DRS

Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-5.

Pursuant to 17 C.F.R. Section 200.83.

 

This is a confidential draft submission to the U.S. Securities and Exchange Commission on March 14, 2018 and is not being filed under the Securities Act of 1933, as amended.

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.  ☐

 

 

 


Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-6.

Pursuant to 17 C.F.R. Section 200.83.

 

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.

Item 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.

 


Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-7.

Pursuant to 17 C.F.R. Section 200.83.

 

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.

 


Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-8.

Pursuant to 17 C.F.R. Section 200.83.

 

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*    Bylaws of Mercantil Bank Holding Corporation.
10.1*    Separation and Distribution Agreement between Mercantil Servicios Financieros, C.A. and Mercantil Bank Holding Corporation.
10.2*    Distribution Trust Agreement by and among Mercantil Servicios Financieros, C.A., Mercantil Bank Holding Corporation and TMI Trust Company.
10.3*    Registration Rights Agreement between Mercantil Servicios Financieros, C.A. and Mercantil Bank Holding Corporation.
21.1*    List of Subsidiaries of Mercantil Bank Holding Corporation.
99.1    Preliminary Information Statement of Mercantil Bank Holding Corporation, subject to completion, dated March 14, 2018.

 

* To be filed by amendment.

 


Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-9.

Pursuant to 17 C.F.R. Section 200.83.

 

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:  

 

  Name:
  Title:

Date:

 

EX-99.1
Table of Contents

Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-10.

Pursuant to 17 C.F.R. Section 200.83.

Exhibit 99.1

 

 

LOGO

Caracas, Venezuela        

            , 2018

Dear Mercantil Servicios Financieros, C.A. Shareholder,

On December 15, 2017, our shareholders approved 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 for MSF and the Company. 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 for the benefit of MSF and its shareholders as of the record date of              Eastern Time             , 2018, or the Trust. 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, their shares also will remain in the Trust and will be included in the 19.9% of the Company Shares retained by MSF as beneficiaries of the Trust. The proceeds to MSF from such sales will support MSF’s and its subsidiaries’ business.

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

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.


Table of Contents

Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-11.

Pursuant to 17 C.F.R. Section 200.83.

 

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.

Holders of MSF’s American Depository Receipts, or ADRs, with questions related to the Distribution should contact JP Morgan Depository Receipt Services — Latin America: Maria Cecilia Salazar: +1 212 622 9227 or maria.c.salazar@jpmorgan.com and/or Marcos Rivero: + 1 302 552 0257 or marcos.rivero@jpmorgan.com, with questions. No additional ADRs will be issued with respect to the Company Shares.

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.


Table of Contents

Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-12.

Pursuant to 17 C.F.R. Section 200.83.

 

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, 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, $753.5 million in common equity and $1.8 billion assets under management or custody as of December 31, 2017. 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, banking, 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.

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

I encourage you to read the enclosed information statement to learn more about the spin-off, the Company and our plans.

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.

 

Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-13.

Pursuant to 17 C.F.R. Section 200.83.

Preliminary and Subject to Completion, dated March 14, 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 approved 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 as of             , 2018 at     p.m. Eastern Time, 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 as of 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 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.

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 beneficiaries of the Trust.

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 “            ” and intend to list our Class B common stock on the Nasdaq Stock Market under the symbol “    .”

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 11.

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.

Holders of MSF’s American Depository Receipts with inquiries related to the Distribution should contact JP Morgan Depository Receipt Services — Latin America: Maria Cecilia Salazar: +1 212 622 9227 or maria.c.salazar@jpmorgan.com and/or Marcos Rivero: + 1 302 552 0257 or marcos.rivero@jpmorgan.com.

The date of this information statement is             , 2018.


Table of Contents

Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-14.

Pursuant to 17 C.F.R. Section 200.83.

 

TABLE OF CONTENTS

 

     Page  

SUMMARY

     1  

RISK FACTORS

     11  

FORWARD-LOOKING STATEMENTS

     39  

DIVIDEND POLICY

     40  

CAPITALIZATION

     41  

SELECTED FINANCIAL INFORMATION

     42  

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

     45  

SUPERVISION AND REGULATION

     98  

BUSINESS

     117  

MANAGEMENT

     127  

EXECUTIVE AND DIRECTOR COMPENSATION

     134  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     142  

THE SPIN-OFF

     144  

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

     151  

MATERIAL VENEZUELA TAX CONSIDERATIONS

     153  

OWNERSHIP OF OUR STOCK

     154  

DESCRIPTION OF CAPITAL STOCK

     157  

SHARES ELIGIBLE FOR FUTURE SALE

     161  

INDEMNIFICATION OF DIRECTORS AND OFFICERS

     162  

AVAILABLE INFORMATION

     164  

INDEX TO FINANCIAL STATEMENTS

     F-1  

 

-i-


Table of Contents

Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-15.

