424B4
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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-227744

 

PROSPECTUS

6,300,000 Shares

 

LOGO

Class A Common Stock

 

 

This is the initial public offering of Mercantil Bank Holding Corporation’s Class A common stock, which we refer to as the Offering. We are a bank holding company for Amerant Bank, N.A., a national bank headquartered in Coral Gables, Florida. We are rebranding our organization as Amerant.

We are offering 1,377,523 shares of our Class A common stock. Mercantil Servicios Financieros, C.A., the selling shareholder identified in this prospectus, is offering all of its 4,922,477 shares of our Class A common stock. We will not receive any of the proceeds from the sale of the shares being sold by the selling shareholder.

The Offering price per share of our Class A common stock is $13.00 per share. Our Class A common stock and our Class B common stock are listed on the Nasdaq Global Select Market under the trading symbols “AMTB” and “AMTBB,” respectively. On December 18, 2018, the last reported sales price of our Class A common stock was $12.00 per share.

Our Class B common stock is not convertible into our Class A common stock and no shares of our Class B common stock are included in this Offering.

Investing in our Class  A common stock involves risks. SeeRisk Factors” beginning on page 26, for a discussion of certain risks that you should consider before investing in our Class A common stock.

 

 

Neither the United States Securities and Exchange Commission nor any state securities commission nor regulatory body has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

Our Class A common stock is not a deposit and is not insured or guaranteed by the FDIC or any other governmental agency.

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 registration statement, which we refer to as the Offering Registration 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 “Emerging Growth Company Status” below.

 

 

     Per
Share
     Total  

Offering price

   $ 13.00      $ 81,900,000  

Underwriting discount (1)

   $ 0.91      $ 5,733,000  

Proceeds to us before expenses and reimbursement

   $ 12.09      $ 16,654,253  

Proceeds to selling shareholder before expenses

   $ 12.09      $ 59,512,747  

 

(1)

See “Underwriting” for additional information regarding the underwriting discounts and commissions and certain expenses payable to the underwriters.

 

The underwriters have an option for a period of 30 days to purchase up to an additional 945,000 shares of our Class A common stock from us at the Offering price less the underwriting discount.

The underwriters expect to deliver the shares of our Class A common stock to purchasers on or about December 21, 2018 through the book-entry facilities of The Depository Trust Company.

 

 

 

RAYMOND JAMES  

KEEFE, BRUYETTE & WOODS

A Stifel Company

STEPHENS INC.
SUNTRUST ROBINSON HUMPHREY   FIG PARTNERS, LLC

The date of this prospectus is December 18, 2018


Table of Contents

TABLE OF CONTENTS

 

     Page  

Summary

     1  

The Offering

     16  

Non-GAAP Financial Measures

     19  

Selected Consolidated Financial Data

     20  

Risk Factors

     26  

Cautionary Note Regarding Forward-Looking Statements

     59  

Use of Proceeds

     62  

Capitalization

     63  

Dividend Policy

     65  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     66  

Business

     145  

Management

     164  

Executive Compensation

     173  

Principal Shareholders and Selling Shareholder

     181  

Certain Relationships and Related Party Transactions

     185  

Description of Capital Stock

     194  

Supervision and Regulation

     198  

Underwriting

     220  

Legal Matters

     225  

Experts

     225  

Where You Can Find More Information

     225  

Index to Financial Statements

     F-1  

 

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ABOUT THIS PROSPECTUS

Unless the context indicates otherwise, references in this prospectus to “we,” “our,” “us,” and the “Company” refer to Mercantil Bank Holding Corporation, a Florida corporation, and its consolidated subsidiaries. All references in this prospectus to “Amerant Bank” or “the Bank” refer to Amerant Bank, N.A., our wholly-owned bank subsidiary.

Neither we, the selling shareholder nor the underwriters have authorized anyone to provide you with information that is additional to, different from, or inconsistent with, that contained in this prospectus. If anyone provides you with additional, different or inconsistent information, you should not rely on it as having been authorized by us, the selling shareholder or the underwriters. Neither we, the selling shareholder nor the underwriters take responsibility for, or can provide any assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares of our Class A common stock offered hereby, and only under circumstances and in jurisdictions where it is lawful to do so. Neither we, the selling shareholder nor the underwriters are making an offer of, or a solicitation of an offer to buy, shares of our Class A common stock in any state, country or other jurisdiction where the offer or solicitation is not permitted. You should not assume that the information in this prospectus or any free writing prospectus is accurate as of any date other than the date of the applicable document regardless of its time of delivery or the time of any sales of our Class A common stock. Our business, financial condition, results of operations and cash flows may have changed since the date of the applicable document.

This prospectus describes the specific details regarding this Offering and the terms and conditions of our Class A common stock being offered hereby and the risks of investing in our Class A common stock. For additional information, please see the section entitled “Where You Can Find More Information.”

