consumer credit and mortgage lending;

 

  •   Capital requirements;

 

  •   Volcker Rule compliance;

 

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  •   Stress testing and enhanced prudential standards; and

 

  •   Capital formation.

We are evaluating the 2018 Growth Act and its likely effects on us. We believe it will facilitate our business, subject to its interpretation and implementation by our regulators. The following provisions of the 2018 Growth Act may be especially helpful to banks of our size:

 

  •   “Qualifying community banks,” defined as institutions with total consolidated assets of less than $10 billion, which meet a “community bank leverage ratio” of 8.00% to 10.00%, may be deemed to have satisfied applicable risk based capital requirements as well as the capital ratio requirements;

 

  •   Section 13(h) of the BHC Act, or the “Volcker Rule,” is amended to exempt from the Volcker Rule, banks with total consolidated assets valued at less than $10 billion, and trading assets and liabilities comprising not more than 5.00% of total assets;

 

  •   “Reciprocal deposits” will not be considered “brokered deposits” for FDIC purposes, provided such deposits do not exceed the lesser of $5 billion or 20% of the bank’s total liabilities; and

 

  •   The consolidated asset threshold at which company-run stress tests are required increased from $10 billion to $250 billion, and the consolidated asset threshold for mandatory risk committees increased from $10 billion to $50 billion.

The Volcker Rule change may enable us to invest in certain collateralized loan obligations that are treated as “covered funds” prohibited to banking entities by the Volcker Rule. Reciprocal deposits, such as CDARs, may expand our funding sources without being subjected to FDIC limitations and potential insurance assessments increases for brokered deposits.

 

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BUSINESS

Our Company

We are a bank holding company headquartered in Coral Gables, Florida, with $8.4 billion in assets, $6.3 billion in deposits, $712.3 million in common equity and $1.7 billion assets under management or custody as of March 31, 2018. We provide individuals and businesses a comprehensive array of deposit, credit, investment, wealth management and fiduciary services, both in the United States and to select international customers. These services are offered primarily through the Bank.

The Bank was founded in 1979 and is the fifth largest bank headquartered in Florida. The Bank’s primary markets are South Florida, where it operates 15 banking centers in Miami-Dade, Broward and Palm Beach counties; the greater Houston, Texas area where it has seven banking centers in Harris and Montgomery counties; and New York City where it has a loan production office in Midtown Manhattan. We are constructing an additional banking center in Katy, Texas. Our limited representative offices in Brazil and Colombia are being closed. Our previous representative office in Mexico was closed in 2017.

The Bank provides a variety of banking services through traditional channels, such as banking centers and ATMs, as well as via secure website, mobile devices and telephone. Investment, fiduciary and wealth management services are provided by the Trust Company and Investment Services.

Our Achievements and Highlights

Our highlights and operational achievements include the following:

 

  •   Strong Reputation and Client Relationships . During our more than 30 years of operating the Bank, we have maintained an excellent long-term relationship with our customers and communities. We have developed deep ties to the South Florida communities that we serve and are quickly developing a reputation as a preferred financial services provider in the greater Houston, Texas communities that we serve. Similarly, in the greater New York City area, we are well regarded as a CRE lender with the ability to underwrite and execute sophisticated CRE loans in the highly competitive greater New York City market.

 

  •   Diversified Markets . Unlike most banks that are headquartered in Florida, our markets are diversified across South Florida, the greater Houston, Texas area and the greater New York City area (especially the five New York City boroughs). Our markets are large urban areas with vibrant businesses and distinct economic centers. We believe that their diverse economies will help us mitigate the risks associated with economic downturns. We recently began lending in the Dallas and Austin, Texas markets, and are considering one or more LPOs to serve these areas.

 

  •   Affinity for doing business with Latin American clients . Through our suite of bilingual electronic banking channels and our historical relationship with MSF, we have been able to provide our international customers with a wide variety of services. Also, our presence in the South Florida and greater Houston markets has positioned us to serve an established and expanding Latin American community. In particular, our banking centers in Doral, Weston, Cypress Creek and Coral Gables, Florida, and Katy, Texas, can draw from a growing number of Venezuelans and other local Latin Americans. Our officers and employees, many of whom are bilingual, are especially skilled at guiding and serving these clients as they, buy homes and establish businesses in our communities.

 

  •  

Outstanding Employee Relations . The well-being, motivation, recognition and development of our employees are some of our long standing hallmarks. On average, our employees have worked for us for more than eight years and our executive officers have worked with us for more than 22 years. We strive to maintain superior employee relationships, and monitor our success by conducting annual evaluations with all employees to address areas where we can improve. Additionally, we frequently benchmark

 

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employee pay to compensate our employees fairly in light of the market, and therefore promote talent retention. As an independent public company, we plan to provide equity incentives to retain and attract talented personnel, reward our employees’ performance, and align their interests with our shareholders.

 

  •   Disciplined Culture . Our in-depth knowledge of our markets, credit approval processes and disciplined balance sheet growth strategies have allowed us to maintain our culture of soundness and compliance. We believe that the sophistication of our risk management practices is unique for a bank of our size. We strive to maintain our reputation above the interests of any particular officer or employee. As such, we believe that a commitment to strength and soundness, adherence to all applicable laws, and our code of ethics is the best way to ensure our continued strong reputation and success. We maintain a long-term focus on our financial performance by continually managing risk in our balance sheet with the goal of producing consistent results.

 

  •   Investment in Technology . We also maintain a long-term focus on our franchise and have made significant investments in our information technology infrastructure, personnel and our digital banking products and services. We believe that these investments have enabled us to more effectively compete with larger institutions while retaining our ability to offer customized, relationship-based services to our customers, and to more easily accommodate future growth and expansion.

Our Growth Strategy

We believe that the spin-off will speed our execution of a number of growth strategies. Our focus will be profitable growth and maximizing shareholder returns. As part of our transition to being a standalone company, we are currently engaged in a comprehensive strategic planning process with outside consultants to improve our business and performance. This process is not complete, and may change. Key strategic initiatives that we currently expect to implement are:

 

  •   Drive New Business Through Enhanced Customer Experience . We are actively working to enhance our customer service and overall customer experience. Our efforts include a new branch design and service model. Our next generation banking centers will increase staff interaction with customers with less focus on routine transactional activities. Our staff will be empowered to focus on identifying and addressing customers’ needs and problems. These additional interactions will enable us to promote the customers’ knowledge of and utilization of digital banking services, our broad product range and expand the service we provide to each household. Finally, we are completing the implementation of a new customer relationship management, or CRM, system that will allow us to proactively and efficiently identify customer needs, expand our services per household, and improve service quality and timeliness while reducing delivery costs.

 

  •   Further Diversify Our Deposit Base . While we expect to continue to serve our valued foreign depositors, including our low-cost Venezuela deposits, we seek to continue to grow our domestic deposit base. We believe that our branch network’s customer-service-oriented approach, and our attractive product offerings and pricing will help us capture deposit market share in our highly competitive markets. We may also seek to open additional banking centers in Florida and Texas and expand our online deposit gathering, to include nationwide deposit taking. The online channel is expected to allow us to more quickly raise or lower deposit balances in an opportunistic fashion without having to consider fixed branch investments.

In order to grow our core deposit balances, and contain our overall deposit costs, we plan to continue to develop new products and product suites that will address our customers’ varying needs, expand our cross selling success and increase customer loyalty.

 

  •  

Further Diversify Our Wealth Management Offerings . The Bank offers brokerage, investment advisory and trust services through its wholly owned subsidiaries. Presently, our wealth management customer base is comprised almost entirely of wealthy foreign persons. We plan to use our qualified investment and trust staff, and extensive asset management infrastructure already in place, to seek additional

 

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domestic wealth management customers, including among our existing bank customers, increase fee revenues, and increase the member of services we offer per household and customer loyalty.

 

  •   Leverage Our Lending Strengths to Expand Other Lines of Business . We believe that we possess a competitive strength in CRE lending in our three primary markets. We are also very knowledgeable in serving the needs of commercial customers in our Florida and Texas markets. We seek to further leverage our expertise in lending transactions by cross-selling our borrower’s deposit, treasury management and other deposit and fee generating services.

 

  •   Seeking Continued Improvements in Operational Efficiency . As a MSF subsidiary, we offered certain products and services which we may not have offered as a standalone financial institution. Following the spin-off, we will evaluate the products and services we offer. As a result of this evaluation, certain of our products and services may be discontinued or modified due to risks or complexity, or insufficient volumes or profitability. We will also continue seeking operational efficiencies and other measures to improve our operating margins. We intend to improve operational efficiency by simplifying our business and enhancing our electronic banking services and customers’ utilization of more of our services. We seek further automation of our manual customer service and back office processes.

Our Segments

We report our results of operations through four segments: Personal and Commercial (“PAC”), Corporate LATAM, Treasury and Institutional.

The PAC segment represents the largest contributor to our results in terms of loan and deposit volumes and income, representing, among others, the following businesses: commercial real estate (“CRE”), middle market, commercial (both domestic and international), small business and personal, family and household clients (both domestic and international). This segment is supported by the Bank’s 15 banking centers in Florida, seven in Texas and the loan production office in New York City, and a wide array of products and services offered by the Bank. In addition, PAC, in conjunction with our Treasury segment, participates in the sourcing and management of syndicated and purchased accounts receivable loans.

Corporate LATAM serves Tier 1 financial institutions and a select number of companies in the target countries of Brazil, Chile, Peru, Colombia and Mexico. Corporate LATAM customers generally have over $1.0 billion in annual sales and operate in several large industries.

Treasury manages certain elements of the Bank’s balance sheet, including liquidity, duration, economic values and general asset/liability management, or ALM. Therefore, it derives a significant portion of its results from its securities portfolio management activities. These activities seek to maintain an adequate combination of profitability, liquidity, interest risk and credit risk of the Bank’s investment portfolio to achieve its overall strategic goals, including capital preservation. Through the timing of its purchases and sales to achieve these objectives, Treasury historically has also provided a source of revenue to us in a volatile and constantly changing economic environment. In addition, Treasury, together with PAC, participates in sourcing and managing syndicated and accounts receivable loans and the offering of derivative instruments to our borrowers seeking to hedge potential changes in their loan interest rates.

The activities of our Institutional segment relate to institutional or corporate overhead activities, including those of the Trust Company and Investment Services.

Our Markets

Our primary market areas are South Florida, the greater Houston, Texas and the greater New York City area, especially the five New York City boroughs. We serve the South Florida and greater Houston, Texas

 

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communities from our headquarters in Coral Gables, Florida, and through a network of 15 banking locations in South Florida and seven banking locations in the greater Houston, Texas area. We also maintain a loan production office in New York City that focuses on originating CRE loans. As part of our strategic plan, in addition to expansion in our domestic market areas, we may further diversify our markets through entry into other large metropolitan markets, especially in other major cities in Texas. Expansion may include loan production offices and banking centers.

South Florida

As of March 31, 2018, the Bank had 15 banking centers. The total domestic deposits in these offices were $1.56 billion, $1.49 billion, $1.38 billion and $1.22 billion as of March 31, 2018, December 31, 2017, 2016 and 2015, respectively. The Bank’s Florida domestic deposits have grown 111.03% since December 31, 2012. The Bank’s South Florida banking centers had total domestic loans outstanding of $3.62 billion, $3.63 billion, $ 3.54 billion and $3.24 billion as of March 31, 2018, December 31, 2017, 2016 and 2015, respectively.

South Florida’s strong economy makes it an attractive market to grow our core deposit base and make quality loans. According to 2016 census data, the median household income was $44,224, $52,954 and $55,277 in Miami-Dade, Broward, and Palm Beach counties, respectively, compared to a state-wide household income of $48,900 and a national median household income of $55,322. We believe that our experienced, customer-oriented employees and offices in the South Florida market makes us well suited to serve the needs of this market. According to U.S. Census Bureau data, the population of Florida was 20.98 million in 2016, up 9.6% since 2010. Among these Florida residents is a large population of Latin Americans. Our Latin American roots enable us to serve the banking needs of these communities, and grow.

The unemployment rate in South Florida’s tri-county area was 4.2% in March 2018 according to data provided by the U.S. Department of Labor.

Greater Houston, Texas

As of March 31, 2018, the Bank had seven banking centers with total domestic deposits of $540.5 million, $466.8 million, $314.5 million and $205.1 million as of March 31, 2018, December 31, 2017, 2016 and 2015, respectively. Over the past five years, the Bank’s total domestic deposits and its deposit market share in the Houston area has more than doubled. The Bank’s greater Houston, Texas banking centers had total domestic loans outstanding of $856.5 million, $867.2 million, $634.8 million and $403.3 million as of March 31, 2018, December 31, 2017, 2016 and 2015, respectively.

The $1.6 trillion Texas economy is the second biggest in the United States, behind only California. The metropolitan statistical area, or MSA, for Houston-The Woodlands-Sugar Land, Texas, is comprised of nine counties and represents the fifth most populous metropolitan area in the United States, according to the U.S. Census Bureau’s 2016 population estimates.

As of July 1, 2016, the U.S. Census Bureau estimates that the population of Texas was 27.9 million people, representing a 10.8% increase since 2010. The population of the Houston MSA is 24.0% of Texas’ total population, with 6.8 million people. Since 2010, this market’s population increased 14.4%.

The Houston MSA’s strong economic environment makes it an attractive market to grow our core deposit base and make quality loans. In 2016, median household income in the Houston MSA was $60,902 compared to $54,727 and $55,322 in Texas and the United States, respectively, according to data provided by the U.S. Census Bureau. The Houston MSA had the sixth highest GDP among all the metropolitan areas monitored by the U.S. Bureau of Economic Analysis in 2016. The unemployment rate in Texas and the Houston MSA was 4.0% and 4.6%, respectively, in March 2018.

 

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Real estate in the Houston MSA has recovered strongly from the floods in 2017. According to data provided by the Houston Association of Realtors, the median sale price for single-family homes in the Houston MSA reached $233,500 in March 2018, a 2.4% increase from the previous year. Median home values were approximately 10% higher than those found in Texas. Single-family home sales declined by 2.5% year-over-year in March 2018 and total dollar volume of home sales is up 0.7%. The 2016 median real estate tax paid on mortgaged properties in the Houston MSA was $3,708.

New York City

The New York City CRE market is one of the largest and most sophisticated in the world. We serve this market through our loan production office in Manhattan, which is staffed with six full-time loan originators and portfolio managers, plus one credit analyst. All of our professionals in New York City are senior bankers, with an average tenure with the Bank of seven years, and with an average of 17 years of industry experience. We serve the financing needs of our clients in the greater New York City area through our CRE lending platform, which focuses on originating construction loans and permanent loans and repositioning loans on multi-family, retail, office, industrial and select hospitality properties. As of March 31, 2018, December 31, 2017, 2016 and 2015, the Bank had outstanding loans to greater New York City area customers of $762.3 million, $780.5 million, $688.6 million and $558.5 million, respectively.

Venezuela and Latin America

Partially as a result of our affiliation with MSF, we have historically maintained a significant deposit base from customers who reside in Venezuela and other Latin American countries. In addition, through our PAC segment, we offer a variety of loans to customers located outside of the United States. As of March 31, 2018, December 31, 2017, 2016 and 2015, the Bank had deposits from international customers of $3.3 billion, $3.5 billion, $4.1 billion and $4.5 billion, respectively. At such dates, our loans to international customers were $0.7 billion, $0.8 billion, $0.9 billion and $1.4 billion, respectively. Loans to Venezuelan persons secured by U.S. residential properties were $143.3 million, $145.1 million, $147.0 million and $138.4 million as of March 31, 2018, December 31, 2017, 2016 and 2015, respectively. Loans to Venezuelans not secured by U.S. real property, principally automobile loans and outstanding credit card balances, net of deposit balances held at the Bank, were $35.1 million, $37.6 million, $37.1 million and $47.5 million as of March 31, 2018, December 31, 2017, 2016 and 2015, respectively. Outstanding loans to non-Venezuela international financial institutions, international corporate borrowers and international retail borrowers were $508.4 million, $572.6 million, $663.8 million and $1,174.3 million, respectively, at March 31, 2018, December 31, 2017, 2016 and 2015. Since December 31, 2015, average balances for loans to international financial institutions and international corporate borrowers declined by 29.88% and 48.28%.

Credit Policies and Procedures

General . We adhere to what we believe are disciplined underwriting standards. We maintain asset quality through an emphasis on local market knowledge, long-term customer relationships, consistent and thorough underwriting for all loans and a conservative credit culture. We also seek to maintain a broadly diversified loan portfolio across geographies, customers, products and industries. Our lending policies do not provide for any loans that are highly speculative, subprime, or that have high loan-to-value ratios. These components, together with active credit management, are the foundation of our credit culture, which we believe is critical to enhancing the long-term value of our organization to our customers, employees, shareholders and communities.

Credit Concentrations . In connection with the management of our credit portfolio, we actively manage the composition of our loan portfolio, including credit concentrations. Our loan approval policies establish concentration limits with respect to industry and loan product type to ensure portfolio diversification, which are reviewed at least annually. The CRE concentration limits include sub-limits by type of property and geographic market, which are reviewed semi-annually. Country limits for loans to foreign borrowers are also assessed semi-annually. In general, all concentration levels are monitored on a monthly basis.

 

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Loan Approval Process . We seek to achieve an appropriate balance between prudent and disciplined underwriting and flexibility in our decision-making and responsiveness to our customers. As of March 31, 2018, the Bank had a legal lending limit of approximately $128.7 million for unsecured loans, and its “in-house” single obligor lending limit was $35.0 million for CRE loans, representing 27.20% of our legal lending limit and $30.0 million for all other loans, representing 23.31% of our legal lending limit as of such date. Our credit approval policies provide the highest lending authority to our credit committee, as well as various levels of officer and senior management lending authority for new credits and renewals, which are based on position, capability and experience. These limits are reviewed periodically by the Bank’s board of directors. We believe that our credit approval process provides for thorough underwriting and sound and efficient decision making.

Credit Risk Management . We use what we believe is a comprehensive methodology to monitor credit quality and prudently manage credit concentration within our loan portfolio. Our underwriting policies and practices govern the risk profile and credit and geographic concentration of our loan portfolio. We also have what we believe to be a comprehensive methodology to monitor these credit quality standards, including a risk classification system that identifies potential problem loans based on risk characteristics by loan type as well as the early identification of deterioration at the individual loan level.

Credit risk management involves a collective effort among our loan officers and credit underwriting, credit administration, credit risk and collections personnel. We conduct weekly credit committee meetings to approve loans and review any other credit related matter. Once a month, the asset quality and delinquencies are also reviewed by the committee and reports are elevated to senior management and the board of directors. Our evaluation and compensation program for our loan officers includes significant asset quality goals, such as the percentage of past due loans and charge-offs to total loans in the officer’s portfolio, that we believe motivate the loan officers to focus on the origination and maintenance of high quality credits consistent with our strategic focus on asset quality.

It is our policy to discuss each loan that has one or more past due payments at our monthly meetings. Our policies require rapid notification of delinquency and prompt initiation of collection actions. Loan officers, credit administration personnel and senior management proactively support collection activities.

Deposits

Our deposits serve as the primary funding source for lending, investing and other general banking purposes. We provide a full range of deposit products and services, including a variety of checking and savings accounts, certificates of deposit, money market accounts, debit cards, remote deposit capture, online banking, mobile banking, e-Statements and direct deposit services. We also offer business accounts and cash management services, including business checking and savings accounts and treasury management services for our commercial clients. We solicit deposits through our relationship-driven team of dedicated and accessible bankers and through community focused marketing. We also seek to cross-sell deposit products and services at loan origination and loans to our depository and other customers.

We utilize brokered deposits. As of March 31, 2018, we had brokered deposits of $724,916, 12.0% of our total deposits.

Following the spin-off, we will seek to continue to increase our share of domestic deposits by continuing our banking center expansion and redevelopment plans and focusing on improved efficiency and customer satisfaction.

Investment, Advisory and Trust Services

We offer a wide variety of trust and estate planning products and services through the Trust Company. Catering to high net worth customers, our trust and estate planning products include simple and complex trusts;

 

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private foundations; personal investment companies and escrow accounts. The Trust Company also acts as a U.S. fiduciary responsible for managing trust or escrow assets, provides custody services, and provides administrative services to MSF’s non-U.S. affiliates. See “Certain Relationships and Related Party Transactions.” The Trust Company’s wholly owned subsidiary, CTC Management Services, LLC, provides corporate and ancillary administrative services for the Trust Company’s fiduciary relationships.

We also offer brokerage and investment advisory services in global capital markets through Investment Services, which is a member of FINRA, the Securities Investor Protection Corporation (SIPC) and a registered investment adviser with the SEC. Investment Services acts as an introducing broker-dealer through Pershing (a wholly owned subsidiary of The Bank of New York Mellon) to obtain clearing, custody and other ancillary services. Investment Services offers a wide range of products, including mutual funds, exchange-traded funds, equity securities, fixed income securities, structured products, discretionary portfolio management, margin lending and online equities trading. Investment Services has distribution agreements with many major U.S. and international asset managers, as well as with some focused boutique providers. Investment Services provides its services to the Bank’s U.S. domestic and international customers mainly in the PAC segment. The Bank’s retail customers are offered non-FDIC insured investment products and services exclusively through Investment Services.

MSF indirectly, through its Panama holding company, currently owns 100% of the Cayman Bank. The Cayman Bank operates under a Cayman Offshore Bank license, or B license, and a Trust license and is supervised by the Cayman Islands Monetary Authority, or CIMA. The Cayman Bank has no staff and its fiduciary services and general administration are provided by the staff of the Trust Company and the Bank, respectively, under separate agreements. Approximately 50% of our trust relationships, including those of many of our important foreign customers, employ Cayman Islands trusts and are domiciled in the Cayman Bank. The OCC periodically examines the Bank and the Trust Company and reviews the fiduciary relationships and transactions that the Trust Company and the Bank manage for the Cayman Bank.

The Cayman Bank is operated and managed by us and serves a number of our trust and wealth management customers. We intend to acquire the Cayman Bank for its book value (approximately $13.8 million), plus a premium reflecting its fair value in excess of book value. This is acquisition is subject to the negotiation of a definitive agreement and the receipt of necessary regulatory approvals. Prior to the completion of the acquisition, we expect to continue the existing fiduciary services and general administrative services agreements with the Trust Company and the Bank, subject to any regulatory requirement. The continuation of these services, as well as the continued designation of our officers and directors, including Mr. Wilson, as officers or directors of the Cayman Bank will protect our customers’ interests pending the proposed acquisition.

Other Products and Services

We offer banking products and services that we believe are attractively priced with a focus on customer convenience and accessibility. We offer a full suite of online banking services including access to account balances, online transfers, online bill payment and electronic delivery of customer statements, as well as ATMs, and banking by mobile device, telephone and mail. Many of the services provided in our online platform are also available via our mobile application for smart devices. We also offer debit cards, credit cards to our international customers, night depository, direct deposit, cashier’s checks, safe deposit boxes in various locations and letters of credit, as well as treasury management services, including wire transfer services, remote deposit capture and automated clearinghouse services.

Investments

Our investment policy, set by our board of directors, requires that investment decisions are made based on, but not limited to, the following four principles: safety of the instrument, liquidity requirements, interest-rate risk sensitivity and estimated return on investment. These characteristics are pillars of our investment decision-

 

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making process, which seeks to minimize exposure to risks while providing a reasonable yield and liquidity. The investment policy is carried out by Treasury in coordination with ALCO. Under the direction of ALCO and Treasury, the Bank employees have delegated authority to invest in securities within specified policy guidelines.

Information Technology Systems

We continue to make significant investments in our information technology systems for our deposit and lending operations and treasury management activities. We believe that this investment is essential to enhance our capabilities to offer new products, to increase our overall customer experience, to provide scale for future growth and acquisitions, and to increase controls and efficiencies in our back office operations. We purchased our core data processing platform from a nationally recognized bank software vendor, which provides us with essential functionalities to support our continued growth. Our internal network and the majority of key applications are maintained in-house. The scalability of our infrastructure is designed to support our expansion strategy. In addition, we leverage the capabilities of a third-party service provider to augment the technical capabilities and expertise that is required for us to operate as an effective and efficient organization.

The Bank is actively engaged in identifying and managing cybersecurity risks. Protecting company data, non-public customer and employee data, and the systems that collect, process, and maintain this information is deemed critical. The Bank has an enterprise-wide Information Security Program, or Security Program, which is designed to protect the confidentiality, integrity and availability of customer non-public information and bank data. The Security Program is designed to protect our operations and assets through a continuous and comprehensive cybersecurity detection, protection and prevention program. This program includes an information security governance structure and related policies and procedures, security controls, protocols governing data and systems, monitoring processes, and processes to ensure that the information security programs of third party service providers are adequate. Our Security Program also continuously promotes cybersecurity awareness and culture across the organization.

The bank also has a business continuity plan, which it actively manages to prepare for any business continuity challenges it may face. Our business continuity/disaster recovery plan provides for the resiliency and recovery of our operations and services to our customers. The plan is supported and complemented by a robust business continuity governance framework, a life safety program as well as an enterprise-wide annual exercise and training to keep the program and strategies effective, scalable and understood by all employees. We believe both the Security Program and business continuity programs adhere to industry best practices and comply with the FFIEC’s guidelines, and are subject to periodic testing and independent audits.

Competition

The banking and financial services industry is highly competitive, and we compete with a wide range of lenders and other financial institutions within our markets, including local, regional, national and international commercial banks and credit unions. We also compete with mortgage companies, brokerage firms, trust service providers, consumer finance companies, mutual funds, securities firms, insurance companies, third-party payment processors, fintech companies and other financial intermediaries on various of our products and services. Some of our competitors are not subject to the regulatory restrictions and level of regulatory supervision applicable to us.

Interest rates on loans and deposits, as well as prices on fee-based services, are typically significant competitive factors within the banking and financial services industry. Many of our competitors are much larger financial institutions that have greater financial resources than we do and compete aggressively for market share. These competitors attempt to gain market share through their financial product mix, pricing strategies and larger banking center networks. Other important competitive factors in our industry and markets include office locations and hours, quality of customer service, community reputation, continuity of personnel and services, capacity and willingness to extend credit, electronic delivery systems and ability to offer sophisticated banking

 

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products and services. While we seek to remain competitive with respect to fees charged, interest rates and pricing, we believe that our broad and sophisticated commercial banking product suite, our high-quality customer service culture, our positive reputation and long-standing community relationships enable us to compete successfully within our markets and enhance our ability to attract and retain customers.

Our Employees

As of March 31, 2018, we employed 939 full-time equivalent persons. None of our employees are represented by any collective bargaining unit or are parties to a collective bargaining agreement. We consider our relations with our employees to be very good and monitor these through employee engagement surveys. The Bank has earned an AON’s Regional “Best Employer” award in the last three years. This award recognizes those organization that have made an extraordinary effort to gain a competitive advantage through their people and, in doing so, become employers of choice.

Properties

We conduct our business from our headquarters in Coral Gables, Florida, located at 220 Alhambra Circle, Coral Gables, Florida 33134. We own the Coral Gables location and, as of March 31, 2018, occupy approximately 42% of the building, with the remaining approximately 102,000 square feet either available for lease, or leased to unrelated third-parties. All of our business segments operate out of the headquarters. A significant portion of the employees included in the Institutional segment, primarily support services, operate out of our 101,000 square feet operations center in the Beacon Industrial Park area located in Doral, Florida. We own the operations center and occupy 100% of this building.

We have 22 banking centers, including 15 in Florida and 7 in Texas. Seventeen of these are occupied under lease agreements (including land leases).

We lease approximately 6,000 square feet in New York City where we have a loan production office.

Other Subsidiaries

Intermediate Holding Company

The Company owns the Bank through our wholly-owned, intermediate holding company, Mercantil Florida Bancorp Inc., or Mercantil Florida. Mercantil Florida is the obligor under the $118.1 million aggregate principal amount of junior subordinated debentures related to our outstanding trust preferred securities. As of March 31, 2018, Mercantil Florida had cash and cash equivalents of $37.5 million.

Voting Trust

In October 2008, MSF, the Company and various individuals as Voting Trustees, entered into a Voting Trust Agreement, which we call the Voting Trust. The Voting Trust’s purposes are to promote the interests of the Bank and expand its business in the United States by facilitating access to the United States’ capital markets, and to provide continued appropriate corporate governance of the Bank upon the occurrence of certain changes or threatened changes in control of MSF not approved by MSF’s board of directors, which we refer to as Control Changes. The Voting Trust was amended and restated in 2017 to clarify its terms and governance, and to extend the Voting Trust’s original 10-year term by an additional 25 years.

The Voting Trust is organized under the laws of Florida and is a grantor trust for Federal income tax purposes. It holds all the issued and outstanding shares of capital stock of Mercantil Florida, which is the Bank’s immediate parent and sole shareholder. The Voting Trust is a “company” subject to supervision and regulation under the BHC Act. The Voting Trust has issued Voting Trust certificates representing the entire interest in the

 

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Voting Trust to the Company. In the event of Control Changes in MSF, the Voting Trustees, may cancel the existing Voting Trust certificates and distribute these to MSF’s shareholders pro rata to preserve the Bank and MSF’s shareholders’ economic interests in the Bank. No Control Change had occurred as of March 31, 2018.

The Company has determined that it is the sole beneficial owner of the Voting Trust. Accordingly, the Voting Trust’s financial statements are consolidated with the Company’s financial statements for regulatory reporting purposes.

The Voting Trustees and the Company have voted to terminate the Voting Trust. The Voting Trust will be terminated at or prior to the Distribution Date.

The REIT

Through the Bank’s subsidiary, CB Reit Holding Corporation, or REIT Hold Co., we maintain a real estate investment trust, CB Real Estate Investments, or REIT, which is taxed as a real estate investment trust. The REIT allows the Bank to better manage the Bank’s real estate portfolio. The REIT’s outstanding common stock is owned entirely by REIT Hold Co. Of the REIT’s 1,250 issued and outstanding 6.00% preferred shares (par value $750), 1,125 are owned by REIT Hold Co. and 125 are owned by different employees of the Bank.

Legal Proceedings

We are, from time to time, in the ordinary course, engaged in litigation, and we have a small number of unresolved claims pending. In addition, as part of the ordinary course of business, we are parties to litigation involving claims to the ownership of funds in particular accounts, the collection of delinquent accounts, credit relationships, challenges to security interests in collateral and foreclosure interests, that are incidental to our regular business activities. While the ultimate liability with respect to these other litigation matters and claims cannot be determined at this time, we believe that potential liabilities relating to pending matters are not likely to be material to our financial position, results of operations or cash flows. Where appropriate, reserves for these various matters of litigation are established, under FASB ASC Topic 450, Contingencies, based in part upon the advice of legal counsel.

At least quarterly, we assess our liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. For those matters where it is probable that we will incur a loss and the amount of the loss can be reasonably estimated, we record a liability in our consolidated financial statements. These legal reserves may be increased or decreased to reflect any relevant developments based on our quarterly reviews. For other matters, where a loss is not probable or the amount of the loss is not estimable, we have not accrued legal reserves, consistent with applicable accounting guidance. Based on information currently available to us, advice of counsel, and available insurance coverage, we believe that our established reserves are adequate and the liabilities arising from the legal proceedings will not have a material adverse effect on our consolidated financial condition. We note, however, that in light of the inherent uncertainty in legal proceedings there can be no assurance that the ultimate resolution will not exceed established reserves. As a result, the outcome of a particular matter or a combination of matters, if unfavorable, may be material to our financial position, results of operations or cash flows for a particular period, depending upon the size of the loss or our income for that particular period.

 

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MANAGEMENT

Our Directors and Executive Officers

The following table and biographies set forth information as to persons who serve as our directors and executive officers as of March 14, 2018. All of our directors, and Messrs. Peraza and Figueredo also serve on the board of directors of the Bank and all of our executive officers serve in the same position at the Bank.

 

Name

   Age     

Title

Gustavo J. Vollmer A.

     68      Chairman of the Board of Directors

Millar Wilson

     65     

Vice-Chairman and Chief Executive Officer

Alberto Peraza

     58      Co-President and Chief Financial Officer

Alfonso Figueredo

     57      Co-President and Chief Operating Officer

Miguel Palacios

     49      Executive Vice President and Chief Banking Officer

Alberto Capriles

     51      Executive Vice President and Chief Risk Officer

Miguel A. Capriles L.

     54      Director

Frederick C. Copeland, Jr.

     76      Director

Rosa M. Costantino

     61      Director

Pamella J. Dana, Ph.D.

     55      Director

Alejandro Gonzalez S.

     65      Director

Gustavo Marturet M.

     53      Director

Jose Antonio Villamil

     71      Director

Guillermo Villar

     75      Director

Background and Experience of our Executive Officers and Directors

Gustavo J. Vollmer A. Mr. Vollmer has served as Chairman of the board of directors of the Company and the Bank since 2012 and has been a member of the board of directors of the Company and the Bank since 2003 and 2013, respectively. Mr. Vollmer has served as the Chairman and Chief Executive Officer of MSF since 2011 and as a member of the MSF board of directors since 1997. Additionally, Mr. Vollmer has served as a member of the Latin America Advisory Committee of the New York Stock Exchange from 1996 to 2004, as a Director of the Institute of Advanced Studies in Administration (Instituto de Estudios Superiores de Administración (IESA)) since 2000, and as its Chairman from 2002 to 2008, as a member of the International Young Presidents Organization (YPO) from 1983 to 1998, and as its President from 1992 to 1993, as a member of The Group of Fifty (G-50) since 1994, as the Founding President of the Partnership for a Drug-free Venezuela from 1990 to 1991, as a member of the Development Council of Universidad Católica Andrés Bello since 2015, and as a member of the World President’s Organization (WPO) since 1998. Mr. Vollmer was also Founding Co-Chairman and a Member of the US-Venezuelan Business Council (CEVEU) from 1990 to 2010. Mr. Vollmer is a graduate of Duke University, Cambridge University and the Program for Executive Development at the International Institute for Management Development in Switzerland.

Mr. Vollmer brings extensive experience in leadership positions with global economic development and commerce, as well as business and social/community organizations to the board of directors.

Millar Wilson . Mr. Wilson has served as Chief Executive Officer of the Company and the Bank since 2009 and as the Vice-Chairman of the Company and the Bank since 2013 and as a director since 1987. Mr. Wilson also served as an alternate director for MSF from 2015 to 2017. Mr. Wilson has successfully led the Company through one of the most historically difficult times the financial industry has faced. Under his leadership, the Bank has grown to $8.4 billion in assets, achieved a continuous upward trend in net income, and enhanced both the banking center network and product offerings to steadily increase lending and deposits. Mr. Wilson has served in various roles with MSF for over 40 years, including as Executive Director of International Business of MSF from 2013 until January 2018. Mr. Wilson served as a member of the board of directors of the Federal

 

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Reserve Bank of Atlanta Miami Branch since 2013, as a member of the board of directors of Enterprise Florida, Inc. from 2009 to 2013, as chairman of the board of directors of the American Red Cross of Greater Miami and the Keys from 2001 to 2002 and as a director and treasurer of the Miami Dade College Foundation from 1999 to 2004. Mr. Wilson is a graduate of Bradford University, England and the Harvard Business School Management Development Program.

As our Chief Executive Officer, Mr. Wilson has a breadth of knowledge concerning issues affecting us. His prior executive and director experience will assist the board of directors as we continue to expand our business.

Alberto Peraza . Mr. Peraza was appointed as the Co-President and Chief Financial Officer in February 2018. Mr. Peraza provides support and guidance to the Chief Executive Officer on the execution of the business strategy. He directly manages all finance areas, including the Treasury segment, accounting, budgeting, tax and reporting. He is also responsible for investor and public relations. Mr. Peraza has served in various roles with us since 1992, including as President and Chief Operating Officer of the Bank from 2013 to 2018, Chief Financial Officer of the Bank from 1995 to 2013 and Corporate Secretary of the Bank from 1998 to 2004. Mr. Peraza has served in various finance management roles at Southeast Bank from 1980 to 1991 and Wells Fargo & Company from 1991 to 1992. Mr. Peraza has been a member of the board of directors of Habitat for Humanity of Greater Miami since 2014 and was a member of the Board of Directors of the Florida Bankers Association from 2010 to 2013 and the Coral Gables Chamber of Commerce from 2013 to 2016. Mr. Peraza is a graduate of Florida International University and the Vanderbilt University School of Bank Financial Management.

Alfonso Figueredo . Mr. Figueredo was appointed as the Co-President and Chief Operating Officer in February 2018. Mr. Figueredo is responsible for all the day-to-day business operations and administration activities, including operations & technology, human resources, legal, credit services & administration, and products & channels. Mr. Figueredo has served in various roles with MSF since 1988, including as Executive Vice President of Operations & Administration from 2015 to 2018 and Chief Financial Officer from 2008 to 2015. Previously, he held various management positions in finance from 1988 to 2008, including as Corporate Controller. Prior to joining MSF, he worked at PricewaterhouseCoopers in Caracas, Venezuela from 1981 to 1988. Mr. Figueredo served as President of the Bank Controllers Committee of the Venezuela Banking Association (ABV) from 2000 to 2005 and as a member of the Venezuelan-German Chamber of Commerce from 2012 to 2015. He received a degree in accounting and his MBA from Andres Bello Catholic University.

Miguel Palacios . Mr. Palacios was appointed as the Executive Vice President and Chief Banking Officer in February 2018. Mr. Palacios is responsible for implementing our corporate strategies, managing the business units, and establishing performance and production targets to achieve our financial objectives. He has held various roles since joining the Bank in 2005, including as Executive Vice President and Domestic Personal and Commercial Manager from 2012 to 2018, Special Assets Manager from 2009 to 2012 and Corporate International-LATAM Manager from 2005 to 2009. Mr. Palacios has also served in various roles with MSF since 1992. Mr. Palacios graduated with a degree in Business Administration from Jose Maria Vargas University.

Alberto Capriles. Mr. Capriles was appointed as the Executive Vice President and Chief Risk Officer in February 2018. Mr. Capriles is responsible for all enterprise risk management oversight, including credit, market, operational and information security risk. Mr. Capriles has served in various roles with MSF since 1995, including as Executive Vice President and Chief Risk Officer of the Bank since 2016, Corporate Treasurer from 2008 to 2015, head of Corporate Market Risk Management from 1999 to 2008, and as Corporate Risk Specialist from 1995 to 1999, where he led the project to implement MSF’s enterprise risk management model. Prior to joining MSF, Mr. Capriles served as a foreign exchange trader with the Banco Central de Venezuela (Venezuelan Central Bank) from 1989 to 1991. Mr. Capriles has also served as a Professor in the Economics Department at the Andres Bello Catholic University from 1996 to 2008. Mr. Capriles graduated with a degree in Economics from the Andres Bello Catholic University, and earned a master’s degree in International Development Economics from Yale University, and a MBA from the Massachusetts Institute of Technology.