Pursuant to 17 C.F.R. Section 200.83.

 

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, $753.5 million in common equity and $1.8 billion assets under management or custody as of December 31, 2017. We and MSF acquired Mercantil Bank, N.A., or the Bank, in 1987. We provide individuals and businesses a comprehensive array of deposit, credit, banking, investment, wealth management and fiduciary services, both in the United States and to select international customers. These services are offered primarily through the Bank, its national trust company subsidiary, which we refer to as the Trust Company, and its securities broker-dealer subsidiary, which we refer to as Investment Services.

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 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.

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 subsidiaries of the Bank.

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



 

1


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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-16.

Pursuant to 17 C.F.R. Section 200.83.

 

  the five New York City boroughs). While we view our markets to be comprised of large urban areas with vibrant business and economic centers, we believe that these diverse economies helps diversify our risk of a sustained economic downturn across all of our markets.

 

    Identified With the Venezuelan and Latin American Communities in the United States. The Venezuelan population in the United States is expected to continue to increase. Through our South Florida presence and our historical relationship with MSF, we are identified with the Venezuelan community in the United States as well as other Latin American communities. In particular, our banking centers in Doral, Weston, Cypress Creek and Coral Gables, Florida, and Katy, Texas, are well positioned to benefit from significant concentrations of Venezuelans. Our officers and employees are from a wide variety of communities and Hispanic countries, many are bilingual and all are experienced in serving all customers, including Hispanics, in our markets.

 

    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 360-degree evaluations with all employees to address areas where we can improve. Additionally, we frequently benchmark employee pay to insure that we are compensating our employees at market rates, and therefore promote talent retention.

 

    Disciplined Culture. Our in-depth knowledge of our markets, prudent 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 are 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 recognize that a commitment to strength and soundness, adherence to all applicable laws, and our code of ethics is the only 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 consummation of the spin-off will position us to execute on a number of growth strategies. The key strategic initiatives that we expect to undertake include:

 

   

Further Diversify Our Markets and Deposit Base. While we expect to continue to benefit from our identification with the Venezuelan and other Latin American communities that we serve, particularly in South Florida, as well as the greater Houston, Texas area, we expect to continue to diversify our markets and our deposit base. We believe that our customer-service-oriented approach to banking and attractive product offerings and pricing will help us grow our share of the domestic deposit base in our existing markets, particularly in the Miami-Dade, Broward and Palm Beach areas. We may also seek to open additional banking centers in Florida and Texas. We believe that this targeted growth into new



 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-17.

Pursuant to 17 C.F.R. Section 200.83.

 

  markets will further benefit the Bank by diversifying and improving our mix of loans, deposits and other funding. Moreover, further expansion and diversification of our domestic deposit base will help reduce our dependence on international deposits.

 

    Drive New Business Through Enhanced Customer Experiences. We are actively working to further enhance our customer service and overall customer experience. We are currently engaged in a banking center redevelopment effort, where our banking centers will be transformed from places merely to transact business to full service customer service centers. Our next generation banking centers will be staffed with employees that can address customers’ needs and solve customers’ problems, including problems experienced with digital banking products, and will provide a better customer experience. We are also expanding our digital banking products to facilitate our customers’ on-line business with us. Finally, we are working to complete the implementation of a new customer relationship management, or CRM, system that we believe will allow us to more efficiently and proactively identify customer needs and improve service quality, timeliness and costs.

 

    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, as well as experience in participating in large syndicated loans. We intend to continue to leverage our expertise in lending transactions by cross-selling our borrowers’ deposit, treasury management and other services, and we are exploring other lending services.

 

    Seeking Continued Improvements in Operational Efficiency. Following the consummation of the spin-off, as an independent business, we will seek to continue to enhance operational efficiency to better improve our operating margins. We intend to achieve improved operational efficiency from the simplification of our business and by continuing to implement digital banking services and further automate manual customer service and back office processes.