INDUSTRY AND MARKET DATA

This prospectus includes industry and market data that we obtained from periodic industry publications, third-party studies and surveys, filings of public companies in our industry and internal company surveys. These sources include government and industry sources. Industry publications and surveys generally state that the information contained therein has been obtained from sources believed to be reliable. Although we believe the industry and market data to be reliable as of the date of this prospectus, this information could prove to be inaccurate. Industry and market data could be wrong because of the method by which sources obtained their data and because information cannot always be verified with complete certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties. In addition, we do not know all of the assumptions regarding general economic conditions or growth that were used in preparing the forecasts from the sources relied upon or cited herein. Forward-looking information obtained from these sources is subject to the same qualifications and the additional uncertainties regarding the other forward-looking statements in this prospectus. See “Cautionary Note Regarding Forward-Looking Statements.” Trademarks used in this prospectus are the property of their respective owners, although for presentational convenience, we may not use the ® or the ™ symbols to identify such trademarks.

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

 

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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 completed 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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SUMMARY

This summary highlights information included elsewhere in this prospectus and does not contain all of the information you should consider in making an investment decision. You should read this entire prospectus carefully, including the sections entitled “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements,” “Selected Consolidated Financial Data,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the notes thereto before making an investment decision regarding our Class A common stock.

For all historical periods described, we have 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 standalone public company.

About Our Company

Our Company

We are a bank holding company headquartered in Coral Gables, Florida, with $8.4 billion in assets, $6.2 billion in loans, $6.2 billion in deposits, $727.7 million of shareholders’ equity and $1.7 billion in assets under management and custody as of September 30, 2018. We provide individuals and businesses a comprehensive array of deposit, credit, investment, wealth management, retail banking and fiduciary services. We serve customers in our United States markets and select international customers. These services are offered through Amerant Bank, N.A., or the Bank, which is also headquartered in Coral Gables, Florida, and its subsidiaries. Fiduciary, investment and wealth management services are provided by the Bank’s national trust company subsidiary, or the Trust Company, and the Bank’s securities broker-dealer subsidiary, or Investment Services. We call these services and entities wealth management.

The Bank was founded in 1979 and is the largest community bank headquartered in Florida. We currently operate 23 banking centers where we offer personal and commercial banking services. The Bank’s primary markets are South Florida, where we operate 15 banking centers in the Miami-Dade, Broward and Palm Beach counties; the greater Houston, Texas area, where we have eight banking centers that serve nearby areas of Harris, Montgomery, Fort Bend and Waller counties; and the New York City area, where we have a loan production office, or LPO, in Midtown Manhattan. We are opening a LPO in Dallas, Texas in the fourth quarter of 2018. We currently have 948 full time equivalent employees, or FTEs, throughout our markets. We have no foreign offices.

From 1987 through December 31, 2017, we were a wholly-owned subsidiary of Mercantil Servicios Financieros, C.A., which we refer to as MSF or the selling shareholder. On March 15, 2018, MSF transferred 100% of our outstanding Class A common stock and Class B common stock, together, the Company Shares, to a newly created Florida common law, non-discretionary, grantor trust, which we refer to as the Distribution Trust or the Trust. TMI Trust Company is the trustee of the Distribution Trust. See “Certain Relationships and Related Party Transactions—Distribution Trust.”

On August 10, 2018, we completed our spin-off from MSF, or Spin-off, through the distribution, or Distribution, of 19,814,992 shares of our Class A common stock and 14,218,596



 

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shares of our Class B common stock in each case adjusted for the October 24, 2018 stock split. The shares distributed in the Distribution, or Distributed Shares, constitute 80.1% of the total issued and outstanding Company Shares of each class. As a result of the Distribution, each holder of record of MSF’s Class A common stock or Class B common stock on April 2, 2018 received one share of our Class A common stock or one share of our Class B common stock for each share of MSF Class A common stock or Class B common stock, respectively.

The Distributed Shares were registered with the United States Securities and Exchange Commission, or SEC, on Form 10, or the Spin-off Registration Statement. Except for Company Shares held by our affiliates, including Company Shares held in the Distribution Trust on behalf of MSF, the Distributed Shares are freely transferable.

The Distribution Trust retains the remaining 19.9% of the outstanding Company Shares of each class pending their sale or disposition by MSF. These shares are called the Retained Shares. MSF, as the selling shareholder, seeks to sell all of its 4,922,477 Class A Retained Shares in the Offering.

Our Class A common stock and Class B common stock is listed on the Nasdaq Global Select Market under the trading symbols “AMTB” and “AMTBB,” respectively.

New Brand

We are rebranding our Company as Amerant. We believe our new name and logo will identify us as separate and distinct from MSF and promote our strategic focus as a community bank with its own identity. All the entities in our organization are adopting the new name and logo, and the Company will formally change its name, subject to shareholder approval, following our 2019 annual shareholders’ meeting. We changed the Nasdaq Global Select Market trading symbols for our Class A common stock and Class B common stock to “AMTB” and “AMTBB,” respectively, to reflect the new brand.

Competitive Strengths

Established Franchise and Attractive Markets

We believe we have developed a strong reputation as well as deep client relationships in our markets during our over 30 years of business. We operate in high growth markets in Florida, Texas, and New York. Our management has a track record of profitable organic growth, a conservative credit culture, and a community-focused approach to banking in our markets.