 

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Miguel A. Capriles L. Mr. Capriles has served as a director since 2003 and as a director of MSF since 1997. Mr. Capriles has been the Managing Director of Gran Roque Capital, a real estate development firm focused on Spain and Portugal, since 2014. Previously, Mr. Capriles served as the Chairman and President of Cadena Capriles, a newspaper publisher from 1998 to 2013. He has also served as a director of H.L. Boulton S.A. since 1999 and Corporación Industrial Carabobo, C.A. since 2014, and is a member of the Governing Council of the Institute for Higher Studies in Administration (IESA) and of the Fedecámaras Consultative Council. Mr. Capriles has a degree in business administration from Universidad Metropolitana in Caracas, Venezuela.

As a long-time director of MSF and the Company and as a large shareholder of MSF and the Company, Mr. Capriles brings extensive experience with the Company to the board.

Frederick C. Copeland, Jr. Mr. Copeland has served as a director of the Company and the Bank since 2007. Previously, Mr. Copeland served as the President and Chief Executive Officer of Far East National Bank, Los Angeles, a bank, from May 2009 to December 2009 and as a member of the board of directors of Far East National Bank, Los Angeles from September 2004 to December 2009, the President and Chief Executive Officer of Aetna International, Inc., an insurance company, from 1995 to 2001, the Chairman, President and Chief Executive Officer of Fleet Bank, N.A., a bank, from 1993 to 1995, and the President and Chief Executive Officer of Citibank Canada, a bank, from 1987 to 1993. Additionally, Mr. Copeland is the Chairman of the Board of Connecticut Landmarks and a Trustee of the Wadsworth Atheneum, Hartford, Connecticut. Mr. Copeland received a Bachelor of Arts degree from Bowdoin College and a MBA from Columbia University.

Mr. Copeland brings extensive experience in leading large financial services companies to the board.

Rosa M. Costantino . Ms. Costantino has served as a director since January 2018. Ms. Costantino retired in 2015 after 36 years in the financial services industry. Ms. Costantino served in various positions with MSF from 1979 to 2015, including as the Global Personal Banking and Wealth Management Manager from 2005 to 2015 and in various roles in treasury, finance and retail banking. Ms. Costantino graduated with a degree in Economics from the Universidad Central de Venezuela. Ms. Costantino has served as a director of Mercantil Bank Schweiz, A.G., MSF’s Swiss bank subsidiary.

Ms. Costantino brings unique knowledge of the Company and wealth management expertise to the board of directors.

Pamella J. Dana, Ph.D . Dr. Dana has served as a director since 2007. Dr. Dana has served as Senior Advisor for Strategic Initiatives at the Institute for Human & Machine Cognition, a Florida-based research institute engaged in artificial intelligence, robotics, sensory substitution, data mining, and related technologies, since 2007. Previously, Dr. Dana served as the Executive Director of the Florida Governor’s Office of Tourism, Trade, and Economic Development from 1999 to 2007 and the Florida’s Chief Protocol Officer from 2002 to 2007. Dr. Dana served as Assistant and Deputy Secretary of the California Trade and Commerce Agency from 1995 to 1999. Dr. Dana serves on the board of directors of Triumph Gulf Coast, Inc. since 2013, which is overseeing the distribution of $1.5 billion in BP oil spill settlements monies awarded to Florida, and the Scripps Florida Funding Corporation Board, where she also serves on the Audit Committee, since 2007. She has been a Trustee of the Florida Chamber of Commerce Foundation since 2007, a member of the Florida Sports Foundation Board since 2011, and a member of the International Economic Development Council since 2007. From 2006 to 2009, Dr. Dana was a Trustee of the University of West Florida and was a voting member for Florida on the U.S. Gulf of Mexico Fisheries Management Council from 2011 to 2016. Dr. Dana holds a Ph.D. in International Development and Economics from the University of Southern California, a master’s degree in administration, planning and policy from Harvard University and a bachelor’s degree in sociology and social work from California State University, Chico.

Dr. Dana brings over 30 years of successful senior economic, business, and university leadership, policymaking and public affairs experience to the board of directors.

 

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Alejandro Gonzalez S. Mr. Gonzalez has served as a director since 2004 and as an alternate director of MSF since 2006. Mr. Gonzalez has served in various positions with MSF since 1981, including as Executive President from 2007 to 2013 and as Executive President of Mercantil Banco Universal from 2005 to 2007. Mr. Gonzalez has also served as a director of the Venezuelan American Chamber of Commerce and Industry (Venamcham) from 2011 to 2013, the Venezuelan National Banking Council (CBN) from 2006 to 2008, the Venezuelan Banking Association (ABV) from 2001 to 2003, the Venezuelan-Swiss Chamber of Commerce and Industry in Venezuela from 2003 to 2008, and the Venezuelan Council for Investment Promotion (CONAPRI) from 2001 to 2003. Mr. Gonzalez has a degree in chemical engineering from Universidad Metropolitana and a MBA from Babson College.

As a former executive of MSF and the Bank, Mr. Gonzalez brings a unique history and track record of success in leading a diversified financial services company to the board of directors.

Gustavo Marturet M. Mr. Marturet has served as a director since 2015 and as a director of MSF since 2014. Mr. Marturet has served as the Portfolio Manager of the Canepa Dividend Select Fund, an investment fund, since 2012. In 2017, he co-founded Unison Asset Management, an affiliate of Canepa U.S., which serves as a financial advisory firm and manages the Canepa Dividend Select Fund. Since 2016, Mr. Marturet has been a Director of Canepa Funds ICAV in Dublin, Ireland, an affiliate of Canepa U.S. Previously, Mr. Marturet served as the Head of Private Banking and Asset Management at the Bank from 2008 to 2012, and as President and Chief Executive Officer of Investment Services from 2002 to 2010. Mr. Marturet also served in various roles at Verizon Investment Management, a corporate pension manager, and Bankers Trust Company, a New York-based bank. Mr. Marturet is a graduate of Andres Bello Catholic University, Yale University, and Hult University.

Mr. Marturet brings extensive wealth management, banking and U.S. capital markets experience to the board, which will be instrumental as the Company transitions to being a publicly traded entity.

Jose Antonio Villamil . Mr. Villamil has served as a director since 2003. Mr. Villamil has over 35 years of successful experience as a senior business economist, university educator and high-level policymaker for both the Federal and Florida governments. Mr. Villamil is the Founder and currently a Senior Advisor to The Washington Economics Group, Inc., a Florida-based economic consulting firm established in 1993 upon his return to Florida from his service as Chief Economist and U.S. Undersecretary of Commerce for Economic Affairs from 1989 to 1993. He was selected in 2008 as the founding Dean of the School of Business of St. Thomas University, serving until December 31, 2013. From 1999 to 2000, he directed the Florida’s Tourism, Trade and Economic Development activities in the Office of the Governor and is the immediate past Chairman of the Governor’s Council of Economic Advisors of Florida. Mr. Villamil is a Board Member of the Beacon Council, Miami-Dade County’s official economic development organization, and Chairman of its Economic Roundtable. He also serves as Senior Fellow of the James Madison Institute of Tallahassee, Florida. Since June 2004, he has been a member of the board of directors of Spanish Broadcasting System, Inc., and since November 2010 he has been director of Pan-American Life Insurance Group. Mr. Villamil is a graduate of Louisiana State University and Florida International University.

Mr. Villamil brings over 30 years of successful experience as a senior business economist, and as a public official of both the Federal and Florida governments to the board of directors.

Guillermo Villar . Mr. Villar has served as a director of the Company and the Bank since 1998. Mr. Villar has served as a Managing Partner of Alcazar Development Group, a real estate development firm, since April 2015. Previously, Mr. Villar served as the President and Chief Executive Officer of the Bank and the Company from 1988 and 2008. Mr. Villar has also served in various roles with MSF since 1974, including as Chief Financial Officer from 1978 to 1988 and Managing Director of other international banking subsidiaries from 1980 to 2008. Prior to joining MSF, Mr. Villar managed corporate and real estate lending in Puerto Rico for Chase Manhattan Bank (now JPMorgan Chase Bank) from 1972 to 1974. Mr. Villar has served on the boards of various trade, community, and charitable organizations, including Enterprise Florida, Inc., the American Red

 

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Cross, the Small Business Credit Initiative, and the Coral Gables Chamber of Commerce. Mr. Villar has a master’s degree in Economics from Vanderbilt University and a MBA from Universidad de Puerto Rico.

As a former executive of MSF and President and Chief Executive Officer of the Bank, Mr. Villar brings extensive experience, Company knowledge and continuity to the board that is essential for maintaining the trust of our employees, customers and communities depend on when doing business with us.

Annual Shareholders’ Meeting

Our first annual meeting of shareholders after the spin-off is expected to be held in 2019. This will be an annual meeting of shareholders for the election of directors. The annual meeting will be held at our principal office or at such other place or by electronic means as permitted by the laws of the state of Florida and on such date as may be fixed from time to time by resolution of our board of directors.

Relationship with MSF

Prior to the spin-off several of our directors and executive officers served as directors and officers of MSF and at other MSF subsidiaries. In connection with the spin-off, all of our directors and executive officers have resigned from their respective positions at MSF and at other MSF subsidiaries except for Messrs. Capriles, Marturet and Vollmer, who serve on the board of directors of MSF, and Mr. Wilson who serves as Chairman at the Cayman Bank.

Director Independence

The board of directors has determined that the following directors meet the independence requirements set forth in the listing standards of the Nasdaq Stock Market: Messrs. Copeland, Villamil, Villar and Gonzalez and Dr. Dana. The board further determined that Ms. Costantino will become independent in September 2018, when she has been retired three years from MSF.

Committees of the Board of Directors

We are governed by our board of directors. In connection with the spin-off, our board of directors established the following standing committees pursuant to new charters: the compensation committee, audit committee and corporate governance and nominating committee.

Compensation Committee . In accordance with the Nasdaq Stock Market listing standards and applicable SEC rules, we have a compensation committee of the board of directors consisting of three independent members. Following the spin-off, the members of our compensation committee are expected to be Dr. Dana, as Chair, and Messrs. Copeland and Gonzalez.

We have a written compensation committee charter, which details the principal functions of the compensation committee, including:

 

  •   reviewing and approving on an annual basis the corporate goals and objectives relevant to our Chief Executive Officer’s compensation, evaluating our Chief Executive Officer’s performance in light of such goals and objectives and determining and approving the remuneration (if any) of our Chief Executive Officer based on such evaluation;

 

  •   reviewing and approving the compensation of all of our other executive officers;

 

  •   reviewing our executive compensation policies and plans;

 

  •   implementing and administering our incentive compensation equity-based remuneration plans;

 

  •   assisting management in complying with our proxy statement and annual report disclosure requirements;

 

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  •   approving all special perquisites, special cash payments and other special compensation and benefit arrangements for our executive officers and employees;

 

  •   producing a report on executive compensation to be included in our annual proxy statement; and

 

  •   reviewing, evaluating and recommending changes, if appropriate, to the remuneration for directors.

The charter also provides that the compensation committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, legal counsel or other adviser and will be directly responsible for the appointment, compensation and oversight of the work of any such adviser. However, before engaging or receiving advice from a compensation consultant, external legal counsel or any other adviser, the compensation committee will consider the independence of each such adviser, including the factors required by the Nasdaq Stock Market and the SEC.

Audit Committee . In accordance with the Nasdaq Stock Market listing standards and applicable SEC rules, we have an audit committee of the board of directors consisting of at least three independent members. Following the spin-off, the members of our audit committee are expected to be Mr. Villar, as Chair, Dr. Dana, and Messrs. Copeland and Gonzalez. Each member of the audit committee is financially literate and our board of directors has determined that Mr. Gonzalez qualifies as an “audit committee financial expert” as defined in applicable SEC rules.

We have a written audit committee charter, which details the principal functions of the audit committee, including:

 

  •   the appointment, compensation, retention, replacement and oversight of the work of the independent registered public accounting firm and any other independent registered public accounting firm engaged by us.

 

  •   pre-approving all audit and non-audit services to be provided by the independent registered public accounting firm or any other independent registered public accounting firm engaged by us, and establishing pre-approval policies and procedures;

 

  •   reviewing and discussing with the independent registered public accounting firm all relationships the independent registered public accounting firm has with us in order to evaluate their continued independence;

 

  •   setting clear hiring policies for employees or former employees of the independent registered public accounting firm;

 

  •   setting clear policies for audit partner rotation in compliance with applicable laws and regulations;

 

  •   obtaining and reviewing a report, at least annually, from the independent registered public accounting firm describing (i) the independent registered public accounting firm’s internal quality-control procedures and (ii) any material issues raised by the most recent internal quality-control review, or peer review, of the audit firm, or by any inquiry or investigation by governmental or professional authorities, within, the preceding five years respecting one or more independent audits carried out by the firm and any steps taken to deal with such issues;

 

  •   reviewing and approving any related party transaction required to be disclosed pursuant to Item 404 of Regulation S-K promulgated by the SEC prior to us entering into such transaction; and

 

  •   reviewing with management, the independent registered public accounting firm and our legal advisors, as appropriate, any legal, regulatory or compliance matters, including any correspondence with regulators or government agencies and any employee complaints or published reports that raise material issues regarding our financial statements or accounting policies and any significant changes in accounting standards or rules promulgated by the Financial Accounting Standards Board, the SEC or other regulatory authorities.

 

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Corporate Governance and Nominating Committee . In accordance with the Nasdaq Stock Market listing standards and applicable SEC rules, we have a corporate governance and nominating committee of the board of directors consisting of all independent members. Following the spin-off, the members of our corporate governance and nominating committee are expected to be Mr. Copeland, as Chair, and Messrs. Villamil and Gonzalez.

We have a written corporate governance and nominating committee charter, which details the principal functions of the corporate governance and nominating committee, including:

 

  •   to identify individuals qualified to become members of the board of directors;

 

  •   make recommendations to the board of directors regarding board of director and committee composition;

 

  •   to develop and recommend to the board of directors corporate governance principles applicable to the us; and

 

  •   over see the evaluation of the board of directors and management.

Code of Ethics

We have adopted a Code of Ethics that applies to our directors and employees, including our principal executive officer, principal financial officer, principal accounting officer and controller and persons performing similar functions.

 

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EXECUTIVE AND DIRECTOR COMPENSATION

Introduction

As an emerging growth company under the JOBS Act, we are eligible for certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. These include, but are not limited to, exemptions from certain narrative and tabular disclosure obligations regarding executive compensation in our proxy statements, including the requirement to include a Compensation Discussion and Analysis section and to provide information relating to the ratio of total compensation of our Chief Executive Officer to the median of the annual total compensation of all of our employees, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and an exemption from the requirement to hold a non-binding shareholder advisory vote on executive compensation. We are also permitted to provide scaled down financial disclosure. Furthermore, we have opted to comply with the executive compensation disclosure rules applicable to “smaller reporting companies,” which require compensation disclosure for our principal executive officer and the two most highly compensated executive officers (other than our principal executive officer) serving as executive officers at the end of the last completed fiscal year. Unless the context requires otherwise, for purposes of this section, references to “the Company” refer to Mercantil Bank Holding Corporation and its subsidiaries, including the Bank.

This section describes the executive compensation program in place for our named executive officers, or NEOs, for the year ended December 31, 2017, who are:

 

  (1) Millar Wilson — Vice-Chairman and Chief Executive Officer;

 

  (2) Alberto Peraza — Co-President and Chief Financial Officer; and

 

  (3) Miguel Palacios — Executive Vice President and Chief Banking Officer.

Summary Compensation Table

The following table sets forth certain information with respect to the compensation earned during the year that ended on December 31, 2017 by our NEOs:

 

Name and Principal Position

   Year      Salary
     Non-Equity
Incentive Plan
Compensation
(1) 		     All Other
Compensation
(2) 		     Total
 

Millar Wilson

     2017      $ 566,010      $ 1,533,872      $ 217,695      $ 2,317,577  

Vice-Chairman and Chief Executive Officer

              

Alberto Peraza

     2017      $ 496,158      $ 722,271      $ 118,801      $ 1,337,230  

Co-President and Chief Financial Officer

              

Miguel Palacios

     2017      $ 412,010      $ 400,059      $ 68,464      $ 880,534  

Executive Vice President and Chief Banking Officer

              

 

(1) Represents annual incentive cash awards earned under the Semi-Annual Variable Compensation Program and Long-Term Incentive Plan described below.
(2) All Other Compensation for the NEOs which exceeded $10,000 is detailed in the following table:

 

Name

   Matching
Awards ($)  (1) 		     Director
Fees ($)  (2) 		     Insurance
Premiums
($) (3) 		     Perquisites
($) (4) 		     Total ($)  

Millar Wilson

   $ 27,900      $ 137,650      $ 16,863      $ 35,282      $ 217,695  

Alberto Peraza

   $ 25,649      $ 63,050      $ 13,718      $ 16,384      $ 118,801  

Miguel Palacios

   $ 13,500      $ 2,000      $ 15,480      $ 37,484      $ 68,464  

 

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  (1) Represents matching contributions under the 401(k) Plan and Executive Deferred Compensation Plan.
  (2) For Mr. Wilson, represents fees paid for service on the board of directors of the Company, the Bank, Mercantil Florida, Investment Services and the Trust Company. For Mr. Peraza, represents fees paid for service on the board of directors of the Bank, Investment Services and the Trust Company. For Mr. Palacios, represents fees paid for service on the board of directors of Investment Services.
  (3) Includes employer paid insurance premium and associated gross-up payment for BOLI.
  (4) Represents auto allowance, club memberships and cellular phone payments.

Narrative to Summary Compensation Table

The compensation committee of our board of directors generally administers the compensation program for the NEOs. Each of the NEOs were employed by us prior to the spin-off. Therefore, the information provided in this section reflects compensation earned by the NEOs in connection with all services rendered in all capacities to us and reflects the design and objectives of our executive compensation programs in place prior to the spin-off. In connection with the spin-off, the compensation committee will be reorganized as required under Nasdaq Stock Market and SEC rules. Furthermore, in connection with the spin-off, the compensation committee will amend our incentive compensation programs and objectives as appropriate to reflect our status as an independent publicly-traded company.

The compensation program for our executives consists of a base salary, short-term incentive compensation (under the Semi-Annual Variable Compensation Program), long-term incentive compensation (under the Long-Term Incentive Plan), and health and welfare benefits. The compensation program’s design is based upon the Company’s performance, the level of responsibility and performance of the executive officer, and the analysis of market compensation levels and trends.

Non-Equity Incentive Plan Awards

Our NEOs are eligible to earn cash incentive awards under our Semi-Annual Variable Compensation Program and Long-Term Incentive Plan based on the level of achievement of performance goals for each applicable performance cycle under each plan.

Our Semi-Annual Variable Compensation Program is a short-term, non-equity incentive plan that is intended to motivate and reward the NEOs’ performance to us and focus the NEO’s attention on specific goals. The plan provides a cash incentive based on the achievement of individual and/or corporate performance objectives, individual contributions to us through team work and leadership, and for Millar Wilson, MSF’s financial results. The performance goals for each NEO’s awards are established at the beginning of semi-annual period, and are weighted according to their level of importance to achieving the Bank’s five-year strategic plan, which is set annually for the immediately following five year-period. The compensation committee then reviews and makes recommendations to the board of directors for approval as to the semi-annual awards based on the level of performance for the applicable semi-annual period. The first semi-annual period runs from January 1 through June 30 and the second semi-annual period runs from July 1 through December 31. For the NEOs’ 2017 awards, the performance metrics and weightings were as follows:

 

    

2017 First Semi-Annual Period

  

2017 Second Semi-Annual Period

Millar Wilson

  

•   The Bank’s financial and operating performance (40%);

 

•   MSF’s financial performance (50%); and

 

•   Contributions through team work (10%).

 

  

•   The Bank’s financial and operating performance (40%);

 

•   MSF’s financial performance (50%); and

 

•   Contributions through team work (10%).

 

 

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2017 First Semi-Annual Period

  

2017 Second Semi-Annual Period

Alberto Peraza

  

•   The Bank’s financial and operating performance (70%); and

 

•   Execution approach and contributions through team work (30%).

 

  

•   The Bank’s financial and operating performance (70%); and

 

•   Execution approach and contributions through team work (30%).

Miguel Palacios

  

•   The Bank’s financial and operating performance (70%); and

 

•   Execution approach and contributions through team work (30%).

  

•   The Bank’s financial and operating performance (70%); and

 

•   Execution approach and contributions through team work (30%).

Bonus payouts, which are equal to a percentage of an NEO’s base salary, are based on a range that depends on a NEO’s achievement of applicable performance goals. The plan sets forth the minimum, target and maximum levels of annual payouts for each salary grade, but those levels for NEOs can be adjusted in the judgment of the compensation committee, management. In addition to meeting the performance goals for the plan, employees must also be employed at the time of payment to receive a bonus under the plan. The aggregate target amounts for each NEO under the Semi-Annual Variable Program for 2017 were $635,763 for Mr. Wilson, $384,375 for Mr. Peraza, and $207,400 for Mr. Palacios. Based on the achievement of the applicable performance goals, for the 2017 First Semi-Annual Period, Mr. Wilson received $575,000, Mr. Peraza received $240,193, and Mr. Palacios received $135,815. For the 2017 Second Semi-Annual Period, Mr. Wilson received $575,000, Alberto Peraza received $283,317, and Miguel Palacios received $132,295.

In addition to the other programs and benefits described in this section, the compensation committee is entitled to award a discretionary cash bonus to the NEOs based on their historical performance. Corresponding to the first half of 2017, additional awards of $24,807 and $12,185 were paid to Mr. Peraza and Mr. Palacios, respectively. In the second half of 2017, an additional award of $60,000 was paid to Mr. Wilson for his leadership and efforts made during such time period in connection with the spin-off. Any continuation of these awards is subject to review and applicability after the spin-off. Awards for the 2017 First Semi-Annual Period were paid in cash on August 18, 2017 to Mr. Peraza and Mr. Palacios and on October 13, 2017 to Mr. Wilson. Awards for the 2017 Second Semi-Annual Period were paid in cash on February 16, 2018.

The Long-Term Incentive Plan is a long-term, non-equity incentive plan that was adopted by us in 2014 to reward participants for their performance and contributions to long-term financial organizational goals and objectives and to improve competitive positioning, assuring engagement and retention of key employees. Each award granted under the Long-Term Incentive Plan has a three-year performance cycle, which starts on January 1 of the first year and ends on December 31 of the third year, and cash awards, which equal a percentage of the executive’s base salary, are earned based on the achievement of both corporate and individual corporate goals, which are approved for each performance cycle. In 2014, we consulted with outside compensation advisors and reviewed market compensation data during the process of establishing the Long-Term Incentive Plan. Based on that consultation and review, the compensation committee chose the following three performance metrics to apply to each performance-cycle under the plan until otherwise determined by the compensation committee: (1) three year average return on equity, or ROE, which is derived from our five-year strategic plan, (2) the level of non-accruing loans/gross loans, and (3) the particular individual’s contributions. When evaluating the individual contribution metric, the compensation committee measures contributions such as an executive’s engagement with the corporate culture, his or her leadership, and teamwork, customer satisfaction scores, performance evaluation scores, and contributions to strategic goals. Payment of awards under the Long-Term Incentive Plan is contingent upon the achievement of a ROE threshold. Any award that is earned under the plan is paid following the completion of the applicable three-year performance cycle. Accordingly, the amounts shown in the Summary Compensation Table for fiscal year 2017 represent the cash incentive awards earned under the Long-Term Incentive Plan for the 2015-2017 performance cycle.

For each of the NEOs, the applicable performance metrics and weightings for the 2015-2017 performance cycle were (i) three year average ROE (50%), (ii) non-accruing loans/gross loans ratio (20%), and (iii) individual contribution (30%).

 

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For the NEOs, the applicable targets and actual payouts under the Long-Term Incentive Plan for the 2015-2017 performance cycle were as follows:

 

     Target Award (% of
2015 base salary) 		    Maximum
Award (% of
2015 base
salary) 		    Actual Award
(% of 2015 base salary) 		 

Millar Wilson

     80 %      120 %    $ 323,872 (64.8%)  

Alberto Peraza

     55 %      82.5 %    $ 173,955 (39.5%)  

Miguel Palacios

     45 %      67.5 %    $ 97,654 (34.7%)  

The award payouts for the 2015-2017 performance cycle were determined based on achievement of the corporate and individual performance metrics as described above. The actual award for each of the NEOs varied based on their individual performance during the evaluation period. The awards for the 2015-2017 performance cycle were paid on February 16, 2018 in the amounts set forth in the above table.

401(k) Plan

The Bank sponsors the Mercantil Bank Retirement Benefits Plan, or the 401(k) Plan, for its employees. Each employee is eligible to make contributions to the plan and receive matching employer contributions after attaining age 21 and three months’ employment with the Bank. The NEOs may participate in the 401(k) Plan on the same terms as the rest of the Bank’s employees. The 401(k) Plan is intended to be qualified under Section 401(a) of the Code. As a tax-qualified retirement plan, pre-tax contributions to the 401(k) Plan and earnings on those contributions are not taxable to the employees until distributed from the 401(k) Plan. Each participant may defer eligible compensation subject to the statutory limit and participants that are 50 years or older can also make additional “catch-up” contributions above the statutory limit. As a safe harbor plan, the Bank matches 100% of the first 5% of the participants’ contribution to the plan. All contributions made by both the participants and the Bank to the participants’ accounts are vested immediately.

Executive Deferred Compensation Plan

The Bank maintains a non-qualified deferred compensation plan, or the Deferred Compensation Plan, for highly compensated employees, including the NEOs. The Deferred Compensation Plan is designed to prevent such employees from being disadvantaged by 401(k) plan limits, and supplements the 401(k) Plan’s savings opportunities.

Under the Deferred Compensation Plan, eligible employees, including the NEOs, may elect to defer all or a portion of their annual salary and cash incentive awards. The Deferred Compensation Plan allows eligible employees to receive matching contributions up to 5% of their annual salary. The Deferred Compensation Plan permits deferrals of compensation above the amounts they can contribute for retirement under the 401(k) Plan. All deferrals, employer contributions, earnings, and gains on each participant’s account in the Deferred Compensation Plan are vested immediately.

Each participant’s account under the Deferred Compensation Plan holds their contributions, along with earnings, expenses, gains, and losses. Each participant makes his or her own investment decisions as to amounts held in a participant’s account from among investment options that are designated in a services agreement between the Bank and Fidelity Investments, Inc. for the Deferred Compensation Plan.

The vested portion of a participant’s Deferred Compensation Plan is distributed in cash after the participant’s separation from service, either in a lump sum payment or in installment payments, in accordance with the participant’s distribution election. Each distribution, whether in a lump sum or a series of installment payments, commences on the first day of the month following the month in which the applicable triggering event occurred. Installment payments continue annually from the commencement day of the first installment

 

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distribution. If the participant’s separation from service is due to the participant’s disability or death, the participant will immediately become 100% vested in his or her account under the plan and payment will be made in such form as designated in the participant’s distribution election.

Additional Compensation Upon Termination or Change in Control

We do not have employment agreements with any of the NEOs. However, the NEOs are eligible to receive severance payments under our severance policy, which also applies to all qualifying employees and varies by employee grade levels. Severance payments may be triggered by a reduction in work force, job elimination, or re-organization (other than a change in control). Severance is paid as a lump sum or in installments for a period of time after termination. Severance payment is conditioned upon a release of claims against us and satisfactory performance. Subject to the determination of the compensation committee, severance payments to the NEOs may be greater than the minimum they are entitled to receive under our severance policy. If the NEOs were terminated at the end of 2017, they would be eligible to receive the following amounts under the severance policy: Millar Wilson, $469,904, Alberto Peraza, $331,154, and Miguel Palacios, $279,192.

Under the Long Term Incentive Plan, if an NEO’s employment is terminated due to his retirement, disability, or death, the NEO will receive a prorated award based on the number of months employed during the performance period prior to such termination. If the NEO’s employment is terminated before payout for any other reason other than retirement, disability, or death, the award is forfeited in its entirety.

Under the Deferred Compensation Plan, the vested portion of each NEO’s account is distributed in cash after the NEO’s separation of service, either in a lump sum payment or in installment payments, in accordance with the NEO’s distribution election. In addition, if a change in control of the Bank, as defined in Section 409A of the Internal Revenue Code, occurs prior to a participant’s separation from service, the participant will become 100% vested in his or her account at such time and will receive a lump sum cash payment on the first day of the month following the change in control.

The spin-off will cause an unexpected early distribution from our deferred compensation plan that will be taxable to participants as ordinary income during 2018. We expect to partially compensate participants, in the approximate aggregate amount of $1.1 million, for the higher tax expense that will be incurred as a result of the effect of the distribution on each participant’s estimated effective tax rate. Consequently, as a result of the early taxable distribution to the participants, we will be able to deduct previously deferred compensation of approximately $7.9 million earlier than originally expected.

Outstanding Equity Awards at Fiscal Year-End

None of our NEOs had outstanding equity awards as of the end of fiscal year 2017 and we do not currently have any equity compensation plans.

2018 Equity and Incentive Compensation Plan

In anticipation of the spin-off, on March 12, 2018, our board of directors adopted and approved the Mercantil Bank Holding Corporation 2018 Equity and Incentive Compensation Plan, or the 2018 Plan, and recommended it for stockholder approval. On the same date, MSF, our sole shareholder, approved the 2018 Plan. In the future, awards under the 2018 Plan will replace cash grants under the Long-Term Incentive Plan.

The purpose of the 2018 Plan is to attract and retain our and our subsidiaries’ non-employee directors, officers and other employees and potentially certain of our consultants, and to provide to such persons incentives and rewards for service and/or performance to us and/or our subsidiaries. The compensation committee of our board of directors, as plan administrator, will determine the grantees as well as award types and grant amounts under the 2018 Plan. The compensation committee expects to select the award mix for any future grants under the 2018 Plan in consultation with its outside compensation consultants.

 

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The following types of awards are available under the 2018 Plan: option rights, appreciation rights, restricted stock, restricted stock units, cash incentive awards, performance shares, performance units, and other awards that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, Company Shares or factors that may influence the value of such shares. Awards will be in made only in shares of Class A common stock. We have reserved 10 million shares of Class A common stock for issuance under the 2018 Plan.

Our compensation committee is considering restricted stock awards in the aggregate of 1.7 to 2.5 million shares of our common stock following the distributions Class A common stock under the 2018 Plan following the Distribution.

Director Compensation

The following table provides information on 2017 compensation for each of our non-NEO directors who served during 2017. The table below reflects payments made in connection service on the board of directors of us, the Bank and Mercantil Florida, as applicable.

 

     Fees
Earned
or Paid in
Cash
($) (1) 		     All Other
Compensation
($) ( ² ) 		     Total ($)  

Alejandro Gonzalez S.

   $ 77,500      $ 16,000      $ 93,500  

Alfredo Travieso ( ³ )

   $ 134,900      $ 16,000      $ 150,900  

Federico Vollmer A. ( ³ )

   $ 76,100      $ 16,000      $ 92,100  

Frederick C. Copeland, Jr.

   $ 140,500      $ 14,000      $ 154,500  

Guillermo Villar

   $ 118,100      $ —        $ 118,100  

Gustavo Marturet M.

   $ 134,900      $ —        $ 134,900  

Gustavo J. Vollmer A. (4 )

   $ 167,100      $ 263,184      $ 430,284  

Jose Antonio Villamil (5 )

   $ 133,500      $ 60,000      $ 193,500  

Luis A. Romero ( ³ )

   $ 77,000      $ —        $ 77,000  

Miguel A. Capriles L.

   $ 52,700      $ 12,000      $ 64,700  

Pamella J. Dana, Ph.D.

   $ 120,900      $ 16,000      $ 136,900  

Peter Huwyler ( ³ )

   $ 120,900      $ 16,000      $ 136,900  

Roberto Vainrub ( ³ )

   $ 54,400      $ —        $ 54,400  

 

(1) Represents fees earned or paid in cash for services provided to us, the Bank and/or Mercantil Florida as a director, including retainer fees, committee fees, and meeting fees.
(2) Includes travel allowances for meetings for directors who live outside of the Miami area.
(3) Mr. Travieso, Mr. Frederico Vollmer, Mr. Romero, Mr. Huwyler and Mr. Vainrub resigned from the board of directors in January 2018.
(4) Mr. Vollmer was an employee of the Bank in 2017 and received a salary and health and welfare benefits and participated in our 401(k) plan.
(5) Includes amounts paid to The Washington Economics Group, Inc. pursuant to a consulting arrangement. The Washington Economics Group, Inc. is owned by Mr. Villamil’s wife and receives a monthly fee of $5,000 for the rendering of economic advisory services.

 

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We pay our directors based on the directors’ participation in board of directors and committee meetings held throughout the year (typically eight times per year). The following table illustrates the fees received by the directors in 2017.

 

     Monthly
Retainer 		     Board Meeting
Attendance Fee 		     Committee
Meeting
Attendance
Fee 		     Travel
Allowance Per
Meeting 		 

The Company

   $ —        $ 1,700      $ 1,400      $ —    

The Bank

   $ 1,500      $ 3,700      $ 1,400      $ —    

Mercantil Florida

   $ 1,250      $ 3,500      $ 1,400      $ 2,000  

In connection with the spin-off, director compensation will be restructured so that payments will be made by a single entity (i.e., us), and the amount of fees will be determined by the compensation committee after consultation with an outside compensation consultant to reflect our status as an independent publicly-traded company.

Compensation Committee Interlocks and Insider Participation

In connection with the spin-off, our board of directors reconstituted the compensation committee in accordance with Nasdaq Stock Market and SEC rules. The members of the compensation committee during 2017 were Alejandro Gonzalez S. (Chairman), Miguel A. Capriles L., Gustavo Marturet M., Luis A. Romero, Alfredo Travieso, Gustavo J. Vollmer A., Federico Vollmer A., and Millar Wilson. Except for Mr. Wilson, who is a NEO, and Mr. Vollmer, who was an employee of the Bank, none of the members of this committee in 2017 had any interlocks required to be disclosed under Regulation S-K 407(e)(4).

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

In addition to the compensation arrangements with directors and executive officers described in “Executive and Director Compensation” above, the following describes our transactions with our “related persons” since January 1, 2017, where the amount involved exceeded or will exceed $120,000. Related persons include our executive officers, directors, 5% or more beneficial owners of our common stock, immediate family members of these persons and entities in which one of these persons has a direct or indirect material interest. We generally refer to transactions with these related persons as “related party transactions.”

Policies and Procedures Regarding Related Party Transactions

Transactions by the Bank or its subsidiaries with related parties are subject to certain regulatory requirements and restrictions, including Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Regulation W. Under applicable SEC and Nasdaq Stock Market rules, related party transactions are transactions in which we are a participant, the amount involved exceeds $120,000 and a related party has or will have a direct or indirect material interest. Our related parties include directors (including nominees for election as directors), executive officers, 5% shareholders and the immediate family members of these persons.

Our board of directors has adopted a written policy governing the review and approval of transactions with related parties that are expected to exceed $120,000 in any fiscal year, which it is reviewing and will revise before the Distribution Date, as appropriate, for a public company. The policy calls for the related party transactions to be reviewed and, if deemed appropriate, approved or ratified by our audit committee. Upon determination by our audit committee that a transaction requires review under the policy, the material facts are required to be presented to the audit committee. In determining whether or not to approve a related party transaction, our audit committee will take into account, among other relevant factors, whether the related party transaction is in our best interest, whether it involves a conflict of interest and the commercial reasonableness of the transaction. In the event that we become aware of a related party transaction that was not approved under the policy before it was entered into, our audit committee will review such transaction as promptly as reasonably practical and will take such course of action as may be deemed appropriate under the circumstances. In the event a member of our audit committee is not disinterested with respect to the related party transaction under review, that member may not participate in the review, approval or ratification of that related party transaction.

Certain transactions are not subject to the related party transaction approval policy, including: (1) decisions on compensation or benefits relating to directors or executive officers and (2) credit extensions by us in the ordinary course of business, on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable loans with persons not related to us and not presenting more than the normal risk of collectability or other unfavorable features.

All related party transactions, including those described below, have been made consistent with our policy and applicable law, including Federal Reserve Regulation W.

2018 Special Dividend

On March 13, 2018, prior to MSF placing all of our outstanding Company Shares into the Trust, we paid the 2018 Special Dividend. Aside from the 2018 Special Dividend, we have paid a total of $2.7 million to MSF in three dividends since 1987.

Sale of G200 Leasing, LLC

At December 31, 2017, the Bank directly owned 25% and indirectly owned 75%, through the Bank’s beneficial interest in a U.S. based voting trust, G200 Leasing, LLC, a special purpose entity that owns a Gulfstream 200 aircraft, which, in turn, is leased to MSF pursuant to a separate lease agreement. On February 15,

 

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2018, pursuant to a purchase and sale agreement, the Bank sold its direct and indirect interests in G200 Leasing to Alvina Corporation, a wholly owned, non-U.S. subsidiary of MSF, for $8.5 million in cash (fair market value). The purchase and sale agreement contained customary representations and warranties, and provided for the resignation from the management of G200 Leasing by any Bank employees. The agreement also provided for the allocation of tax liabilities for the tax year in which the sale took place.

Registration Rights Agreement

In connection with the Separation Agreement, we have entered into a registration rights agreement with MSF with regard to MSF’s resale of the Retained Shares after the Distribution. Pursuant to the registration rights agreement, for as long as MSF holds the Retained Shares and such shares are not otherwise eligible for resale under SEC Rule 144, without volume or manner of sale restrictions, we have agreed to grant MSF “piggyback” registration rights that would require us to include, subject to certain conditions, the offering for resale of the Retained Shares on the same registration statement we use for any of our own underwritten offerings of our Company Shares. MSF could only sell, pursuant to piggy back registration rights, the same class of common stock as the Company determines to sell on its own behalf.