Recent Events

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 Common Shares, held by MSF in certificated form, in exchange 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. Except for the 2018 Special Dividend, we have paid a total of $2.7 million to MSF in three dividends since 1987.



 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-18.

Pursuant to 17 C.F.R. Section 200.83.

 

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, referred to as the “Distribution Trust” or the “Trust.”

 

Distribution Trustee

 

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.

 

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 Common Shares retained in the Trust after the Distribution, or the Retained Shares, will represent 19.9% of our



 

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Table of Contents

Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-19.

Pursuant to 17 C.F.R. Section 200.83.

 

 

outstanding shares of Class A and Class B common stock, respectively. 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 beneficiaries of the Trust. 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.

 

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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Table of Contents

Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-20.

Pursuant to 17 C.F.R. Section 200.83.

 

 

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 rather than delivery of physical stock certificates. 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.

 

Record Date

The record date is              Eastern Time on             , 2018. Following the record date, holders of MSF common stock may wish to 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 shares of our common stock 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 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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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-21.

Pursuant to 17 C.F.R. Section 200.83.

 

 

dividend will be 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.

 

Stock Exchange Listing

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

 

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 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 and other U.S. banking laws.

 

 

We and MSF have entered into the Separation Agreement for the purpose of accomplishing the spin-off. The Separation Agreement generally allocates certain assets and liabilities between us and MSF according to the business to which such assets and liabilities primarily relate, 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 a limited right to use the “Mercantil” name and marks until we develop a new name and marks. The Separation Agreement provides for various transaction services and consulting arrangements for limited periods as part of separating from MSF. See “Risk Factors —We have



 

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Table of Contents

Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-22.

Pursuant to 17 C.F.R. Section 200.83.

 

 

a contractual obligation to provide certain services to MSF’s subsidiaries on a transition basis after the spin-off, which could present regulatory and operational risks to us.” and “Certain Relationships and Related Party Transactions” for a more detailed description of these agreements.

 

Dividend Policy after the Spin-off

We do not anticipate paying any dividends on our common stock in the foreseeable future, and will retain earnings to support our business plan. 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 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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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-23.

Pursuant to 17 C.F.R. Section 200.83.

 

Summary Historical Financial Information

The following table sets forth summary historical financial information derived from our audited financial statements, presented on a consolidated basis with our subsidiaries 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 financial statements not included herein. 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 audited financial statements and corresponding notes to financial statements 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.”

 

     December 31,  
Consolidated Results of Operations Measures    2017     2016     2015  
(In thousands, except per share amounts and percentages)                   

Net interest income

   $ 209,710     $ 191,933     $ 172,285  

(Reversal of) provision for loan losses

     (3,490     22,110       11,220  

Noninterest income

     71,485       62,270       54,756  

Noninterest expense

     207,636       198,303       192,262  

Net income

     43,057       23,579       15,045  

Basic and diluted income per common share (1)

     0.34       0.18       0.12  

Consolidated Balance Sheet

      

Total assets

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

Total investments

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

Total loan portfolio (2)

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

Allowance for loan losses

     72,000       81,751       77,043  

Total deposits

     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  

Advances from the FHLB and other borrowings

     1,173,000       931,000       722,250  

Stockholder’s equity

     753,450       704,737       682,403  

Other Financial and Operating Data

      

Profitability Indicators (%)

      

Net interest income / Average total interest earning assets (NIM) (3)

     2.63     2.48     2.26

Net income / Average total assets (ROA) (4)

     0.51     0.29     0.19

Net income / Average stockholders’ equity (ROE) (5)

     5.62     3.29     2.14

Capital Adequacy Indicators (%)

      

Total capital ratio (6)

     13.31     13.05     12.91

Tier 1 capital ratio (7)

     12.26     11.86     11.78

Tier 1 leverage ratio (8)

     10.15     9.62     9.88

Common equity tier 1 (CET1) (9)

     10.68     10.25     10.12

Asset Quality Indicators (%)

      

Non-performing assets / Total assets (10)

     0.32     0.85     0.95

Non-performing loans / Total loans portfolio (2)(11)

     0.44     1.23     1.38

Allowance for loan losses / Total non-performing loans (11)(12)

     267.18     115.25     99.55

Allowance for loan losses / Total loans portfolio (2)(12)

     1.19     1.42     1.37

Net charge-offs (recoveries)/ Average total

     (0.11     0.32     (0.01

Efficiency Indicators (13)

      

Noninterest expense / Average total assets

     2.45     2.41     2.41

Personnel expense / Average total assets

     1.55     1.58     1.53

Efficiency ratio (14)

     73.84     78.01     84.68


 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-24.