We are the largest community bank in Miami and a leading bank serving Hispanic communities. Substantial amounts of our operations are in the greater Houston, Texas area, where we are growing a diversified loan and domestic deposit base. Our New York LPO serves the greater New York City area and originates commercial real estate, or CRE, loans. We are experienced in this market, and we compete for and make CRE loans to sophisticated borrowers, including many with long relationships with the Bank.

Growing Domestic Deposits

We are successfully executing our domestic deposit strategy. Our domestic deposits have grown from $2.5 billion to $3.0 billion from December 31, 2016 to September 30, 2018, representing a compound annual growth rate, or CAGR, of 12.70%. Although we have selectively closed approximately $272 million of foreign deposits since December 31, 2016, because of their



 

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compliance costs and risks, we continue to serve our valued international customers and others who meet our criteria. We had approximately $3.2 billion of foreign deposits at September 30, 2018. Our deposits from foreign depositors, predominantly Venezuelans, had an average annual cost of approximately 0.25% for the nine months ended September 30, 2018.

The following chart summarizes the change in the geographic composition of our deposit mix from the fourth quarter of 2015 to the third quarter of 2018:

 

LOGO

We seek continued core deposit growth through our needs-based consultative sales and servicing approach, and through improving deposit account penetration among our commercial and wealth management customers, and we are in the process of transforming our banking centers. We also benefit from our long-term experience in providing banking services to sophisticated domestic and international customers.

Well-Positioned Loan Portfolio

Our loans are diversified across asset classes and geographic markets. Our asset sensitive balance sheet is positioned to drive net interest margin, or NIM, expansion in the current rising interest rate environment. Our disciplined underwriting culture is reflected in our outstanding credit performance. We continue to replace lower yielding international commercial and financial institution loans with higher yielding domestic commercial and industrial, or C&I, loans, CRE loans, and other mortgage lending to increase our net income. Our banking teams are well-positioned to serve the needs of our communities. Our employees are generally bilingual in English and Spanish, which enables us to serve Hispanic and English speaking customers in South Florida and Texas. We believe our commitment to strength and soundness, compliance with applicable laws, and our code of ethics is the best way to maintain our reputation and long-term success.



 

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The following chart summarizes the change in the geographic composition of our loan portfolio from the fourth quarter of 2015 to the third quarter of 2018:

 

LOGO

Differentiated Fee Income Platform

We leverage our various fee income generating platforms across our diverse client base. Wealth management had approximately $1.7 billion of assets under management at September 30, 2018. We believe that our Trust Company, Investment Services and private banking provide comprehensive services, which are unique for a bank of our size. We offer these services through a consultative process designed to meet our clients’ objectives. The Bank, Trust Company and Investment Services seek to appropriately cross-sell all their respective services to build broader relationships with our customers. We believe our scalable investment, fiduciary and private banking platforms will enable us to provide personalized services complementary to our deposit and lending capabilities to additional clients, driving future growth and profitability.

The Company’s non-interest income, including the $10.5 million gain in 2017 on the sale of the New York Building, has averaged 24.8% of net interest income and non-interest income before taxes from December 31, 2012 to September 30, 2018.

Experienced Management

We are led by a team of experienced banking executives, most of whom are very knowledgeable about our markets. Most of our executive team has spent at least 20 years with us or our former parent company. See “Management.”

 

   

Millar Wilson has served as an officer and a director of the Bank since 1987, and our Chief Executive Officer since 2009. Mr. Wilson has served in various roles with MSF for over 40 years, including as Executive Director of International Business from 2013 until January 2018. Mr. Wilson has served as a member of the board of directors of the Federal Reserve Bank of Atlanta, Miami Branch since 2013.

 

   

Alberto Peraza was appointed as our Co-President and Chief Financial Officer in February 2018. Mr. Peraza provides support and guidance to the Chief Executive Officer on our business strategy. He directly manages all finance areas, including treasury, budgeting, tax and reporting. He is also responsible for investor and public relations. Mr. Peraza has served in various roles with us since 1992, including as President and Chief Operating Officer of the Bank from 2013 to 2018, Chief Financial Officer of the Bank from 1995 to 2013 and Corporate Secretary of the Bank from 1998 to 2004.



 

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Alfonso Figueredo became our Co-President and Chief Operating Officer in February 2018. Mr. Figueredo is responsible for all day-to-day business operations and administration activities, including operations and technology, human resources, legal, credit services and administration. Mr. Figueredo has served in various roles with MSF since 1988, including as Executive Vice President of Operations & Administration from 2015 to 2018 and Chief Financial Officer from 2008 to 2015.

 

   

Miguel Palacios was appointed as our Executive Vice President and Chief Business Officer in February 2018. Mr. Palacios is responsible for implementing our corporate strategies, managing the business units and our products and channels, and establishing performance and production targets to achieve our financial objectives. He has held various roles since joining the Bank in 2005, including as Executive Vice President and Domestic Personal and Commercial Manager from 2012 to 2018, Special Assets Manager from 2009 to 2012 and Corporate International-LATAM Manager from 2005 to 2009. Mr. Palacios has also served in various roles with MSF since 1992.