In addition, during that same time period, we have agreed to use our commercially reasonable efforts to file, at MSF’s request, a “shelf” registration statement registering the Retained Shares for resale from time to time. MSF may request that one offering conducted under the shelf registration statement be underwritten, as long as such offering is for at least 25% of the then-outstanding Retained Shares and the aggregate offering price, net of underwriting discounts and commissions, is expected to be at least $50.0 million. We will be required to maintain the effectiveness of the shelf registration statement until the earlier of two years and such time as MSF no longer holds the Retained Shares, or such shares are otherwise eligible for resale under SEC Rule 144 without volume or manner of sale restrictions.

We will be responsible for all costs associated with preparing any such registration statements, while MSF will be responsible for all of its sales costs, including underwriting discounts, selling commissions and expenses with respect to the Retained Shares. The registration rights agreement includes customary indemnification provisions, a requirement that we remain current in our Exchange Act reporting, and a provision requiring MSF and its executives officers and directors to enter into customary lock-up agreements in connection with any public offering of our common stock that we may undertake.

Proposed Lease Agreement

The Bank expects to lease on market terms approximately 2,000 square feet in its headquarters building pursuant to a net lease on market terms and conditions to a service company that MSF is forming to perform services solely for MSF and its non-U.S. affiliates. The annual rent is expected to be approximately $83,000, including sales tax, per year. The lease will contain customary 3% rent escalation provisions, and any build out will be conducted at MSF’s expense.

Distribution Trust

MSF irrevocably has granted three persons, as agents and representatives of MSF and its shareholders, with powers of attorney to take any action on behalf of MSF or its shareholders under the Separation Agreement or the Distribution Trust Agreement and an irrevocable proxy coupled with an interest to vote the Company Shares that the Trust holds prior to the Distribution. After the Distribution, the trustee is directed to vote the Retained Shares held in the Trust in proportion to the votes cast by our other stockholders. This proxy, however, will be automatically revoked as to particular shares upon any sale or transfer of shares from MSF to a person unaffiliated with MSF.

 

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Service Agreements

The Bank provides non-U.S. subsidiaries of MSF with various services consistent with our related party transactions approval policy and in compliance with applicable laws regarding related party transactions (including Federal Reserve Regulation W). Upon the spin-off, the various services agreements that govern the provision of the services will become transition services agreements with 12-month terms (one agreement will have an 18-month term), subject to a 6-month extension, unless terminated earlier. A transition service agreement will be terminated automatically upon any change of control of MSF or the particular non-U.S. subsidiary, or if the Bank is prohibited from providing the particular service by law, regulation, or order. The aggregate annual charges for these services are expected to be approximately $1.6 million, but charges will be reevaluated and reset semi-annually.

 

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THE SPIN-OFF

General

MSF’s board of directors and shareholders have voted to approve the spin-off. Each holder of record of MSF common stock as of April 2, 2018, which is the “record date,” will receive one share of our Class A common stock for every share of MSF class A common stock and one share of our Class B common stock for every share of MSF class B common stock, respectively, held on the record date. After giving effect to the Exchange, on February 7, 2018, there were 74,212,408 shares of our Class A common stock and 53,253,157 shares of our Class B common stock outstanding. In the aggregate, record holders of MSF common stock will receive 80.1% of each of our outstanding Class A and Class B common stock. No cash will be paid to, or payable by, MSF shareholders in lieu of fractional shares or otherwise in connection with the spin-off, including the Distribution.

The exact terms of the spin-off, including the Distribution, are subject to change as a result of discussions with, and requirements of, our bank regulators, including the Federal Reserve and the OCC. See “Risk Factors —The exact terms of the spin-off, including the Distribution, are subject to change as a result of discussions with, and requirements of, our bank regulators, including the Federal Reserve and the OCC.”

The Distribution will not affect the number of MSF Shares you hold. Upon the Distribution, you will hold MSF Shares and Company Shares, except to the extent you elect to sell any such shares.

YOU WILL NOT BE REQUIRED TO PAY FOR SHARES OF OUR COMMON STOCK RECEIVED IN THE DISTRIBUTION OR TO SURRENDER OR EXCHANGE SHARES OF MSF COMMON STOCK TO RECEIVE OUR COMMON STOCK. NO CASH IS BEING PAID TO MSF SHAREHOLDERS IN CONNECTION WITH THE SPIN-OFF, EXCEPT FOR THE MSF CASH DIVIDEND THAT WAS PREVIOUSLY DECLARED AND PAID TO HELP HOLDERS OF MSF SHARES PAY VENEZUELA TAXES ON THE DISTRIBUTED SHARES.

Separation Agreement

We entered into the Separation Agreement with MSF for the purpose of accomplishing the spin-off and setting forth various matters governing our relationship with MSF after the spin-off. The material terms of the agreement are summarized below, and it has been filed as an exhibit to the Spin-off Registration Statement, which includes this information statement. We entered into this agreement with MSF while we were still a wholly owned subsidiary of MSF. Except as required by Federal Reserve Regulation W with respect to the Bank and its subsidiaries, we believe that certain terms of the agreement are not necessarily the same as could have been obtained from an unrelated third-party. All provisions between MSF and its non-U.S. affiliates, on the one hand, and the Bank and its subsidiaries, on the other, are believed to comply with Regulation W, including terms and credit standards that are at least as favorable as those prevailing for comparable transactions with unaffiliated companies. No “low quality” assets for Regulation W purposes, or assets or liabilities that are not legally permissible for U.S. bank holding companies or national banks will be transferred to, or assumed by, us or our subsidiaries.

Record Date; Distribution of our Company Shares

MSF will notify its shareholders of record of the Distribution by notice published in two newspapers of general circulation in Venezuela, notices and hyperlinks posted on our and MSF’s websites, and electronic mail, which will include hyperlinks to our and MSF’s websites and to this information statement. We will mail copies of this information statement to MSF shareholders of record whose address of record is in the United States.

The Separation Agreement sets forth the procedures by which the shares of our Class A and Class B common stock held by the Trust will be delivered to the distribution agent on the Distribution Date as well as the retention of the Retained Shares by the Distribution Trust. MSF or its distribution agent will notify MSF

 

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record holders of the Distribution Date. Each record holder of MSF Shares will receive one share of our Class A common stock for each share of MSF class A common stock held as of the record date, and one share of our Class B common stock for every share of MSF class B common stock held as of the record date. No cash will be payable in connection with the distribution of our Class A and Class B common stock.

Retained Shares

The Distribution Trust will hold, on behalf of MSF, the 19.9% of the outstanding shares of Class A and Class B common stock that are Retained Shares. The Retained Shares will be held for sale and disposition by MSF until the Distribution Trust terminates one business day prior to its second anniversary or upon the earlier sale or disposition of all Retained Shares. The beneficial ownership of the Retained Shares will change to the Company immediately prior to any change in control of MSF. This will have an effect similar to a contribution of capital to the Company.

Exchange of information

The Separation Agreement provides for other arrangements with respect to the mutual sharing of information between us and MSF and its affiliates in order to comply with reporting, filing, audit or tax requirements, for use in judicial proceedings, and to comply with our respective obligations after the completion of the spin-off. We and MSF and its affiliates have also agreed to provide each other with access to historical business records.

Tax matters

We and MSF will cooperate with respect to all tax filings and proceedings and will treat and report the spin-off in a consistent manner.

Releases and indemnification

Except for each party’s obligations under the Separation Agreement, the other transaction documents and certain other specified liabilities, we and MSF, on behalf of ourselves and each of our respective affiliates, have released and discharged the other and its respective affiliates from all liabilities existing or arising between us on or before the completion of the spin-off. The release does not extend to obligations or liabilities under any agreements between us and MSF or its affiliates that remain in effect following the spin-off, including ordinary course liabilities for products and services.

Each party has agreed to indemnify, hold harmless and defend the other party, its affiliates and each of its respective directors, officers, employees and controlling persons, on an after-tax basis, from and against all liabilities relating to, arising out of or resulting from:

 

  •   the operation of the indemnifying party’s and its subsidiaries’ business prior to the spin-off;

 

  •   the liabilities retained by such party pursuant to the Separation Agreement; or

 

  •   any breach of the Separation Agreement.

In addition, MSF has agreed to indemnify, hold harmless and defend us, our affiliates and each of our respective directors, officers and employees, on an after-tax basis, from and against all liabilities relating to, arising out of or resulting from any untrue statement of material fact, or omission to state a material fact required to be stated, in this information statement, the Spin-off Registration Statement of which this information statement forms a part, or any registration statement under the Securities Act that we file to register Retained Shares for resale or disposition by MSF.

 

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Conditions to the separation and distribution

Pursuant to the Separation Agreement, the obligations of MSF to effect the spin-off will be subject to the fulfillment (or our waiver), at or prior to the Distribution Date, of the following conditions:

 

  •   the Separation Agreement and any other material transition agreements shall be in full force and effect and the parties shall have performed or complied with all of their respective covenants, obligations and agreements contained therein, except as have been waived by the other party;

 

  •   the Spin-off Registration Statement shall have been declared effective by the SEC and there shall be no stop-order in effect with respect thereto;

 

  •   all third party consents and waivers, as to material contracts or required for the spin-off shall have been obtained and are in full force and effect;

 

  •   MSF and the Company shall have received the opinion of Jones Day, counsel to us, confirming that the Distribution should qualify as a tax-free distribution under Section 355 of the Internal Revenue Code of 1986, as amended, or the Code, for U.S. federal income tax purposes; and

 

  •   all U.S. federal and state governmental approvals shall have been received and remain in full force and effect.

Use of the “Mercantil” name and marks

MSF has granted us a two-year license commencing on the Distribution Date to use the “Mercantil” name and marks in connection with our business. All such use must be in strict accordance with MSF’s current use policies.

No fees will be charged for the first year of the license. After the first year of the license, we will begin paying a license fee monthly, at an annual rate equal to the lesser of $400,000 or the fair value of the license as determined by an independent appraisal consistent with Federal Reserve Regulation W. Payments under this license will cease when we terminate the use of the name and mark.

We have begun work on rebranding ourselves and our subsidiaries to reflect our separation from MSF.

Expenses of the separation and distribution

Except as otherwise provided in the Separation Agreement, each of us and MSF will pay their respective expenses, including legal fees incurred, with respect to the spin-off, and will split the costs of the Distribution Trust, except as to indemnity and contribution liabilities, where the allocation will depend on the relative fault and benefit of the event giving rise to the liability.

Noncompetition agreement

During the five-year period following the spin-off, MSF has agreed generally that neither it nor its subsidiaries or affiliates will, directly or through another person, own, manage, operate, control, participate in, invest in, lend money to, acquire or hold any investment in, or otherwise carry on, the business of providing domestic, international, personal and commercial banking services, including investment, trust, and estate planning in the United States and its territories.

In addition, subject to specified exceptions, during the same five-year period, neither MSF nor its subsidiaries or affiliates will, on its own behalf or on behalf of any other person, directly or indirectly, (1) hire, engage, solicit or attempt to solicit for hire any person who is then one of our or our subsidiaries’ employees, (2) solicit or attempt to solicit any person or entity who was one of our or our subsidiaries’ customers during the 18 months immediately prior to the spin-off, or (3) solicit, request, advise or induce any supplier or other business contact of the other party to cancel, curtail or otherwise adversely change its relationship with us or our subsidiaries.

 

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Dispute resolution procedures

We have agreed with MSF that neither party will commence any court action to resolve any dispute or claim arising out of or relating to the Separation Agreement. Instead, any dispute that is not resolved in the normal course of business will be submitted to senior executives of each business entity involved in the dispute for resolution. If the dispute is not resolved by negotiation within 30 days, either party may submit the dispute to mediation. If the dispute is not resolved by mediation within 30 days of the selection of a mediator, either party may submit the dispute to binding arbitration before a panel of three arbitrators. The arbitrators will resolve the dispute in accordance with Florida law.

These dispute resolution procedures will not apply to any dispute or claim related to MSF’s or its affiliates’ rights as a holder of the Company Shares and both parties will submit to the exclusive jurisdiction of courts in Florida for resolution of any such dispute. In addition, both parties will be permitted to seek injunctive or interim relief in the event of any actual or threatened breach of the provisions of the agreement relating to confidentiality, use of restricted marks, and noncompetition agreements. If an arbitral tribunal has not been appointed, both parties may seek injunctive or interim relief from any court with jurisdiction over the matter.

Each party will bear its own costs of dispute resolution.

Other provisions

The Separation Agreement also contains covenants between us and MSF with respect to:

 

  •   confidentiality of our and MSF’s, and our respective subsidiaries’, information;

 

  •   restrictions on the parties’ ability to take any action or enter into any agreement that would cause the other party or any of its subsidiaries to violate any law, organizational document or judgment;

 

  •   restrictions on the parties’ ability to take action that reasonably could result in a breach or default under any agreement which binds or purports to bind the other party or any of its other subsidiaries;

 

  •   litigation and settlement cooperation between us and MSF and our respective subsidiaries; and

 

  •   proposed intercompany transactions, including material amendments to the agreements accomplishing the spin-off, all of which must be approved by a majority of independent directors or a committee comprised solely of independent directors.

Transition Services

The Bank, Trust Company and Investment Services have historically provided certain services to MSF’s other subsidiaries, including accounting and financial reporting, administration, operations and technology, planning and budgeting, human resources, vendor administration and management, market risk assessment, operational risk and physical security, operations and non-U.S. regulatory consulting, credit risk, loan review, technology infrastructure, treasury, and customer referral services. The Bank has entered into service contracts with the individual MSF subsidiaries receiving the services and, semi-annually, determines the price for the service, consistent with our related party transactions policies and in compliance with applicable laws regarding related party transactions (including Federal Reserve Regulation W).

Pursuant to the Separation Agreement, and subject to approval by the Federal Reserve and OCC, we have agreed that the Bank will continue to provide certain of these services to the applicable MSF entities under existing agreements for up to 12 months after the spin-off (one of them for 18 months), on the same terms (including pricing) as in effect as of the spin-off, including semi-annual reviews and pricing changes, based on semi-annual reviews. These services agreements may be extended by six months, if needed, or terminated earlier, and are subject to automatic termination upon a change in control of MSF or the particular non-U.S. subsidiary, or if the Bank is prohibited from providing the service by applicable law, regulation or order. See “Certain Relationships and Related Party Transactions.”

 

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Manner of Effecting the Distribution

The general terms and conditions relating to the spin-off are set forth in a Separation Agreement between MSF and us. As part of the spin-off, MSF has delivered 100% of the outstanding Company Shares into the Trust for the benefit of MSF and its shareholders as of the record date. All Company Shares will be held by the Trust until the Spin-off Registration Statement has been declared effective by the SEC. As soon as practical after the SEC declares the Spin-off Registration Statement effective, 80.1% of the outstanding Company Shares will be distributed to the MSF record holders, pro rata on the basis of one share of Company Class A common stock for each share of MSF class A common stock held of record on the record date and one share of Company Class B common stock for each share of MSF class B common stock held of record as of the record date. The Trust will retain the remaining 19.9% of our outstanding Class A common stock and Class B common stock until the earlier of (i) the date upon which MSF divests such shares and is no longer deemed by the Federal Reserve to “control” us under the BHC Act, provided no change in control of MSF has occurred and is continuing or (ii) one business day prior to March 15, 2020.

Direct Registration System

Company Shares will be issued in book-entry form only. For shareholders of record on the record date whose shares are registered in their own names, our transfer agent will have their Company Shares credited to their direct registration (book entry) accounts in their respective names on books and records maintained by our transfer agent and registrar. Our distribution agent will send each registered shareholder a statement reflecting their ownership of Company Shares. Direct registration (book entry) refers to a method of recording stock ownership in our records in lieu of physical certificates. Shareholders who own MSF common stock through a broker who is a participant of the Depository Trust Company, or DTC, or who hold Company Shares directly or indirectly through a DTC participant, shall have their shares credited by our transfer agent and registrar to their brokerage account, with directions for the broker to credit such shares to your brokerage account. For more information, see “— Direct Registration System” below.

We will have a direct registration (book entry) program with respect to record ownership of Company Shares. Direct registration is a form of record keeping that allows shares to be owned, reported and transferred electronically without having a physical stock certificate issued. Persons who acquire Company Shares will not receive a physical stock certificate; rather, ownership of the shares is recorded in the names of such persons electronically on our books and records. Direct registration is intended to alleviate problems relating to stolen, misplaced or lost stock certificates and to reduce the paperwork relating to the transfer of ownership of our common stock.

Under direct registration, any voting, dividend and other rights and benefits of holders of our Class A and Class B common stock, respectively, will be the same as with holders of certificates, if there were any.

At or about the time of the Distribution, our distribution agent will deliver by email to MSF shareholders of record, except those with a record address in the United States, on the record date a statement generally confirming the issuance to them of the appropriate number of Company Shares through direct registration. Company shareholders will receive an annual account statement of their holdings of Company Shares in the direct registration system. Persons who, regardless of reason, do not receive a notice of their holdings of Company Shares should contact our transfer agent, us or MSF, as provided under “Inquiries” at the beginning of this information statement.

To utilize the services of a stockbroker to sell their shares, shareholders holding their shares through direct registration must first arrange to transfer their shares to their account at their broker.

 

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Shareholders who have an account with a broker that is a DTC participant (or who hold shares through a DTC participant), may use one of two methods to arrange for transfer of their shares from their direct registration account to their brokerage account:

Method One. A shareholder may provide his broker with his personal account information contained in his direct registration statement and request that the broker initiate a transfer of the shares through the direct registration system to the broker.

Method Two. A shareholder may complete a “Broker-Dealer Authorization Form” and deliver that document to our transfer agent. The transfer agent will add appropriate stock broker information to the direct registration account so that the shareholder may by telephone or in writing transfer his shares from his direct registration account to his brokerage account.

Reasons for the Spin-off

MSF believes that the spin-off will provide MSF shareholders with opportunities and benefits, including:

 

  •   a reduction in economic and political risks to our subsidiaries and our shareholders;

 

  •   simplification of the Company’s and MSF’s businesses and regulation;

 

  •   creation of new capital raising opportunities in the United States;

 

  •   improved shareholder liquidity; and

 

  •   reduced uncertainty for MSF and us.

Results of the Spin-off

After the spin-off, we will be a public company that is no longer a subsidiary of MSF. Immediately after the Distribution, there will be 74,212,408 shares of our Class A common stock outstanding, held by approximately 17,800 holders of record, and 53,253,157 shares of our Class B common stock outstanding, held by approximately 16,300 holders of record. See “Ownership of Our Common Stock.” MSF will, however, remain our affiliate for bank regulatory and SEC purposes until MSF is no longer deemed by the Federal Reserve to “control” us under the BHC Act or under federal securities laws. See “Supervision and Regulation — Bank Holding Company Regulation” and “Risk Factors — MSF is likely to be deemed to retain “control” over us and the Bank for Federal Reserve and BHC Act purposes, which, together with the controlling shareholder base we have in common with MSF, likely will lead to restrictions and limitations upon the relationships and transactions between MSF and us, which may adversely affect our business and results of operations.”

Our Separation Agreement with MSF will govern the relationship between us and our respective subsidiaries and MSF and its subsidiaries following the spin-off, including certain transition services provided by us to MSF and its subsidiaries. See “— Separation Agreement” and “Risk Factors — The Bank has agreed to continue to provide certain services to MSF’s subsidiaries after the spin-off, which could present additional regulatory and operational risks to us.”

The Distribution will not affect the number of outstanding shares of MSF common stock or any rights of MSF’s shareholders as MSF shareholders. Each MSF shareholder will continue to have the same number of MSF Shares regardless of the amount of Company Shares received in the spin-off.

Listing and Trading of Our Common Stock

There is no current market for our Company Shares. We intend to list shares of our Class A common stock on the Nasdaq Stock Market under the symbol “MBNAA” and intend to list shares of our Class B common stock on the Nasdaq Stock Market under the symbol “MBNAB.” None of the Company Shares nor any interest therein, nor any interest in the Trust itself, may be transferred prior to the Distribution Date. We expect that trading in our Company Shares will begin on the first trading day following the Distribution Date.

 

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We cannot assure you as to the price at which Company Shares will trade. The price may fluctuate significantly. In addition, the combined trading prices of our Company Shares and MSF common stock held by shareholders after the Distribution Date may be less than, equal to, or greater than the trading price of MSF common stock prior to the Distribution, and will continually change.

Most of our shareholders will be located in Venezuela, and currency controls and the difficulty of establishing U.S. Dollar accounts may limit Venezuelans’ ability to sell or buy our Company Shares.

We are contemplating a Reorganization to reduce the number of our shareholders and related shareholder maintenance costs, through a merger with a newly formed subsidiary following the distribution. Presently, we contemplate that the Reorganization will provide that holders of less than approximately 300 shares of our Class A common stock or less than approximately 300 shares of our Class B common stock will receive solely the right to receive cash instead of fractional shares as a result of the Reorganization. The Reorganization may be subject to Federal Reserve approvals or waivers.

The Reorganization will be subject to the execution of a definitive agreement and necessary corporate and regulatory approvals or waivers, and a determination of the price to be paid for fractional shares resulting from the Reorganization. Such price may be based on the price of common stock realized in any IPO which we determine to conduct, or a volume weighted average price in the market prior to the Reorganization or after any IPO, or other value we may determine as appropriate. We do not expect that our shareholders will have any rights of dissent or appraisal in connection with the Reorganization. See “Risk Factors — Persons who trade in Company Shares between the Distribution and the Reorganization prior to any IPO, may realize significantly differed prices from those that may result from any Reorganization or potential IPO.”

Following the Reorganization, we plan to declare a stock split to bring the expected value of a share of our Class A common stock and a share of our Class B common stock to estimated values that we believe would improve their market liquidity.

The shares distributed to MSF shareholders will be freely transferable, except for shares beneficially owned by MSF and our “affiliates.” People who may be considered our affiliates after the Distribution generally include individuals or entities that control, are controlled by, or are under common control with us. This includes our executive officers, directors and 10% or greater beneficial owners of Company Shares. Our affiliates will be permitted to sell their shares only pursuant to an effective registration statement under the Securities Act or an exemption from the registration requirements of the Securities Act.

MSF currently expects to dispose of the Retained Shares within 24 months of MSF’s delivery of the Company Shares to the Trust. Our Registration Rights Agreement obligates us to register, under the Securities Act, Company Shares held by the Trust on behalf of MSF. We expect to file a registration statement following the spin-off to facilitate such resales in public offerings and have agreed to cooperate in any such resales. MSF may also sell those shares from time to time in transactions exempt from registration under the Securities Act, provided, as required by the Federal Reserve, that no one buyer acquires 2% or more of our Class A common stock.

Additionally, if we determine to make a registered offering of our Company Shares, we have granted MSF “piggyback” registration rights that would require us to include certain of the Retained Shares on the same registration statement we use for our own offering. If conducted, we expect that our IPO would include a material number of shares of our Class A common stock sold by MSF.

Reason for Supplying this Information Statement

This information is being supplied by us solely to provide information to holders of MSF Shares on the record date who will receive Company Shares in the Distribution. It is not intended and should not be construed as an inducement or encouragement to buy or sell any of our securities. The information contained in this information statement is believed by us to be accurate as of the date set forth on its cover. Changes may occur after such date and we have no obligation or intention to update the information except in the normal course of our public disclosure obligations and practices.

 

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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

The following is a summary of the material U.S. federal income tax consequences of the Distribution to the holders of MSF Shares. This summary is based on the Code, the Treasury Regulations promulgated thereunder and judicial and administrative interpretations thereof, in each case as may be in effect and available as of the date of this information statement and all of which are subject to change at any time, possibly with retroactive effect. Any such change could affect the tax consequences described below. This discussion assumes that the transaction will be consummated in accordance with the Separation Agreement and this information statement.

This summary is limited to holders of MSF’s common stock that are U.S. Holders, as defined immediately below. A U.S. Holder is a beneficial owner of MSF common stock that is, for U.S. federal income tax purposes:

 

  •   an individual who is a citizen or a resident of the United States;

 

  •   a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized under the laws of the United States or any state thereof or the District of Columbia;

 

  •   an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or

 

  •   a trust, if (i) a court within the United States is able to exercise primary jurisdiction over its administration and one or more U.S. persons have the authority to control all of its substantial decisions or (ii) in the case of a trust that was treated as a U.S. trust under the law in effect before 1997, a valid election is in place under applicable Treasury Regulations.

This discussion is not a complete description of all of the consequences of the Distribution and, in particular, does not address U.S. federal income tax considerations applicable to MSF shareholders subject to special treatment under U.S. federal income tax law. Persons subject to special treatment include, for example:

 

  •   partnerships, S corporations and other pass-through entities;

 

  •   non-U.S. persons, non-U.S. entities and U.S. expatriates;

 

  •   mutual funds, banks, thrifts and other financial institutions;

 

  •   dealers and traders in securities;

 

  •   insurance companies;

 

  •   tax-exempt entities and pension funds;

 

  •   MSF shareholders who acquired their shares through a benefit plan or a tax-qualified retirement plan, or through the exercise of an employee stock option or similar derivative or otherwise as compensation;

 

  •   MSF shareholders whose functional currency is not the U.S. Dollar;

 

  •   MSF shareholders who hold MSF common stock as part of a “hedge,” “straddle,” “conversion,” “constructive sale,” or other integrated investment or financial transaction; and

 

  •   MSF shareholders who own, or are deemed to own, at least 10% or more, by voting power or value, of MSF equity.

This summary does not address the U.S. federal income tax consequences to MSF shareholders who do not hold MSF common stock as a capital asset. Moreover, this discussion does not address any tax consequence of the Distribution arising under any U.S. state or local, or non-U.S. laws.

MSF shareholders are urged to consult with their own tax advisors regarding the tax consequences to them of the Distribution in light of their particular circumstances, including the applicability and effect of U.S. federal, state, and local, and non-U.S. tax laws.

 

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The consummation of the Distribution is conditioned upon the receipt by MSF of an opinion of Jones Day, counsel to MSF and the Company, to the effect that the Distribution should qualify as a tax-free distribution under Section 355 of the Code for U.S. federal income tax purposes. The opinion of counsel is not binding on the IRS or the courts; there can be no certainty that the IRS will not challenge the conclusions reflected in the opinion or that a court would not sustain such a challenge. Furthermore, this opinion of counsel will rely, among other things, on specified assumptions, including assumptions regarding the absence of changes in existing facts and law and the consummation of the spin-off, including the Distribution, in accordance with the Separation Agreement, and on certain representations as to factual matters made by, among others, MSF and us. Any inaccuracy in these assumptions or representations could jeopardize the conclusions reached by counsel in its opinions. Neither we nor MSF intend to request a ruling from the IRS regarding the U.S. federal income tax consequences of the Distribution.

Based upon the expected Jones Day opinion, the material U.S. federal income tax consequences of the Distribution would be as follows:

 

  •   no taxable gain or loss should be recognized by a MSF shareholder solely as the result of the receipt of Company Shares in the Distribution;

 

  •   the aggregate tax basis of the MSF Shares and Company Shares in the hands of each MSF shareholder on record immediately after the Distribution should be the same as the aggregate tax basis of the MSF Shares held by that shareholder immediately before the Distribution, allocated between the MSF Shares and Company Shares in proportion to their relative fair market values on the Distribution Date; and

 

  •   the holding period of Company Shares received by each MSF shareholder in the Distribution should include the holding period of its MSF Shares, provided that its MSF Shares were held as a capital asset on the date our common stock is distributed to MSF shareholders.

If, notwithstanding the conclusions in the opinion, it is ultimately determined that the Distribution does not qualify as tax-free for U.S. federal income tax purposes, then each MSF shareholder that is subject to U.S. federal income tax and that receives Company Shares in the Distribution could be treated for U.S. federal income tax purposes as receiving a taxable Distribution in an amount equal to the fair market value of such shares. Each such shareholder could be taxed on the full value of the Company Shares received, which generally would be treated first as a taxable dividend to the extent of MSF’s earnings and profits, then as a non-taxable return of capital to the extent of each such shareholder’s tax basis in his, her or its MSF common stock, and thereafter as capital gain with respect to any remaining value.

MSF shareholders that acquired different blocks of MSF common stock at different times or prices should consult their tax advisors regarding the determination of their basis and holding period for Company Shares distributed with respect to such blocks of MSF common stock.

 

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MATERIAL VENEZUELA TAX CONSIDERATIONS

MSF has determined that the distribution of Company Shares to MSF shareholders will be taxable to persons subject to Venezuela income taxation, including holders in the United States that are not Venezuela citizens. MSF has advised us that Venezuela income tax generally is computed in cases such as this as 34% of the taxable amount of the dividend decreed, which is calculated based on the value that the Company Shares that are carried on MSF’s books, or approximately 50.8 Bolivars per MSF Share, or an aggregate of 1.8 billion Bolivars.

At the same time as it approved the Distribution, MSF declared an aggregate cash dividend of 2.6 billion Bolivars, payable in Bolivars to holders of MSF Shares on the record date for the Distribution, which has been paid. This dividend is subject to a 34% tax rate on persons subject to Venezuela income taxation, including holders in the United States that are not Venezuela citizens.

Under the treaty to avoid double taxation between Venezuela and the United States, U.S. shareholders may be subject to lower taxes in Venezuela, and may be able to deduct the tax as a credit against the United States tax on income. Since your particular facts may differ, you are strongly encouraged to consult your own tax accountants or advisors to determine the Venezuela tax consequences to you, and properly pay such taxes when due. Neither we nor MSF have any obligations to pay any taxes that MSF shareholders may incur in connection with the spin-off, or to otherwise withhold any amounts with respect to any such tax obligations.

 

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OWNERSHIP OF OUR STOCK

MSF has owned 100% of the issued and outstanding Company Shares. As part of the spin-off, MSF placed all issued and outstanding Company Shares into the Distribution Trust for the benefit of MSF and its shareholders on the record date. The following table sets forth the projected beneficial ownership of our outstanding Class A common stock and Class B common stock, immediately after the Distribution, by:

 

  •   each person who is known by us to be the beneficial owner of 5% or more,

 

  •   each director, each director nominee, our chief executive officer and our two other most highly compensated officers identified in “Executive and Director Compensation,” and

 

  •   all of our directors, director nominees and executive officers as a group.

The beneficial ownership is calculated based on each person’s beneficial ownership of our Class A common stock and our Class B common stock issued and outstanding as of the Distribution Date. We expect that 74,212,408 shares of our Class A common stock and 53,253,157 shares of our Class B common stock will be issued and outstanding on the Distribution Date.

Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Except as otherwise noted in the footnotes below, each holder identified below has sole voting and investment power with respect to such securities. Unless otherwise provided, the address of each holder listed is c/o Mercantil Bank Holding Corporation, 220 Alhambra Circle, Coral Gables, Florida 33134.

To our knowledge, except as noted below, no person or entity is the beneficial owner of more than 5% of the voting power of our stock.

 

     Amount and Nature of
Beneficial Ownership 		 
     Class A
Common
Stock 		    Class B
Common
Stock 		 

Name of Beneficial Owner

   Shares      %     Shares      %  

Executive Officers and Directors

          

Gustavo J. Vollmer A. (1)

     5,361,632        7.22 %      1,244,271        2.34 % 

Millar Wilson

     0        *       0        *  

Alberto Peraza

     0        *       0        *  

Alfonso Figueredo

     3,444        *       2,812        *  

Miguel Palacios

     41        *       156        *  

Alberto Capriles

     0        *       0        *  

Miguel A. Capriles L. (2)

     6,485,499        8.74 %      5,318,067        9.99 % 

Frederick C. Copeland, Jr.

     0        *       0        *  

Rosa M. Costantino

     13,996        *       9,030        *  

Pamella J. Dana, Ph.D.

     0        *       0        *  

Alejandro Gonzalez S. (3)

     633,457        *       40,150        *  

Gustavo Marturet M. (4)

     198,641        *       21,449        *  

Jose Antonio Villamil

     0        *       0        *  

Guillermo Villar

     0        *       0        *  

Executive officers and directors as a group:

     12,696,710        17.11 %      6,635,935        12.46 % 

Other Greater than 5% Security Holders (5)

          

MSF (6)

     14,767,433        19.90 %      10,597,370        19.90 % 

Marturet family (7)

     11,035,577        14.87 %      710,344        1.33 % 

Vollmer family (8)

     10,317,623        13.90 %      1,999,122        3.75 % 

Capriles family (9)

     6,485,499        8.74 %      5,318,067        9.99 % 

Altamis, B.V. (10)

     6,471,113        8.72 %      5,284,887        9.92 % 

Marturet Medina Family (11)

     6,632,668        8.94 %      671,273        1.26 % 

Marturet companies (12)

     3,815,049        5.14 %      34,047        *  

 

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* Represents less than 1% of the class.

 

(1) These shares include 5,387 shares of our Class A common stock and 651 shares of our Class B common stock held by Mr. Vollmer’s wife. Gustavo J. Vollmer A. disclaims beneficial ownership of 3,108,897 shares of our Class A common stock and 1,067,061 shares of our Class B common stock included in the table above as to which he has no economic interest therein. These shares are included in the shares beneficially owned by the Vollmer family, as to which Gustavo J. Vollmer A. may be deemed to have shared voting and investment power.

 

(2) Miguel A. Capriles L. disclaims beneficial ownership over 4,755,410 shares of our Class A common stock and 3,899,764 shares of our Class B common stock included in the table above and held by certain of his sisters of which he has no economic interest therein. These shares are included in the shares beneficially owned by the Capriles family and Altamis, B.V., as to which Miguel A. Capriles L. may be deemed to have shared voting and investment power.

 

(3) These shares include 979 shares of our Class A common stock and 431 shares of our Class B common stock held by Mr. Gonzalez’s wife.

 

(4) All of these shares are included in the shares beneficially owned by the Marturet family and the Marturet Medina family and 172,213 shares of our Class A common stock and 1,544 shares of our Class B common stock are included in the shares beneficially owned by the Marturet Companies.

 

(5) This information is based solely on our records and interviews or communications with our holders and their representatives. AV Securities, Inc., or AV Securities, is the only other record holder holding more than 5% of our Class A common stock or our Class B common stock. AV Securities, a securities broker, is the record holder, holder in “street name,” of 4,995,133 shares, or 6.73%, of our Class A common stock and 18,186,040 shares, or 34.15%, of our Class B common stock for the beneficial owners of the shares of our common stock. AV Securities holds all these shares in non-discretionary accounts, where AV Securities does not have the authority to acquire, dispose or vote these shares absent direction from the account holder. Based on the information available to us at this time, we are unable to determine the beneficial holders of the shares held by AV Securities as broker. We believe, based upon information provided to us by AV Securities on March 28, 2018, that no individual or group beneficially owned more than 5% of our Class A or Class B common stock as of the record date.

 

(6) MSF’s address is Av. Francisco de Miranda Urb. Los Palos Grandes, Centro Comercial El Parque, Suites C-3-10 and C-3-11, Caracas, Venezuela. For a description of certain voting arrangements relating to the Retained Shares held by the Trust, see “Certain Relationships and Related Party Transactions—Certain Related Party Transactions—Distribution Trust” in this Information Statement.

 

(7) Members of the Marturet family have, in the aggregate, sole or shared voting and investment power with respect to 11,035,577 shares of our Class A common stock and 710,344 shares of our Class B common stock. These shares include the shares beneficially owned by Gustavo Marturet M. the Marturet Medina family and the Marturet Companies and are included in the table above.

There are no voting agreements or other arrangements among the members of the Marturet family regarding the 11,035,577 shares of our Class A common stock and 710,344 shares of our Class B common stock and, accordingly, the members of the Marturet family are not deemed a “group” for purposes of Section 13(d)(3) of the Exchange Act with respect to such shares. Each member of the Marturet family disclaims beneficial ownership of any of our Company Shares as to which such member does not have sole or shared voting or investment power.

 

(8)

Members of the Vollmer family, including Gustavo J. Vollmer A., certain other Vollmer family members and certain non-profit foundations controlled by members of the Vollmer family, have in the aggregate sole or shared voting and investment power with respect to 10,317,623 shares of our Class A common stock and 1,999,122 shares of our Class B common stock. These shares include the 2,252,735 shares of our Class A common stock and 177,210 shares of our Class B common stock beneficially owned by Gustavo J. Vollmer

 

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  A. The Vollmer family disclaims beneficial ownership of 1,206,315 shares of our Class A common stock and 156,734 shares of our Class B common stock, as to which no family member has any economic interest.

There are no voting agreements or other arrangements among the members of the Vollmer family regarding the 10,317,623 shares of our Class A common stock and 1,999,122 shares of our Class B common stock. Accordingly, the members of the Vollmer family are not deemed a “group” for purposes of Section 13(d)(3) of the Exchange Act with respect to such shares. Each member of the Vollmer family disclaims beneficial ownership of any of our Company Shares as to which such member does not have sole or shared voting or investment power.

 

(9) Members of the Capriles family, including Miguel A. Capriles L. and certain of his sisters, have sole or shared voting and investment power with respect to 6,485,499 shares of our Class A common stock and 5,318,067 shares of our Class B common stock. These shares include the shares beneficially owned by Miguel A. Capriles L. and Altamis B.V. and are included in the table above.

There are no voting agreements or other arrangements among the members of the Capriles family regarding the 6,485,499 shares of our Class A common stock and 5,318,067 shares of our Class B common stock. Accordingly, the members of the Capriles family are not deemed a “group” for purposes of Section 13(d)(3) of the Exchange Act with respect to such shares. Each member of the Capriles family disclaims beneficial ownership of any of our Company Shares as to which such member does not have sole or shared voting or investment power.

 

(10) Altamis, B.V. is a Curacao corporation owned by Miguel A. Capriles L. and certain of his sisters, who have sole or shared voting and investment power over all of these shares. These shares are included in the shares beneficially owned by Miguel A. Capriles L. and the Capriles family and included in the table above.

 

(11) These shares consist of shares held individually by members of the Marturet Medina family, certain of the shares held by the Marturet Companies and by certain trusts and entities controlled by Mrs. Gustavo Marturet Machado. Mrs. Gustavo Marturet Machado has sole or shared voting and investment power over 5,605,961 shares of our Class A common stock and 647,370 shares of our Class B common stock. Mrs. Gustavo Marturet Machado disclaims beneficial ownership over 561,993 shares of our Class A common stock and 73,856 shares of our Class B common stock in which she has no economic interest therein. All of these shares are included in the shares beneficially owned by the Marturet family and by Gustavo Marturet M. and included in the table above. The table includes 1,003,213 shares of our Class A common stock and 8,887 shares of our Class B common stock beneficially owned by the Marturet Companies.