Pursuant to 17 C.F.R. Section 200.83.

 

 

(1) 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.
(2) Outstanding loan principal balance net of deferred loan fees and costs, excluding the allowance for loan losses.
(3) 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.
(4) Calculated based upon the average daily balance of total assets.
(5) Calculated based upon the average daily balance of equity.
(6) Total Capital divided by total risk-weighted assets, calculated according to the standardized capital ratio calculations.
(7) Tier 1 capital divided by total risk-weighted assets.
(8) Tier 1 capital divided by fourth quarter’s average assets. Tier 1 capital is composed of Common Equity Tier 1 plus outstanding Qualifying Trust Preferred Securities of $109.9 million at December 31, 2017, $110.1 million at December 31, 2016 and $110.4 million at December 31, 2015.
(9) Common Equity Tier 1 capital divided by total risk-weighted assets.
(10) Non-performing assets include all non-performing loans and other real estate owned (OREO) properties acquired through or in lieu of foreclosure.
(11) Non-performing loans include all accruing loans past due by more than 90 days, and all non-accrual loans. Non-performing loans were $27.0 million, $70.9 million and $77.4 million, as of December 31, 2017, 2016 and 2015, respectively.
(12) 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 financial statements for more details on our impairment models.
(13) Average total assets excludes assets under management and custody.
(14) Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income and net interest income.


 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-25.

Pursuant to 17 C.F.R. Section 200.83.

 

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 common stock.

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 five times since December 2015 in 25 basis point increments from 0.25% to 1.50% on December 13, 2017. 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.

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-26.

Pursuant to 17 C.F.R. Section 200.83.

 

    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, 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. Pending legislation to remove Volcker Rule restrictions on banks under $10 billion in assets may or may not be adopted in a form that changes the applicability of the Volcker Rule to us.

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 December 31, 2017 we had $182.7 million of consumer loans and residential mortgage loans secured by properties in the U.S. outstanding to Venezuelan persons. This exposure to Venezuelan borrowers also includes $37.6 million of other loans. 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 December 31, 2017 and 2016, our nonperforming loans totaled $27.0 million and $70.9 million, respectively, or 0.44% and 1.23% of total loans, respectively. In addition, we had approximately $0.3 million and

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-27.

Pursuant to 17 C.F.R. Section 200.83.

 

$0.4 million of OREO at December 31, 2017 and 2016, 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, 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

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-28.

Pursuant to 17 C.F.R. Section 200.83.

 

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.”

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 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 December 31, 2017, we had net DTAs with a net book value of $14.6 million, based on a U.S. corporate income tax rate of 21%, after a remeasurement of net DTAs and recording $9.6 million in additional tax expense and a corresponding reduction in net income in December 2017. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates.”

The defaults 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

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-29.

Pursuant to 17 C.F.R. Section 200.83.

 

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 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.

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.”

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.

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-30.

Pursuant to 17 C.F.R. Section 200.83.

 

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, Fannie Mae expects that the Director of the Federal Housing Finance Agency, or FHFA, will request the Treasury Department to provide Fannie Mae $3.7 billion of capital. Freddie Mac had a net worth deficit of $312 million at December 31, 2017, and expects that the FHFA will request the Treasury Department to provide Freddie Mac $312 million of capital.

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 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.

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-31.

Pursuant to 17 C.F.R. Section 200.83.

 

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 334.5% of risk-based capital, or 48.84% of our total loans, as of December 31, 2017 compared to 300.0% of risk-based capital, or 44.13% of our total loans, as of December 31, 2016. 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 December 31, 2017, approximately 53.9% of total CRE loans are in the Miami-Dade, Broward and Palm Beach counties, Florida, 17.5% are in the greater Houston, Texas area, and 23.3% are 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 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

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-32.

Pursuant to 17 C.F.R. Section 200.83.

 

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 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.

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 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

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-33.

Pursuant to 17 C.F.R. Section 200.83.