 

   

Alberto Capriles was appointed as our Executive Vice President in February 2018 and has been our Chief Risk Officer since 2016. Mr. Capriles is responsible for all enterprise risk management oversight, including credit, market, operational and information security risks. Mr. Capriles served in various roles with MSF, including Corporate Treasurer from 2008 to 2015, head of Corporate Market Risk Management from 1999 to 2008, and as Corporate Risk Specialist from 1995 to 1999, where he led the project to implement MSF’s enterprise risk management model.

Enhanced Profitability

The Spin-off and this Offering simplify our business and regulation. The Spin-off has sharpened our focus on our strategy to increase our return on assets, or ROA, and return on equity, or ROE, through margin expansion, shift in loan mix, efficiencies, appropriate cross-selling of services, increased fee income and growth in our various businesses. We intend to continue to build on our already improving financial performance as part of a multi-year strategic plan which focuses on increasing our core domestic business and profitability.

As we have continued to execute on our plan, we have seen significant improvement in key profitability and operating measures as follows:

 

    

Nine Months Ended

     Growth
Rates
 
     September 30,
2018
     September 30,
2017
 
     (in thousands, except percentages)  

Total interest income

   $ 227,472      $ 201,114        13.11

Net interest income

   $ 162,255      $ 154,858        4.78

We believe that our cost reduction program will generate a significant reduction in noninterest expenses as a result of our simplified business model and as better technology is deployed. In addition, our asset sensitive balance sheet is expected to result in further margin expansion as a result of the current rising rate environment. Our redeployment from lower yielding loans and securities into higher yielding U.S. C&I loans and CRE loans is further expected to improve our NIM.



 

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The Company received Federal Reserve approval for the repurchase of up to all 3,532,457 shares of our Class B common stock held by the Distribution Trust on behalf of MSF. The Company and MSF are seeking a determination from the Federal Reserve that, following this Offering, MSF will no longer control the Company for BHC Act purposes.

The estimated net proceeds to the Company from this Offering will be used to repurchase, as soon as possible after this Offering, approximately 1.42 million shares of our Class B common stock held by the Distribution Trust on behalf of MSF (or approximately 2.39 million shares of our Class B common stock if the underwriters exercise in full their option to repurchase additional shares of our Class A common stock from us) at a 3% discount to the Offering price. MSF’s resulting beneficial ownership of our nonvoting Class B common stock will be reduced to approximately 4.98% of the Company’s total outstanding shares of Class A and Class B common stock (or 2.68% if the underwriters exercise in full their option to purchase additional shares of our Class A common stock from us). No Offering proceeds are expected to be available to redeem the Company’s outstanding trust preferred securities or for any other purpose. See “Use of Proceeds.”

Our Business Strategy

We recently conducted a strategic review with the assistance of a nationally known consulting firm to evaluate our post Spin-off business strategy as an independent company. As part of our Spin-off from MSF, our business model and product offerings are being simplified and focused on U.S. domestic lending.

We have adopted and are in the early stages of implementing our strategic plan to simplify our business model and focus our activities as a community bank serving our domestic customers and select foreign depositors, and wealth management and fiduciary customers.

Our strategic objectives include:

 

   

Increase domestic core deposits by bundling products and improving customer and market data to improve deposit offerings and gain a greater share of each customer’s business;

 

   

Enhance retail and commercial sales approaches with better data and customer relationship management, or CRM, tools, improved banking centers of the future, and a consultative approach to identify and meet customer needs, while reducing banking center occupancy and staffing costs;

 

   

Replace the approximately $300 million of low yielding foreign Corporate LATAM loans outstanding at September 30, 2018 as these mature this year and in the first quarter of 2019, with higher margin domestic loans;

 

   

Focus on domestic lending opportunities, especially relationship-driven consumer loans (including residential first mortgages and home equity loans), retail lending (including personal and small business loans) and C&I and CRE loans, which may improve our returns at lower risks than various types of credit we have made historically;

   

Improve cross-selling among all business lines, with a focus on attracting core deposits, fee income and loans, while building broader, more profitable customer relationships, including wealth management;

 

   

Increase non-interest fee income through our cash management products, interest rate swaps, private banking and wealth management services;

 

   

Build our scalable wealth management business with more domestic, as well as international, customers;



 

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Expand by four new banking centers of the future in South Florida through 2020, reconfigure banking centers to smaller banking center of the future facilities, and relocate certain banking centers to better locations as existing leases expire;

 

   

Improve the customer experience by:

 

   

improving online and mobile banking for retail and commercial customers;

 

   

transforming our banking centers to provide a seamless retail banking experience with staff focused on consultative customer service across the full range of products we offer with less emphasis on routine transactions;

 

   

streamlining and speeding product applications, transactions and customer processes compliant with regulatory requirements, such as data privacy and anti-money laundering; and

 

   

providing quicker decisions on customer requests while maintaining accountability and appropriate credit and compliance standards;

 

   

Reduce the number of our computer applications and programs and streamline our processes to increase efficiency through approximately $10 to $15 million of technology investments over the next 3 years;

 

   

Reduce staffing generally, including as a result of more automated and better integrated systems, and reduced staffing in the banking centers of the future;

 

   

Improve the quality of our capital for bank regulatory purposes by issuing additional shares of voting Class A common stock and repurchasing up to approximately $17.9 million of our outstanding nonvoting Class B common stock (or $30.19 million if the underwriters exercise in full their option to purchase additional shares of our Class A common stock from us);

 

   

Reduce and reorganize the space we occupy in our main office to increase the amount and attractiveness of space available for lease to third parties;

 

   

Expand and improve the capabilities of our online bank to offer deposit accounts nationwide; and

 

   

Align responsibilities and incentives to achieve these goals.