There are no voting agreements or other arrangements among the members of the Marturet Medina family regarding the 6,632,668 shares of our Class A common stock and 671,273 shares of our Class B common stock and, accordingly, the members of the Marturet Medina family are not deemed a “group” for purposes of Section 13(d)(3) of the Exchange Act with respect to such shares. Each member of the Marturet Medina family disclaims beneficial ownership of any of our Company Shares as to which such member does not have sole or shared voting or investment power.

 

(12) These shares consist of shares held by certain trusts and companies under common control by and/or for the benefit of certain members of the Marturet family. Voting and investment power over shares held by the companies included in the Marturet Companies is exercised by the board of directors of such company, which makes decisions with respect to the shares by majority vote or consensus, as applicable. Voting and investment power over shares held by the trusts included in the Marturet Companies is exercised by the applicable trustee in a fiduciary capacity. Accordingly, each member of the Marturet family disclaims beneficial ownership of any of our Company Shares held by Marturet companies and in which they have no economic interest therein. 172,213 shares of our Class A common stock and 1,544 shares of our Class B common stock are included in the shares beneficially owned by Gustavo Marturet M. and in the table above. All of these shares also are included in the shares held by the Marturet family and included in the table above, and 1,003,213 of these shares of our Class A common stock and 8,887 of these shares of our Class B common stock are included in the shares held by the Marturet Medina family and included in the table above.

 

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DESCRIPTION OF CAPITAL STOCK

The following information reflects our amended and restated articles of incorporation and amended and restated bylaws as in effect at the date of the Information Statement.

Authorized Capital Stock

Our authorized capital stock consists of 400 million shares of Class A common stock, 100 million shares of Class B common stock and 50 million shares of Preferred Stock. Upon the SEC declaring our Spin-off Registration Statement effective, our Class A common stock and Class B common stock will be registered under the Exchange Act.

The following statements set forth the material terms of our authorized capital stock; however, reference is made to the more detailed provisions of, and such statements are qualified in their entirety by reference to, our amended and restated articles of incorporation, which have been filed as an exhibit to the Spin-off Registration Statement, of which this information statement is a part. Following the Distribution, our shares of Class A common stock and Class B common stock will be held by approximately 20,000 shareholders.

Class A Common Stock

Holders of shares of our Class A common stock are entitled to one vote for each share on all matters to be voted on by the shareholders. Holders of our Class A common stock are entitled to share ratably upon liquidation of the Company, and in dividends, if any, as may be declared from time to time by our board of directors in its discretion from funds legally available therefor.

We anticipate that upon the Distribution, there will be 74,212,408 shares of our Class A common stock outstanding. Following the Distribution we expect that there will be approximately 17,800 holders of our Class A common stock.

Class B Common Stock

Holders of shares of our Class B common stock have no voting rights, except as mandated by Florida law, and separately as a voting group as to amendments or changes to our articles of incorporation that would significantly and adversely affect the rights of Class B common stock, or upon a reorganization event, such as a merger, where the Class B common stock does not remain outstanding or the rights and powers of the Class B common stock are changed materially and adversely. If and when we ask our shareholders to approve our recommendation of independent certified accountants for a given fiscal year, holders of shares of our Class B common stock will be entitled to one-tenth of a vote for each share, voting together with the holders of the Class A common stock on the matter. Shares of Class B common stock otherwise have the same rights and entitlements as the Class A common stock, including the right to share ratably upon liquidation of the Company, and in dividends, if any, as may be declared from time to time by our board of directors in its discretion from funds legally available therefor, except that shares of Class B common stock are not entitled to receive dividends in the form of shares of Class A common stock. Shares of Class B common stock are not convertible into Shares of Class A common stock.

We anticipate that upon the Distribution, there will be 53,253,157 shares of our Class B common stock outstanding. Following the Distribution we expect that there will be approximately 16,300 holders of our Class B common stock.

Preferred Stock

Our board of directors has the authority to fix the price, dividend rates, rights, preferences, privileges and restrictions, including voting rights, of one or more series of our preferred stock, from time to time, without any further vote or action by our shareholders. There are currently no shares of our preferred stock outstanding.

 

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Anti-Takeover Effects of Our Amended and Restated Articles of Incorporation and Amended and Restated Bylaws, Florida Law and U.S. Banking Laws

Some provisions of our amended and restated articles of incorporation and amended and restated bylaws, as well as certain provisions of Florida law and U.S. banking laws, could make the following more difficult:

 

  •   acquisition of us by means of a tender offer;

 

  •   acquisition of us by means of a proxy contest or otherwise; or

 

  •   removal of our incumbent officers and directors.

These provisions, summarized below, are expected to discourage coercive takeover practices and takeover bids that are not in the best interest of our shareholders. These provisions also are designed to encourage persons seeking to acquire control of us to first negotiate with our board. We believe that the benefits of this increased protection give us the potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us and outweigh the disadvantages of discouraging those proposals because negotiation of them could result in an improvement of their terms.

Articles of Incorporation and Bylaws

Our amended and restated articles of incorporation and amended and restated bylaws contain provisions that could make more difficult the acquisition of us by means of a tender offer, a proxy contest or otherwise. These provisions are summarized below.

Authorized but Unissued Shares of Common Stock . Immediately after the spin-off, we expect to have approximately 325,787,592 shares of Class A common stock and 46,746,843 shares of Class B common stock authorized but unissued, and available for future issuance without additional shareholder approval, except as otherwise restricted by the rules of the Nasdaq Stock Market, Florida law, or federal banking laws. While the additional shares are not designed to deter or prevent a change of control, under some circumstances we could use the additional shares to create voting impediments or to frustrate persons seeking to effect a takeover or otherwise gain control by, for example, issuing those shares in private placements to purchasers who might side with our board of directors in opposing a hostile takeover bid.

Undesignated Preferred Stock. Our amended and restated articles of incorporation authorize 50 million shares of preferred stock, which our board has the authority, without any further vote or action by our shareholders, to issue from time to time, in one or more series of preferred stock, to fix the number of shares constituting such series and the designation of such series, the voting powers, if any, of the shares of such series, and the preferences and relative, participating, optional or other special rights, if any, and any qualifications, limitations or restrictions thereof, of the shares of such series. The existence of authorized but unissued preferred stock could reduce our attractiveness as a target for an unsolicited takeover bid since we could, for example, issue shares of preferred stock to parties who might oppose such a takeover bid, or the shares may contain terms, such as “poison pill” rights, that a potential acquirer may find unattractive. This may have the effect of delaying or preventing a change of control, may discourage bids for the Company Shares at a premium over the market price of the Company Shares, and may adversely affect the market price of, and the voting and other rights of the holders of, the Company Shares.

Size of Board and Vacancies. Our amended and restated articles of incorporation provide that the number of directors on our board will be fixed exclusively by our board. Newly created directorships resulting from any increase in our authorized number of directors or any vacancies in our board resulting from death, resignation, retirement, disqualification, removal from office or other causes will be filled solely by the vote of our remaining directors in office.

Shareholder Meetings. Under our amended and restated articles of incorporation, a special meeting of shareholders may only be called by our board, the chairman, CEO, or president, or by the holders of not less than 25% of all the votes entitled to be cast on any issue proposed. In addition, our shareholders are prohibited from taking action by written consent.

 

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Advance Notice Requirements . Our amended and restated bylaws establish an advance notice procedure for shareholders to make nominations of candidates for election as directors before an annual meeting of our shareholders, or to bring other business before an annual or special meeting of our shareholders. The amended and restated bylaws provide that any shareholder wishing to nominate persons for election as directors at, or bring other business before, a meeting must deliver to our corporate secretary a written notice of the shareholder’s intention to do so. These provisions make it more procedurally difficult for a shareholder to place a proposal or nomination on the meeting agenda, and therefore may reduce the likelihood that a shareholder will seek to take independent action to replace directors or seek a shareholder vote with respect to other matters that are not supported by management. We expect that these provisions may also discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of our company.

Florida Law and Federal Banking Laws

The Florida Business Corporation Act contains a control-share acquisition statute that provides that a person who acquires shares in an “issuing public corporation,” as defined in the statute, in excess of certain specified thresholds generally will not have any voting rights with respect to such shares unless such voting rights are approved by the holders of a majority of the votes of each class of securities entitled to vote separately, excluding shares held or controlled by the acquiring person.

The Florida Business Corporation Act also provides that an “affiliated transaction” between a Florida corporation with an “interested shareholder,” as those terms are defined in the statute, generally must be approved by the affirmative vote of the holders of two-thirds of the outstanding voting shares, other than the shares beneficially owned by the interested shareholder. The Florida Business Corporation Act defines an “interested shareholder” as any person who is the beneficial owner of 10% or more of the outstanding voting shares of the corporation.

Furthermore, the BHC Act and Change in Bank Control Act banking laws impose notice, application and approvals and ongoing regulatory requirements on any shareholder or other party that seeks to acquire direct or indirect “control” of bank holding companies. These laws could delay or prevent an acquisition.

Annual Meeting of Shareholders

Our amended and restated bylaws provide that an annual meeting of shareholders will be held each year on a date fixed by resolution of our board. The first annual meeting of our shareholders after the spin-off is expected to be held in 2019.

In order for a shareholder to bring, pursuant to our amended and restated bylaws, nominations or other proposals before the 2019 annual shareholders meeting, the shareholder must comply with the requirements for shareholder proposals set forth in our amended and restated bylaws and described in a proxy statement that we will prepare and distribute relating to such meeting.

Transfer Agent and Registrar

Computershare Trust Company, N.A., and Computershare, Inc. will be the transfer agent and registrar for all Company Shares.

Stock Exchange Listing

We intend to list shares of our Class A common stock on the Nasdaq Stock Market under the symbol “MBNAA” and intend to list shares of our Class B common stock on the Nasdaq Stock Market under the symbol “MBNAB.” There is currently no established public trading market for our Class A common stock or Class B common stock.

 

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SHARES ELIGIBLE FOR FUTURE SALE

Sales or the availability for sale of substantial amounts of our Company Shares in the public market could adversely affect our Company Shares’ prevailing market price. Upon completion of the Distribution, we will have outstanding an aggregate of 74,212,408 shares of our Class A common stock and 53,253,157 shares of our Class B common stock. The actual number of shares of our Company Shares to be distributed will be determined on the record date for the Distribution based on the number of shares of MSF Class A common stock and Class B common stock outstanding on the record date. All of the shares distributed to MSF shareholders of record on the record date, except for the Retained Shares, will be freely tradeable without restriction or further registration under the Securities Act, unless the shares are owned by our “affiliates” as that term is defined in Rule 405 under the Securities Act. Shares held by “affiliates” may be sold in the public market only if registered or if they qualify for an exemption from registration, including, without limitation, under Rule 144, which is summarized below.

Rule 144

Rule 144 may be available to affiliates of the Company who meet all applicable terms of such Rule. Rule 144 is expected to be available to affiliates of the Company six months after the date the Spin-off Registration Statement becomes effective, provided the Company has been subject to Exchange Act, Section 13(d) or 15(d) reporting for at least 90 days before a sale and is current in all reports specified in Rule 144(c)(1).

In general, under Rule 144 as currently in effect, an affiliate would be entitled to sell within any three-month period a number of shares that does not exceed the greater of:

 

  •   1% of the number of Company Shares then outstanding, which will equal 742,124 shares of Class A common stock and 532,531 shares of Class B common stock immediately after the Distribution, or

 

  •   the average weekly trading volume of our Company Shares during the four calendar weeks preceding the filing of a notice of Form 144 with respect to such sale.

Sales by our affiliates under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us.

MSF has agreed to not sell or dispose of Company Shares, generally prior to the 90 th day following the effectiveness of the Spin-off Registration Statement. If an IPO or other underwritten public offering of Company Shares is undertaken, we expect that the underwriters will require MSF, and MSF’s and our directors, executive officers and controlling persons to enter into lock-up agreements to not sell or dispose of Company Shares for up to 180 days in the case of an IPO. Such lock-ups may be waived in the sole discretion of the managing underwriters.

MSF Registration Rights

We have entered into a registration rights agreement with MSF, pursuant to which we have agreed to file a resale registration statement under the Securities Act for MSF’s resale, from time to time, of its Company Shares. Also, if we determine to undertake our own offering of securities, we have granted MSF “piggyback” registration rights that would require us to include, subject to certain conditions, Company Shares held by MSF on the same registration statement we use for our own offering. If we engage in an IPO or other public offering, we expect these offerings will be limited to shares of our Class A common stock, and that such offerings will include Class A common stock held by MSF as Retained Shares. MSF will only have piggyback registration rights to the same class of Company Shares offered by the Company. See “Certain Relationships and Related Party Transactions —Certain Related Party Transactions — Registration Rights Agreement.”

 

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INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Florida Business Corporation Act permits, under certain circumstances, the indemnification of officers, directors, employees and agents of a corporation with respect to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, and whether formal or informal, to which such person was or is a party or is threatened to be made a party, by reason of his or her being an officer, director, employee or agent of a corporation, or is or was serving at the request of, such corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against liability incurred in connection with such proceeding, including appeals thereof; provided, however, that the officer, director, employee or agent acted in good faith and in a manner that he or she reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any such third-party action by judgment, order, settlement, or conviction or upon a plea of nolo contendere or its equivalent does not, of itself, create a presumption that the person (1) did not act in good faith and in a manner which he or she reasonably believed to be in, or not opposed to, the best interests of the corporation or (2) with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful.

In the case of proceedings by or in the right of the corporation, the statute permits indemnification of any person by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of, such corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses and certain amounts paid in settlement in connection with such proceeding, including appeals thereof; provided, however, that the officer, director, employee or agent acted in good faith and in a manner that he or she reasonably believed to be in, or not opposed to, the best interests of the corporation, except that no indemnification is made where such person is adjudged liable, unless, and only to the extent that, the court in which such proceeding was brought, or any other court of competent jurisdiction, determines that, despite the adjudication of liability but in view of all circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper.

To the extent that such person is successful on the merits or otherwise in defending against any such proceeding, the statute provides that he or she shall be indemnified against expenses actually and reasonably incurred by him or her in connection therewith.

Also, under the statute, expenses incurred by an officer or director in defending a civil or criminal proceeding may be paid by the corporation in advance of the final disposition of such proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if he or she is ultimately found not to be entitled to indemnification by the corporation pursuant to this section. Expenses incurred by other employees and agents may be paid in advance upon such terms or conditions that the board of directors deems appropriate.

Our amended and restated articles of incorporation provide that our officers and directors will be indemnified by us to the fullest extent authorized by Florida law and any other applicable law, as it now exists or may in the future be amended.

Our amended and restated bylaws contain indemnification provisions similar to the Florida Business Corporation Act, and further provide that we may purchase and maintain insurance on behalf of our directors, officers, employees and agents in their capacities as such, or serving at the request of us, against any liabilities asserted against such persons and incurred by such persons in any capacity, or arising of such persons status as such, whether or not we would have the power to indemnify such persons against such liability under our amended and restated bylaws.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted for our directors and officers, or for persons controlling us, pursuant to our amended and restated articles of incorporation,

 

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amended and restated bylaws or the Florida Business Corporation Act, we acknowledge that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

In addition to the authority granted to us by the Florida Business Corporation Act to indemnify our directors, certain other provisions of the Florida Business Corporation Act have the effect of further limiting the personal liability of our directors. For example, a director of a Florida corporation cannot be held personally liable for monetary damages to the corporation or any other person for any statement, vote, decision or failure to act regarding corporate management or policy except in the case of certain qualifying breaches of the director’s duties.

 

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AVAILABLE INFORMATION

We have filed with the SEC the Spin-off Registration Statement under the Exchange Act and the rules and regulations promulgated under the Exchange Act with respect to the Company Shares being distributed to MSF’s shareholders in the Distribution. This information statement does not contain all of the information set forth in the Spin-off Registration Statement and its exhibits and schedules, to which reference is made hereby. Statements in this information statement as to the contents of any contract, agreement or other document are qualified in all respects by reference to such contract, agreement or document. If we have filed any of those contracts, agreements or other documents as an exhibit to the Spin-off Registration Statement, you should read the full text of such contract, agreement or document for a more complete understanding of the document or matter involved. For further information with respect to us and our Company Shares, we refer you to the Spin-off Registration Statement, including its exhibits and the schedules filed as a part of it. You may read and copy the Spin-off Registration Statement and its exhibits and schedules at the SEC’s Public Reference Room Office at 100 F. Street, N.E., Washington, D.C. 20549.

You may also obtain copies of the Spin-off Registration Statement by mail from the Public Reference Section of the SEC at 100 F. Street, N.E., Washington, D.C. 20549 or by telephone at 1-800-SEC-0330. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Spin-off Registration Statement is available to the public from commercial document retrieval services and at the SEC’s website located at http://www.sec.gov.

We intend to furnish the holders of our Company Shares with annual reports containing financial statements audited by an independent certified public accounting firm and make available to our shareholders quarterly reports for the first three quarters of each fiscal year containing interim unaudited financial information. We also intend to furnish other reports as we may determine or as required by law.

After the Distribution, we will be subject to the informational requirements of the Exchange Act and will therefore be required to file reports, proxy statements and other information with the SEC. Information that we file with the SEC after the date of this information statement will automatically supersede the information in this information statement and any earlier filed incorporated information. You may read these reports, proxy statements and other information and obtain copies of such documents and information as described above.

No person is authorized to give any information or to make any representations other than those contained in this information statement, and, if given or made, such information or representations must not be relied upon as having been authorized. Neither the delivery of this information statement nor any distribution of securities made hereunder shall imply that there has been no change in the information set forth herein or in our affairs since the date hereof, or since the respective dates of information contained herein.

 

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Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Index

 

     Page(s)  

Report of Independent Registered Public Accounting Firm

     F-2  

Consolidated Financial Statements

  

Consolidated Balance Sheets as of December 31, 2017 and 2016

     F-3  

Consolidated Statements of Operations and Comprehensive Income for each of the three years in the period ended December 31, 2017

     F-4  

Consolidated Statements of Changes in Stockholder’s Equity for each of the three years in the period ended December 31, 2017

     F-5  

Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2017

     F-6  

Notes to Consolidated Financial Statements *

     F-7  

Interim Consolidated Financial Statements (Unaudited)

  

Consolidated Balance Sheets as of March 31, 2018 and December  31, 2017

     F-56  

Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2018 and 2017

     F-57  

Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2018 and 2017

     F-58  

Consolidated Statements of Cash Flows for the three months ended March  31, 2018 and 2017

     F-59  

Notes to Consolidated Financial Statements **

     F-60  

 

* All references to “Notes” from pages F-3 through F-55 pertain to our audited consolidated financial statements, unless otherwise stated.

 

** All references to “Notes” from pages F-56 through F-77 pertain to our unaudited interim consolidated financial statements, unless otherwise stated.

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Mercantil Bank Holding Corporation:

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Mercantil Bank Holding Corporation and its subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of operations and comprehensive income, of changes in stockholder’s equity, and of cash flows for each of the three years in the period ended December 31, 2017, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers, LLP

Certified Public Accountants

Fort Lauderdale, Florida

March 12, 2018, except for the effects of the revision discussed in Note 10 to the consolidated financial statements as to which the date is June 15, 2018.

We have served as the Company’s auditor since 1987.

PricewaterhouseCoopers LLP, 401 East Las Olas Boulevard, Suite 1800, Ft. Lauderdale, Florida 33301.

T: (305) 375 7400, F: (305) 375 6221, www.pwc.com/us

 

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Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Consolidated Balance Sheets

 

(in thousands of dollars, except per share data)    December 31,
2017 		    December 31,
2016 		 
Assets             

Cash and due from banks

   $ 44,531     $ 32,956  

Interest earning deposits with banks

     108,914       102,033  
  

 

 

   

 

 

 

Cash and cash equivalents

     153,445       134,989  
  

 

 

   

 

 

 

Securities

    

Available for sale

     1,687,157       2,123,247  

Held to maturity

     89,860       —    

Federal Reserve Bank and Federal Home Loan Bank stock

     69,934       59,490  

Loans held for sale

     5,611       —    

Loans, gross

     6,066,225       5,764,761  

Less: Allowance for loan losses

     72,000       81,751  
  

 

 

   

 

 

 

Loans, net

     5,994,225       5,683,010  

Bank owned life insurance

     200,318       164,860  

Premises and equipment, net

     129,357       148,712  

Deferred tax assets, net

     14,583       30,730  

Goodwill

     19,193       19,193  

Accrued interest receivable and other assets

     73,084       70,033  
  

 

 

   

 

 

 
   $ 8,436,767     $ 8,434,264  
  

 

 

   

 

 

 

Liabilities and Stockholder’s Equity

    

Deposits

    

Demand

    

Noninterest bearing

   $ 895,710     $ 1,106,834  

Interest bearing

     1,496,749       1,736,136  

Savings and money market

     1,684,080       1,897,136  

Time

     2,246,434       1,837,259  
  

 

 

   

 

 

 

Total deposits

     6,322,973       6,577,365  

Advances from the Federal Home Loan Bank and other borrowings

     1,173,000       931,000  

Junior subordinated debentures held by trust subsidiaries

     118,110       118,110  

Securities sold under agreements to repurchase

     —         50,000  

Accounts payable, accrued liabilities and other liabilities

     69,234       53,052  
  

 

 

   

 

 

 
     7,683,317       7,729,527  
  

 

 

   

 

 

 

Commitments and contingencies (Note 16)

    

Stockholder’s equity (Notes 1 and 22)

    

Class A common stock, $0.10 par value, 400,000,000 shares authorized; 74,212,408 shares issued and outstanding in 2017 and 2016

     7,421       7,421  

Class B common stock, $0.10 par value, 100,000,000 shares authorized; 53,253,157 shares issued and outstanding in 2017 and 2016

     5,325       5,325  

Additional paid in capital

     359,008       359,008  

Retained earnings

     387,829       343,678  

Accumulated other comprehensive loss

     (6,133 )      (10,695 ) 
  

 

 

   

 

 

 
     753,450       704,737  
  

 

 

   

 

 

 
   $ 8,436,767     $ 8,434,264  
  

 

 

   

 

 

 

 

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Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Consolidated Statements of Operations and Comprehensive Income

 

    Years ended December 31,  
(in thousands of dollars, except per share data)   2017     2016     2015  
Interest income                  

Loans

  $ 223,765     $ 188,526     $ 160,893  

Investment securities

    47,913       49,495       46,898  

Interest earning deposits with banks

    1,642       806       408  
 

 

 

   

 

 

   

 

 

 

Total interest income

    273,320       238,827       208,199  
 

 

 

   

 

 

   

 

 

 

Interest expense

     

Interest bearing demand deposits

    394       653       1,187  

Savings and money market deposits

    8,856       8,306       7,426  

Time deposits

    26,787       16,576       8,016  

Advances from the Federal Home Loan Bank

    18,235       10,971       8,787  

Junior subordinated debentures

    7,456       7,129       6,868  

Securities sold under agreements to repurchase

    1,882       3,259       3,630  
 

 

 

   

 

 

   

 

 

 

Total interest expense

    63,610       46,894       35,914  
 

 

 

   

 

 

   

 

 

 

Net interest income

    209,710       191,933       172,285  

(Reversal of) provision for loan losses

    (3,490 )      22,110       11,220  
 

 

 

   

 

 

   

 

 

 

Net interest income after (reversal of) provision for loan losses

    213,200       169,823       161,065  
 

 

 

   

 

 

   

 

 

 

Noninterest income

     

Deposits and service fees

    19,560       20,928       21,147  

Brokerage, advisory and fiduciary activities

    20,626       20,282       19,047  

Change in cash surrender value of bank owned life insurance

    5,458       4,422       438  

Cards and trade finance servicing fees

    4,589       4,250       5,175  

Data processing, rental income and fees for other services to related parties

    3,593       4,409       4,342  

Securities (losses) gains, net

    (1,601 )      1,031       1,062  

Other noninterest income

    19,260       6,948       3,545  
 

 

 

   

 

 

   

 

 

 

Total noninterest income

    71,485       62,270       54,756  
 

 

 

   

 

 

   

 

 

 

Noninterest expense

     

Salaries and employee benefits

    131,800       129,681       122,230  

Occupancy and equipment

    17,381       18,368       16,441  

Professional and other services fees

    16,399       11,937       16,892  

FDIC assessments and insurance

    7,624       7,131       7,579  

Telecommunication and data processing

    9,825       8,392       7,494  

Depreciation and amortization

    9,040       9,130       8,381  

Other operating expenses

    15,567       13,664       13,245  
 

 

 

   

 

 

   

 

 

 

Total noninterest expenses

    207,636       198,303       192,262  
 

 

 

   

 

 

   

 

 

 

Net income before income tax

    77,049       33,790       23,559  

Income tax expense

    (33,992 )      (10,211 )      (8,514 ) 
 

 

 

   

 

 

   

 

 

 

Net income

    43,057       23,579       15,045  
 

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     

Net unrealized holding gains (losses) on securities available for sale arising during the year

    3,577       (3,839 )      (11,456 ) 

Net unrealized holding gains (losses) on cash flow hedges arising during the year

    152       3,598       (114 ) 

Reclassification adjustment for net losses (gains) included in net income

    833       (1,004 )      (1,258 ) 
 

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

    4,562       (1,245 )      (12,828 ) 
 

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 47,619     $ 22,334     $ 2,217  
 

 

 

   

 

 

   

 

 

 

Basic and diluted earnings per share:

     

Net income available to common shareholders

  $ 43,057     $ 23,579     $ 15,045  

Basic and diluted weighted average shares outstanding

    127,465,565       127,465,565       127,465,565  
 

 

 

   

 

 

   

 

 

 

Basic and diluted income per common share

    0.34       0.18       0.12  
 

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Consolidated Statements of Changes in Stockholder’s Equity

Each of the Three Years Ended December 31, 2017

 

    Common Stock     Additional
Paid
in Capital 		    Retained
Earnings 		    Accumulated
Other
Comprehensive
Loss 		    Total
Stockholder’s
Equity 		 
    Class A     Class B          

(in thousands of
dollars, except per

share data)

  Shares
Issued and
Outstanding 		    Par
value 		    Shares
Issued and
Outstanding 		    Par
value 		         

Balances at December 31, 2014

    74,212,408     $ 7,421       53,253,157     $ 5,325     $ 359,008     $ 305,054     $ 3,378     $ 680,186  

Net income

    —         —         —         —         —         15,045       —         15,045  

Other comprehensive loss

    —         —         —         —         —         —         (12,828 )      (12,828 ) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31 2015

    74,212,408     $ 7,421       53,253,157     $ 5,325     $ 359,008     $ 320,099     $ (9,450 )    $ 682,403  

Net income

    —         —         —         —         —         23,579       —         23,579  

Other comprehensive loss

    —         —         —         —         —         —         (1,245 )      (1,245 ) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31 2016

    74,212,408     $ 7,421       53,253,157     $ 5,325     $ 359,008     $ 343,678     $ (10,695 )    $ 704,737  

Net income

    —         —         —         —         —         43,057       —         43,057  

Reclassification of tax law impact on AOCI

    —         —         —         —         —         1,094       (1,094 )      —    

Other comprehensive income

    —         —         —         —         —         —         5,656       5,656  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31 2017

    74,212,408     $ 7,421       53,253,157     $ 5,325     $ 359,008     $ 387,829     $ (6,133 )    $ 753,450  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-5

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Consolidated Statements of Cash Flows

 

     Years ended December 31,  
  

 

 

 
(in thousands of dollars)    2017     2016     2015  

Cash flows from operating activities

      

Net income

   $ 43,057     $ 23,579     $ 15,045  

Adjustments to reconcile net income to net cash provided by operating activities

      

(Reversal of) provision for loan losses

     (3,490 )      22,110       11,220  

Net premium amortization on securities

     19,357       27,264       36,702  

Depreciation and amortization

     9,040       9,130       8,381  

Increase in cash surrender value of bank owned life insurance

     (5,458 )      (4,422 )      (438 ) 

Net gain on sale of premises and equipment

     (11,319 )      (1,956 )      (189 ) 

Deferred taxes, securities net gains or losses and others

     14,684       (4,705 )      (2,315 ) 

Net changes in operating assets and liabilities

      

Loans held for sale

     (5,705 )      (4,730 )      (2,788 ) 

Accrued interest receivable and other assets

     (1,257 )      (7,937 )      (3,118 ) 

Account payable, accrued liabilities and other liabilities

     14,373       16,935       1,134  
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     73,282       75,268       63,634  
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

      

Purchases of investment securities

      

Available for sale

     (231,675 )      (1,084,029 )      (633,527 ) 

Held to maturity securities

     (90,196 )      —         —    

Federal Reserve Bank and Federal Home Loan Bank stock

     (41,044 )      (53,350 )      (59,143 ) 

Maturities, sales and calls of investment securities

      

Available for sale

     655,305       986,041       707,557  

Held to maturity securities

     315       —         —    

Federal Reserve Bank and Federal Home Loan Bank stock

     30,600       44,253       58,749  

Net increase in loans

     (393,636 )      (259,931 )      (420,742 ) 

Proceeds from loan sales

     85,767       105,164       84,107  

Purchase of bank owned life insurance

     (30,000 )      (60,000 )      (100,000 ) 

Purchases of bank premises and equipment

     (8,606 )      (8,535 )      (15,028 ) 

Net proceeds from sales of premises and equipment and others

     30,737       8,159       5,137  
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     7,567       (322,228 )      (372,890 ) 
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

      

Net decrease in demand, savings and money market accounts

     (663,568 )      (388,520 )      (278,204 ) 

Net increase in time deposits

     409,175       446,211       522,798  

Net decrease in securities sold under agreements to repurchase

     (50,000 )      (23,488 )      (25,887 ) 

Proceeds from Advances from the Federal Home Loan Bank and other banks

     1,771,500       2,239,000       1,781,800  

Repayments of Advances from the Federal Home Loan Bank and other banks

     (1,529,500 )      (2,029,536 )      (1,741,800 ) 
  

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (62,393 )      243,667       258,707  
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     18,456       (3,293 )      (50,549 ) 

Cash and cash equivalents

      

Beginning of year

     134,989       138,282       188,831  
  

 

 

   

 

 

   

 

 

 

End of year

     153,445       134,989       138,282  
  

 

 

   

 

 

   

 

 

 

Supplemental disclosures of cash flow information

      

Cash paid:

      

Interest

   $ 61,590     $ 46,109     $ 35,035  

Income taxes

     18,881       9,264       10,137  

Noncash investing activities:

      

Loans transferred to other assets

     319       5,545       2,475  

Loans held for sale exchanged for securities

     4,710       4,659       2,762  

The accompanying notes are an integral part of these consolidated financial statements.

 

F-6

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

1. Organization and Summary of Significant Accounting Policies

Mercantil Bank Holding Corporation (the “Company”), a Florida Corporation incorporated in 1985 and operating since January 1987, is a bank holding company registered under the Bank Holding Company Act of 1956. The Company’s principal office is in the City of Coral Gables, Florida. The Company is a wholly owned subsidiary of Mercantil Servicios Financieros, C.A. (“MSF”), a corporation domiciled in the Bolivarian Republic of Venezuela.

On December 15, 2017, MSF shareholders voted to approve the spin-off of the Company from MSF. Following the spin-off, the Company will operate as a separate organization. In connection with the spin-off, each MSF shareholder of record will be entitled to receive one share of the Company’s Class A and Class B common stock for each share of MSF of the same class held by the MSF record holder as of the record date, which is to be determined by MSF’s Board of Directors as soon as practicable. MSF will retain shares of the Company’s common stock representing 19.9% of the Company’s outstanding common stock, through MSF’s beneficial interest in a newly-created trust for the benefit of MSF’s shareholders of record, until such time as MSF can divest those shares. The spin-off is expected to be completed in the first half of 2018, subject to the receipt of various regulatory actions, including the effectiveness of a registration statement to be filed by the Company with the U.S. Securities and Exchange Commission (“SEC”). In February 2018, the Company’s Articles of Incorporation were amended and restated. See Note 22. “Subsequent Events” for additional information.

In October 2008, MSF, the Company and various individuals as Voting Trustees (“Voting Trustees”), entered into a Voting Trust Agreement (the “Voting Trust”). The Voting Trust’s purposes are to promote the interests of Mercantil Bank, N.A. (the “Bank”) and expand its business in the United States by facilitating access to the United States’ capital markets, and to provide continued appropriate corporate governance of the Bank upon the occurrence of certain changes or threatened changes in control of MSF not approved by MSF’s board of directors (“Control Changes”). The Voting Trust was amended and restated in 2017 to clarify its terms and governance, and to extend the Voting Trust’s original 10-year term by an additional 25 years.

The Voting Trust is organized under the laws of Florida and is a grantor trust for Federal income tax purposes. It holds all the issued and outstanding shares of capital stock of Mercantil Florida Bancorp, Inc., which is the Bank’s immediate parent and sole shareholder. The Voting Trust is a “company” subject to supervision and regulation under the Bank Holding Company of 1956 (the “BHC Act”). The Voting Trust has issued Voting Trust certificates representing the entire interest in the Voting Trust to the Company. In the event of Control Changes in MSF, the Voting Trustees, may cancel the existing Voting Trust certificates and distribute these to MSF’s shareholders pro rata to preserve the Bank and MSF’s shareholders’ economic interests in the Bank. No Control Change had occurred as of December 31, 2017.

The Company has determined that it is the sole beneficial owner of the Voting Trust. Accordingly, the Voting Trust’s financial statements are consolidated with the Company’s financial statements for regulatory reporting purposes.

The Bank and its subsidiaries have been serving the communities in which they operates for over 35 years. The Bank is headquartered in the City of Coral Gables, Florida and has 23 Banking Centers, including 15 located in South Florida, seven in the Greater Houston area, Texas and a loan production office in New York City, New York. As the main operating subsidiary of the Company, the Bank offers a wide variety of domestic, international, personal and commercial banking services. Investment, trust, fiduciary and wealth management

 

F-7

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

services are provided through the Bank’s main operating subsidiaries Mercantil Investment Services, Inc. and Mercantil Trust Company, N.A.

Most of the Company’s investments are U.S. government, U.S. government agencies and U.S. government-sponsored entity securities. Most of the Company’s banking activity is with domestic customers located within the States of Florida, Texas and New York, and with international customers located in Latin America. The Company’s banking activities are concentrated in its primary markets. The Company does not have any significant concentrations to any one customer.

The effects of significant subsequent events, if any, have been adequately recognized or disclosed in these consolidated financial statements. Subsequent events have been evaluated through March 12, 2018, the date when these consolidated financial statements were available to be issued. See Note 22. “Subsequent Events” for additional information.

The following is a description of the significant accounting policies and practices followed by the Company in the preparation of the accompanying consolidated financial statements. These policies conform with generally accepted accounting principles in the United States (U.S. GAAP).

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made by management include: i) the determination of the allowance for loan losses; (ii) the fair values of securities, bank owned life insurance and the reporting unit to which goodwill has been assigned during the annual goodwill impairment test; and (iii) the determination of whether the amount of deferred tax assets will more likely than not be realized. Management believes that these estimates are appropriate. Actual results could differ from these estimates.

Income Recognition

Interest income is generally recognized on the accrual basis using the interest method. Non-refundable loan origination fees, net of direct costs of originating or acquiring loans, as well as loan purchase premiums and discounts, are deferred and amortized over the term of the related loans as adjustments to interest income using the level yield method. Purchase premiums and discounts on debt securities are amortized as adjustments to interest income over the estimated lives of the securities using the level yield method.

Brokerage and advisory activities include brokerage commissions and advisory fees. Brokerage commissions earned are related to the dollar amount of trading volume of customers’ transactions. Commissions and related clearing expenses are recorded on a trade-date basis as securities transactions occur. Advisory fees are derived from investment advisory fees and account administrative services. Investment advisory fees are recorded as earned on a pro rata basis over the term of the contracts, based on a percentage of the average value

 

F-8

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

of assets managed during the period. These fees are assessed and collected quarterly. Account administrative fees are charged to customers for the maintenance of their accounts and are earned and collected on a quarterly basis. Fiduciary activities fee income is recognized as earned on a pro rate basis over the term of contracts.

Card servicing fees include credit card issuance fees, and debit and credit card interchange fees. Annual credit card membership fees are generally recognized in the period over which the cardholders are entitled to use the cards. Interchange fees are recognized when earned. Trade finance servicing fees are generally recognized over the service period on a straight line basis.

Earnings per Share

Basic and diluted earnings per share are computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during each period. As of December 31, 2017, 2016 and 2015, the Company had no outstanding dilutive instruments. Changes in the number of shares outstanding as a result of stock dividends, stock splits, stock exchanges or reverse stock splits are given effect retroactively for all periods presented to reflect those changes in capital structure. See Note 22. “Subsequent Events” for additional information.

 

Cash and Cash Equivalents

The Company has defined as cash equivalents those highly liquid instruments purchased with an original maturity of three months or less and include cash and cash due from banks, federal funds sold and deposits with banks.

The Company must comply with federal regulations requiring the maintenance of minimum reserve balances against its deposits. At December 31, 2017 and 2016, these reserve balances amounted to approximately $1.2 million and $4.2 million, respectively.

Securities

The Company classifies its investments in securities as available for sale and held to maturity. Securities classified as available for sale are carried at fair value with unrealized gains and losses included in accumulated other comprehensive income (“AOCI”) in stockholder’s equity on an after-tax basis. Securities classified as held to maturity are securities the Company has both the ability and intent to hold until maturity and are carried at amortized cost. Investments in stock issued by the Federal Reserve Bank of Atlanta (“FRB”) and Federal Home Loan Bank of Atlanta (“FHLB”) are stated at their original cost, which approximates their realizable value. Realized gains and losses from sales of securities are recorded on the trade date and are determined using the specific identification method. Securities purchased are recorded on the consolidated balance sheets as of the trade date. Receivables and payables to and from clearing organizations relating to outstanding transactions are included in other assets or other liabilities. At December 31, 2017 and 2016 securities receivables amounted to $6.5 million and $5.6 million, respectively.

The Company considers an investment security to be impaired when a decline in fair value below the amortized cost basis is other-than-temporary. When an investment security is considered to be other-than-temporarily impaired, the cost basis of the individual investment security is written down through earnings by an amount that corresponds to the credit component of the other-than-temporary impairment. The amount of the

 

F-9

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

other-than-temporary impairment that corresponds to the noncredit component of the other-than-temporary impairment is recorded in AOCI and is associated with securities which the Company does not intend to sell and it is more likely than not that the Company will not be required to sell the securities prior to the recovery of its fair value.