 

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 December 31, 2017, 49.7% of our deposits, or approximately $3.2 billion, were from Venezuelans, and such deposits have been declining. The Bank’s Venezuelan deposits declined 19.8% from December 31, 2015 to December 31, 2017. 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 rely on their Dollar deposits to spend without being able to earn additional Dollars. Venezuela currency controls and its official currency exchange rates for converting Bolivars into U.S. 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. 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.

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-34.

Pursuant to 17 C.F.R. Section 200.83.

 

Our brokered deposits and wholesale funds increase our liquidity risks, and could increase our deposit insurance costs.

Our brokered deposits at December 31, 2017 were 12.3% of total deposits. Wholesale funding, including FHLB advances and brokered deposits represent 25.9% of our funding at December 31, 2017 and increased 16.8% 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 five times between December 2015 and January 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.

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 advisory services is dependent on business from Venezuelan customers. Economic conditions in Venezuela may affect amounts, assets we manage 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,

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-35.

Pursuant to 17 C.F.R. Section 200.83.

 

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 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

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-36.

Pursuant to 17 C.F.R. Section 200.83.

 

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 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 “— We have a contractual obligation to cause the Bank to continue to provide certain services to MSF’s subsidiaries after the spin-off, which could present additional regulatory and operational risks to us.”

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-37.

Pursuant to 17 C.F.R. Section 200.83.

 

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 cyberattack, other financial services institutions and their service providers have reported breaches in the security

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-38.

Pursuant to 17 C.F.R. Section 200.83.

 

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

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-39.

Pursuant to 17 C.F.R. Section 200.83.

 

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;

 

    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

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-40.

Pursuant to 17 C.F.R. Section 200.83.

 

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 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 of our business from MSF or at any other time. 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. 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

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-41.

Pursuant to 17 C.F.R. Section 200.83.

 

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, but the nature, effects and timing of administrative and legislative change 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 be subject to direct CFPB examination as well.

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;

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-42.

Pursuant to 17 C.F.R. Section 200.83.

 

    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.”

No trading market exists for our common shares, and no market may develop or continue. If one develops, it may be limited, which could lead to volatility in the prices for our shares.

Your ability to sell or purchase Company Shares depends upon the existence of an active trading market for our common stock. Although our common stock is expected to be quoted on the Nasdaq Stock Market, our shares have not previously been publicly held or traded and no trading market exists for such shares. Such a market may not develop or be consistent over time. As a result, you may be unable to sell or purchase shares of our common stock at the volume, price and time that you desire. Additionally, whether the purchase or sales 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 an inactively traded 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.

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 December 31, 2017, we had $118.1 million of trust preferred securities outstanding with 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, 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.”

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-43.

Pursuant to 17 C.F.R. Section 200.83.

 

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 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;

 

    subject to annual Dodd-Frank Act self-administered stress testing, or DFAST tests; 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 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 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.

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.”

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-44.

Pursuant to 17 C.F.R. Section 200.83.

 

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. 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 December 31, 2017, $3.2 billion, or 49.8%, 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 $755.3 million, or 12.45%, of our total loans, at December 31, 2017.

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 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 and regulatory limitations on implementing certain aspects of our business plan, including acquisitions or banking center expansion, 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

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-45.

Pursuant to 17 C.F.R. Section 200.83.

 

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 an internal or outsourced investor relations function. 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 do not currently 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 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. 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.

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-46.

Pursuant to 17 C.F.R. Section 200.83.

 

MSF’s retention of 19.9% of our Class A common stock and Class B common stock may adversely affect the trading price of our common stock, presents risk, which 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 following the Distribution. 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 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.

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 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 overhang 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 could be affected by events beyond MSF’s 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 will also be common officer, with us after the spin-off. These shared persons will beneficially own, immediately following the Distribution, approximately     % and     % of the total outstanding shares of our Class A and Class B common stock, respectively of upon the Distribution. 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.

We have a contractual obligation to cause the Bank 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.

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-47.

Pursuant to 17 C.F.R. Section 200.83.

 

MSF is likely to be deemed to retain “control” over us and the Bank for Federal Reserve and Bank Holding Company 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 officers. 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 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.”

The exact terms of the spin-off, including the Distribution, 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, the interlocking directors or officers, and transition services, 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

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-48.

Pursuant to 17 C.F.R. Section 200.83.

 

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 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 has 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.

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.

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 and its subsidiaries 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. 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

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-49.

Pursuant to 17 C.F.R. Section 200.83.