Our plan includes replacing existing technology and information systems with a reduced number of systems that are better integrated, and which automate and speed our customer and compliance processes, while enabling us to improve the data we use to better understand and anticipate our markets’ and customers’ needs. We also continue to implement digital banking services and further automate manual customer service and back office processes. We believe these enhanced processes and systems will promote our growth, efficiency and profitability.

We attribute much of our success to our strong culture of customer service, credit policies, internal controls and regulatory compliance, and our experience as a subsidiary of a large, well-established, sophisticated multinational banking organization. In contrast to many community banks, we have extensive experience working with larger, sophisticated customers to provide solutions for their entire banking and wealth management needs. We operate in highly attractive markets and will seek to expand to meet those markets’ needs, such as with an additional banking



 

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center in Palm Beach, as well as expand in other markets in Florida and Texas with attractive demographics, including Dallas. We will continue to serve our existing profitable international customer base, and will seek select new customers that meet our risk and profitability objectives.

We believe that we have substantially completed our strategic reduction in our international customer base to reduce our risks and costs. We selectively closed accounts held by certain Venezuelan and other international customers with approximately $272 million of deposits in 2017 and the first nine months of 2018. We expect to redeploy maturing foreign loans into higher yielding domestic loans. Our domestic deposit strategy is expected to fund anticipated loan growth. We will use FHLB advances to match fund real estate loans. We are seeing substantial growth in the Houston market and continued growth in Florida. We have increased our core domestic deposits, and will continue do to so through our needs-based consultative sales and service approach. We have improved our deposit account penetration among our commercial customer base and are seeking further increases in these deposits.

We believe that our bank model, including wealth management, provides a seamless, multi-channel client experience that permits us to build upon existing customer relationships and attract new, profitable business. Our focus is gaining an increased share of wallet and non-lending products from our existing client base, and using a consultative approach to increase our customers, generally. We plan to leverage our wealth management capabilities and focus on other cross-selling opportunities. We seek to increase our deposits from our borrowers and loans and deposits from our wealth management customers. We seek to expand our wealth management services to our depositors and borrowers, especially owners and managers of small and medium size businesses.

We continue to pursue targeted lending opportunities consistent with our credit guidelines. We are seeking to increase our domestic lending to reduce foreign lending risks, and we have refined our product suite to target selected domestic customers.

Retail Banking

Retail banking includes our consumer and small business deposit and lending groups. It operates through our 23 banking centers, and our online and mobile banking services. It offers a full array of deposit products, residential first mortgages, home equity loans and lines of credit, executive lines of credit and loans to small businesses, including SBA loans. It actively seeks to bundle products to attract a greater share of its customers’ wallets and to cross-sell wealth management and other services such as cash management for small businesses. At September 30, 2018, retail accounted for $1.8 billion (29.62%) of our deposits and $431.0 million (7.08%) of our loans.

Retail banking is implementing our new strategy successfully in other ways, also. During the first three quarters of 2018, retail deposits grew 16.6%, including 38.2% growth in Texas. In May, we introduced our new relationship money market and checking account product. Our home equity lines were actively promoted during 2018. Although the amounts fluctuate, the Dollar amount of these home equity lines increased 23.7% as of September 30, 2018 compared to September 30, 2017. More than one-half of the new home equity line customers also established a checking account with us. Our jumbo mortgage product has been successfully promoted in 2018, with outstanding jumbo loans growing $58.2 million, or 89.1%, since December 31, 2017. We have been adding experienced residential mortgage lenders, and improving our product offerings and processes.



 

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Retail banking seeks efficiencies and improved customer service with electronic banking, and speedier processes and customer services platforms. For example, in August 2018, we introduced the Aperio system from FISERV, our core banking system provider, to speed account openings and promote our ongoing customer service.

In February 2018, we launched our “banking center of the future” with our new banking center in Wellington, Florida. These smaller facilities will offer a combination of bank relationship managers and products, and focus on consultative, needs-oriented service to our customers, while recognizing that customers’ banking center needs are changing as a result of mobile and electronic banking.

We currently have three banking centers of the future, and are adding four new banking centers in Miami Lakes, Davie, Delray Beach and Boca Raton during 2019. The banking center of the future reduces the average size of a banking center from 4,000 square feet to between 2,000 and 3,000 square feet, depending on the location. The staffing of our banking centers has been reduced already, and the banking centers of the future will be reduced further to an average of approximately four FTEs. The banking centers of the future will focus less on routine transactions. Instead, these offices will promote interaction with our customers. Our banking specialists, who are cross-trained to market and execute the full variety of our retail banking services, will help customers with specialized needs, and introduce them to our specialists who are available via video conference with respect to wealth management, mortgages and other services. Existing banking centers are being converted to the banking center of the future as their leases expire, and, in some cases, are being relocated to better facilities and better locations.