The Company estimates the credit component of other-than-temporary impairment using a discounted cash flow model. The Company estimates the expected cash flows of the underlying collateral using third party vendor models that incorporate management’s best estimate of current key assumptions, such as default rates, loss severity and prepayment rates (based on historical performance and stress test scenarios). Assumptions used can vary widely from security to security and are influenced by such factors as current debt service coverage ratio, historical prepayment rates, expected prepayment rates, and loans’ current interest rates. The Company then uses, as it deems appropriate, a third party vendor to determine how the underlying collateral cash flows will be distributed to each security. The present value of an impaired debt security results from estimating its future cash flows, discounted at the security’s effective interest rate. The Company expects to recover the remaining noncredit related unrealized losses included as a component of AOCI.

Loans Held for Sale

Loans are transferred into the held for sale classification at the lower of carrying amount or fair value when they are specifically identified for sale and a formal plan exists to sell them.

Loans

Loans represent extensions of credit which the Company has the intent and ability to hold for the foreseeable future or until maturity or payoff. These extensions of credit consist of commercial real estate (including land acquisition, development and construction loans), single-family residential, commercial loans, loans to financial institutions and acceptances, and consumer loans. Amounts included in the loan portfolio are stated at the amount of unpaid principal, reduced by unamortized net deferred loan fees and origination costs and an allowance for loan losses. Unamortized net deferred loan fees and origination costs amounted to $7.4 million and $5.3 million at December 31, 2017 and 2016, respectively.

A loan is placed in nonaccrual status when management believes that collection in full of the principal amount of the loan or related interest is in doubt. Management considers that collectability is in doubt when any of the following factors are present, among others: (1) there is a reasonable probability of inability to collect principal, interest or both, on a loan for which payments are current or delinquent for less than ninety days; and (2) when a required payment of principal, interest or both is delinquent for ninety days or longer, unless the loan is considered well secured and in the process of collection in accordance with regulatory guidelines. Once a loan to a single borrower has been placed in nonaccrual status, management reviews all loans to the same borrower to determine their appropriate accrual status. When a loan is placed in nonaccrual status, accrual of interest and amortization of net deferred loan fees or costs are discontinued, and any accrued interest receivable is reversed against interest income.

Payments received on a loan in nonaccrual status are generally applied to its outstanding principal amount, unless there are no doubts on the full collection of the remaining recorded investment in the loan. When there are no doubts on the full collection of the remaining recorded investment in the loan, and there is sufficient documentation to support the collectability of that amount, payments of interest received may be recorded as interest income.

 

F-10

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

A loan in nonaccrual status is returned to accrual status when none of the conditions noted when first placed in nonaccrual status are currently present, none of its principal and interest is past due, and management believes there are reasonable prospects of the loan performing in accordance with its terms. For this purpose, management generally considers there are reasonable prospects of performance in accordance with the loan terms when at least six months of principal and interest payments or principal curtailments have been received, and current financial information of the borrower demonstrates that performance will continue into the near future.

The total outstanding principal amount of a loan is reported as past due thirty days following the date of a missed scheduled payment, based on the contractual terms of the loan.

Loans which have been modified because the borrowers were experiencing financial difficulty and the Company, for economic or legal reasons related to the debtors’ financial difficulties, granted a concession to the debtors that it would not have otherwise considered, are accounted for as troubled debt restructurings.

Allowance for Loan Losses

The allowance for loan losses represents an estimate of the current amount of principal that is probable the Company will be unable to collect given facts and circumstances as of the evaluation date, and includes amounts arising from loans individually and collectively evaluated for impairment. These estimated amounts are recorded through a provision for loan losses charged against income. Management periodically evaluates the adequacy of the allowance for loan losses to ensure it is maintained at a reasonable level to provide for recognized and unrecognized but inherent losses in the loan portfolio. The Company uses the same methods used to determine the allowance for loan losses, to assess any reserves needed for off-balance sheet credit risks such as unfunded loan commitments and contingent obligations on letters of credit. These reserves for off-balance sheet credit risks are presented in the liabilities section in the consolidated balance sheets.

The Company develops and documents its methodology to determine the allowance for loan losses at the portfolio segment level. The Company determines its loan portfolio segments based on the type of loans it carries and their associated risk characteristics. The Company’s loan portfolio segments are: Real Estate, Commercial, Financial Institutions, Consumer and Other. Loans in these portfolio segments have distinguishing borrower needs and differing risks associated with each product type.

Real estate loans include commercial loans secured by real estate properties. Commercial loans secured by non-owner occupied real estate properties are generally granted to finance the acquisition or operation of commercial real estate properties, with terms similar to the properties’ useful lives or the operating cycle of the businesses. The main source of repayment of these real estate loans is derived from cash flows or conversion of productive assets and not from the income generated by the disposition of the property held as collateral. The main repayment source of loans granted to finance land acquisition, development and construction projects is generally derived from the disposition of the properties held as collateral, with the repayment capacity of the borrowers and any guarantors considered as alternative sources of repayment.

Commercial loans correspond to facilities established for specific business purposes such as financing working capital and capital improvements projects and asset-based lending, among others. These may be loan commitments, uncommitted lines of credit to qualifying customers, short term (one year or less) or longer term credit facilities, and may be secured, unsecured or partially secured. Terms on commercial loans generally do not exceed five years, and exceptions are documented. Commercial loans secured by owner-occupied real estate properties are generally granted to finance the acquisition or operation of commercial real estate properties, with

 

F-11

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

terms similar to the properties’ useful lives or the operating cycle of the businesses. The main source of repayment of these commercial real estate loans is derived from cash flows and not from the income generated by the disposition of the property held as collateral. Commercial loans to borrowers in similar businesses or products with similar characteristics or specific credit requirements are generally evaluated under a standardized commercial credit program. Commercial loans outside the scope of those programs are evaluated on a case by case basis, with consideration of any exposure under an existing commercial credit program.

Loans to financial institutions and acceptances are facilities granted to fund certain transactions classified according to their risk level, and primarily include trade financing facilities through letters of credits, bankers’ acceptances, pre and post-export financing, and working capital loans, among others. Loans in this portfolio segment are generally granted for terms not exceeding three years and on an unsecured basis under the limits of an existing credit program, primarily to the largest financial institutions that our credit analyzes indicate are of high quality in Brazil, Chile, Colombia, Mexico and Peru, as well as a limited number of other countries in Latin America. Prior to approval, management also considers cross-border and portfolio limits set forth in its programs and credit policies.

Consumer and other loans are retail open-end and closed-end credits extended to individuals for household, family and other personal expenditures. These loans include loans to individuals secured by their personal residence, including first mortgage, home equity and home improvement loans as well as revolving credit card agreements. Because these loans generally consist of a large number of relatively small-balance, homogeneous loans, their risk is generally evaluated collectively.

An individual loan is considered impaired when it is probable that the Company will be unable to collect all amounts due, including both principal and interest, according to the contractual terms of the loan agreement. The Company generally considers as impaired all loans in nonaccrual status, and other loans classified in accordance with an internal risk grading system exceeding a defined threshold when it is probable that an impairment exists and the amount of the potential impairment is reasonably estimable. To determine when it is probable that an impairment exists, the Company considers the extent to which a loan may be inadequately protected by the current net worth and paying capacity of the borrower or any guarantor, or by the current value of the assets pledged as collateral.

When a loan is considered impaired, the potential impairment is measured as the excess of the carrying value of the loan over the present value of expected future cash flows at the measurement date, or the fair value of the collateral in the case where the loan is considered collateral-dependent. If the amount of the present value of the loan’s expected future cash flows exceeds the loan’s carrying amount, the loan is still considered impaired but no impairment is recorded. The present value of an impaired loan results from estimating its future cash flows, discounted at the loan’s effective interest rate. In the case of loans considered collateral-dependent, which are generally certain real estate loans for which repayment is expected to be provided solely by the operation or sale of the underlying collateral, the potential impairment is measured based on the fair value of the asset pledged as collateral. The allowance for loan losses on loans considered troubled debt restructuring is generally determined by discounting the restructured cash flows by the original effective rate of the loan.

Loans that do not meet the criteria of an individually impaired loan are collectively evaluated for impairment. These loans include large groups of smaller homogeneous loan balances, such as loans in the consumer and other loan portfolio segment, and all other loans that have not been individually identified as impaired. This group of collective loans is evaluated for impairment based on measures of historical losses associated with loans within their respective portfolio segments adjusted by a variety of qualitative factors. These

 

F-12

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

qualitative factors incorporate the most recent data reflecting current economic conditions, industry performance trends or obligor concentrations within each portfolio segment, among other factors. Other adjustments may be made to the allowance for loans collectively evaluated for impairment based on any other pertinent information that management considers may affect the estimation of the allowance for loan losses, including a judgmental assessment of internal and external influences on credit quality that are not fully reflected in historical loss or their risk rating data. The measures of historical losses and the related qualitative adjustments are updated quarterly and semi-annually, respectively, to incorporate the most recent loan loss data reflecting current economic conditions.

Loans to borrowers that are domiciled in foreign countries, primarily loans in the Financial Institutions portfolio segment, are also evaluated for impairment by assessing the probability of additional losses arising from the Company’s exposure to transfer risk. The Company defines transfer risk exposure as the possibility that a loan obligation cannot be serviced in the currency of payment because the borrower’s country of origin may not have sufficient available currency of payment or may have put restraints on its availability, such as currency controls. To determine an individual country’s transfer risk probability, the Company assigns numerical values corresponding to the perceived performance of that country in certain macroeconomic, social and political factors generally considered in the banking industry for evaluating a country’s transfer risk. A defined country’s transfer risk probability is assigned to that country based on an average of the individual scores given to those factors, calculated using an interpolation formula. The results of this evaluation are also updated semi-annually.

Loans in the real estate, commercial and financial institutions portfolio segments are charged off against the allowance for loan losses when they are considered uncollectable. These loans are considered uncollectable when a loss becomes evident to management, which generally occurs when the following conditions are present, among others: (1) a loan or portions of a loan are classified as “loss” in accordance with the internal risk grading system; (2) a collection attorney has provided a written statement indicating that a loan or portions of a loan are considered uncollectible; and (3) the carrying value of a collateral-dependent loan exceeds the appraised value of the asset held as collateral.

Consumer and other retail loans are charged off against the allowance for loan losses at the earlier of (1) when management becomes aware that a loss has occurred, or (2) when closed-end retail loans become past due 120 cumulative days or open-end retail loans become past due 180 cumulative days from the contractual due date. For open and closed-end retail loans secured by residential real estate, any outstanding loan balance in excess of the fair value of the property, less cost to sell, is charged off no later than when the loan is 180 days past due. Consumer and other retail loans may not be charged off when management can clearly document that a past due loan is well secured and in the process of collection such that collection will occur regardless of delinquency status in accordance with regulatory guidelines applicable to these types of loans.

Recoveries on loans represent collections received on amounts that were previously charged off against the allowance for loan losses. Recoveries are credited to the allowance for loan losses when received, to the extent of the amount previously charged off against the allowance for loan losses on the related loan. Any amounts collected in excess of this limit are first recognized as interest income, then as a reduction of collection costs, and then as other income.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales or purchases when control over the assets has been surrendered by the transferor. Control over transferred assets is deemed to be surrendered when the assets have

 

F-13

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

been isolated from the transferor, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the transferor does not maintain effective control over the transferred assets.

Premises and Equipment, Net

Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed on the straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized over the remaining term of the lease. Repairs and maintenance are charged to operations as incurred; renewals, betterments and interest during construction are capitalized. Gains or losses on sales of premises and equipment are recorded as other noninterest income or noninterest expense at the date of the sales.

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of recognition and measurement of an impairment loss, when the independent and identifiable cash flow of a single asset may not be determinable, the long-lived asset may be grouped with other assets of like cash flows. Recoverability of an asset or group of assets to be held and used is measured by comparing the carrying amount with future undiscounted net cash flows expected to be generated by the asset or group of assets. If an asset is considered impaired, the impairment recognized is generally measured by the amount by which the carrying amount of the asset or group exceeds its fair value.

Bank Owned Life Insurance

Bank owned life insurance policies (“BOLI”) are recorded at the cash surrender value of the insurance contracts, which represent the amount that may be realizable under the contracts, at the consolidated balance sheet dates. Changes to the cash surrender value are recorded as other noninterest income in the consolidated statements of operations.

Income Taxes

Deferred income tax assets and liabilities are determined using the balance sheet method. Under this method, the resulting net deferred tax asset is determined based on the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax basis. The effect of changes in tax laws or rates is recognized in results in the period that includes the legislation enactment date. A valuation allowance is established against the deferred tax asset to the extent that management believes that it is more likely than not that any tax benefit will not be realized. Income tax expense is recognized on the periodic change in deferred tax assets and liabilities at the current statutory rates.

The results of operations of the Company and the majority of its wholly owned subsidiaries are included in the consolidated income tax return of the Company and its subsidiaries as members of the same consolidated tax group.

Under the intercompany income tax allocation policy, the Company and the subsidiaries included in the consolidated tax group are allocated current and deferred taxes as if they were separate taxpayers. As a result, the subsidiaries included in the consolidated group pay their allocation of income taxes to the Company, or receive payments from the Company to the extent that tax benefits are realized.

 

F-14

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

Goodwill

Goodwill is not amortized but is reviewed for potential impairment at the reporting unit level on an annual basis, or on an interim basis if events or circumstances indicate a potential impairment. The impairment test is performed in two steps. The first step of the goodwill impairment test compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. However, if the carrying amount of the reporting unit exceeds its fair value, an additional procedure must be performed as a second step. In that second step, the implied fair value of the reporting unit’s goodwill is compared to the carrying amount of goodwill allocated to that reporting unit. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value at the measurement date. At December 31, 2017 and 2016, goodwill was considered not impaired and, therefore, no impairment charges were recorded.

Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase are classified as secured borrowings and are reflected at the amount of cash received in connection with the transaction.

Derivative Instruments

Derivative instruments are recognized on the consolidated balance sheet as other assets or other liabilities, at their respective fair values. The accounting for changes in the fair value of a derivative instrument is dependent upon whether the derivative has been designated and qualifies as part of a hedging relationship. For derivative instruments that have not been designated and qualified as hedging relationships, the change in their fair value is recognized in current period earnings. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instruments is initially recognized as a component of other comprehensive income (loss), and subsequently reclassified into earnings in the same period during which the hedged transactions affect earnings. The ineffective portion of the gain or loss, if any, is recognized immediately in earnings. The Company has designated certain derivatives as cash flow hedges. Management periodically evaluates the effectiveness of these hedges in offsetting the fluctuations in cash flows due to changes in benchmark interest rates.

Fair Value Measurement

Financial instruments are classified based on a three-level valuation hierarchy required by U.S. GAAP. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

 

Level 1 Inputs to the valuation methodology are quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities may include debt and equity securities that are traded in an active exchange market, as well as certain U.S. securities that are highly liquid and are actively traded in over-the-counter markets.

 

Level 2

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange traded instruments which value is determined by using a pricing model with inputs that are observable in the market or can be derived principally from, or corroborated by, observable

 

F-15

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

  market data. This category generally may include U.S. Government and U.S. Government Sponsored Enterprise mortgage backed debt securities and corporate debt securities.

 

Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities may include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Recently Issued Accounting Pronouncements

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the Financial Accounting Standards Board (“FASB”) issued guidance that allows a reclassification from AOCI to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate. The amount of the reclassification is the difference between the historical corporate income tax rate and the newly enacted 21% corporate income tax rate pursuant to H.R. 1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal year 2018, known as the Tax Cuts and Jobs Act of 2017 (“the 2017 Tax Act”). This guidance is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted for (1) public business entities for reporting periods for which financial statements have not been issued, and (2) for other entities for reporting periods for which financial statements have not yet been made available for issuance. The Company early-adopted this guidance and reclassified the effect of remeasuring net deferred tax assets related to items within AOCI to retained earnings resulting in a $1.1 million increase in retained earnings in 2017.

Targeted Improvements to Accounting for Hedging Activities

In August 2017, the FASB issued targeted amendments to the guidance for recognition, presentation and disclosure of hedging activities. These targeted amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The amendments also simplify the application of hedge accounting guidance. This guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years for public business entities. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. The Company is in the process of determining whether the adoption of this guidance will have a material impact on the Company’s consolidated financial statements and disclosures.

Statement of Cash Flows Classification of Certain Receipts and Payments

In August 2016 , the FASB issued specific guidance for the classification of a number of cash receipts and payments, including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, proceeds from the settlement of insurance claims and proceeds from the settlement of bank-

 

F-16

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

owned life insurance policies. The new guidance is effective for years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019, for private companies, and for years beginning after December 15, 2017 and interim periods within those fiscal years for public companies. Early adoption is permitted. The Company is in the process of understanding whether this new guidance will have a material impact on its consolidated statement of cash flows when adopted.

Accounting for Credit Losses on Financial Instruments

In June 2016, the FASB issued new guidance for the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The standard is effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021, for private companies, and for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, for public companies. Early adoption is permitted for fiscal years beginning after December 15, 2018. The Company is in the process of determining whether these changes will have a material impact on its consolidated financial position or results of operations or disclosures.

Accounting for Leases

In February 2016, the FASB issued guidance for the recognition and measurement of all leases. The new guidance requires lessees to recognize a right-of-use asset and a lease liability for most leases within the scope of the guidance. There were no significant changes to the guidance for lessors. The standard is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020, for private companies, and for fiscal periods beginning after December 15, 2018, and interim periods within those fiscal years, for public companies. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition at the beginning of the earliest comparative period presented, and provides for certain practical expedients. The Company is in the process of determining whether this new guidance will have a material impact on its consolidated financial position, results of operations and disclosures, when adopted.

Recognition and Measurement of Financial Instruments

In January 2016, the FASB issued changes to the guidance on the recognition and measurement of financial instruments. The changes include, among others, the removal of the available-for-sale category for equity securities and updates to certain disclosure requirements. This standard is effective for annual reporting periods beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019, for private companies, and for fiscal periods beginning December 15, 2017, and interim periods within those fiscal years, for public companies, with limited early adoption permitted. The Company is in the process of determining whether these changes will have a material impact on its consolidated financial position or results of operations or disclosures.

Revenue from Contracts with Customers

In May 2014, the FASB issued a common revenue standard for recognizing revenue from contracts with customers. This new standard establishes principles for reporting information about the nature, amount, timing,

 

F-17

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amended effective date is annual reporting periods beginning after December 15, 2018, and interim periods beginning after December 15, 2019, for private companies, and for annual reporting periods beginning after December 15, 2017, and interim periods within that reporting period, for public companies. Earlier adoption continues to be permitted. The Company is in the process of determining whether the new guidance will have a material impact on its consolidated financial position or results of operations.

Reclassifications

Certain reclassifications have been made to the December 31, 2016 and 2015 consolidated financial statements to conform to current year presentation.

2. Interest Earning Deposits with Banks

At December 31, 2017 and 2016 interest earning deposits with banks are comprised of deposits with the FRB in the amount of approximately $109 million and $102 million, respectively. At December 31, 2017 and 2016, the average interest rate on these deposits was approximately 1.10% and 0.51%, respectively. These deposits mature within one year.

 

3. Securities

Amortized cost and approximate fair values of securities available for sale are summarized as follows:

 

     December 31, 2017  
  

 

 

 
     Amortized
Cost 		     Gross Unrealized     Estimated
Fair Value 		 
(in thousands of dollars)       Gains      Losses    

U.S. government sponsored enterprise debt securities

   $ 889,396      $ 1,784      $ (15,514 )    $ 875,666  

Corporate debt securities

     310,781        3,446        (835 )      313,392  

U.S. government agency debt securities

     293,908        870        (3,393 )      291,385  

Municipal bonds

     179,524        2,343        (1,471 )      180,396  

Mutual funds

     24,262        —          (645 )      23,617  

U.S. treasury securities

     2,700        2        (1 )      2,701  
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 1,700,571      $ 8,445      $ (21,859 )    $ 1,687,157  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     December 31, 2016  
  

 

 

 
     Amortized
Cost 		     Gross Unrealized     Estimated
Fair Value 		 
(in thousands of dollars)       Gains      Losses    

U.S. government sponsored enterprise debt securities

   $ 1,017,957      $ 4,497      $ (17,991 )    $ 1,004,463  

U.S. government agency debt securities

     553,257        2,519        (6,692 )      549,084  

Corporate debt securities

     370,042        2,468        (1,256 )      371,254  

Municipal bonds

     171,693        167        (4,971 )      166,889  

Mutual funds

     24,260        —          (645 )      23,615  

Foreign sovereign debt

     5,228        9        —         5,237  

U.S. treasury securities

     2,701        9        (5 )      2,705  
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 2,145,138      $ 9,669      $ (31,560 )    $ 2,123,247  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

F-18

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

At December 31, 2017, the Company had no foreign sovereign debt securities. At December 31, 2016, foreign sovereign debt available for sale securities included only securities issued or guaranteed by the government of Colombia.

The Company’s investment securities available for sale with unrealized losses that are deemed temporary, aggregated by length of time that individual securities have been in a continuous unrealized loss position, are summarized below:

 

    December 31, 2017  
    Less Than 12 Months     12 Months or More     Total  
(in thousands of dollars)   Estimated
Fair Value 		    Unrealized
Loss 		    Estimated
Fair Value 		    Unrealized
Loss 		    Estimated
Fair Value 		    Unrealized
Loss 		 

U.S. government sponsored enterprise debt securities

  $ 333,232     $ (2,956 )    $ 485,555     $ (12,558 )    $ 818,787     $ (15,514 ) 

U.S. government agency debt securities

    92,138       (728 )      128,316       (2,665 )      220,454       (3,393 ) 

Municipal bonds

    4,895       (8 )      76,003       (1,463 )      80,898       (1,471 ) 

Corporate debt securities

    94,486       (751 )      3,694       (84 )      98,180       (835 ) 

Mutual funds

    —         —         23,375       (645 )      23,375       (645 ) 

U.S. treasury securities

    —         —         2,199       (1 )      2,199       (1 ) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 524,751     $ (4,443 )    $ 719,142     $ (17,416 )    $ 1,243,893     $ (21,859 ) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    December 31, 2016  
    Less Than 12 Months     12 Months or More     Total  
(in thousands of dollars)   Estimated
Fair Value 		    Unrealized
Loss 		    Estimated
Fair Value 		    Unrealized
Loss 		    Estimated
Fair Value 		    Unrealized
Loss 		 

U.S. government sponsored enterprise debt securities

  $ 735,759     $ (16,212 )    $ 57,914     $ (1,779 )    $ 793,673     $ (17,991 ) 

U.S. government agency debt securities

    183,299       (1,659 )      263,526       (5,033 )      446,825       (6,692 ) 

Municipal bonds

    140,864       (4,971 )      —         —         140,864       (4,971 ) 

Corporate debt securities

    116,073       (1,255 )      1,111       (1 )      117,184       (1,256 ) 

Mutual funds

    23,375       (645 )      —         —         23,375       (645 ) 

U.S. treasury securities

    2,195       (5 )      —         —         2,195       (5 ) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 1,201,565     $ (24,747 )    $ 322,551     $ (6,813 )    $ 1,524,116     $ (31,560 ) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At December 31, 2017 and 2016 debt securities issued by U.S. government-sponsored entities and agencies held by the Company were issued by institutions which the government has affirmed its commitment to support. Because the decline in fair value is attributable to changes in interest rates, and not credit quality, and because the Company does not have the intent to sell these debt securities and it is more likely than not that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired.

Unrealized losses on municipal and corporate debt securities, at December 31, 2017 and 2016, are attributable to normal fluctuations in interest rates and investment securities markets, and as a result, temporary in nature. In addition, the issuers of these debt securities are considered to be high quality, and management does not intend to sell these investments and it is more likely than not that it will not be required to sell these investments before their anticipated recovery. As a result, the Company does not consider these securities to be other-than-temporarily impaired.

 

F-19

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

Amortized cost and approximate fair values of securities held to maturity at December 31, 2017 are summarized as follows:

 

     December 31, 2017  
     Amortized
Cost 		     Gross Unrealized     Estimated
Fair Value 		 
(in thousands of dollars)       Gains      Losses    

U.S. government sponsored enterprise debt securities

   $ 86,826      $ 47      $ (441 )    $ 86,432  

U.S. Government agency debt securities

     3,034        —          —         3,034  
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 89,860      $ 47      $ (441 )    $ 89,466  
  

 

 

    

 

 

    

 

 

   

 

 

 

Contractual maturities of securities at December 31, 2017 are as follows:

 

     Available for Sale      Held to Maturity  
(in thousands of dollars)    Amortized
Cost 		     Estimated
Fair Value 		     Amortized
Cost 		     Estimated
Fair Value 		 

Within 1 year

   $ 6,745      $ 6,737      $ —        $ —    

After 1 year through 5 years

     272,928        273,483        —          —    

After 5 years through 10 years

     252,512        252,315        —          —    

After 10 years

     1,144,124        1,131,005        89,860        89,466  

No contractual maturities

     24,262        23,617        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,700,571      $ 1,687,157      $ 89,860      $ 89,466  
  

 

 

    

 

 

    

 

 

    

 

 

 

Actual maturities of investment securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties. Proceeds from sales and calls of securities available for sale in 2017 and 2016 were approximately $393 million and $584 million, respectively, with gross realized gains of $2.6 million and gross realized losses of $4.2 million in 2017, gross realized gains of $7.3 million and gross realized losses of $6.2 million in 2016.

At December 31, 2017 and 2016, securities available for sale with a fair value of approximately $246 million and $371 million, respectively, were pledged as collateral to secure securities sold under agreements to repurchase and advances from the FHLB.

 

F-20

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

4. Loans

The loan portfolio consists of the following loan classes:

 

(in thousands of dollars)    2017      2016  

Real estate loans

     

Commercial

     

Nonowner-occupied

   $ 1,745,839      $ 1,445,243  

Multi-family residential

     795,912        669,659  

Land development and construction loans

     421,285        429,085  
  

 

 

    

 

 

 
     2,963,036        2,543,987  

Single-family residential

     515,237        476,840  

Owner-occupied

     429,803        463,040  
  

 

 

    

 

 

 
     3,908,076        3,483,867  

Commercial loans

     1,529,572        1,742,192  

Loans to financial institutions and acceptances

     497,626        416,293  

Consumer loans and overdrafts

     130,951        122,409  
  

 

 

    

 

 

 
   $ 6,066,225      $ 5,764,761  
  

 

 

    

 

 

 

The amounts in the table above include loans under syndication facilities for approximately $989 million and $996 million at December 31, 2017 and 2016, respectively. These loans are primarily designed for providing working capital to certain qualified domestic and international commercial entities meeting strict credit quality criteria and concentration limits, and approved in accordance with credit policies.

While maintaining a diversified loan portfolio, the Company is dependent mostly on the economic conditions that affect South Florida, greater Houston and the greater New York City area, especially the five New York City boroughs. Also, the Company’s loans to financial institutions and acceptances primarily include trade financing facilities through letters of credits, bankers’ acceptances, pre and post-export financing, and working capital loans, among others. Loans in this portfolio segment are generally granted for terms not exceeding three years and on an unsecured basis under the limits of an existing credit program, primarily to the largest financial institutions that we believe are of the highest quality in Brazil, Chile, Colombia, Mexico and Peru, as well as other countries in Latin America. Diversification is managed through policies with limitations for exposure to individual or related debtors and for country risk exposure.

The following tables summarize international loans by country, net of loans fully collateralized with cash of approximately $32 million and $63 million at December 31, 2017 and 2016, respectively.

 

     December 31, 2017  
(in thousands of dollars)    Brazil      Venezuela      Chile      Others (1)      Total  

Real estate loans

              

Single-family residential (2)

   $ 219      $ 145,069      $ 179      $ 7,246      $ 152,713  

Loans to financial institutions and acceptances

     129,372        —          93,000        258,811        481,183  

Commercial loans

     8,451        —          —          60,843        69,294  

Consumer loans and overdrafts

     3,046        37,609        1,364        10,060        52,079  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 141,088      $ 182,678      $ 94,543      $ 336,960      $ 755,269  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

F-21

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

 

(1) Includes loans to borrowers in eighteen other countries which do not individually exceed 1% of total assets.
(2) Includes mortgage loans for single-family residential properties located in the U.S.

 

     December 31, 2016  
(in thousands of dollars)    Brazil      Venezuela      Colombia      Others (1)      Total  
Real estate loans                                   

Single-family residential (2)

   $ 233      $ 147,041      $ 1,947      $ 5,620      $ 154,841  

Commercial loans

     79,738        468        19,704        138,375        238,285  

Loans to financial institutions and acceptances

     151,493        —          84,667        170,803        406,963  

Consumer loans and overdrafts

     2,757        36,639        1,070        7,385        47,851  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 234,221      $ 184,148      $ 107,388      $ 322,183      $ 847,940  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes loans to borrowers in twenty other countries which do not individually exceed 1% of total assets.
(2) Includes mortgage loans for single-family residential properties located in the U.S.

The age analysis of the loan portfolio by class, including nonaccrual loans, as of December 31, 2017 and 2016 are summarized in the following tables:

 

    December 31, 2017  
    Total Loans,
Net of
Unearned
Income 		          Past Due     Total Loans in
Nonaccrual
Status 		    Total Loans
90 Days or
More
Past Due
and Accruing 		 
(in thousands of dollars)     Current     30-59
Days 		    60-89
Days 		    Greater
than
90 Days 		    Total Past
Due 		     

Real estate loans

               

Commercial

               

Nonowner occupied

  $ 1,745,839     $ 1,745,686     $ —       $ —       $ 153     $ 153     $ 162     $ —    

Multi-family residential

    795,912       795,912       —         —         —         —         —         —    

Land development and construction loans

    421,285       421,285       —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    2,963,036       2,962,883       —         —         153       153       162       —    

Single-family residential

    515,237       504,204       6,609       2,421       2,003       11,033       5,004       226  

Owner-occupied

    429,803       423,560       1,571       503       4,169       6,243       10,398       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    3,908,076       3,890,647       8,180       2,924       6,325       17,429       15,564       226  

Commercial loans

    1,529,572       1,523,329       1,814       5       4,424       6,243       11,103       —    

Loans to financial institutions and acceptances

    497,626       497,626       —         —         —         —         —         —    

Consumer loans and overdrafts

    130,951       130,846       57       29       19       105       55       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 6,066,225     $ 6,042,448     $ 10,051     $ 2,958     $ 10,768     $ 23,777     $ 26,722     $ 226  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-22

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

    December 31, 2016  
    Total Loans,
Net of
Unearned
Income 		          Past Due     Total Loans in
Nonaccrual
Status 		    Total Loans
90 Days or
More
Past Due
and Accruing 		 
(in thousands of dollars)     Current     30-59
Days 		    60-89
Days 		    Greater
than
90 Days 		    Total Past
Due 		     

Real estate loans

               

Commercial

               

Nonowner occupied

  $ 1,445,243     $ 1,444,591     $ 346     $ —       $ 305     $ 651     $ 1,169     $ —    

Multi-family residential

    669,659       660,394       —         —         9,265       9,265       9,265       —    

Land development and construction loans

    429,085       426,366       —         —         2,719       2,719       2,719       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    2,543,987       2,531,351       346       —         12,289       12,635       13,153       —    

Single-family residential

    476,840       464,051       4,675       1,433       6,681       12,789       8,893       116  

Owner-occupied

    463,040       449,582       2,819       1,713       8,926       13,458       17,090       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    3,483,867       3,444,984       7,840       3,146       27,896       38,882       39,136       116  

Commercial loans

    1,742,192       1,718,789       4,141       —         19,262       23,403       31,236       —    

Loans to financial institutions and acceptances

    416,293       416,293       —         —         —         —         —         —    

Consumer loans and overdrafts

    122,409       120,489       1,098       443       380       1,921       74       370  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 5,764,761     $ 5,700,555     $ 13,079     $ 3,589     $ 47,538     $ 64,206     $ 70,446     $ 486  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At December 31, 2017 and 2016, loans with an outstanding principal balance of $1,476 million and $1,040 million, respectively, were pledged as collateral to secure advances from the FHLB.

 

F-23

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

5. Allowance for Loan Losses

An analysis by loan segment of the changes in the allowance for loan losses for the years ended December 31, 2017, 2016 and 2015, and its allocation by impairment methodology and the related investment in loans, net as of December 31, 2017, 2016 and 2015 are summarized in the following tables.

 

     December 31, 2017  
(in thousands of dollars)    Real Estate     Commercial     Financial
Institutions 		    Consumer
and Others 		    Total  

Balances at beginning of year

   $ 31,055     $ 40,555     $ 5,304     $ 4,837     $ 81,751  

(Reversal of) provision for loan losses

     (1,607 )      359       (942 )      (1,300 )      (3,490 ) 

Loans charged-off

          

Domestic

     (97 )      (1,979 )      —         (424 )      (2,500 ) 

International

     —         (6,166 )      —         (757 )      (6,923 ) 

Recoveries

     895       962       —         1,305       3,162  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at end of year

   $ 30,246     $ 33,731     $ 4,362     $ 3,661     $ 72,000  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses by impairment methodology

          

Individually evaluated

   $ —       $ 2,866     $ —       $ —       $ 2,866  

Collectively evaluated

     30,246       30,865       4,362       3,661       69,134  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 30,246     $ 33,731     $ 4,362     $ 3,661     $ 72,000  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment in loans, net of unearned income

          

Individually evaluated

   $ 1,318     $ 20,907     $ —       $ 374     $ 22,599  

Collectively evaluated

     2,816,541       2,169,596       497,626       559,863       6,043,626  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 2,817,859     $ 2,190,503     $ 497,626     $ 560,237     $ 6,066,225  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-24

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

     December 31, 2016  
(in thousands of dollars)    Real Estate     Commercial     Financial
Institutions 		    Consumer
and Others 		    Total  

Balances at beginning of year

   $ 19,253     $ 43,812     $ 9,226     $ 4,752     $ 77,043  

(Reversal of) provision for loan losses

     7,990       16,733       (3,922 )      1,309       22,110  

Loans charged-off

          

Domestic

     (94 )      (1,496 )      —         (224 )      (1,814 ) 

International

     —         (19,610 )      —         (1,186 )      (20,796 ) 

Recoveries

     3,906       1,116       —         186       5,208  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at end of year

   $ 31,055     $ 40,555     $ 5,304     $ 4,837     $ 81,751  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses by impairment methodology

          

Individually evaluated

   $ —       $ 6,596     $ —       $ —       $ 6,596  

Collectively evaluated

     31,055       33,959       5,304       4,837       75,155  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 31,055     $ 40,555     $ 5,304     $ 4,837     $ 81,751  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment in loans, net of unearned income

          

Individually evaluated

   $ 13,888     $ 51,236     $ —       $ 4,205     $ 69,329  

Collectively evaluated

     2,391,363       2,371,350       416,336       516,383       5,695,432  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 2,405,251     $ 2,422,586     $ 416,336     $ 520,588     $ 5,764,761  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    

December 31, 2015

 
(in thousands of dollars)    Real Estate     Commercial     Financial
Institutions 		    Consumer
and Others 		    Total  

Balances at beginning of year

   $ 17,591     $ 34,349     $ 9,849     $ 3,596     $ 65,385  

(Reversal of) provision for loan losses

     1,059       9,352       (623 )      1,432       11,220  

Loans charged-off

          

Domestic

     (197 )      (1,612 )      —         (162 )      (1,971 ) 

International

     —         (73 )      —         (300 )      (373 ) 

Recoveries

     800       1,796       —         186       2,782  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at end of year

   $ 19,253     $ 43,812     $ 9,226     $ 4,752     $ 77,043  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses by impairment methodology

          

Individually evaluated

   $ —       $ 9,094     $ —       $ —       $ 9,094  

Collectively evaluated

     19,253       34,718       9,226       4,752       67,949  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 19,253     $ 43,812     $ 9,226     $ 4,752     $ 77,043  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment in loans, net of unearned income

          

Individually evaluated

   $ 22,404     $ 61,254     $ —       $ 3,361     $ 87,019  

Collectively evaluated

     1,797,383       2,514,798       742,622       481,400       5,536,203  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 1,819,787     $ 2,576,052     $ 742,622     $ 484,761     $ 5,623,222  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-25

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

The following is a summary of the recorded investment amount of loan sales by portfolio segment in the years ended December 31, 2017, 2016 and 2015:

 

(in thousands of dollars)    Real Estate      Commercial      Financial
Institutions 		     Consumer
and others 		     Total  

2017

   $ 15,040      $ 35,260      $ 40,177      $ —        $ 90,477  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

2016

   $ 9,151      $ 72,597      $ 23,500      $ —        $ 105,248  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

2015

   $ 7,893      $ 45,714      $ 30,500      $ —        $ 84,107  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following is a summary of impaired loans as of December 31, 2017 and 2016:

 

    December 31, 2017  
    Recorded Investment                    
(in thousands of dollars)   With a
Valuation
Allowance 		    Without a
Valuation
Allowance 		    Total     Average     Total
Unpaid
Principal
Balance 		    Valuation
Allowance 		    Interest
Income
Recognized 		 

Real estate loans

             

Commercial

             

Nonowner occupied

  $ —       $ —       $ —       $ 143     $ —       $ —       $ —    

Multi-family

residential

    —         1,318       1,318       7,898       1,330       —         54  

Land development and construction loans

    —         —         —         1,359       —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    —         1,318       1,318       9,400       1,330       —         54  

Single-family residential

    —         877       877       3,100       871       —         1,101  

Owner-occupied

    —         9,488       9,488       13,080       10,494       —         11  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    —         11,683       11,683       25,580       12,695       —         1,166  

Commercial loans

    7,173       3,743       10,916       18,653       16,940       2,866       12  

Loans to financial institutions and acceptances

    —         —         —         —         —         —         —    

Consumer loans and overdrafts

    —         —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 7,173     $ 15,426     $ 22,599     $ 44,233     $ 29,635     $ 2,866     $ 1,178  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-26

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

    December 31, 2016  
    Recorded Investment                    
(in thousands of dollars)   With a
Valuation
Allowance 		    Without a
Valuation
Allowance 		    Total     Average     Total
Unpaid
Principal
Balance 		    Valuation
Allowance 		    Interest
Income
Recognized 		 

Real estate loans

             

Commercial

             

Nonowner occupied

  $ —       $ 885     $ 885     $ 4,105     $ 1,600     $ —       $ 314  

Multi-family residential

    —         10,758       10,758       6,107       10,771       —         64  

Land development and construction loans

    —         2,719       2,719       8,454       2,719       —         450  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    —         14,362       14,362       18,666       15,090       —         828  

Single-family residential

    —         6,852       6,852       5,391       8,146       —         186  

Owner-occupied

    —         16,529       16,529       15,466       17,916       —         201  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    —         37,743       37,743       39,523       41,152       —         1,215  

Commercial loans

    21,536       10,050       31,586       23,165       31,600       6,596       1,984  

Loans to financial institutions and acceptances

    —         —         —         —         —         —         —    

Consumer loans and overdrafts

    —         —         —         5       —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 21,536     $ 47,793     $ 69,329     $ 62,693     $ 72,752     $ 6,596     $ 3,199  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The recorded investment in loans considered troubled debt restructuring (“TDR”) completed during 2017 totaled approximately $1.5 million as of December 31, 2017 ($12.3 million as of December 31, 2016 for TDR loans completed in 2016, and $6.3 million as of December 31, 2015 for TDR loans completed in 2015). In 2017, there was one commercial real estate owner-occupied TDR loan for $0.6 million completed since 2016, which subsequently defaulted under the modified terms of the loan agreement. In 2016, there were four commercial real estate owner-occupied TDR loans totaling $3.0 million, and six single-family residential TDR loan totaling $2.9 million completed since 2015, which subsequently defaulted under the modified terms of the loan agreement. In 2015, there no TDR loans completed since 2014, which subsequently defaulted under the modified terms of the loan agreement. In 2017, the Company charged-off $6.0 million against the allowance for loan losses as a result of the designation of a commercial loan as TDR. In 2017, 2016 and 2015, all TDR loans were commercial and real estate loans under modified terms that did not substantially impact the allowance for loan losses since these impaired loans were recorded at their realizable value, which approximated their fair value previous to their designation as TDR loans.