 

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          % of our Class A common stock and approximately          % of our Class B common stock will be deemed to be our affiliates, together with our directors and executive officers. No market exists for our common stock 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 common stock, we have granted MSF “piggyback” registration rights that would require us to include certain of its 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 common stock or the perception in the market that this may occur may reduce the market price of our common stock.

A trading market may not develop or continue for shares of our common stock, 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 our common stock is expected to be listed 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 such a market will develop or be sustained following the Distribution. We intend to list shares of our Class A common stock on the Nasdaq Stock Market under the symbol “        ” and intend to list shares of our Class B common stock on the Nasdaq Stock Market under the symbol “        .” 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. Additionally, whether the purchase or sales prices of our common stock reflects 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.

Shares of our Class B common stock may trade at a discount to shares of our Class A common stock.

Class B stock has limited voting rights and therefore may trade less frequently or at a discount to voting Class A shares.

We expect to issue more Class A common stock in the future which may increase the market for, and liquidity of, Class A stock compared to Class B Stock.

The Federal Reserve policy requires bank holding companies’ capital to be comprised predominantly of voting common stock. Class B stock is not voting common stock for Federal Reserve purposes, therefore we

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-50.

Pursuant to 17 C.F.R. Section 200.83.

 

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.

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 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 bylaws, as well as Florida law, and the Federal Bank Holding Company Act, or BHC Act, and Change in Bank Control Act, could delay or prevent a change of control that you may favor.

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-51.

Pursuant to 17 C.F.R. Section 200.83.

 

Our amended and restated articles of incorporation and 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.

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.

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-52.

Pursuant to 17 C.F.R. Section 200.83.

 

Our stock price may fluctuate significantly.

We cannot predict the prices at which our common stock may trade after the Distribution. The market prices of our common stock 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 common stock after the Distribution;

 

    changes in earnings estimates by securities analysts;

 

    the operating and stock price performance of other comparable companies;

 

    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;

 

    hyperinflation and currency controls and the market for our common stock could be adversely affected by events affecting MSF. Venezuela and government regulation of MSF in the U.S., Venezuela and other countries where MSF conducts business may adversely affect the Company;

 

    the timing and amounts of MSF’s planned dispositions of our common stock and the market for our common stock could be adversely by events affecting MSF;

 

    MSF’s intent to sell our common stock, and the intent of MSF shareholders to hold or sell shares of our common stock;

 

    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 common stock.

We, particularly as a newly independent company, face strategic risks.

As a newly independent company, 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.

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-53.

Pursuant to 17 C.F.R. Section 200.83.

 

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,” “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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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-54.

Pursuant to 17 C.F.R. Section 200.83.

 

DIVIDEND POLICY

We do not anticipate paying any dividends on the Company Shares in the foreseeable future because we expect to retain our future earnings for use in the operation and expansion of our business. 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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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-55.

Pursuant to 17 C.F.R. Section 200.83.

 

CAPITALIZATION

The following table sets forth our capitalization as of December 31, 2017 on a historical and as adjusted basis to give effect to the spin-off and the payment of the 2018 Special Dividend.

This table should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and corresponding notes included elsewhere in this information statement.

 

     December 31, 2017  
(in thousands except share data)    Actual     As
Adjusted (2)
 

Cash and cash equivalents

   $ 153,445     $ 113,445  

Indebtedness

    

Advances from the Federal Home Loan Bank and other borrowings

   $ 1,173,000     $ 1,173,000  

Junior subordinated debentures held by Trust

     118,110       118,110  
  

 

 

   

 

 

 

Total Indebtedness

   $ 1,291,110     $ 1,291,110  
  

 

 

   

 

 

 

Stockholders’ Equity (1)

    

Class A common stock, $0.10 par value, 400,000,000 shares authorized; 74,212,408 shares issued and outstanding in 2017

   $ 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

     5,325       5,325  

Additional paid in capital

     359,008       359,008  

Retained earnings

     387,829       347,829  

Accumulated other comprehensive loss

     (6,133     (6,133
  

 

 

   

 

 

 

Total Stockholders’ Equity

   $ 753,450     $ 713,450  
  

 

 

   

 

 

 

Total Capitalization

   $ 2,198,005     $ 2,158,005  
  

 

 

   

 

 

 

 

(1) The number of authorized Company Shares reflects the February 2018 amendment to the Company’s articles of incorporation, and the number of outstanding Company Shares reflects the Exchange whereby the number of Company Shares held by MSF was changed to permit the one-to-one Distribution to MSF shareholders. MSF was the sole Company shareholder immediately before and after the Exchange.
(2) The as adjusted numbers assume the payment of the 2018 Special Dividend.