Our Markets

Our primary markets are the Miami-Fort Lauderdale-West Palm Beach, FL metropolitan statistical area, or MSA, Houston-The Woodlands-Sugar Land, TX MSA and New York City markets. We offer our services through 23 banking centers in Florida and Texas and a LPO in New York City. According to S&P Global, the Miami MSA, which has approximately 29% of Florida’s total population, is home to some of the largest Southeast companies. The Miami MSA is comprised of the Miami-Dade, Broward, and Palm Beach counties and is the second most populous Southeast MSA behind the Washington D.C. MSA. The Miami MSA had $236.8 billion of total deposits as of June 30, 2018, and its projected population growth rate of 6.6% is almost twice the projected national population growth rate.

Additionally, the Houston MSA, which comprises roughly 24% of Texas’ total population and is also home to some of the largest Southwest companies, is the second largest Southwest MSA in terms of total population behind the Dallas MSA. The Houston MSA had $245.6 billion of total deposits as of June 30, 2018. Its projected population growth rate of 8% is significantly outpacing the national rate by approximately 4.4%. We believe these markets have significant organic growth opportunities.



 

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The following table shows certain demographic information regarding the Florida and Texas markets where we provide the full range of our services:

 

     September 30,
2018
    June 30,
2018
    Projected
Total
Population
2019
    Projected
Population
Change
2010-2019
(%)
    Projected
Population
Change
2019-2024
(%)
    Projected
Median
Household
Income
2019
    Projected
Household
Income
Change
2019-2024
(%)
 

MSA

  Number of
Mercantil
Banking
Centers
    Mercantil
Deposits  in
Market
(millions)
 

Miami-Fort Lauderdale-West Palm Beach, FL

    15     $ 5,761.5       6,283,790       12.92       6.60     $ 57,220       11.26  

Houston-The Woodlands-Sugar Land, TX

    8       638.4       7,092,836       19.80       8.01       65,702       2.36  

Weighted Average: MSA

          13.61       6.74       58,066       10.37  

Aggregate: National

        329,236,175       6.64       3.56       63,174       8.82  

 

Source:

FDIC deposit data as of June 30, 2018 and demographic data from S&P Global Market Intelligence as of June 2018.

We are the largest community bank headquartered in the Miami MSA with 2.43% deposit market share according to the most recent Federal Deposit Insurance Corporation, or FDIC, data, as of June 30, 2018. We believe our focused efforts on generating domestic deposits, while serving our valued international customers, will expand our overall market share in the Miami and Houston MSAs.



 

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The following table shows our market position in the Miami MSA among the top 15 banks.

 

            June 30, 2018  

Institution (Headquarters)

   Rank      Number of
Branches in
Market
    Total Deposits
in Market
     Total
Deposit
Market
Share
(%)
 
     (Dollars in thousands)  

Miami-Fort Lauderdale-West Palm Beach, FL

  

Bank of America, N.A. (NC)

     1        193     $ 41,729,608        17.62  

Wells Fargo Bank, N.A. (SD)

     2        204       35,831,937        15.13  

JPMorgan Chase Bank, N.A. (OH)

     3        187       21,480,232        9.07  

Citibank, N.A. (SD)

     4        54       17,991,000        7.60  

BankUnited, N.A. (FL)

     5        59       12,607,372        5.32  

SunTrust Bank (GA)

     6        92       11,474,561        4.84  

City National Bank of Florida (FL)***

     7        42       10,445,419        4.41  

TD Bank, N.A. (DE)***

     8        75       7,520,706        3.18  

Branch Banking and Trust Company (NC)

     9        98       7,288,234        3.08  

Amerant Bank, N.A. (FL)****

     10        16     5,761,530        2.43  

Iberiabank (LA)

     11        30       5,031,967        2.12  

Florida Community Bank, N.A. (FL)**

     12        21       4,994,010        2.11  

PNC Bank, N.A. (DE)

     13        71       4,737,361        2.00  

HSBC Bank USA, N.A. (VA)***

     14        17       4,307,081        1.82  

Regions Bank (AL)

     15        66       4,083,400        1.72  
     

 

 

   

 

 

    

Total for Top 15 Institutions

        1,225     $ 195,284,418        82.45  
     

 

 

   

 

 

    

Total for Other Institutions

        324       41,557,606        17.55  
     

 

 

   

 

 

    

Aggregate Total

        1,549       236,842,024        100.00  
     

 

 

   

 

 

    

 

Source: FDIC data as of June 30, 2018.

*

The Company operates 15 banking centers in the Miami MSA (23 in total). The FDIC also counts the Coral Gables headquarters office as a “branch.”

**

Recently approved sale to Synovus Financial Corp. (GA).

***

Parent company headquartered outside of the United States.