Credit Risk Quality

The sufficiency of the allowance for loan losses is reviewed monthly by the Chief Risk Officer and the Chief Financial Officer. These recommendations are reviewed and approved monthly by the Executive Committee. The Board of Directors considers the allowance for loan losses as part of its review of the Company’s consolidated financial statements. As of December 31, 2017 and 2016, the Company considers the allowance for loan losses to be sufficient to absorb losses in the loans portfolio in accordance with U.S. GAAP.

Loans may be classified but not considered impaired due to one of the following reasons: (1) the Company has established minimum dollar amount thresholds for loan impairment testing, which results in loans under

 

F-27

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

those thresholds being excluded from impairment testing and therefore not included in impaired loans; (2) classified loans may be considered nonimpaired because collection of all amounts due is probable.

As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related primarily to (i) the risk rating of loans, (ii) the loan payment status, (iii) net charge-offs, (iv) nonperforming loans and (v) the general economic conditions in the main geographies where the Company’s borrowers conduct their businesses.

The Company utilizes a credit risk rating system to identify the risk characteristics of each of its loans. Loans are rated on a quarterly basis (or more frequently when the circumstances require it) on a scale from 1 (worst credit quality) to 10 (best credit quality). Loans are then grouped in five master risk categories for purposes of monitoring rising levels of potential loss risks and to enable the activation of collection or recovery processes as defined in the Company’s Credit Risk Policy. The following is a summary of the master risk categories and their associated loan risk ratings, as well as a description of the general characteristics of the master risk category:

 

     Loan Risk
Rating 		 

Master risk category

  

Nonclassified

     4 to 10  

Classified

     1 to 3  

Substandard

     3  

Doubtful

     2  

Loss

     1  

Nonclassified

This category includes loans considered as Pass and Special Mention. A loan classified as pass is considered of sufficient quality to preclude a lower adverse rating. These loans are generally well protected by the current net worth and paying capacity of the borrower or by the value of any collateral received. Special Mention loans are defined as having potential weaknesses that deserve management’s close attention which, if left uncorrected, could potentially result in further credit deterioration. Special Mention loans may include loans originated with certain credit weaknesses or that developed those weaknesses since their origination.

Classified

This classification indicates the presence of credit weaknesses which could make loan repayment unlikely, such as partial or total late payments and other contractual defaults.

Substandard

A loan classified substandard is inadequately protected by the sound worth and paying capacity of the borrower or the collateral pledged. They are characterized by the distinct possibility that the Company will sustain some loss if the credit weaknesses are not corrected. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual assets.

 

F-28

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

Doubtful

These loans have all the weaknesses inherent in a loan classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. These are poor quality loans in which neither the collateral, if any, nor the financial condition of the borrower presently ensure collectability in full in a reasonable period of time. As a result, the possibility of loss is extremely high; in fact, there is a permanent impairment in the collateral securing the loan.

Loss

Loans classified as loss are considered uncollectible and of such little value that the continuance as bankable assets is not warranted. This classification does not mean that the assets have absolutely no recovery or salvage value, but not to the point where a write-off should be deferred even though partial recoveries may occur in the future. This classification is based upon current facts, not probabilities. As a result, loans in this category should be promptly charged off in the period in which they surface as uncollectible.

The Company’s investment in loans by credit quality indicators as of December 31, 2017 and 2016 are summarized in the following tables.

 

     December 31, 2017  
     Credit Risk Rating         
            Classified         
(in thousands of dollars)    Nonclassified      Substandard      Doubtful      Loss      Total  

Real estate loans

              

Commercial

              

Nonowner occupied

   $ 1,745,677      $ 162      $ —        $ —        $ 1,745,839  

Multi-family residential

     795,912        —          —          —          795,912  

Land development and construction loans

     421,285        —          —          —          421,285  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     2,962,874        162        —          —          2,963,036  

Single-family residential

     509,368        5,869        —          —          515,237  

Owner-occupied

     417,694        12,109        —          —          429,803  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     3,889,936        18,140        —          —          3,908,076  

Commercial loans

     1,513,375        16,197        —          —          1,529,572  

Loans to financial institutions and acceptances

     497,626        —          —          —          497,626  

Consumer loans and overdrafts

     125,762        5,189        —          —          130,951  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,026,699      $ 39,526      $ —        $ —        $ 6,066,225  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

F-29

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

     December 31, 2016  
     Credit Risk Rating         
            Classified         
(in thousands of dollars)    Nonclassified      Substandard      Doubtful      Loss      Total  

Real estate loans

              

Commercial

              

Nonowner occupied

   $ 1,441,148      $ 4,095      $ —        $ —        $ 1,445,243  

Multi-family residential

     660,253        9,406        —          —          669,659  

Land development and construction loans

     426,366        2,719        —          —          429,085  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     2,527,767        16,220        —          —          2,543,987  

Single-family residential

     467,831        9,009        —          —          476,840  

Owner-occupied

     442,071        20,969        —          —          463,040  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     3,437,669        46,198        —          —          3,483,867  

Commercial loans

     1,710,394        31,798        —          —          1,742,192  

Loans to financial institutions and acceptances

     416,293        —          —          —          416,293  

Consumer loans and overdrafts

     117,189        5,220        —          —          122,409  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 5,681,545      $ 83,216      $ —        $ —        $ 5,764,761  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Credit Risk Quality Indicators - Consumer Loan Classes

The credit risk quality of the Company’s residential real estate and consumer loan portfolios is evaluated by considering the repayment performance of individual borrowers, and then classified on an aggregate or pool basis. Loan secured by real estate in these classes which have been past due 90 days or more, and 120 days (non-real estate secured) or 180 days or more, are classified as Substandard and Loss, respectively. When the Company has documented that past due loans in these classes are well-secured and in the process of collection, then the loans may not be classified. These indicators are updated at least quarterly.

 

F-30

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

Single-family residential loans portfolio:

 

     As of December 31,  
     2017     2016     2015  
(in thousands of dollars, except percentages)   

Loan

Balance

     %    

Loan

Balance

     %    

Loan

Balance

     %  

Accrual Loans

               

Current

   $ 502,118        97.45 %    $ 461,761        96.84 %    $ 417,332        97.21 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

30-60 Days Past Due

     6,025        1.17 %      4,675        0.98 %      2,807        0.65 % 

60-90 Days Past Due

     1,864        0.36 %      1,395        0.29 %      1,258        0.29 % 

90+ Days Past Due

     226        0.04 %      116        0.02 %      —          0.00 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     8,115        1.58 %      6,186        1.30 %      4,065        0.95 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Accrual Loans

   $ 510,233        99.03 %    $ 467,947        98.14 %    $ 421,397        98.16 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Non-Accrual Loans

               

Current

   $ 2,086        0.40 %    $ 2,290        0.48 %    $ 3,820        0.89 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

30-60 Days Past Due

     584        0.11 %      —          0.00 %      —          0.00 % 

60-90 Days Past Due

     557        0.11 %      38        0.01 %      530        0.12 % 

90+ Days Past Due

     1,777        0.34 %      6,565        1.38 %      3,561        0.83 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     2,918        0.57 %      6,603        1.38 %      4,091        0.95 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Non-Accrual Loans

     5,004        0.97 %      8,893        1.86 %      7,911        1.84 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 515,237        100.00 %    $ 476,840        100.00 %    $ 429,308        100.00 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Consumer loans and overdrafts:

 

     As of December 31,  
     2017     2016     2015  
(in thousands of dollars, except percentages)   

Loan

Balance

     %    

Loan

Balance

     %    

Loan

Balance

     %  

Accrual Loans

               

Current

   $ 130,830        99.91 %    $ 120,446        98.40 %    $ 125,229        98.55 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

30-60 Days Past Due

     48        0.04 %      1,076        0.88 %      745        0.59 % 

60-90 Days Past Due

     18        0.01 %      443        0.36 %      168        0.13 % 

90+ Days Past Due

     —          0.00 %      370        0.30 %      809        0.64 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     66        0.05 %      1,889        1.54 %      1,722        1.36 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Accrual Loans

   $ 130,896        99.96 %    $ 122,335        99.94 %    $ 126,951        99.91 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Non-Accrual Loans

               

Current

   $ 16        0.01 %    $ 43        0.04 %    $ 32        0.03 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

30-60 Days Past Due

     9        0.01 %      22        0.02 %      —          — % 

60-90 Days Past Due

     11        0.01 %      —          — %      47        0.04 % 

90+ Days Past Due

     19        0.01 %      9        0.01 %      39        0.03 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     39        0.03 %      31        0.03 %      86        0.07 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Non-Accrual Loans

   $ 55        0.04 %    $ 74        0.06 %    $ 118        0.09 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Loans

   $ 130,951        100.00 %    $ 122,409        100.00 %    $ 127,069        100.00 % 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

F-31

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

The Company generally takes into account the views of its regulators as to loan classification and impairment.

 

6. Premises and Equipment, Net

Premises and equipment, net include the following:

 

     December 31,         
(in thousands of dollars)    2017      2016      Estimated
Useful
Lives
(in Years) 		 

Land

   $ 18,307      $ 19,325        NA  

Buildings and improvements

     93,848        115,053        10–30  

Equipment leased under operating lease

     19,626        19,626        15  

Furniture and equipment

     19,832        19,903        3–10  

Computer equipment and software

     29,749        27,968        3  

Leasehold improvements

     18,260        18,732        5–10  

Work in progress

     6,532        4,474        NA  
  

 

 

    

 

 

    
   $ 206,154      $ 225,081     

Less: Accumulated depreciation and amortization

     (76,797 )       (76,369 )    
  

 

 

    

 

 

    
   $ 129,357      $ 148,712     
  

 

 

    

 

 

    

In 2017 and 2016, the Company sold properties with a carrying value of approximately $19.1 million and $1.0 million, respectively, and realized a gain on sale of approximately $11.3 million and $2.0 million, respectively. There were no significant sales of property and equipment in 2015.

Depreciation and amortization expense was approximately $9.0 million, $9.1 million and $8.4 million at December 31, 2017, 2016 and 2015, respectively. In 2017 and 2016 fully-depreciated equipment with an original cost of approximately $1.4 million and $1.9 million were written-off with a charge to their respective accumulated depreciation.

 

7. Time Deposits

Time deposits in denominations of $100,000 or more amounted to approximately $1.2 billion and $922 million at December 31, 2017 and 2016, respectively. Time deposits in denominations of $250,000 or more amounted to approximately $624 million and $536 million at December 31, 2017 and 2016, respectively. The average interest rate paid on time deposits, was approximately 1.26% in 2017 and 1.01% in 2016. Time deposits include brokered time deposits, all in denominations of less than $100,000. As of December 31, 2017 and 2016 these time deposits amounted to $780 million and $691 million, respectively.

 

F-32

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

At December 31, 2017 and 2016 time deposits maturities were as follows:

 

(in thousands, except percentages)    2017     2016  
Year of Maturity    Amount      %     Amount      %  

2017

   $ —          —   %    $ 1,150,587        62.63 % 

2018

     1,357,668        60.44 %      396,019        21.55 % 

2019

     331,515        14.76 %      142,316        7.75 % 

2020

     194,175        8.64 %      19,766        1.08 % 

2021

     103,781        4.62 %      104,066        5.66 % 

2022 and thereafter

     259,295        11.54 %      24,502        1.33 % 
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 2,246,434        100.00 %    $ 1,837,259        100.00 % 
  

 

 

    

 

 

   

 

 

    

 

 

 

 

8. Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase are primarily used to fund asset matching transactions or to accommodate major customer deposits. At December 31, 2017, there were no securities sold under agreements to repurchase. At December 31, 2016, securities sold under agreements to repurchase amounted to approximately $50 million. In 2017, the highest month-end outstanding balance and monthly average outstanding balance was approximately $50 million ($73 million in 2016). The average interest rate paid in 2017 and 2016 was 3.8% and 4.5%, respectively.

 

9. Advances From the Federal Home Loan Bank and Other Borrowings

At December 31, 2017 and 2016, the Company had outstanding advances from the FHLB and other borrowings as follows:

 

Year of Maturity    Interest
Rate 		     2017      2016  
(in thousands of dollars)                     

2017

     0.37% to 1.08%      $ —        $ 455,000  

2018

     0.90% to 2.03%        567,000        65,000  

2019

     1.00% to 3.86%        155,000        130,000  

2020

     1.50% to 2.74%        211,000        181,000  

2021

     1.93% to 2.50%        240,000        100,000  
     

 

 

    

 

 

 
      $ 1,173,000      $ 931,000  
     

 

 

    

 

 

 

At December 31, 2017, advances from the FHLB include $255 million ($225 million in 2016) which have variable interest rates ranging from 1.23% to 1.71% with maturities in 2018 and 2019 (0.75% to 1.08% with maturities within a year in 2016).

At December 31, 2017 and 2016, the Company held stock of the FHLB for approximately $57 million and $46 million, respectively. The terms of the advance agreement require the Company to maintain certain investment securities and loans as collateral for these advances. At December 31, 2017 and 2016, the Company was in compliance with this requirement of the FHLB membership agreement.

Other borrowings as of December 31, 2017 and 2016 include $12 million and $10 million in advances from other banks, respectively, which matured in January 2018 and 2017, respectively.

 

F-33

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

10. Derivative Instruments

From time to time, the Company enters into derivative financial instruments as part of its interest rate management activities and to facilitate customer transactions. Those instruments may or not be designated and qualify as part of a hedging relationship.

At December 31, 2017 and 2016 the fair value of the Company’s derivative instruments was as follows:

 

     2017      2016  
(in thousands of dollars)    Other Assets      Other
Liabilities 		     Other Assets  

Interest rate swaps designated as cash flow hedges

   $ 5,462      $ —        $ 5,309  
  

 

 

    

 

 

    

 

 

 

Interest rate swaps not designated as hedging instruments:

        

Customers

     1,375        —          —    

Third party broker

     —          1,375        —    
  

 

 

    

 

 

    

 

 

 
     1,375        1,375        —    
  

 

 

    

 

 

    

 

 

 

Interest Rate Caps not designated as hedging instruments:

        

Customers

     —          195        —    

Third party broker

     195        —          —    
  

 

 

    

 

 

    

 

 

 
     195        195        —    
  

 

 

    

 

 

    

 

 

 
   $ 7,032      $ 1,570      $ 5,309  
  

 

 

    

 

 

    

 

 

 

Derivatives Designated as Hedging Instruments

During 2017 and 2016 the Company entered into interest rate swaps that were designated and qualified as cash flow hedges. These interest rate swaps were designed as cash flow hedges to manage the exposure that arises from differences in the amount of the Company’s known or expected cash receipts and the known or expected cash payments related to the Company’s borrowings from the FHLB, the value of which are determined by interest rates.

At December 31, 2017 and 2016 the Company’s interest rate swaps designated as cash flow hedges involve the payment of fixed-rate amounts in exchange for the Company receiving variable-rate payments over the life of the agreements without exchange of the underlying notional amount.

As of December 31, 2017 and 2016 the Company had 15 interest rate swap contracts with a total notional amount of $255 million that were designated as cash flow hedges of floating rate interest payments on the currently outstanding and expected subsequent rollover of advances from the FHLB. As of December 31, 2017, these advances have a carrying amount of $366 million and maturities ranging from two to nine years ($255 million with maturities ranging from four to ten years as of December 31, 2016). The interest rate swaps mature in 3 to 9 years (four to ten years in 2016). The Company expects the hedge relationships to be highly effective in offsetting the effects of changes in interest rates in the cash flows associated with the advances from the FHLB. No hedge ineffectiveness gains or losses were recognized in 2017 and 2016.

 

F-34

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

Derivatives Not Designated as Hedging Instruments

At December 31, 2017, the Company had one interest rate swap contract with a customer with a total notional amount of $54.6 million (none in 2016). These instruments involve the payment of fixed-rate amounts in exchange for the Company receiving variable-rate payments over the life of the contracts. In addition, at December 31, 2017, the Company had an interest rate swap mirror contract with a third party broker with similar terms. These instruments mature in 10 years and do not involve the exchange of the underlying notional amount.

At December 31, 2017, the Company had seven interest rate cap contracts with customers with a total notional amount of $162.1 million (none in 2016). In addition, the Company had seven interest rate cap mirror contracts with a third party broker with similar terms. These instruments’ maturities range from one and a half years to four years.

Related to its derivatives not designated as hedging instruments, the Company previously disclosed in Note 10 of its audited consolidated financial statements as of and for the year ended December 31, 2017, notional amounts of interest rate swaps and interest cap contracts of $111 million and $206 million, respectively. These amounts should have been disclosed as $54.6 million and $162.1 million, respectively, as reflected above. These changes to the previously disclosed amounts have no impact on the Consolidated Statements of Operations and Comprehensive Income, Balance Sheets or Cash Flows.

 

11. Junior Subordinated Debentures Held by Trust Subsidiaries

At December 31, 2017 and 2016, the Company owns all of the common capital securities issued by 8 trust subsidiaries (“the Trust Subsidiaries”). These Trust Subsidiaries were first formed by the Company for the purpose of issuing trust preferred securities (“the Trust Preferred Securities”) and investing the proceeds in the junior subordinated debentures issued by the Company. The common securities issued by the Trust Subsidiaries were received and the obligations under the junior subordinated debentures were assumed by the Company in 2008 as part of the corporate reorganization described in Note 1. The debentures have the full and unconditional guarantee of the Company. The Company records the common capital securities issued by the Trust Subsidiaries in other assets in its consolidated balance sheets using the equity method. The junior subordinated debentures issued to the Trust Subsidiaries, less the common securities of the Trust Subsidiaries, qualify as Tier 1 regulatory capital.

The following table provides information of the outstanding Trust Preferred Securities issued by, and the junior subordinated debentures issued to, each of the Trust Subsidiaries as of December 31, 2017 and 2016:

 

(in thousands of dollars)    Amount of
Trust
Preferred
Securities
Issued by
Trust 		     Principal
Amount of
Debenture
Issued to
Trust 		     Year of
Issuance 		     Annual Rate of Trust
Preferred Securities
and Debentures 		     Year of
Maturity 		 

Commercebank Capital Trust I

     $26,830        $28,068        1998        8.9%        2028  

Commercebank Statutory Trust II

     15,000        15,464        2000        10.6%        2030  

Commercebank Capital Trust III

     10,000        10,400        2001        10.18%        2031  

Commercebank Capital Trust VI

     9,250        9,537        2002        3-M LIBOR + 3.35%        2033  

Commercebank Capital Trust VII

     8,000        8,248        2003        3-M LIBOR + 3.25%        2033  

Commercebank Capital Trust VIII

     5,000        5,155        2004        3-M LIBOR + 2.85%        2034  

Commercebank Capital Trust IX

     25,000        25,774        2006        3-M LIBOR + 1.75%        2038  

Commercebank Capital Trust X

     15,000        15,464        2006        3-M LIBOR + 1.78%        2036  
  

 

 

    

 

 

          
   $ 114,080      $ 118,110           
  

 

 

    

 

 

          

 

F-35

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

The Company and the Trust Subsidiaries have the option to defer payment of interest on the obligations for up to ten semi-annual periods. In 2017 and 2016, no payment of interest have been deferred on these obligations. The Trust Preferred Securities are subject to mandatory redemption, in whole or in part, upon the maturity or early redemption of the debentures.

 

12. Income Taxes

The components of the income tax expense for the years ended December 31, 2017, 2016, and 2015 are as follows:

 

(in thousands of dollars)    2017      2016      2015  

Current provision

        

Federal

   $ 19,194      $ 10,981      $ 9,095  

State

     1,763        844        782  

Impact of lower rate under the 2017 Tax Act -

        

Remeasurement of net deferred tax assets, other than balances corresponding to items in AOCI

     8,470        —          —    

Remeasurement of net deferred tax assets corresponding to items in AOCI

     1,094        —          —    

Deferred tax expense (benefit)

     3,471        (1,614 )       (1,363 ) 
  

 

 

    

 

 

    

 

 

 
   $ 33,992      $ 10,211      $ 8,514  
  

 

 

    

 

 

    

 

 

 

On December 22, 2017, the 2017 Tax Act was signed into law. This law significantly changes U.S. tax law by, among other things, lowering corporate federal income tax rates and implementing a territorial tax system. The legislation permanently reduces the U.S. corporate income tax rate from 35% to 21%, effective January 1, 2018. As a result of the reduction in the U.S. corporate federal income tax rate, the Company remeasured its ending net deferred tax assets at December 31, 2017 and recognized a total of $9.6 million tax expense in the Company’s consolidated statement of income for the year ended December 31, 2017.

A reconciliation of the income tax expense at the statutory federal income tax rate to the Company’s effective income tax rate for the years ended December 31, 2017, 2016, and 2015 follows:

 

     2017     2016     2015  
(in thousands of dollars)    Amount     %     Amount     %     Amount     %  

Tax expense calculated at the statutory federal income tax rate

   $ 26,967       35.0 %    $ 11,827       35.0 %    $ 8,246       35.0 % 

Increases (decreases) resulting from:

            

Impact of the 2017 Tax Act -

            

Remeasurement of net deferred tax assets

     9,564       12.41 %      —         — %      —         — % 

Income not subject to tax

     (3,553 )      (4.61 )%      (2,679 )      (7.93 )%      (454 )      (1.93 )% 

Disallowed interest expense and other expenses

     577       0.75 %      464       1.37 %      164       0.7 % 

State and city income taxes, net of federal income tax benefit

     1,146       1.49 %      549       1.62 %      508       2.16 % 

Other, net

     (709 )      (0.92 )%      51       0.16 %      50       0.21 % 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 33,992       44.12 %    $ 10,211       30.22 %    $ 8,514       36.14 % 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-36

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

The composition of the net deferred tax asset is as follows:

 

     December 31,  
(in thousands of dollars)    2017      2016  

Tax effect of temporary differences

     

Provision for loan losses

   $ 13,372      $ 25,704  

Deferred compensation expense

     3,460        4,437  

Net unrealized losses in other comprehensive income

     1,680        5,886  

Dividend income

     946        1,693  

Interest income on nonaccrual loans

     599        1,558  

Goodwill amortization

     (3,223 )       (4,866 ) 

Depreciation and amortization

     (3,601 )       (6,032 ) 

Other

     1,350        2,350  
  

 

 

    

 

 

 

Net deferred tax asset amount

   $ 14,583      $ 30,730  
  

 

 

    

 

 

 

The Company evaluates the deferred tax asset for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including its own historical financial performance and that of its operating subsidiaries and projections of future taxable income. This evaluation involves significant judgment by management about assumptions that are subject to change from period to period. Management believes that the weight of all the positive evidence currently available exceeds the negative evidence in support of the realization of the future tax benefits associated with the federal net deferred tax asset. As a result, management has concluded that the federal net deferred tax asset in its entirety will more likely than not be realized. Therefore, a valuation allowance is not considered necessary. If future results differ significantly from the Company’ current projections, a valuation allowance against the net deferred tax asset may be required.

At December 31, 2017 and 2016 the Company had accumulated net operating losses (“NOLs”) in the State of Florida of approximately $143.6 million and $132.3 million, respectively. These NOLs are carried forward for a maximum of 20 years based on applicable Florida law. The deferred tax asset related to these NOLs at December 31, 2017 and 2016 is approximately $6.2 million and $4.7 million, respectively. A valuation allowance has been recorded against the state deferred tax asset related to these NOLs as management believes it is more likely than not that the tax benefit will not be realized.

At December 31, 2017 and 2016, the Company had no unrecognized tax benefits or associated interest or penalties that needed to be accrued.

 

F-37

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

13. Other Comprehensive Income (Loss)

The related tax effect allocated to each component of other comprehensive income (loss) for the years ended December 31, 2017, 2016, and 2015 is as follows:

 

     2017  
(in thousands of dollars)    Before Tax
Amount 		     Tax
Effect 		     Net of Tax
Amount 		 

Net unrealized holding gain on securities available for sale arising during the year

   $ 6,875      $ (3,298 )     $ 3,577  

Net unrealized holding gains on cash flow hedges arising during the year

     293        (141 )       152  

Reclassification adjustment for net losses on sale of securities included in net income

     1,601        (768 )       833  
  

 

 

    

 

 

    

 

 

 

Other comprehensive income

   $ 8,769      $ (4,207 )     $ 4,562  
  

 

 

    

 

 

    

 

 

 

 

     2016  
(in thousands of dollars)    Before Tax
Amount 		     Tax
Effect 		     Net of Tax
Amount 		 

Net unrealized holding losses on securities available for sale arising during the year

   $ (5,952 )     $ 2,113      $ (3,839 ) 

Net unrealized holding gains on cash flow hedges arising during the year

     5,578        (1,980 )       3,598  

Reclassification adjustment for net gains on sale of securities included in net income

     (1,556 )       552        (1,004 ) 
  

 

 

    

 

 

    

 

 

 

Other comprehensive loss

   $ (1,930 )     $ 685      $ (1,245 ) 
  

 

 

    

 

 

    

 

 

 

 

     2015  
(in thousands of dollars)    Before Tax
Amount 		     Tax
Effect 		     Net of Tax
Amount 		 

Net unrealized holding losses on securities available for sale arising during the year

   $ (17,762 )     $ 6,306      $ (11,456 ) 

Net unrealized holding losses on cash flow hedges arising during the year

     (177 )       63        (114 ) 

Reclassification adjustment for net gains on sale of securities included in net income

     (1,950 )       692        (1,258 ) 
  

 

 

    

 

 

    

 

 

 

Other comprehensive loss

   $ (19,889 )     $ 7,061      $ (12,828 ) 
  

 

 

    

 

 

    

 

 

 

 

F-38

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

14. Related Party Transactions

The Company considers entities that are part of the MSF group worldwide as related parties given that they share a common parent. Included in the consolidated balance sheets and the consolidated statements of operations are amounts with related parties as follows:

 

     December 31,  
(in thousands of dollars)    2017      2016  

Assets

     

Other assets

   $ —        $ 446  
  

 

 

    

 

 

 

Liabilities

     

Demand deposits, noninterest bearing

   $ 24,879      $ 20,248  

Demand deposits, interest bearing

     21,071        54,330  

Money market

     449        282  

Time deposits and accounts payable

     7,636        2,652  
  

 

 

    

 

 

 

Total due to related parties

     54,035        77,512  
  

 

 

    

 

 

 

Net due to related parties

   $ (54,035 )     $ (77,066 ) 
  

 

 

    

 

 

 

 

     Year ended December 31  
(in thousands of dollars)    2017      2016      2015  

Income

        

Data processing and other services

   $ 1,532      $ 2,328      $ 2,287  

Rental income from operating lease

     1,971        1,976        1,971  

Service charges

     90        83        84  
  

 

 

    

 

 

    

 

 

 
   $ 3,593      $ 4,387      $ 4,342  
  

 

 

    

 

 

    

 

 

 

Expenses

        

Interest expense

   $ 85      $ 73      $ 157  

Loss on sale of securities

     —          796        —    

Fees and other expenses

     302        504        600  
  

 

 

    

 

 

    

 

 

 
     387        1,373        757  
  

 

 

    

 

 

    

 

 

 
   $ 3,206      $ 3,014      $ 3,585  
  

 

 

    

 

 

    

 

 

 

The Company makes loans in the normal course of business to certain related parties. At December 31, 2017 and 2016, these loans amounted to $4.8 million and $12.6 million, respectively. These loans are generally made to persons who participate or have authority to participate (other than in the capacity of a director) in major policymaking functions of the Company or its affiliates, such as principal owners and management of the entity and their immediate families.

In 2016, the Company sold securities guaranteed by the government of Venezuela to a non-U.S. affiliate at their fair value of approximately $11.8 million and realized a loss on the sale of approximately $0.8 million. Such securities had been held by the Company as available for sale.

In 2016, the Company bought from the Bank a non-performing loan to a Canadian oil company’ Colombian operation at its fair value at the time of the transaction. Subsequently, the Company sold to a non-U.S. affiliate

 

F-39

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

shares received in a restructuring of the same loan at their estimated fair value of approximately $4.9 million, which was included in other assets in the cash flow statement, and realized no gain or loss on sale of such shares.

For the years ended December 31, 2017 and 2016, participations in corporate financial institution loans that were sold to non- U.S. affiliates amounted to approximately $45 million and $50 million, respectively. There were no participations purchased from affiliates in 2017, 2016 and 2015. These participated loans were made to unaffiliated borrowers under terms consistent with the Company’s normal lending practices. The Company recorded no gain or loss on these loan participation transactions.

The Company provides certain data processing and corporate services to non-U.S. affiliates under the term of certain service level agreements. Fee income for those services are included in data processing and other fees above.

Through one of its operating subsidiaries, G200 Leasing, LLC (“G200 Leasing”), the Company leases to MSF an aircraft the Company owns. Under the terms of the lease agreement, MSF has sole use of the aircraft and provides for all of its scheduled maintenance, including maintaining sufficient qualified collateral in accordance with U.S. banking regulatory requirements. MSF had time deposits with the Company of $2.0 million at December 31, 2017 and 2016, to meet those collateral requirements. MSF makes monthly payments to G200 Leasing in accordance with the lease agreement. Income from this lease agreement is included in Rental income from operating lease in the table above. As amended in 2017, the lease agreement will expire in February 2023.

On February 15, 2018, the Company sold all of its interest in G200 Leasing to a non-U.S. subsidiary of MSF. See Note 22. “Subsequent Events.”

Transactions with related parties are entered into pursuant to the Company’s policies and procedures on substantially the same terms and conditions as transactions with unaffiliated third parties.

 

15. Employee Benefit Plan

The Mercantil Bank U.S.A. Retirement Plan (formerly Mercantil Commercebank U.S.A. Retirement Plan) (the “Plan”) is a 401(k) benefit plan covering substantially all employees of the Company.

The Company matches 100% of each participant’s contribution up to a maximum of 5% of their annual salary. Contributions by the Company to the Plan are based upon a fixed percentage of participants’ salaries as defined by the Plan. The Plan enables Highly Compensated employees to contribute up to the maximum allowed without further restrictions. All contributions made by the Company to the participants’ accounts are vested immediately. In addition, employees with at least three months of service and who have reached the age of 21 may contribute a percentage of their salaries to the Plan as elected by each participant.

The Company contributed to the Plan approximately $4 million in 2017 and 2016, in matching contributions.

 

16. Commitments and Contingencies

The Company and its subsidiaries are party to various legal actions arising in the ordinary course of business. In the opinion of management, the outcome of these proceedings litigation will not have a significant effect on the Company’s consolidated financial position or results of operations.

 

F-40

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

The Company occupies various banking centers under noncancelable lease agreements expiring through the year 2046. Actual rental payments expenses may include deferred rents but are recognized as rent expense on a straight line basis. Rent expense under these leases was approximately $6 million for each of the years ended December 31, 2017 and 2016, respectively.

Future minimum annual lease payments under such leases are as follows:

 

(in thousands of dollars)       
Years    Approximate
Amount 		 

2018

   $ 5,582  

2019

     5,390  

2020

     5,456  

2021

     5,207  

2022

     4,707  

Thereafter

     44,434  
  

 

 

 
   $ 70,776  
  

 

 

 

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the financial statements.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments and letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making loan commitments and letters of credit as it does for on-balance sheet instruments. The Company controls the credit risk of loan commitments and letters of credit through credit approvals, customer limits, and monitoring procedures.

Loan commitments are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company evaluates each customer’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include cash, accounts receivable, inventory, property and equipment, real estate in varying stages of development, and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support borrowing arrangements. They generally have one year terms and are renewable on a yearly basis. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company generally holds deposits, investments and real estate as collateral supporting those commitments. The extent of collateral held for those commitments at December 31, 2017 ranges from unsecured commitments to commitments fully collateralized by cash and securities.

Commercial letters of credit are conditional commitments issued by the Company to guarantee payment by a customer to a third party upon proof of shipment or delivery of goods as agreed. Commercial letters of credit

 

F-41

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

are used primarily for importing or exporting goods and are terminated when proper payment is made by the customer.

Financial instruments whose contract amount represents off-balance sheet credit risk at December 31, 2017 are generally short-term and are as follows:

 

(in thousands of dollars)    Approximate
Contract
Amount 		 

Commitments to extend credit

   $ 762,437  

Credit card facilities

     266,799  

Standby letters of credit

     17,369  

Commercial letters of credit

     981  
  

 

 

 
   $ 1,047,586  
  

 

 

 

 

17. Fair Value Measurement

Assets and liabilities measured at fair value on a recurring basis are summarized below:

 

     December 31, 2017  
(in thousands of dollars)    Quoted
Prices in
Active
Markets
for Identical
Assets
(Level 1) 		     Third-Party
Models with
Observable
Market
Inputs
(Level 2) 		     Internal
Models
with
Unobservable
Market
Inputs
(Level 3) 		     Total
Carrying
Value in the
Consolidated
Balance
Sheet 		 

Assets

           

Securities available for sale

           

U.S. government sponsored enterprise debt securities

   $ —        $ 875,666      $ —        $ 875,666  

Corporate debt securities

     —          313,392        —          313,392  

U.S. government agency debt securities

     —          291,385        —          291,385  

Municipal bonds

     —          180,396        —          180,396  

Mutual funds

     —          23,617        —          23,617  

U.S. treasury securities

     —          2,701        —          2,701  
  

 

 

    

 

 

    

 

 

    

 

 

 
     —          1,687,157        —          1,687,157  

Bank owned life insurance

     —          200,318        —          200,318  

Derivative instruments

     —          7,032        —          7,032  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —        $ 1,894,507      $ —        $ 1,894,507  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Derivative instruments

   $ —        $ 1,570      $ —        $ 1,570  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

F-42

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

 

     December 31, 2016  
(in thousands of dollars)    Quoted
Prices in
Active
Markets
for Identical
Assets
(Level 1) 		     Third-Party
Models with
Observable
Market
Inputs
(Level 2) 		     Internal
Models
with
Unobservable
Market
Inputs
(Level 3) 		     Total
Carrying
Value in the
Consolidated
Balance
Sheet 		 

Assets

           

Securities available for sale

           

U.S. government sponsored enterprise debt securities

   $ —        $ 1,004,463      $ —        $ 1,004,463  

U.S. government agency debt securities

     —          549,084        —          549,084  

Corporate debt securities

     —          371,254        —          371,254  

Municipal bonds

     —          166,889        —          166,889  

Mutual funds

     —          23,615        —          23,615  

Foreign sovereign debt

     —          5,237        —          5,237  

U.S. treasury securities

     —          2,705        —          2,705  
  

 

 

    

 

 

    

 

 

    

 

 

 
     —          2,123,247        —          2,123,247  

Bank owned life insurance

     —          164,860           164,860  

Derivative instruments

     —          5,309           5,309  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —        $ 2,293,416      $ —        $ 2,293,416  
  

 

 

    

 

 

    

 

 

    

 

 

 

Level 2 Valuation Techniques

The valuation of securities and derivative instruments is performed through a monthly pricing process using data provided by third parties considered leading global providers of independent data pricing services (“the Pricing Providers”). These pricing providers collect, use and incorporate descriptive market data from various sources, quotes and indicators from leading broker dealers to generate independent and objective valuations.

The valuation techniques and the inputs used in our consolidated financial statements to measure the fair value of our recurring Level 2 financial instruments consider, among other factors, the following:

 

  •   Similar securities actively traded which are selected from recent market transactions.

 

  •   Observable market data which includes spreads in relationship to LIBOR, swap curve, and prepayment speed rates, as applicable.

 

  •   The captured spread and prepayment speed is used to obtain the fair value for each related security.

On a quarterly basis, the Company evaluates the reasonableness of the monthly pricing process described for the valuation of securities and derivative instruments. This evaluation includes the challenging of a random sample selection of the different types of securities in the investment portfolio as of the end of the quarter selected. This challenge consists of obtaining from the pricing providers a document explaining the methodology applied to obtain their fair value assessments for each type of investment included in the sample selection. The Company then analyzes in detail the various inputs used in the fair value calculation, both observable and

 

F-43

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

unobservable (e.g., prepayment speeds, yield curve benchmarks, spreads, delinquency rates). Management considers that the consistent application of this methodology allows the Company to understand and evaluate the categorization of the investment portfolio.

The methods described above may produce a fair value calculation that may differ from the net realizable value or may not be reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of its financial instruments could result in different estimates of fair value at the reporting date.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The following table presents the major category of assets measured at fair value on a nonrecurring basis:

 

     December 31, 2017  
(in thousands of dollars)    Quoted
Prices in
Active
Markets
for Identical
Assets
(Level 1) 		     Significant
Other
Observable
Inputs
(Level 2) 		     Significant
Other
Unobservable
Inputs
(Level 3) 		     Total
Impairments 		 

Description

           

Loans held for sale

   $ 5,611      $ —        $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2016 there were no significant assets or liabilities measured at fair value on a nonrecurring basis.