For a discussion of our regulatory capital, including total Tier 1 capital and related ratios, see “Management’s Discussion and Analysis of Finance Condition and Results of Operations”—Regulatory Capital Requirements.

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-56.

Pursuant to 17 C.F.R. Section 200.83.

 

SELECTED FINANCIAL INFORMATION

The following table sets forth selected financial information derived from 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 consolidated financial statements not included herein. The selected financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and the corresponding notes included elsewhere in this information statement.

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-57.

Pursuant to 17 C.F.R. Section 200.83.

 

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.”

 

     December 31,  
Consolidated Results of Operations Measures    2017     2016     2015  
(In thousands, except per share amounts and percentages)                   

Net interest income

   $ 209,710     $ 191,933     $ 172,285  

(Reversal of) provision for loan losses

     (3,490     22,110       11,220  

Noninterest income

     71,485       62,270       54,756  

Noninterest expense

     207,636       198,303       192,262  

Net income

     43,057       23,579       15,045  

Basic and diluted income per common share (1)

     0.34       0.18       0.12  

Consolidated Balance Sheet

      

Total assets

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

Total investments

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

Total loan portfolio (2)

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

Allowance for loan losses

     72,000       81,751       77,043  

Total deposits

     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  

Advances from the FHLB and other borrowings

     1,173,000       931,000       722,250  

Stockholder’s equity

     753,450       704,737       682,403  

Other Financial and Operating Data

      

Profitability Indicators (%)

      

Net interest income / Average total interest earning assets (NIM) (3)

     2.63     2.48     2.26

Net income / Average total assets (ROA) (4)

     0.51     0.29     0.19

Net income / Average stockholders’ equity (ROE) (5)

     5.62     3.29     2.14

Capital Adequacy Indicators (%)

      

Total capital ratio (6)

     13.31     13.05     12.91

Tier 1 capital ratio (7)

     12.26     11.86     11.78

Tier 1 leverage ratio (8)

     10.15     9.62     9.88

Common Equity Tier 1 (CET1) (9)

     10.68     10.25     10.12

Asset Quality Indicators (%)

      

Non-performing assets / Total assets (10)

     0.32     0.85     0.95

Non-performing loans / Total loans portfolio (2)(11)

     0.44     1.23     1.38

Allowance for loan losses / Total non-performing loans (11)(12)

     267.18     115.25     99.55

Allowance for loan losses / Total loans portfolio (2)(12)

     1.19     1.42     1.37

Net charge-offs (recoveries)/ Average total

     (0.11     0.32     (0.01

Efficiency Indicators (13)

      

Noninterest expense / Average total assets

     2.45     2.41     2.41

Personnel expense / Average total assets

     1.55     1.58     1.53

Efficiency Ratio (14)

     73.84     78.01     84.68

 

(1) 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.

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-58.

Pursuant to 17 C.F.R. Section 200.83.

 

(2) Outstanding loan principal balance net of deferred loan fees and costs, excluding the allowance for loan losses.
(3) 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.
(4) Calculated based upon the average daily balance of total assets.
(5) Calculated based upon the average daily balance of equity.
(6) Total Capital divided by total risk-weighted assets, calculated according to the standardized capital ratio calculations.
(7) Tier 1 capital divided by total risk-weighted assets.
(8) Tier 1 capital divided by fourth quarter’s average assets. Tier 1 capital is composed of Common Equity Tier 1 plus outstanding Qualifying Trust Preferred Securities of $109.9 million at December 31, 2017, $110.1 million at December 31, 2016 and $110.4 million at December 31, 2015.
(9) Common Equity Tier 1 capital divided by total risk-weighted assets.
(10) Non-performing assets include all non-performing loans and OREO properties acquired through or in lieu of foreclosure.
(11) Non-performing loans include all accruing loans past due by more than 90 days, and all non-accrual loans. Non-performing loans were $27.0 million, $70.9 million and $77.4 million, as of December 31, 2017, 2016 and 2015, respectively.
(12) 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 financial statements for more details on our impairment models.
(13) Average total assets excludes assets under management and custody.
(14) Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income and net interest income.