****

Mercantil Bank, N.A. was renamed “Amerant Bank, N.A.” on the opening of business on October 24, 2018.

The greater Miami market has a diversified economy, including the trade, tourism, services, manufacturing, education, real estate, and construction sectors. Some of Miami’s top private employers include Baptist Health South Florida, University of Miami, American Airlines, Florida Power & Light Company, and Carnival Cruise Lines. The United States Bureau of Labor Statistics states the unemployment rate for the Miami area was 3.5% as of September 2018. According to Miami-Dade Beacon Council, there were over 96,000 businesses located in the Miami-Dade County in 2016 with the most job growth occurring in the hospitality, tourism, life sciences and healthcare sectors, which experienced an increase of 26,209 and 13,403 jobs, respectively, in 2012 and 2017. The 2017 Kauffman Index of start up activity ranked the Miami MSA as the number one area for startup activity in the nation among the 39 largest metropolitan areas in the U.S. Small and medium sized businesses predominate in the Miami MSA.



 

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Summary Risk Factors

There are a number of risks that you should consider before investing in our Class A common stock. These risks are discussed more fully in the section titled ‘‘Risk Factors,’’ beginning on page 26 and in “Cautionary Note Regarding Forward-Looking Statements” beginning on page 59. These risks include, among others, the following:

 

   

We are a relatively new public company, which just completed its spin-off from MSF on August 10, 2018;

 

   

We have been refocusing our business away from low margin foreign lending to higher margin U.S. domestic lending, which is highly competitive;

 

   

In 2017 and the first nine months of 2018, we selectively closed accounts held by certain Venezuelan and other international customers with approximately $272 million of deposits and wealth management accounts totaling approximately $108 million because of their compliance costs and risks. During that same period, foreign depositors have reduced their deposit balances with us by approximately $940 million, as many Venezuela customers used their U.S. deposits for living expenses due to hyperinflation and adverse economic conditions in Venezuela. Replacing lost foreign deposits with core U.S. deposits in a highly competitive, rising rate environment may prove more difficult than we expect and may increase our cost of funding;

 

   

Adverse general business and economic conditions, particularly within our local markets, could adversely affect our growth, results of operations and financial condition;

 

   

We expect that our projected profitability will depend upon continued increases in interest rates generally. If interest rates do not continue to increase, our projected profit growth will be adversely affected;

 

   

We recently adopted a new business strategy to focus on profitable growth, cross selling to gain a larger share of our respective customers’ business, core deposit generation, loan growth in our local markets, changes in loan mix to higher margin loans, and improving our customer experience, processes, operating efficiency and cost reductions. Our strategy may take longer than anticipated and may be more expensive to implement, and otherwise may achieve less than we expect, all of which could adversely affect our business growth, results of operations and financial condition;

 

   

Our wealth management business currently relies almost entirely on our Venezuelan customers. Our strategy calls for expanding this business to U.S.-based customers, where the market for such services is highly competitive;

 

   

Economic, market, operational, liquidity, credit and interest rate risks associated with our business could adversely affect our business, results of operations and financial condition;

 

   

Our markets, and the financial services industry generally, are intensely competitive for customers, loans, deposits and our other services and bank staff. Competition could limit our ability to grow and could adversely affect our costs and the pricing and terms that we are able to offer to our customers;

 

   

If we do not effectively manage our credit risks or economic and credit conditions deteriorate, or both, we may experience increased levels of delinquencies, nonperforming



 

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loans and charge-offs, which could require increases in our loan servicing costs and in our provision for loan losses; and

 

   

We may sell fewer shares in the Offering than we seek. If less than substantially all of the selling shareholder’s Class A common stock are sold in the Offering, or our proceeds from the sale by the Company of Class A common stock are less than needed to repurchase substantially all of MSF’s Class B common stock, it may delay or prevent MSF from obtaining a Federal Reserve determination that MSF is no longer in “control” of the Company under the BHC Act. In such a case, we would remain subject to the regulatory complexity and risks of MSF’s control of the Company.

Recent and Other Developments

Cayman Bank Purchase

We and MSF entered into the amended and restated Separation Agreement dated as of June 12, 2018, which we refer to as the Separation Agreement, for purposes of effecting the Spin-off. The Separation Agreement contemplates the Bank’s purchase from a MSF subsidiary of Mercantil Bank and Trust Limited (Cayman), or the Cayman Bank, a bank and trust company located in St. George, Grand Cayman. We operate and manage the Cayman Bank and receive approximately 75% of its fiduciary revenues. Trusts held by the Cayman Bank held approximately $209.1 million of assets at September 30, 2018 and generated annualized fees of approximately $0.7 million through September 30, 2018. Approximately 28% of our Trust Company customers held their trusts with the Cayman Bank and accounted for approximately 18% and 9% of our Trust Company and Investment Services revenues, respectively, for the nine months ended September 30, 2018. The Cayman Bank had shareholders’ equity of $13.7 million as of September 30, 2018.