Loans Held for Sale

The Company measures the impairment of loans held for sale based on the amount by which the carrying values of those loans exceed their fair values. The Company primarily uses independent third party quotes to measure any subsequent decline in the value of loans held for sale. As a consequence, the fair value of these loans held for sale are considered a Level 1 valuation.

 

18. Fair Value of Financial Instruments

The fair value of a financial instrument represents the price that would be received to sell it in an orderly transaction between market participants at the measurement date. The best indication of the fair value of a financial instrument is determined based upon quoted market prices. However, in many cases, there are no quoted market prices for the Company’s various financial instruments. As a result, the Company derives the fair value of the financial instruments held at the reporting period-end, in part, using present value or other valuation techniques. Those techniques are significantly affected by management’s assumptions, the estimated amount and timing of future cash flows and estimated discount rates included in present value and other techniques. The use of different assumptions could significantly affect the estimated fair values of the Company’s financial instruments. Accordingly, the net realized values could be materially different from the estimates presented below.

 

F-44

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

 

  •   Because of their nature and short-term maturities, the carrying values of the following financial instruments were used as a reasonable estimate of their fair value: cash and cash equivalents, interest earning deposits with banks, variable-rate loans with re-pricing terms shorter than twelve months, demand and savings deposits, short-term time deposits and securities sold under agreements to repurchase, and other borrowings.

 

  •   The fair value of loans held for sale, securities including securities sold under agreements to repurchase, bank owned life insurance and derivative instruments, are based on quoted market prices, when available. If quoted market prices are unavailable, fair value is estimated using the pricing process described in Note 17.

 

  •   The fair value of commitments and letters of credit is based on the assumption that the Company will be required to perform on all such instruments. The commitment amount approximates estimated fair value.

 

  •   The fair value of fixed-rate loans, advances from the FHLB, and junior subordinated debentures are estimated using a present value technique by discounting the future expected contractual cash flows using the current rates at which similar instruments would be issued with comparable credit ratings and terms at the measurement date.

 

  •   The fair value of long-term time or certificate of deposits is determined using a present value technique by discounting the future expected contractual cash flows using current rates at which similar instruments would be issued at the measurement date.

The estimated fair value of financial instruments where fair value differs from book value are as follows:

 

     December 31,  
     2017      2016  
(in thousands of dollars)    Carrying
Value 		     Estimated
Fair
Value 		     Carrying
Value 		     Estimated
Fair
Value 		 

Financial assets

           

Loans

   $ 2,682,790      $ 2,566,197      $ 2,716,107      $ 2,619,238  

Financial liabilities

           

Time deposits

     1,466,464        1,461,908        1,146,316        1,143,053  

Securities sold under agreements to repurchase

     —          —          50,000        51,446  

Advances from the Federal Home Loan Bank

     1,161,000        1,164,686        921,000        927,259  

Junior subordinated debentures

     118,110        95,979        118,110        89,481  

 

19. Regulatory Matters

The Company and the Bank are subject to various regulatory requirements administered by federal banking agencies. The following is a summary of restrictions related to dividend payments and capital adequacy.

 

F-45

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

Dividend Restrictions

Dividends payable by the Bank as a national bank subsidiary of the Company, are limited by law and Office of the Comptroller of the Currency (“OCC”) regulation to the lesser of the amounts calculated under a “recent earnings” test and an “undivided profits” test. Under the recent earnings test, a dividend may not be paid if the total of all dividends declared by a bank in any calendar year is in excess of the current year’s net income combined with the retained net income of the two preceding years, unless the national bank obtains the approval of the OCC. Under the undivided profits test, a dividend may not be paid in excess of a bank’s “undivided profits.” In 2017 and 2016, the Bank was in compliance with these requirements. Under regulatory capital rules, the Bank and the Company can only pay dividends to the extent either have sufficient “capital buffer” as defined in the rules.

In addition, the Company and the Bank are subject to various general regulatory policies and requirements relating to the payment of dividends, including requirements to maintain capital above regulatory minimums and the maintenance of capital in excess of capital conservation buffers required by the Federal Reserve and OCC capital regulations. The appropriate federal and state regulatory authorities are authorized to determine when the payment of dividends would be an unsafe or unsound practice, and may prohibit such dividends.

Capital Adequacy

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective for the Company and the Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. The Company and the Bank opted to not include the net unrealized gains or losses on available for sale securities in computing regulatory capital. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios. As of December 31, 2017, management believes that the Company and the Bank meet all capital adequacy requirements to which they are subject, and are well capitalized. In addition, the Company and the Bank must hold a capital conservation buffer above the adequately capitalized risk-based ratios. The capital conservation buffer is being phased in from 0.0% in 2015 to 2.50% by 2019. The Company’s capital conservation buffer at year end 2017 and 2016 was 5.3% and 5.05%, respectively.

 

F-46

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

The Bank’s actual capital amounts and ratios are presented in the following table:

 

     Actual     Required for Capital
Adequacy Purposes 		    Regulatory Minimums
To be Well Capitalized 		 
(in thousands of dollars)    Amount      Ratio     Amount      Ratio     Amount      Ratio  

December 31, 2017

               

Total capital ratio

   $ 885,855        12.7 %    $ 556,446        8.0 %    $ 695,557        10.0 % 

Tier I capital ratio

     812,631        11.7 %      417,334        6.0 %      556,446        8.0 % 

Tier I leverage ratio

     812,631        9.7 %      335,600        4.0 %      419,500        5.0 % 

Common Equity Tier I

     812,631        11.7 %      313,001        4.5 %      452,112        6.5 % 

December 31, 2016

               

Total capital ratio

   $ 848,029        12.4 %    $ 545,608        8.0 %    $ 682,010        10.0 % 

Tier I capital ratio

     767,048        11.3 %      409,206        6.0 %      545,608        8.0 % 

Tier I leverage ratio

     767,048        9.2 %      326,305        4.0 %      407,881        5.0 % 

Common Equity Tier I

     767,048        11.3 %      306,905        4.5 %      443,307        6.5 % 

The Company’s actual capital amounts and ratios are presented in the following table:

 

     Actual     Required for Capital
Adequacy Purposes 		    Regulatory Minimums
To be Well Capitalized 		 
(in thousands of dollars)    Amount      Ratio     Amount      Ratio     Amount      Ratio  

December 31, 2017

               

Total capital ratio

   $ 926,049        13.3 %    $ 556,578        8.0 %    $ 695,722        10.0 % 

Tier I capital ratio

     852,825        12.3 %      417,433        6.0 %      556,578        8.0 % 

Tier I leverage ratio

     852,825        10.2 %      335,647        4.0 %      419,559        5.0 % 

Common Equity Tier I

     753,545        10.7 %      313,075        4.5 %      452,220        6.5 % 

December 31, 2016

               

Total capital ratio

   $ 890,147        13.1 %    $ 545,727        8.0 %    $ 682,159        10.0 % 

Tier I capital ratio

     809,167        11.9 %      409,295        6.0 %      545,727        8.0 % 

Tier I leverage ratio

     809,167        9.6 %      328,392        4.0 %      410,490        5.0 % 

Common Equity Tier I

     699,046        10.3 %      306,971        4.5 %      443,403        6.5 % 

 

20. Segment Information

We determine our business segments based upon the products and services they provide, the functions performed, or the type of customers served. The business segment information presented in this section reflects our current organizational structure as currently evaluated by management. There are four reportable business segments: Personal and Commercial Banking (“PAC”), Corporate LATAM, Treasury, and Institutional. Corporate activities, including the activities of the Bank’s trust company and broker-dealer subsidiaries, as well as eliminations of balances and transactions between business segments and other corporate allocations are reported under Institutional. Results of these lines of business are presented on a managed basis. Substantially all revenues are generated within the U.S.

 

F-47

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

The following is a description of each of the Company’s business segments, and the products and services they provide to their respective client bases:

Personal and Commercial Banking

PAC delivers the subsidiary Bank’s core services and products to personal and commercial customers in domestic and international markets. Through this segment, both domestic and international customers are introduced to delivery channels including U.S. retail banking centers, online banking, mobile banking, and an ATM network. Targeting the needs of individuals and businesses, its products and services include consumer and commercial banking products such as checking accounts, savings accounts, time deposits, loans and lines of credit, residential and commercial mortgage lending, and unsecured loans and lines of credit, among others.

Corporate LATAM

Corporate LATAM serves financial institutions using a tiered approach, and companies in target countries in Latin America generally with over $1 billion in annual sales in several large industries. The segment combines the team’s expertise in domestic and international markets under one reporting structure to leverage relationship attraction and retention opportunities throughout all markets served. Results of this segment are primarily driven by changes in short-term interest rates, the credit quality of its loan portfolio and, the impact of the economic environment in borrower performance.

Treasury

Treasury is responsible for managing interest rate risk and liquidity risk for the Bank’s balance sheet. Treasury management services complement the mix of products, including loan syndications and accounts receivables, channeled through PAC, and help businesses monitor banking transactions and manage their cash flows. Additionally, Treasury manages credit risk in the Bank’s investment portfolio and supports bank-wide initiatives for increasing non-investment portfolio profitability. This process has the goal of enhancing overall returns for the Bank while keeping the management of liquidity and interest rate costs within approved limits.

Institutional

Results and balances of this segment correspond to all other corporate activities not previously discussed, including Funds Transfer Pricing (“FTP”) capital compensation, excess or deficits in the required level of provision for loan losses not born by the business units, the residual amounts of corporate expenses after allocations to other business units, as well as eliminations of balances and transactions between business segments.

 

F-48

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

Segment results

The following tables provide a summary of the Company’s financial information as of and for the years ended December 31, 2017, 2016 and 2015 on a managed basis. The Company’s definition of managed basis starts with the reported U.S. GAAP results and includes FTP compensation and allocations of direct and indirect expenses from overhead, internal support centers, and product support centers. This allows management to assess the comparability of results from year-to-year arising from segment operations. The corresponding income tax impact related to tax-exempt items is recorded within income tax expense/(benefit).

 

     PAC     Corporate
LATAM 		    Treasury     Institutional     Total  

For the year ended December 31, 2017

          

Income Statement:

          

Net interest income

   $ 182,872     $ 9,514     $ 6,649     $ 10,675     $ 209,710  

(Reversal of) provision for loan losses

     42       (3,879 )      (1,547 )      1,894       (3,490 ) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after (reversal of) provision for loan losses

     182,830       13,393       8,196       8,781       213,200  

Noninterest income

     26,468       509       8,920       35,588       71,485  

Noninterest expense

     161,002       4,894       11,256       30,484       207,636  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (Loss) before income tax benefit (provision):

          

Banking

     48,296       9,008       5,860       13,885       77,049  

Non-banking contribution

     4,788       55       —         (4,843 )      —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     53,084       9,063       5,860       9,042       77,049  

Income tax benefit (expense)

     (18,784 )      (3,207 )      1,106       (13,107 )      (33,992 ) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss)

   $ 34,300     $ 5,856     $ 6,966     $ (4,065 )    $ 43,057  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of December 31, 2017

          

Loans, net

   $ 5,542,545     $ 521,616     $ —       $ (64,325 )    $ 5,999,836  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deposits

   $ 5,454,216     $ 18,670     $ 779,969     $ 70,118     $ 6,322,973  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-49

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

     PAC     Corporate
LATAM 		    Treasury     Institutional     Total  

For the year ended December 31, 2016

          

Income Statement:

          

Net interest income

   $ 157,325     $ 15,302     $ 12,586     $ 6,720     $ 191,933  

Provision for loan losses

     5,795       13,620       (1,069 )      3,764       22,110  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     151,530       1,682       13,655       2,956       169,823  

Noninterest income

     26,461       843       7,808       27,158       62,270  

Noninterest expense

     156,146       8,295       9,041       24,821       198,303  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (Loss) before income tax benefit (provision):

          

Banking

     21,845       (5,770 )      12,422       5,293       33,790  

Non-banking contribution

     5,136       (124 )      —         (5,012 )      —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     26,981       (5,894 )      12,422       281       33,790  

Income tax (expense) benefit

     (10,068 )      2,200       (1,473 )      (870 )      (10,211 ) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss)

   $ 16,913     $ (3,694 )    $ 10,949     $ (589 )    $ 23,579  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of December 31, 2016

          

Loans, net

   $ 5,163,655     $ 601,016     $ —       $ (81,661 )    $ 5,683,010  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deposits

   $ 5,728,228     $ 68,332     $ 691,000     $ 89,805     $ 6,577,365  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     PAC     Corporate
LATAM 		    Treasury     Institutional     Total  

For the year ended December 31, 2015

          

Income Statement:

          

Net interest income

   $ 127,148     $ 22,334     $ 17,474     $ 5,329     $ 172,285  

Provision for loan losses

     9,263       1,059       (223 )      1,121       11,220  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     117,885       21,275       17,697       4,208       161,065  

Noninterest income

     24,512       1,588       2,631       26,025       54,756  

Noninterest expense

     142,845       10,344       7,150       31,923       192,262  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) Income before income tax benefit (provision):

          

Banking

     (448 )      12,519       13,178       (1,690 )      23,559  

Non-banking contribution

     4,256       (197 )      —         (4,059 )      —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     3,808       12,322       13,178       (5,749 )      23,559  

Income tax (expense) benefit

     (1,457 )      (4,715 )      (4,254 )      1,912       (8,514 ) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss)

   $ 2,351     $ 7,607     $ 8,924     $ (3,837 )    $ 15,045  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of December 31, 2015

          

Loans, net

   $ 4,525,302     $ 1,105,139     $ —       $ (74,530 )    $ 5,555,911  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deposits

   $ 5,673,119     $ 53,156     $ 535,963     $ 257,436     $ 6,519,674  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-50

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

21. Condensed Unconsolidated Financial Statements

The condensed unconsolidated financial statements of the Company and its wholly-owned subsidiary Mercantil Florida Bancorp, Inc. have been prepared using the same basis of accounting that the Company used to prepare its consolidated financial statements described in Note 1, except for its investment in subsidiaries which is accounted for using the equity method.    Under the equity method, investments in subsidiaries are initially recorded at cost, and they are periodically adjusted due to changes in the interest of the parent company over the net assets of the subsidiaries. The Company records on the result of the period its participation in the profit or loss of the subsidiaries, and in AOCI its participation in the “Other comprehensive income account” of the subsidiary. In applying equity method the Company uses the subsidiaries consolidated financial statements at the end of the period prepared under U.S. GAAP.

Condensed financial statements of Mercantil Bank Holding Corporation are presented below:

Condensed Balance Sheets:

 

     As of December 31  
(in thousands of dollars)    2017      2016  

Assets

     

Cash and due from banks

   $ 1,420      $ 1,334  

Investments in subsidiaries

     752,409        702,445  

Other assets

     1,798        1,133  
  

 

 

    

 

 

 
   $ 755,627      $ 704,912  
  

 

 

    

 

 

 

Liabilities and Stockholder’s Equity

     

Other liabilities

   $ 2,177      $ 175  

Stockholder’s equity

     753,450        704,737  
  

 

 

    

 

 

 
   $ 755,627      $ 704,912  
  

 

 

    

 

 

 

Condensed Statements of Income:

 

     Years ended December 31  
(in thousands of dollars)    2017      2016      2015  

Income:

        

Interest

   $ 3      $ 2      $ 2  

Equity in earnings of subsidiary

     45,008        23,996        15,434  
  

 

 

    

 

 

    

 

 

 

Total income

     45,011        23,998        15,436  
  

 

 

    

 

 

    

 

 

 

Expenses:

        

Employee compensation and benefit

     350        350        350  

Other expenses

     2,539        250        251  
  

 

 

    

 

 

    

 

 

 

Total expense

     2,889        600        601  
  

 

 

    

 

 

    

 

 

 

Net income before income tax benefit

     42,122        23,398        14,835  

Income tax benefit

     935        181        210  
  

 

 

    

 

 

    

 

 

 

Net income

   $ 43,057      $ 23,579      $ 15,045  
  

 

 

    

 

 

    

 

 

 

 

F-51

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

Condensed Statements of Cash Flows:

 

     Years ended December 31  
(in thousands of dollars)    2017      2016      2015  

Cash flows from operating activities

        

Net income

   $ 43,057      $ 23,579      $ 15,045  

Adjustments to reconcile net income to net cash used in operating activities - Equity in earnings of subsidiaries

     (45,008 )       (23,996 )       (15,434 ) 

Net change in other assets and liabilities

     1,337        (2 )       (8 ) 
  

 

 

    

 

 

    

 

 

 

Net cash used in operating activities

     (614 )       (419 )       (397 ) 

Cash provided by investing activities

        

Dividends from subsidiary

     700        400        400  
  

 

 

    

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents

     86        (19 )       3  

Cash and cash equivalents

        

Beginning of year

     1,334        1,353        1,350  
  

 

 

    

 

 

    

 

 

 

End of year

   $ 1,420      $ 1,334      $ 1,353  
  

 

 

    

 

 

    

 

 

 

Condensed financial statements of Mercantil Florida Bancorp, Inc are presented below:

Condensed Balance Sheets:

 

     As of December 31  
(in thousands of dollars)    2017      2016  

Assets

     

Cash and due from banks

   $ 39,089      $ 39,748  

Investments in subsidiaries

     821,982        771,613  

Other assets

     9,775        9,467  
  

 

 

    

 

 

 
   $ 870,846      $ 820,828  
  

 

 

    

 

 

 

Liabilities and Stockholder’s Equity

     

Junior subordinated debentures held by trust subsidiaries

   $ 118,110      $ 118,110  

Other liabilities

     979        944  

Stockholder’s equity

     751,757        701,774  
  

 

 

    

 

 

 
   $ 870,846      $ 820,828  
  

 

 

    

 

 

 

 

F-52

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

Condensed Statements of Income:

 

     Years ended December 31  
(in thousands of dollars)    2017      2016      2015  

Income:

        

Interest

   $ 85      $ 33      $ 61  

Equity in earnings of subsidiary

     50,982        31,282        20,874  
  

 

 

    

 

 

    

 

 

 

Total income

     51,067        31,315        20,935  
  

 

 

    

 

 

    

 

 

 

Expenses:

        

Interest expense

     7,456        7,129        6,868  

Provision for loan losses

     —          1,838        —    

Other expenses

     1,310        1,361        1,394  
  

 

 

    

 

 

    

 

 

 

Total expense

     8,766        10,328        8,262  
  

 

 

    

 

 

    

 

 

 

Net income before income tax benefit

     42,301        20,987        12,673  

Income tax benefit

     2,726        3,031        2,783  
  

 

 

    

 

 

    

 

 

 

Net income

   $ 45,027      $ 24,018      $ 15,456  
  

 

 

    

 

 

    

 

 

 

Condensed Statements of Cash Flows:

 

     Years ended December 31  
(in thousands of dollars)    2017      2016      2015  

Cash flows from operating activities

        

Net income

   $ 45,027      $ 24,018      $ 15,456  

Adjustments to reconcile net income to net cash used in operating activities - Equity in earnings of subsidiaries

     (50,982 )       (31,282 )       (20,874 ) 

Net change in other assets and liabilities

     (4 )       (35 )       75  
  

 

 

    

 

 

    

 

 

 

Net cash used in operating activities

     (5,959 )       (7,299 )       (5,343 ) 

Cash flows from investing activities

        

Dividends received from subsidiary

     6,000        6,000        6,000  

Dividends paid

     (700 )       (400 )       (400 ) 
  

 

 

    

 

 

    

 

 

 

Net cash provided by investing activities

     5,300        5,600        5,600  
  

 

 

    

 

 

    

 

 

 

Net (decrease) increase in cash and cash equivalents

     (659 )       (1,699 )       257  

Cash and cash equivalents

        

Beginning of year

     39,748        41,447        41,190  
  

 

 

    

 

 

    

 

 

 

End of year

   $ 39,089      $ 39,748      $ 41,447  
  

 

 

    

 

 

    

 

 

 

Investment in subsidiaries corresponds to the Company’s direct beneficial ownership of the Voting Trust. As discussed in Note 1, the Company has determined that it is the sole beneficial owner of the Voting Trust and consolidates that financial statements of the Voting Trust with its own financial statements for regulatory reporting purposes. The Voting Trust wholly-owns Mercantil Florida Bancorp, Inc., which in turn wholly-owns the Bank and its subsidiaries.

 

F-53

Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

22. Subsequent Events

Amended and Restated Articles of Incorporation

On February 6, 2018, the Company filed amended and restated articles of incorporation with the Secretary of State of Florida. Pursuant to the amended and restated articles, the total number of shares of all classes of capital stock that the Company have the authority to issue is 550,000,000, consisting of the following classes:

 

Class

   Number of
Shares 		     Par Value
per Share 		 

Common Stock:

     

Class A

     400,000,000      $ 0.10  

Class B

     100,000,000        0.10  
  

 

 

    
     500,000,000     

Preferred Stock

     50,000,000        0.10  
  

 

 

    
     550,000,000     
  

 

 

    

Common Stock

Holders of Class A Common Shares and Class B Common Shares have identical rights in all respects other than voting rights. Class B Common Shares are not convertible into Class A Common Shares or vice versa. Class A Common Shares are entitled to one vote per share on all matters. Holders of Class B Common Shares are entitled to one-tenth of a vote per Class B Common Share, voting (i) together with the Class A Common Shares as a single voting group on proposals to appoint the Company’s independent auditors, if the Company seeks such a vote, (ii) as required by the Florida Business Corporation Act, and (iii) as a single voting group in other circumstances, including a reorganization event that adversely affects the rights of the Class B Common Shares.

Preferred Stock

The Board of Directors is authorized to provide for, out of the authorized but non-issued shares of Preferred Stock, one or more series of Preferred Stock and, with respect to each such series, to fix the number of shares, the voting powers, if any, the preferences and relative, participating, optional or other special rights, if any, and any qualifications, limitations or restrictions thereof, of the shares of such series of Preferred Stock. Shares of Preferred Stock of different series may have different rights and limitations from each other, including dividend rates.

Dividends

Dividends shall be payable only when, as and if declared by the Board of Directors and may be paid in cash, property, or shares of any class or series or other securities or evidences of indebtedness of the Company or any other issuer, as may be determined by resolution or resolutions of the Board of Directors. Shares of Class B Common Stock are not entitled to receive dividends or distributions payable in shares of Class A Common Stock.

Distribution of Company Shares

MSF is the 100% holder of all Company Class A and Class B common stock (“Company Shares”). MSF’s board of directors and shareholders have approved MSF’s distribution of 80.1% of the Company’s

 

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Table of Contents

Mercantil Bank Holding Corporation and Subsidiaries

(A wholly owned subsidiary of Mercantil Servicios Financieros, C.A.)

Notes to Consolidated Financial Statements

December 31, 2017, 2016 and 2015

 

Class A and Class B common stock (the “Distributed Shares”) on a one-for-one basis to holders of record of MSF Class A and Class B common stock, respectively (the “Distribution”) . The Distribution is expected to be effected through a distribution trust (the “Distribution Trust”), which will hold the Distributed Shares pending the effectiveness of the Company’s SEC registration statement covering Company Shares, when these will be distributed to MSF shareholders. The Distribution Trust is expected to hold the 19.9% of Company Shares retained by MSF for up to two years pending MSF’s sale or disposition of the Retained Shares.

Effective February 6, 2018, the Company exchanged 100% of the 298,570,328 Class A and 215,188,764 Class B Company Shares outstanding, for 74,212,408 Class A and 53,253,157 Class B Company Shares. All references made to share or per share amounts in the consolidated financial statements for the periods presented and applicable disclosures have been retroactively adjusted to reflect this exchange. In addition, as a result of this exchange, the Company reclassified an amount equal to the reduction in the number of Company Shares at par value to additional paid-in capital on its consolidated financial statements for the periods presented.

Sale of G200 Leasing

On February 15, 2018, the Company sold its membership interest in G200 Leasing to a non-U.S. affiliate subsidiary of MSF. Prior to the sale, G200 Leasing distributed $19.8 million in cash to the Bank. All of the membership interests in G200 Leasing were sold for $8.5 million, which approximated the fair value. The Company recorded no gain or loss on this sale.

 

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Mercantil Bank Holding Corporation and Subsidiaries

Consolidated Balance Sheets (Unaudited)

 

(in thousands, except per share data)    March 31,
2018 		    December 31,
2017 		 
Assets             

Cash and due from banks

   $ 29,870     $ 44,531  

Interest earning deposits with banks

     235,787       108,914  
  

 

 

   

 

 

 

Cash and cash equivalents

     265,657       153,445  
  

 

 

   

 

 

 

Securities

    

Available for sale

     1,665,697       1,687,157  

Held to maturity

     89,294       89,860  

Federal Reserve Bank and Federal Home Loan Bank stock

     72,486       69,934  

Loans held for sale

     —         5,611  

Loans, gross

     5,950,450       6,066,225  

Less: Allowance for loan losses

     72,118       72,000  
  

 

 

   

 

 

 

Loans, net

     5,878,332       5,994,225  

Bank owned life insurance

     201,761       200,318  

Premises and equipment, net

     121,656       129,357  

Deferred tax assets, net

     24,468       14,583  

Goodwill

     19,193       19,193  

Accrued interest receivable and other assets

     85,050       73,084  
  

 

 

   

 

 

 
   $ 8,423,594     $ 8,436,767  
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Deposits

    

Demand

    

Noninterest bearing

   $ 836,520     $ 895,710  

Interest bearing

     1,471,986       1,496,749  

Savings and money market

     1,671,247       1,684,080  

Time

     2,300,453       2,246,434  
  

 

 

   

 

 

 

Total deposits

     6,280,206       6,322,973  

Advances from the Federal Home Loan Bank and other borrowings

     1,233,000       1,173,000  

Junior subordinated debentures held by trust subsidiaries

     118,110       118,110  

Accounts payable, accrued liabilities and other liabilities

     80,006       69,234  
  

 

 

   

 

 

 
     7,711,322       7,683,317  
  

 

 

   

 

 

 

Commitments and contingencies (Note 11)

    

Stockholders’ equity (Note 1)

    

Class A common stock, $0.10 par value, 400,000,000 shares authorized; 74,212,408 shares issued and outstanding

     7,421       7,421  

Class B common common stock, $0.10 par value, 100,000,000 shares authorized; 53,253,157 shares issued and outstanding

     5,325       5,325  

Additional paid in capital

     359,008       359,008  

Retained earnings

     357,258       387,829  

Accumulated other comprehensive loss

     (16,740 )      (6,133 ) 
  

 

 

   

 

 

 
     712,272       753,450  
  

 

 

   

 

 

 
   $ 8,423,594     $ 8,436,767  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements (unaudited).

 

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Mercantil Bank Holding Corporation and Subsidiaries

Consolidated Statements of Operations and Comprehensive Income (Unaudited)

 

     Three Months Ended March 31,  
(in thousands, except per share data)    2018     2017  
Interest income             

Loans

   $ 59,670     $ 50,080  

Investment securities

     11,741       12,566  

Interest earning deposits with banks

     520       373  
  

 

 

   

 

 

 

Total interest income

     71,931       63,019  
  

 

 

   

 

 

 

Interest expense

    

Interest bearing demand deposits

     89       100  

Savings and money market deposits

     2,584       2,194  

Time deposits

     8,700       5,660  

Advances from the Federal Home Loan Bank

     5,990       4,249  

Junior subordinated debentures

     1,935       1,824  

Securities sold under agreements to repurchase

     —         641  
  

 

 

   

 

 

 

Total interest expense

     19,298       14,668  
  

 

 

   

 

 

 

Net interest income

     52,633       48,351  

Provision for loan losses

     —         4,097  
  

 

 

   

 

 

 

Net interest income after provision for loan losses

     52,633       44,254  
  

 

 

   

 

 

 

Noninterest income

    

Deposits and service fees

     4,582       4,906  

Brokerage, advisory and fiduciary activities

     4,415       5,261  

Change in cash surrender value of bank owned life insurance

     1,444       1,245  

Cards and trade finance servicing fees

     1,062       1,071  

Data processing, rental income and fees for other services to related parties

     881       583  

Other noninterest income

     1,561       1,151  
  

 

 

   

 

 

 

Total noninterest income

     13,945       14,217  
  

 

 

   

 

 

 

Noninterest expense

    

Salaries and employee benefits

     34,041       32,308  

Occupancy and equipment

     3,715       4,709  

Professional and other services fees

     6,444       2,657  

FDIC assessments and insurance

     1,447       1,963  

Telecommunication and data processing

     3,084       1,752  

Depreciation and amortization

     2,141       2,427  

Other operating expenses

     4,773       3,332  
  

 

 

   

 

 

 

Total noninterest expenses

     55,645       49,148  
  

 

 

   

 

 

 

Net income before income tax

     10,933       9,323  

Income tax expense

     (1,504 )      (2,816 ) 
  

 

 

   

 

 

 

Net income

     9,429       6,507  
  

 

 

   

 

 

 

Other comprehensive (loss) income, net of tax

    

Net unrealized holding (losses) gains on securities available for sale arising during the period

     (14,977 )      1,572  

Net unrealized holding gains on cash flow hedges arising during the period

     4,280       158  

Reclassification adjustment for net losses included in net income

     90       46  
  

 

 

   

 

 

 

Other comprehensive (loss) income

     (10,607 )      1,776  
  

 

 

   

 

 

 

Comprehensive (loss) income

   $ (1,178 )    $ 8,283  
  

 

 

   

 

 

 

Basic and diluted earnings per share:

    

Net income available to common shareholders

   $ 9,429     $ 6,507  

Basic and diluted weighted average shares outstanding

     127,466       127,466  
  

 

 

   

 

 

 

Basic and diluted income per common share

   $ 0.07     $ 0.05  
  

 

 

   

 

 

 

Cash dividends declared per common share (Note 1)

   $ 0.31     $ —    
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements (unaudited).

 

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Mercantil Bank Holding Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

Three Months Ended March 31, 2018 and 2017

 

    Common Stock     Additional
Paid
in Capital 		    Retained
Earnings 		    Accumulated
Other
Comprehensive
Loss 		    Total
Stockholder’s
Equity 		 
    Class A     Class B          
(in thousands, except share
data) 		  Shares
Issued and
Outstanding 		    Par
value 		    Shares
Issued and
Outstanding 		    Par
value 		         

Balance at December 31, 2016

    74,212,408     $ 7,421       53,253,157     $ 5,325     $ 359,008     $ 343,678     $ (10,695 )    $ 704,737  

Net income

    —         —         —         —         —         6,507       —         6,507  

Other comprehensive income

    —         —         —         —         —         —         1,776       1,776  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at
March, 31, 2017

    74,212,408     $ 7,421       53,253,157     $ 5,325     $ 359,008     $ 350,185     $ (8,919 )    $ 713,020  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2017

    74,212,408     $ 7,421       53,253,157     $ 5,325     $ 359,008     $ 387,829     $ (6,133 )    $ 753,450  

Dividends (Note 1)

    —         —         —         —         —         (40,000 )      —         (40,000 ) 

Net income

    —         —         —         —         —         9,429       —         9,429  

Other comprehensive loss

    —         —         —         —         —         —         (10,607 )      (10,607 ) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at
March 31, 2018

    74,212,408     $ 7,421       53,253,157     $ 5,325     $ 359,008     $ 357,258     $ (16,740 )    $ 712,272  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements (unaudited).

 

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Mercantil Bank Holding Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

 

     Three Months Ended March 31,  
(in thousands of dollars)    2018     2017  

Cash flows from operating activities

    

Net income

   $ 9,429     $ 6,507  

Adjustments to reconcile net income to net cash provided by operating activities

    

Provision for loan losses

     —         4,097  

Net premium amortization on securities

     4,411       5,427  

Depreciation and amortization

     2,141       2,427  

Increase in cash surrender value of bank owned life insurance

     (1,443 )      (1,245 ) 

Deferred taxes, securities net gains or losses and others

     (5,349 )      1,228  

Net changes in operating assets and liabilities

    

Accrued interest receivable and other assets

     (6,679 )      (6,145 ) 

Account payable, accrued liabilities and other liabilities

     11,131       1,785  
  

 

 

   

 

 

 

Net cash provided by operating activities

     13,641       14,081  
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchases of investment securities:

    

Available for sale

     (60,793 )      (61,221 ) 

Federal Reserve Bank and Federal Home Loan Bank stock

     (6,802 )      (7,256 ) 

Maturities, sales and calls of investment securities:

    

Available for sale

     57,028       208,475  

Held to maturity

     531       —    

Federal Reserve Bank and Federal Home Loan Bank stock

     4,250       8,288  

Net decrease (increase) in loans

     108,571       (173,448 ) 

Proceeds from loan portfolio sales

     12,958       53,515  

Purchases of bank premises and equipment

     (1,904 )      (1,324 ) 

Net proceeds from sale of subsidiary

     7,500       —    
  

 

 

   

 

 

 

Net cash provided by investing activities

     121,339       27,029  
  

 

 

   

 

 

 

Cash flows from financing activities

    

Net decrease in demand, savings and money market accounts

     (96,787 )      (121,968 ) 

Net increase in time deposits

     54,019       100,764  

Proceeds from Advances from the Federal Home Loan Bank and other banks

     430,000       —    

Repayments of Advances from the Federal Home Loan Bank and other banks

     (370,000 )      (30,000 ) 

Dividend paid

     (40,000 )      —    
  

 

 

   

 

 

 

Net cash used in financing activities

     (22,768 )      (51,204 ) 
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     112,212       (10,094 ) 

Cash and cash equivalents

    

Beginning of period

     153,445       134,989  
  

 

 

   

 

 

 

End of period

     265,657       124,895  
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information

    

Cash paid:

    

Interest

   $ 18,255     $ 13,085  

Income taxes

     81       61  

The accompanying notes are an integral part of these consolidated financial statements (unaudited).

 

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Mercantil Bank Holding Corporation and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

 

1. Basis of Presentation and Summary of Significant Accounting Policies

Mercantil Bank Holding Corporation (the “Company”), a Florida Corporation incorporated in 1985 and operating since January 1987, is a bank holding company registered under the Bank Holding Company Act of 1956. The Company’s principal office is in the City of Coral Gables, Florida. As of December 31, 2017 and for the period ended March 15, 2018, the Company was a wholly owned subsidiary of Mercantil Servicios Financieros, C.A. (“MSF”). On March 15, 2018, MSF transferred ownership of 100% of the Company Shares to a non-discretionary common law, grantor trust governed by the laws of the State of Florida (the “Distribution Trust”).

On February 6, 2018, the Company filed amended and restated articles of incorporation with the State of Florida. Pursuant to this action, the total number of Class A and Class B shares (“Company Shares”) authorized to issue is 400,000,000 and 100,000,000, respectively. In addition, effective on February 6, 2018, the Company exchanged 100% of the 298,570,328 Class A and 215,188,764 Class B Company Shares outstanding, for 74,212,408 Class A and 53,253,157 Class B Company Shares. This facilitated the distribution of one share of Company Class A and Class B Common Stock for each outstanding share of MSF Class A and Class B Common Stock, respectively, discussed below. All references made to share or per share amounts in the consolidated financial statements for the periods presented and applicable disclosures have been retroactively adjusted to reflect this exchange. See Note 22 to the audited consolidated financial statements for additional information.

On March 13, 2018, the Company paid a special, one-time, dividend of $40.0 million to MSF.

The Distribution Trust was established by MSF and the Company pursuant to a Distribution Trust Agreement with a Texas trust company, unaffiliated with MSF, as trustee. The Distribution Trust holds 80.1% of the Company Shares for the benefit of MSF’s Class A and Class B common shares holders of record (“Record Holders”) on April 2, 2018 (“Record Date”). The Distribution Trust holds the remaining 19.9% of the Company Shares for the benefit of MSF and its subsidiaries that are Record Holders. The 19.9% of all Company Shares of each Class held in the Distribution Trust for the benefit of MSF and its subsidiaries are the “Retained Shares”. The Distribution Trust is expected to hold the Retained Shares pending their sale or disposition by MSF over the two years following, pending MSF’s delivery of Company Shares to the Distribution Trusts.

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the SEC. Accordingly, they do not include all of the information and footnotes required for a fair presentation of financial position, results of operations and cash flows in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). These unaudited consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. These adjustments are of a normal, recurring nature. Interim period operating results may not be indicative of the operating results for a full year. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of December 31, 2017 and 2016 and for each of the three years in the period ended December 31, 2017 and the accompanying footnote disclosures for the Company, which are included in the Company’s registration statement on Form 10 filed with the SEC.

The effects of significant subsequent events, if any, have been adequately recognized or disclosed in these interim consolidated financial statements. Subsequent events have been evaluated through June 15, 2018, the date when these consolidated financial statements were available to be issued.

 

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Mercantil Bank Holding Corporation and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

 

Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

Significant estimates made by management include: i) the determination of the allowance for loan losses; (ii) the fair values of securities, bank owned life insurance and the reporting unit to which goodwill has been assigned during the annual goodwill impairment test; and (iii) the determination of whether the amount of deferred tax assets will more likely than not be realized. Management believes that these estimates are appropriate. Actual results could differ from these estimates.

 

2. Recently Issued Accounting Pronouncements

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the Financial Accounting Standards Board (“FASB”) issued guidance that allows a reclassification from accumulated other comprehensive loss (“AOCL”) to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate. The amount of the reclassification is the difference between the historical corporate income tax rate and the newly enacted 21% corporate income tax rate pursuant to H.R. 1, the Tax Cuts and Jobs Act of 2017 (“the 2017 Tax Act”) enacted December 22, 2017. This FASB guidance is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted for (1) public business entities for reporting periods for which financial statements have not been issued, and (2) for other entities for reporting periods for which financial statements have not yet been made available for issuance. The Company early-adopted this guidance and reclassified the effect of remeasuring net deferred tax assets related to items within AOCL to retained earnings resulting in a $1.1 million increase in retained earnings as of December 31, 2017.