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-59.

Pursuant to 17 C.F.R. Section 200.83.

 

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” and our audited 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. 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.”

Our Company

We are a bank holding company headquartered in Coral Gables, Florida. We provide individuals and businesses a comprehensive array of deposit, credit, banking, 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 the 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, noninterest income and noninterest expense.

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

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-60.

Pursuant to 17 C.F.R. Section 200.83.

 

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; 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 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 bank-owned life insurance 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.

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-61.

Pursuant to 17 C.F.R. Section 200.83.

 

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.

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 December 31, 2017, 2016 and 2015 exceeded all well capitalized regulatory requirements 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.

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-62.

Pursuant to 17 C.F.R. Section 200.83.

 

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 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 five times since December 2015 in 25 basis point increments from 0.25% to 1.50% on December 13, 2017.

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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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-63.

Pursuant to 17 C.F.R. Section 200.83.

 

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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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-64.

Pursuant to 17 C.F.R. Section 200.83.

 

(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  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-65.

Pursuant to 17 C.F.R. Section 200.83.

 

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.

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

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-66.

Pursuant to 17 C.F.R. Section 200.83.

 

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 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.

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-67.

Pursuant to 17 C.F.R. Section 200.83.

 

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 $46.7 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, 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 $3.4 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. 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.

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-68.

Pursuant to 17 C.F.R. Section 200.83.

 

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 $44.6 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.

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
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

54


Table of Contents

Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-69.

Pursuant to 17 C.F.R. Section 200.83.

 

     As of December 31,  
     2017     2016     2015      2014     2013  
     (In thousands)  

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  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

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

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-70.

Pursuant to 17 C.F.R. Section 200.83.

 

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 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.

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 bank owned life insurance(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

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-71.

Pursuant to 17 C.F.R. Section 200.83.

 

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 bank-owned life insurance 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 bank-owned life insurance 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.

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
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

57


Table of Contents

Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-72.

Pursuant to 17 C.F.R. Section 200.83.

 

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.

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.

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-73.

Pursuant to 17 C.F.R. Section 200.83.

 

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 estimated 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.

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

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-74.

Pursuant to 17 C.F.R. Section 200.83.

 

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 bank-owned life insurance 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 bank-owned life insurance policies during the year.

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-75.

Pursuant to 17 C.F.R. Section 200.83.

 

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 benefit (expense)

    (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 benefit (expense)

    (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  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-76.

Pursuant to 17 C.F.R. Section 200.83.

 

 

(1) Non-banking contribution reflects allocations of the net results of the Trust Company and Investment Services 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.

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.

 

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Table of Contents

Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-77.

Pursuant to 17 C.F.R. Section 200.83.

 

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.

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.

 

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Table of Contents

Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-78.

Pursuant to 17 C.F.R. Section 200.83.

 

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 $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 $.06 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.

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-79.

Pursuant to 17 C.F.R. Section 200.83.

 

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.

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 bank-owned life insurance 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 bank-owned life insurance 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 a fully taxable 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.

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-80.

Pursuant to 17 C.F.R. Section 200.83.

 

Treasury’s $4.9 million, or 27.97%, reduction in net interest income to $12.6 million in 2016 from $17.5 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 bank-owned life insurance policies. In 2016 and 2015, the Bank purchased $60.0 million and $100.0 million in bank-owned life insurance 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.

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

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-81.

Pursuant to 17 C.F.R. Section 200.83.

 

$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.

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 paid on five of our floating rate junior subordinated debentures, which was $7.1 million in 2016 compared to $6.9 million in 2015, 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.

 

67


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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-82.

Pursuant to 17 C.F.R. Section 200.83.

 

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

     72     68     69

Allowance for loan Losses

   $ 72,000     $ 81,751     $ 77,043  

Allowance for loan losses / totals loans, gross

     1.19     1.42     1.37

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.

 

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-83.

Pursuant to 17 C.F.R. Section 200.83.

 

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.

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

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-84.

Pursuant to 17 C.F.R. Section 200.83.

 

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.

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.

 

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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-85.

Pursuant to 17 C.F.R. Section 200.83.

 

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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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-86.

Pursuant to 17 C.F.R. Section 200.83.

 

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

     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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Confidential Treatment requested by Mercantil Bank Holding Corporation. MBHC-87.

Pursuant to 17 C.F.R. Section 200.83.

 

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