 

3. Securities

Amortized cost and approximate fair values of securities available for sale are summarized as follows:

 

     March 31, 2018  
     Amortized
Cost 		     Gross Unrealized      Estimated
Fair Value 		 
(in thousands)       Gains      Losses     

U.S. government sponsored enterprise debt securities

   $ 883,684      $ 1,582      $ (26,235 )     $ 859,031  

Corporate debt securities

     337,427        2,402        (3,040 )       336,789  

U.S. government agency debt securities

     275,493        524        (4,522 )       271,495  

Municipal bonds

     178,594        219        (4,173 )       174,640  

Mutual funds

     24,262        —          (1,021 )       23,241  

U.S. treasury securities

     500        1        —          501  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,699,960      $ 4,728      $ (38,991 )     $ 1,665,697  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Mercantil Bank Holding Corporation and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

 

     December 31, 2017  
     Amortized
Cost 		     Gross Unrealized      Estimated
Fair Value 		 
(in thousands)       Gains      Losses     

U.S. government sponsored enterprise debt securities

   $ 889,396      $ 1,784      $ (15,514 )     $ 875,666  

Corporate debt securities

     310,781        3,446        (835 )       313,392  

U.S. government agency debt securities

     293,908        870        (3,393 )       291,385  

Municipal bonds

     179,524        2,343        (1,471 )       180,396  

Mutual funds

     24,262        —          (645 )       23,617  

U.S. treasury securities

     2,700        2        (1 )       2,701  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,700,571      $ 8,445      $ (21,859 )     $ 1,687,157  
  

 

 

    

 

 

    

 

 

    

 

 

 

At March 31, 2018 and December 31, 2017, the Company had no foreign sovereign debt securities.

The Company’s investment securities available for sale with unrealized losses that are deemed temporary, aggregated by length of time that individual securities have been in a continuous unrealized loss position, are summarized below:

 

     March 31, 2018  
     Less Than 12 Months     12 Months or More     Total  
(in thousands)    Estimated
Fair Value 		     Unrealized
Loss 		    Estimated
Fair Value 		     Unrealized
Loss 		    Estimated
Fair Value 		     Unrealized
Loss 		 

U.S. government sponsored enterprise debt securities

   $ 346,819      $ (6,368 )    $ 462,924      $ (19,867 )    $ 809,743      $ (26,235 ) 

U.S. government agency debt securities

     96,408        (1,147 )      123,034        (3,375 )      219,442        (4,522 ) 

Municipal bonds

     74,608        (894 )      73,565        (3,279 )      148,173        (4,173 ) 

Corporate debt securities

     178,093        (2,852 )      5,033        (188 )      183,126        (3,040 ) 

Mutual funds

     —          —         22,998        (1,021 )      22,998        (1,021 ) 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 695,928      $ (11,261 )    $ 687,554      $ (27,730 )    $ 1,383,482      $ (38,991 ) 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     December 31, 2017  
     Less Than 12 Months     12 Months or More     Total  
(in thousands)    Estimated
Fair Value 		     Unrealized
Loss 		    Estimated
Fair Value 		     Unrealized
Loss 		    Estimated
Fair Value 		     Unrealized
Loss 		 

U.S. government sponsored enterprise debt securities

   $ 333,232      $ (2,956 )    $ 485,555      $ (12,558 )    $ 818,787      $ (15,514 ) 

U.S. government agency debt securities

     92,138        (728 )      128,316        (2,665 )      220,454        (3,393 ) 

Municipal bonds

     4,895        (8 )      76,003        (1,463 )      80,898        (1,471 ) 

Corporate debt securities

     94,486        (751 )      3,694        (84 )      98,180        (835 ) 

Mutual funds

     —          —         23,375        (645 )      23,375        (645 ) 

U.S. treasury securities

     —          —         2,199        (1 )      2,199        (1 ) 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 524,751      $ (4,443 )    $ 719,142      $ (17,416 )    $ 1,243,893      $ (21,859 ) 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

At March 31, 2018 and December 31, 2017 debt securities issued by U.S. government-sponsored entities and agencies held by the Company were issued by institutions which the government has affirmed its commitment to support. Because the decline in fair value is attributable to changes in interest rates, and not credit

 

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Mercantil Bank Holding Corporation and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

 

quality, and because the Company does not have the intent to sell these debt securities and it is more likely than not that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired.

Unrealized losses on municipal and corporate debt securities, at March 31, 2018 and December 31, 2017, are attributable to normal fluctuations in interest rates and investment securities markets, and as a result, temporary in nature. In addition, the issuers of these debt securities are considered to be high quality, and management does not intend to sell these investments and it is more likely than not that it will not be required to sell these investments before their anticipated recovery. As a result, the Company does not consider these securities to be other-than-temporarily impaired.

Amortized cost and approximate fair values of securities held to maturity, are summarized as follows:

 

     March 31, 2018  
     Amortized
Cost 		     Gross Unrealized      Estimated
Fair Value 		 
(in thousands)       Gains      Losses     

Securities Held to Maturity -

           

U.S. government sponsored enterprise debt securities

   $ 86,312      $ —        $ (2,677 )     $ 83,635  

U.S. Government agency debt securities

     2,982        —          (61 )       2,921  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 89,294      $ —        $ (2,738 )     $ 86,556  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2017  
     Amortized
Cost 		     Gross Unrealized      Estimated
Fair Value 		 
(in thousands)       Gains      Losses     

Securities Held to Maturity -

           

U.S. government sponsored enterprise debt securities

   $ 86,826      $ 47      $ (441 )     $ 86,432  

U.S. Government agency debt securities

     3,034        —          —          3,034  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 89,860      $ 47      $ (441 )     $ 89,466  
  

 

 

    

 

 

    

 

 

    

 

 

 

Contractual maturities of securities at March 31, 2018 are as follows:

 

     Available for Sale      Held to Maturity  
(in thousands)    Amortized
Cost 		     Estimated
Fair Value 		     Amortized
Cost 		     Estimated
Fair Value 		 

Within 1 year

   $ 5,349      $ 5,343      $ —        $ —    

After 1 year through 5 years

     308,050        306,217        —          —    

After 5 years through 10 years

     233,285        230,168        —          —    

After 10 years

     1,129,014        1,100,728        89,294        86,556  

No contractual maturities

     24,262        23,241        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,699,960      $ 1,665,697      $ 89,294      $ 86,556  
  

 

 

    

 

 

    

 

 

    

 

 

 

At March 31, 2018 and December 31, 2017, securities available for sale with a fair value of approximately $307 million and $246 million, respectively, were pledged as collateral to secure securities sold under agreements to repurchase and advances from the FHLB.

 

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Mercantil Bank Holding Corporation and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

 

4. Loans

The loan portfolio consists of the following loan classes:

 

(in thousands)    March 31, 2018      December 31,
2017 		 

Real estate loans

     

Commercial real estate

     

Nonowner-occupied

   $ 1,699,494      $ 1,745,839  

Multi-family residential

     756,934        795,912  

Land development and construction loans

     414,028        421,285  
  

 

 

    

 

 

 
     2,870,456        2,963,036  

Single-family residential

     526,006        515,237  

Owner-occupied

     449,005        429,803  
  

 

 

    

 

 

 
     3,845,467        3,908,076  

Commercial loans

     1,562,645        1,529,572  

Loans to financial institutions and acceptances

     414,480        497,626  

Consumer loans and overdrafts

     127,858        130,951  
  

 

 

    

 

 

 
   $ 5,950,450      $ 6,066,225  
  

 

 

    

 

 

 

The amounts in the table for loan classes above include loans under syndication facilities of approximately $982 million and $989 million at March 31, 2018 and December 31, 2017, respectively.

The following tables summarize international loans by country, net of loans fully collateralized with cash of approximately $30 million and $32 million at March 31, 2018 and December 31, 2017, respectively.

 

     March 31, 2018  
(in thousands)    Brazil      Venezuela      Others (1)      Total  

Real estate loans

           

Single-family residential (2)

   $ 216      $ 143,328      $ 6,765      $ 150,309  

Loans to financial institutions and acceptances

     150,110        —          247,898        398,008  

Commercial loans

     7,231        —          81,850        89,081  

Consumer loans and overdrafts (3)

     2,934        35,132        11,430        49,496  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 160,491      $ 178,460      $ 347,943      $ 686,894  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Corresponds to loans to borrowers in seventeen other countries; the total by country does not individually exceed 1% of total assets.
(2) Corresponds to mortgage loans for single-family residential properties located in the U.S.
(3) Mostly comprised of credit card extensions of credit to customers with deposits with the Bank. Further charges are discontinued, if the deposits decline below the authorized credit line.

 

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Notes to Interim Consolidated Financial Statements (Unaudited)

 

     December 31, 2017  
(in thousands)    Brazil      Venezuela      Chile      Others (1)      Total  

Real estate loans

              

Single-family residential (2)

   $ 219      $ 145,069      $ 179      $ 7,246      $ 152,713  

Loans to financial institutions and acceptances

     129,372        —          93,000        258,811        481,183  

Commercial loans

     8,451        —          —          60,843        69,294  

Consumer loans and overdrafts (3)

     3,046        37,609        1,364        10,060        52,079  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 141,088      $ 182,678      $ 94,543      $ 336,960      $ 755,269  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Corresponds to loans to borrowers in seventeen other countries; the total by country does not individually exceed 1% of total assets.
(2) Corresponds to mortgage loans for single-family residential properties located in the U.S.
(3) Mostly comprised of credit card extensions of credit secured to customers with deposits with the Bank. Further charges are discontinued, if the deposits decline below the authorized credit line.

The analysis of the loan portfolio delinquencies by class, including nonaccrual loans, as of March 31, 2018 and December 31, 2017 are summarized in the following tables:

 

    March 31, 2018  
    Total Loans,
Net of
Unearned
Income 		          Past Due     Total Loans in
Nonaccrual
Status 		    Total Loans
90 Days or
More
Past Due
and Accruing 		 
(in thousands)     Current     30-59
Days 		    60-89
Days 		    Greater
than
90 Days 		    Total
Past
Due 		     

Real estate loans

               

Commercial real estate

               

Nonowner occupied

  $ 1,699,494     $ 1,688,496     $ 10,846     $ —       $ 152     $ 10,998     $ 10,666     $ —    

Multi-family residential

    756,934       756,934       —         —         —         —         —         —    

Land development and construction loans

    414,028       414,028       —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    2,870,456       2,859,458       10,846       —         152       10,998       10,666       —    

Single-family residential

    526,006       512,615       9,805       1,583       2,003       13,391       5,172       —    

Owner-occupied

    449,005       446,848       222       —         1,935       2,157       7,288       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    3,845,467       3,818,921       20,873       1,583       4,090       26,546       23,126       —    

Commercial loans

    1,562,645       1,554,418       4,231       —         3,996       8,227       8,581       —    

Loans to financial institutions and acceptances

    414,480       414,480       —         —         —         —         —         —    

Consumer loans and overdrafts

    127,858       126,180       914       289       475       1,678       25       475  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 5,950,450     $ 5,913,999     $ 26,018     $ 1,872     $ 8,561     $ 36,451     $ 31,732     $ 475  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Mercantil Bank Holding Corporation and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

 

    December 31, 2017  
    Total Loans,
Net of
Unearned
Income 		          Past Due     Total Loans in
Nonaccrual
Status 		    Total Loans
90 Days or
More
Past Due
and Accruing 		 
(in thousands)     Current     30-59
Days 		    60-89
Days 		    Greater
than
90 Days 		    Total
Past
Due 		     

Real estate loans

               

Commercial real estate

               

Nonowner occupied

  $ 1,745,839     $ 1,745,686     $ —       $ —       $ 153     $ 153     $ 162     $ —    

Multi-family residential

    795,912       795,912       —         —         —         —         —         —    

Land development and construction loans

    421,285       421,285       —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    2,963,036       2,962,883       —         —         153       153       162       —    

Single-family residential

    515,237       504,204       6,609       2,421       2,003       11,033       5,004       226  

Owner-occupied

    429,803       423,560       1,571       503       4,169       6,243       10,398       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    3,908,076       3,890,647       8,180       2,924       6,325       17,429       15,564       226  

Commercial loans

    1,529,572       1,523,329       1,814       5       4,424       6,243       11,103       —    

Loans to financial institutions and acceptances

    497,626       497,626       —         —         —         —         —         —    

Consumer loans and overdrafts

    130,951       130,846       57       29       19       105       55       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 6,066,225     $ 6,042,448     $ 10,051     $ 2,958     $ 10,768     $ 23,777     $ 26,722     $ 226  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At March 31, 2018 and December 31, 2017, loans with an outstanding principal balance of $1,510 million and $1,476 million, respectively, were pledged as collateral to secure advances from the FHLB.

 

5. Allowance for Loan Losses

The analyses by loan segment of the changes in the allowance for loan losses for the three months ended March 31, 2018 and 2017, and its allocation by impairment methodology and the related investment in loans, net as of March 31, 2018 and 2017 are summarized in the following tables.

 

     March 31, 2018  
(in thousands)    Real Estate     Commercial     Financial
Institutions 		    Consumer
and Others 		    Total  

Balances at beginning of the period

   $ 30,246     $ 33,731     $ 4,362     $ 3,661     $ 72,000  

(Reversal of) provision for loan losses

     (864 )      578       (691 )      977       —    

Loans charged-off

          

Domestic

     —         (382 )      —         (19 )      (401 ) 

International

     —         —         —         (400 )      (400 ) 

Recoveries

     34       832       —         53       919  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at end of the period

   $ 29,416     $ 34,759     $ 3,671     $ 4,272     $ 72,118  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses by impairment methodology

          

Individually evaluated

   $ —       $ 2,226     $ —       $ —       $ 2,226  

Collectively evaluated

     29,416       32,533       3,671       4,272       69,892  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 29,416     $ 34,759     $ 3,671     $ 4,272     $ 72,118  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Notes to Interim Consolidated Financial Statements (Unaudited)

 

     March 31, 2018  
(in thousands)    RealEstate      Commercial      Financial
Institutions 		     Consumer
and Others 		     Total  

Investment in loans, net of unearned income

              

Individually evaluated

   $ 11,238      $ 15,055      $ —        $ 342      $ 26,635  

Collectively evaluated

     2,699,872        2,243,345        416,292        564,306      $ 5,923,815  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,711,110      $ 2,258,400      $ 416,292      $ 564,648      $ 5,950,450  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     March 31, 2017  
(in thousands)    Real Estate     Commercial     Financial
Institutions 		     Consumer
and Others 		    Total  

Balances at beginning of the period

   $ 31,055     $ 40,555     $ 5,304      $ 4,837     $ 81,751  

Provision for loan losses

     1,723       2,006       311        57       4,097  

Loans charged off

              —    

Domestic

     (97 )      (318 )      —          (113 )      (528 ) 

International

     —         (5,899 )      —          (219 )      (6,118 ) 

Recoveries

     61       43       —          57       161  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balances at end of the period

   $ 32,742     $ 36,387     $ 5,615      $ 4,619     $ 79,363  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Allowance for loan losses by impairment methodology

           

Individually evaluated

   $ —       $ 2,671     $ —        $ —       $ 2,671  

Collectively evaluated

     32,742       33,716       5,615        4,619       76,692  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
   $ 32,742     $ 36,387     $ 5,615      $ 4,619     $ 79,363  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Investment in loans, net of unearned income

           

Individually evaluated

   $ 13,757     $ 42,632     $ —        $ 4,269     $ 60,658  

Collectively evaluated

     2,539,810       2,304,247       448,213        525,290       5,817,560  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
   $ 2,553,567     $ 2,346,879     $ 448,213      $ 529,559     $ 5,878,218  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

The following is a summary of the recorded investment amount of loan sales by portfolio segment:

 

Three Months Ended March 31,

(in thousands)

   Real Estate      Commercial      Financial
Institutions 		     Consumer
and others 		     Total  

2018

   $ 2,958      $ 10,000      $ —        $ —        $ 12,958  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

2017

   $ 1,877      $ 27,361      $ 24,277      $ —        $ 53,515  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Notes to Interim Consolidated Financial Statements (Unaudited)

 

The following is a summary of impaired loans as of March 31, 2018 and December 31, 2017:

 

     March 31, 2018  
     Recorded Investment                       
(in thousands)    With a
Valuation
Allowance 		     Without a
Valuation
Allowance 		     Total      Average      Total
Unpaid
Principal
Balance 		     Valuation
Allowance 		     Interest
Income
Recognized 		 

Real estate loans

                    

Commercial real estate

                    

Nonowner occupied

   $ —        $ 10,505      $ 10,505      $ 12,027      $ 10,556      $ —        $ —    

Multi-family residential

     —          733        733        5,393        740        —          11  

Land development and construction loans

     —          5,888        5,888        1,542        —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     —          17,126        17,126        18,962        11,296        —          11  

Single-family residential

     —          840        840        1,705        833        —          10  

Owner-occupied

     —          —          —          680        6,125        —          2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     —          17,966        17,966        21,347        18,254        —          23  

Commercial loans

     6,203        2,466        8,669        14,357        14,695        2,226        2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,203      $ 20,432      $ 26,635      $ 35,704      $ 32,949      $ 2,226      $ 25  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2017  
     Recorded Investment                       
(in thousands)    With a
Valuation
Allowance 		     Without a
Valuation
Allowance 		     Total      Average      Total
Unpaid
Principal
Balance 		     Valuation
Allowance 		     Interest
Income
Recognized 		 

Real estate loans

                    

Commercial real estate

                    

Nonowner occupied

   $ —        $ —        $ —        $ 143      $ —        $ —        $ —    

Multi-family residential

     —          1,318        1,318        7,898        1,330        —          54  

Land development and construction loans

     —          —          —          1,359        —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     —          1,318        1,318        9,400        1,330        —          54  

Single-family residential

     —          877        877        3,100        871        —          1,101  

Owner-occupied

     —          9,488        9,488        13,080        10,494        —          11  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     —          11,683        11,683        25,580        12,695        —          1,166  

Commercial loans

     7,173        3,743        10,916        18,653        16,940        2,866        12  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 7,173      $ 15,426      $ 22,599      $ 44,233      $ 29,635      $ 2,866      $ 1,178  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Mercantil Bank Holding Corporation and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

 

Credit Risk Quality

The Company’s investment in loans by credit quality indicators as of March 31, 2018 and December 31, 2017 are summarized in the following tables.

 

     March 31, 2018  
     Credit Risk Rating         
            Classified         
(in thousands)    Nonclassified      Substandard      Doubtful      Loss      Total  

Real estate loans

              

Commercial real estate

              

Nonowner occupied

   $ 1,688,829      $ 10,665      $ —        $ —        $ 1,699,494  

Multi-family residential

     756,934        —          —          —        $ 756,934  

Land development and construction loans

     414,028        —          —          —        $ 414,028  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     2,859,791        10,665        —          —          2,870,456  

Single-family residential

     520,834        5,172        —          —        $ 526,006  

Owner-occupied

     438,975        10,030        —          —        $ 449,005  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     3,819,600        25,867        —          —          3,845,467  

Commercial loans

     1,552,338        10,307        —          —        $ 1,562,645  

Loans to financial institutions and acceptances

     414,480        —          —          —        $ 414,480  

Consumer loans and overdrafts

     123,664        4,194        —          —        $ 127,858  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 5,910,082      $ 40,368      $ —        $ —        $ 5,950,450  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2017  
     Credit Risk Rating         
            Classified         
(in thousands)    Nonclassified      Substandard      Doubtful      Loss      Total  

Real estate loans

              

Commercial real estate

              

Nonowner occupied

   $ 1,745,677      $ 162      $ —        $ —        $ 1,745,839  

Multi-family residential

     795,912        —          —          —          795,912  

Land development and construction loans

     421,285        —          —          —          421,285  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     2,962,874        162        —          —          2,963,036  

Single-family residential

     509,368        5,869        —          —          515,237  

Owner-occupied

     417,694        12,109        —          —          429,803  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     3,889,936        18,140        —          —          3,908,076  

Commercial loans

     1,513,375        16,197        —          —          1,529,572  

Loans to financial institutions and acceptances

     497,626        —          —          —          497,626  

Consumer loans and overdrafts

     125,762        5,189        —          —          130,951  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,026,699      $ 39,526      $ —        $ —        $ 6,066,225  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

6. Time Deposits

Time deposits in denominations of $100,000 or more amounted to approximately $1.3 billion and $1.2 billion at March 31, 2018 and December 31, 2017, respectively. Time deposits in denominations of $250,000 or more amounted to approximately $662 million and $624 million at March 31, 2018 and

 

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Notes to Interim Consolidated Financial Statements (Unaudited)

 

December 31, 2017, respectively. Time deposits include brokered time deposits, all in denominations of less than $100,000. As of March 31, 2018 and December 31, 2017 brokered time deposits amounted to $725 million and $780 million, respectively.

 

7. Advances From the Federal Home Loan Bank and Other Borrowings

The Company had outstanding advances from the FHLB and other borrowings as follows:

 

Year of Maturity   

Interest
Rate

   March 31,
2018 		     December 31,
2017 		 
(in thousands, except percentages)                   

2018

   0.90% to 2.31%    $ 377,000      $ 567,000  

2019

   1.00% to 3.86%      240,000        155,000  

2020

   1.50% to 2.74%      306,000        211,000  

2021

   1.93% to 2.50%      190,000        240,000  

2022

   2.48% to 2.80%      120,000        —    
     

 

 

    

 

 

 
      $ 1,233,000      $ 1,173,000  
     

 

 

    

 

 

 

 

8. Derivative Instruments

At March 31, 2018 and December 31, 2017 the fair values of the Company’s derivative instruments were as follows:

 

     March 31, 2018      December 31, 2017  
(in thousands)    Other
Assets 		     Other
Liabilities 		     Other
Assets 		     Other
Liabilities 		 

Interest rate swaps designated as cash flow hedges

   $ 11,805      $ —        $ 5,462      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest rate swaps not designated as hedging instruments:

           

Customers

     36        —          1,375        —    

Third party broker

     —          36        —          1,375  
  

 

 

    

 

 

    

 

 

    

 

 

 
     36        36        1,375        1,375  
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest rate caps not designated as hedging instruments:

           

Customers

     —          518        —          195  

Third party broker

     518        —          195        —    
  

 

 

    

 

 

    

 

 

    

 

 

 
     518        518        195        195  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 12,359      $ 554      $ 7,032      $ 1,570  
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives Designated as Hedging Instruments

At March 31, 2018 and December 31, 2017 the Company’s interest rate swaps designated as cash flow hedges involve the payment of fixed-rate amounts in exchange for the Company receiving variable-rate payments over the life of the agreements without exchange of the underlying notional amount.

 

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Notes to Interim Consolidated Financial Statements (Unaudited)

 

As of March 31, 2018 and December 31, 2017, respectively, the Company had 16 and 15 interest rate swap contracts with total notional amounts of $280 million and $255 million, respectively, that were designated as cash flow hedges of floating rate interest payments on the currently outstanding and expected subsequent rollover of FHLB advances. The Company expects the hedge relationships to be highly effective in offsetting the effects of changes in interest rates in the cash flows associated with the advances from the FHLB. No hedge ineffectiveness gains or losses were recognized in the three months ended March 31, 2018 and 2017.

Derivatives Not Designated as Hedging Instruments

At March 31, 2018 and December 31, 2017, the Company had one interest rate swap contract with a customer with total notional amount of $53.9 million and $54.6 million, respectively. These instruments involved the payment of fixed-rate amounts in exchange for the Company receiving variable-rate payments over the life of the contracts. In addition, at March 31, 2018 and December 31, 2017, the Company had mirror contracts with a third party broker with similar terms.

At March 31, 2018 and December 31, 2017, the Company had nine and seven interest rate cap contracts with customers with a total notional amount of $212.2 million and $162.1 million, respectively. In addition, at March 31, 2018 and December 31, 2017, the Company had interest rate cap mirror contracts with a third party broker with similar terms.

 

9. Income Taxes

Income tax expense for the three months ended March 31, 2018 and 2017 was $1.5 million and $2.8 million.

On December 22, 2017, The 2017 Tax Act significantly changed U.S. tax law by, among other things, lowering corporate federal income tax rates. The legislation permanently reduced the U.S. corporate income tax rate from 35% to 21%, effective January 1, 2018.

The Company uses an estimated annual effective tax rate method in computing its interim tax provision. This effective tax rate is based on forecasted annual pre-tax income, permanent tax differences and statutory tax rates. The effective combined federal and state tax rates for the three months ended March 31, 2018 and 2017 were 13.76% and 30.20%, respectively. Effective tax rates differ from the statutory rates mainly due to the impact of permanent non-taxable interest and other income.

 

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Notes to Interim Consolidated Financial Statements (Unaudited)

 

10. Accumulated Other Comprehensive Loss (“AOCL”):

The components of AOCL are summarized as follows:

 

     March 31, 2018     December 31, 2017  
(in thousands)    Before Tax
Amount 		    Tax
Effect 		    Net of Tax
Amount 		    Before Tax
Amount 		    Tax
Effect 		    Net of Tax
Amount 		 

Unrealized losses on available for sale securities

   $ (34,265 )    $ 8,757     $ (25,508 )    $ (13,415 )    $ 2,884     $ (10,531 ) 

Unrealized gains on interest rate swaps designated as cash flow hedges

     11,824       (3,056 )    $ 8,768       5,602       (1,204 )    $ 4,398  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total AOCL

   $ (22,441 )    $ 5,701     $ (16,740 )    $ (7,813 )    $ 1,680     $ (6,133 ) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The components of other comprehensive loss for the periods presented is summarized as follows:

 

     Three Months Ended March 31,  
     2018     2017  
(in thousands)    Before Tax
Amount 		    Tax
Effect 		    Net of Tax
Amount 		    Before Tax
Amount 		     Tax
Effect 		    Net of Tax
Amount 		 

Unrealized (losses) gains on available for sale securities:

             

Change in fair value arising during the period

   $ (20,850 )    $ 5,873     $ (14,977 )    $ 2,437      $ (865 )    $ 1,572  

Reclassification adjustment for net losses included in net income

     —         —         —         22        (8 )      14  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     (20,850 )      5,873       (14,977 )      2,459        (873 )      1,586  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Unrealized gains on interest rate swaps designated as cash flow hedges:

             

Change in fair value arising during the period

     6,101       (1,821 )      4,280       245        (87 )      158  

Reclassification adjustment for net interest expense included in net income

     121       (31 )      90       50        (18 )      32  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     6,222       (1,852 )      4,370       295        (105 )      190  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total other comprehensive (loss) income

   $ (14,628 )    $ 4,021     $ (10,607 )    $ 2,754      $ (978 )    $ 1,776  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

11. Commitments and Contingencies

The Company and its subsidiaries are party to various legal actions arising in the ordinary course of business. In the opinion of management, the outcome of these proceedings litigation will not have a significant effect on the Company’s consolidated financial position or results of operations.

The Company occupies various banking centers under noncancelable lease agreements expiring through the year 2046. Actual rental payments expenses may include deferred rents but are recognized as rent expense on a straight line basis. Rent expense under these leases was approximately $1.4 million and $1.6 million for the three months ended March 31, 2018 and 2017, respectively.

 

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Notes to Interim Consolidated Financial Statements (Unaudited)

 

Financial instruments whose contract amount represents off-balance sheet credit risk at March 31, 2018 are generally short-term and are as follows:

 

(in thousands)    Approximate
Contract
Amount 		 

Commitments to extend credit

   $ 836,309  

Credit card facilities

     277,330  

Standby letters of credit

     17,957  

Commercial letters of credit

     2,116  
  

 

 

 
   $ 1,133,712  
  

 

 

 

 

12. Fair Value Measurement

Assets and liabilities measured at fair value on a recurring basis are summarized below:

 

     March 31, 2018  
(in thousands)    Quoted
Prices in
Active
Markets
for Identical
Assets
(Level 1) 		     Third-Party
Models with
Observable
Market
Inputs
(Level 2) 		     Internal
Models
with
Unobservable
Market
Inputs
(Level 3) 		     Total
Carrying
Value in the
Consolidated
Balance
Sheet 		 

Assets

           

Securities available for sale

           

U.S. government sponsored enterprise debt securities

   $ —        $ 859,031      $ —        $ 859,031  

Corporate debt securities

     —          336,789        —          336,789  

U.S. government agency debt securities

     —          271,495        —          271,495  

Municipal bonds

     —          174,640        —          174,640  

Mutual funds

     —          23,241        —          23,241  

U.S. treasury securities

     —          501        —          501  
  

 

 

    

 

 

    

 

 

    

 

 

 
     —          1,665,697        —          1,665,697  

Bank owned life insurance

     —          201,761        —          201,761  

Derivative instruments

     —          12,359        —          12,359  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —        $ 1,879,817      $ —        $ 1,879,817  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Derivative instruments

   $ —        $ 554      $ —        $ 554  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2017  
(in thousands)    Quoted
Prices in
Active
Markets
for Identical
Assets
(Level 1) 		     Third-Party
Models with
Observable
Market
Inputs
(Level 2) 		     Internal
Models
with
Unobservable
Market
Inputs
(Level 3) 		     Total
Carrying
Value in the
Consolidated
Balance
Sheet 		 

Assets

           

Securities available for sale

           

U.S. government sponsored enterprise debt securities

   $ —        $ 875,666      $ —        $ 875,666  

Corporate debt securities

     —          313,392        —          313,392  

 

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Notes to Interim Consolidated Financial Statements (Unaudited)

 

     December 31, 2017  
(in thousands)    Quoted
Prices in
Active
Markets
for Identical
Assets
(Level 1) 		     Third-Party
Models with
Observable
Market
Inputs
(Level 2) 		     Internal
Models
with
Unobservable
Market
Inputs
(Level 3) 		     Total
Carrying
Value in the
Consolidated
Balance
Sheet 		 

U.S. government agency debt securities

     —          291,385        —          291,385  

Municipal bonds

     —          180,396        —          180,396  

Mutual funds

     —          23,617        —          23,617  

U.S. treasury securities

     —          2,701        —          2,701  
  

 

 

    

 

 

    

 

 

    

 

 

 
     —          1,687,157        —          1,687,157  

Bank owned life insurance

     —          200,318        —          200,318  

Derivative instruments

     —          7,032        —          7,032  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —        $ 1,894,507      $ —        $ 1,894,507  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Derivative instruments

   $ —        $ 1,570      $ —        $ 1,570  
  

 

 

    

 

 

    

 

 

    

 

 

 

Level 2 Valuation Techniques

The valuation of securities and derivative instruments is performed through a monthly pricing process using data provided by third parties considered leading global providers of independent data pricing services (“the Pricing Providers”). These pricing providers collect, use and incorporate descriptive market data from various sources, quotes and indicators from leading broker dealers to generate independent and objective valuations.

The valuation techniques and the inputs used in our consolidated financial statements to measure the fair value of our recurring Level 2 financial instruments consider, among other factors, the following:

 

  •   Similar securities actively traded which are selected from recent market transactions.

 

  •   Observable market data which includes spreads in relationship to LIBOR, swap curve, and prepayment speed rates, as applicable.

 

  •   The captured spread and prepayment speed is used to obtain the fair value for each related security.

On a quarterly basis, the Company evaluates the reasonableness of the monthly pricing process described for the valuation of securities and derivative instruments. This evaluation includes the challenging of a random sample selection of the different types of securities in the investment portfolio as of the end of the quarter selected. This challenge consists of obtaining from the pricing providers a document explaining the methodology applied to obtain their fair value assessments for each type of investment included in the sample selection. The Company then analyzes in detail the various inputs used in the fair value calculation, both observable and unobservable (e.g., prepayment speeds, yield curve benchmarks, spreads, delinquency rates). Management considers that the consistent application of this methodology allows the Company to understand and evaluate the categorization of the investment portfolio.

The methods described above may produce a fair value calculation that may differ from the net realizable value or may not be reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of its financial instruments could result in different estimates of fair value at the reporting date.

 

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Mercantil Bank Holding Corporation and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

There were no significant assets or liabilities measured at fair value on a nonrecurring basis at March 31, 2018. The following table presents the major category of assets measured at fair value on a nonrecurring basis at December 31, 2017:

 

     December 31, 2017  
(in thousands)    Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1) 		     Significant
Other
Observable
Inputs
(Level 2) 		     Significant
Other
Unobservable
Inputs
(Level 3) 		     Total
Impairments 		 

Description

           

Loans held for sale

   $ 5,611      $ —        $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Loans Held for Sale. The Company measures the impairment of loans held for sale based on the amount by which the carrying values of those loans exceed their fair values. The Company primarily uses independent third party quotes to measure any subsequent decline in the value of loans held for sale. As a consequence, the fair value of these loans held for sale are considered a Level 1 valuation.

13. Fair Value of Financial Instruments

The fair value of a financial instrument represents the price that would be received from its sale in an orderly transaction between market participants at the measurement date. The best indication of the fair value of a financial instrument is determined based upon quoted market prices. However, in many cases, there are no quoted market prices for the Company’s various financial instruments. As a result, the Company derives the fair value of the financial instruments held at the reporting period-end, in part, using present value or other valuation techniques. Those techniques are significantly affected by management’s assumptions, the estimated amount and timing of future cash flows and estimated discount rates included in present value and other techniques. The use of different assumptions could significantly affect the estimated fair values of the Company’s financial instruments. Accordingly, the net realized values could be materially different from the estimates presented below.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

 

  •   Because of their nature and short-term maturities, the carrying values of the following financial instruments were used as a reasonable estimate of their fair value: cash and cash equivalents, interest earning deposits with banks, variable-rate loans with re-pricing terms shorter than twelve months, demand and savings deposits, short-term time deposits and securities sold under agreements to repurchase, and other borrowings.

 

  •   The fair value of loans held for sale, securities including securities sold under agreements to repurchase, bank owned life insurance and derivative instruments, are based on quoted market prices, when available. If quoted market prices are unavailable, fair value is estimated using the pricing process described in Note 17 to the audited consolidated financial statements for the three years ended December 31, 2017 and as of December 31, 2017 and 2016.

 

  •   The fair value of commitments and letters of credit is based on the assumption that the Company will be required to perform on all such instruments. The commitment amount approximates estimated fair value.

 

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Notes to Interim Consolidated Financial Statements (Unaudited)

 

  •   The fair value of fixed-rate loans, advances from the FHLB, and junior subordinated debentures are estimated using a present value technique by discounting the future expected contractual cash flows using the current rates at which similar instruments would be issued with comparable credit ratings and terms at the measurement date.

 

  •   The fair value of long-term time or certificate of deposits is determined using a present value technique by discounting the future expected contractual cash flows using current rates at which similar instruments would be issued at the measurement date.

The estimated fair value of financial instruments where fair value differs from carrying value are as follows:

 

     March 31, 2018      December 31, 2017  
(in thousands)    Carrying
Value 		     Estimated
Fair
Value 		     Carrying
Value 		     Estimated
Fair
Value 		 

Financial assets

           

Loans

   $ 2,643,160      $ 2,533,944      $ 2,682,790      $ 2,566,197  

Financial liabilities

           

Time deposits

     1,575,537        1,564,223        1,466,464        1,461,908  

Advances from the Federal Home Loan Bank

     1,221,000        1,220,285        1,161,000        1,164,686  

Junior subordinated debentures

     118,110        98,417        118,110        95,979  

 

14. Segment Information

The following tables provide a summary of the Company’s financial information as of March 31, 2018 and December 31, 2017 and for the three months ended March 31, 2018 and December 31, 2017 on a managed basis. The Company’s definition of managed basis starts with the reported U.S. GAAP results and includes funds transfer pricing (“FTP”) compensation and allocations of direct and indirect expenses from overhead, internal support centers, and product support centers. This allows management to assess the comparability of results from year-to-year arising from segment operations. The corresponding income tax impact related to tax-exempt items is recorded within income tax (expense)/benefit.

 

(in thousands)    Personal and
Commercial
Banking
(“PAC”) 		    Corporate
LATAM 		    Treasury     Institutional     Total  

For Three Months Ended March 31, 2018

          

Income Statement:

          

Net interest income

   $ 46,681     $ 1,480     $ 956     $ 3,516     $ 52,633  

(Reversal of) provision for loan losses

     (2,139 )      (719 )      (117 )      2,975       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after (reversal of) provision for loan losses

     48,820       2,199       1,073       541       52,633  

Noninterest income

     5,708       109       1,950       6,178       13,945  

Noninterest expense

     40,014       1,175       2,962       11,494       55,645  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income before income tax:

          

Banking

     14,514       1,133       61       (4,775 )      10,933  

Non-banking contribution (1)

     50       (11 )      —         (39 )      —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     14,564       1,122       61       (4,814 )      10,933  

Income tax (expense) benefit

     (2,221 )      (171 )      312       576       (1,504 ) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 12,343     $ 951     $ 373     $ (4,238 )    $ 9,429  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Notes to Interim Consolidated Financial Statements (Unaudited)

 

(In thousands)    Personal and
Commercial
Banking
(“PAC”) 		     Corporate
LATAM 		     Treasury      Institutional     Total  

As of March 31, 2018

             

Loans, net (2)

   $ 5,488,648      $ 461,151      $ —        $ (71,467 )    $ 5,878,332  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Deposits

   $ 5,450,118      $ 19,191      $ 724,916      $ 85,981     $ 6,280,206  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(In thousands)    PAC     Corporate
LATAM 		    Treasury     Institutional     Total  

For Three Months Ended March 31, 2017

          

Income Statement:

          

Net interest income

   $ 41,388     $ 2,564     $ 2,325     $ 2,074     $ 48,351  

Provision for (reversal of) loan losses

     1,131       2,203       (75 )      838       4,097  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for (reversal of) loan losses

     40,257       361       2,400       1,236       44,254  

Noninterest income

     6,083       127       1,180       6,827       14,217  

Noninterest expense

     39,877       1,382       2,749       5,140       49,148  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income before income tax:

          

Banking

     6,463       (894 )      831       2,923       9,323  

Non-banking contribution (1)

     1,086       (2 )      —         (1,084 )      —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     7,549       (896 )      831       1,839       9,323  

Income tax (expense) benefit

     (2,729 )      324       387       (798 )      (2,816 ) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 4,820     $ (572 )    $ 1,218     $ 1,041     $ 6,507  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of December 31, 2017

          

Loans, net (2) (3)

   $ 5,542,545     $ 521,616     $ —       $ (64,325 )    $ 5,999,836  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deposits

   $ 5,454,216     $ 18,670     $ 779,969     $ 70,118     $ 6,322,973  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Non-banking contribution reflects allocations of the net results of the Trust and Broker Dealer subsidiaries to the customers’ primary business unit.
(2) Provisions for the periods presented are allocated to each applicable reportable segment. The allowance for loan losses is reported entirely within Institutional. Unearned deferred loan costs and fees are included in Institutional.
(3) Balances include loans held for sale which are allocated to PAC.

 

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