We intend to acquire the Cayman Bank for cash at its fair market value based on the Cayman Bank’s shareholder’s equity, adjusted to reflect income and losses to the closing date and purchase accounting adjustments, including the mark to market of all assets and liabilities at the closing date, plus a premium of $885,500. The premium is based upon a valuation of the Cayman Bank prepared for us by Hovde Group, an investment banking firm. Based on the Cayman Bank’s October 31, 2018 balance sheet, marked to market with purchase accounting adjustments as of that date, the estimated purchase price would be approximately $13.9 to $14.9 million. See “Related Party Transactions.”

This acquisition is subject to the negotiation of a definitive purchase agreement and the receipt of necessary approvals from the Board of Governors of the Federal Reserve System, or Federal Reserve; and the Cayman Islands Monetary Authority, or CIMA. It is anticipated that the necessary bank regulatory approvals will take 3 to 6 months to complete. The acquisition is expected to be completed promptly after the receipt of the last required bank regulatory approval. Herein, references to the Trust Company include the Cayman Bank upon and following its acquisition.

The Stock Split

Effective October 23, 2018, we split our outstanding Class A and Class B common stock on a one-for-three basis. We refer to this as the stock split. No vote of our shareholders was required for the stock split.



 

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As a result of the stock split, every three outstanding shares of our Class A common stock were combined into only one share of our Class A common stock and every three outstanding shares of our Class B common stock were combined into only one share of our Class B common stock. Fractional shares were issued. No cash was paid to shareholders in respect of fractional shares or otherwise in the stock split. Our current shareholders’ proportionate interests in us did not change as a result of the stock split.

Chairman and Directors

As previously announced, Mr. Vollmer will resign as Chairman of our board of directors effective following the completion of this Offering. Mr. Vollmer intends to continue to serve as one of our directors. Also as previously announced, our board of directors elected, effective upon the completion of the Offering and the retirement of Mr. Vollmer as our Chairman, Mr. Copeland to serve as the nonexecutive Chairman of our board of directors. Our Amended and Restated Bylaws, as amended upon the completion of the Offering, permit Mr. Copeland to be elected as a nonexecutive Chairman of our board of directors and clarify that such position will not interfere with his ability to serve on our committees or interfere with his ability to meet applicable SEC, Nasdaq and corporate independence requirements. Our Amended and Restated Bylaws, as amended upon the completion of the Offering, make no other changes to the Amended and Restated Bylaws currently in effect.

Two of our directors, Messrs. Capriles and Marturet, are also directors of MSF. Messrs. Capriles and Marturet have informed us that they intend to resign as MSF directors following the Offering, and intend to continue as Company directors.

The Company continues to seek new independent directors, especially persons within its markets, and is in discussions to add a new director from Miami early in 2019.

Separately, in connection with the Offering, Patriot Financial Partners, L.P., or Patriot, a private equity fund specializing in bank investments, has expressed an interest in purchasing, in the Offering, between approximately 5.0% and 9.9% of the Company’s Class A common stock outstanding after the Offering. Patriot has requested that, following such investment in the Offering, the Company consider an additional independent director for nomination at the Company’s annual shareholders’ meeting in 2019, including, among possibly others, a person suggested by Patriot.

In each case, any such person would be subject to review and consideration by the Company’s nominating and governance committee and the Company’s and such committee’s criteria for directors, and to compliance, to the Company’s satisfaction, of all applicable banking, securities and corporate laws, as well as Nasdaq requirements.

Patriot has informed the Company that it owns a significant, but non-control ownership interest in, and Patriot’s managing partner is a director of, U.S. Century Bank, which is a direct competitor of the Company in South Florida. This poses potential business and regulatory conflicts and issues, which will have to be resolved in connection with any new director suggested by Patriot. These issues will be considered further with respect to any nominee suggested by Patriot. There is no assurance that such conflicts can be resolved, or that any necessary regulatory approvals can be obtained for a candidate suggested by Patriot to serve as a Company director, and that the Company and Patriot can reach agreement on such person and their related rights and obligations. See “Risk Factors—We may have actual or potential conflicts with respect to new



 

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directors we may add following this Offering” and “Certain Relationships and Related Party Transactions.”

Corporate Information

Our principal executive offices are located at 220 Alhambra Circle, Coral Gables, FL 33134, and our telephone number is (305) 460-8728. Our website is https://www.mercantilbank.com. The information contained on or accessible from our website does not constitute a part of this prospectus and is not incorporated by reference herein.



 

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THE OFFERING

 

Class A common stock offered by us

1,377,523 shares.

 

Class A common stock offered by the selling shareholder


4,922,477 shares.

 

Underwriter purchase option

945,000 shares of Class A common stock from us.

 

Class A common stock outstanding before and after completion of the Offering


24,737,470 shares of Class A common stock before completion of the Offering and 26,114,993 shares of Class A common stock (27,059,993 shares if the underwriters exercise in full their option to purchase additional shares of our Class A common stock from us) after completion of the Offering.

 

Class B common stock offered

None.

 

Voting rights

Holders of shares of our Class A common stock are entitled to one vote for each share on all matters to be voted on by the shareholders.

 

  Holders of shares of our Class B common stock have no voting rights, except as mandated by Florida law, and separately as a voting group as to amendments or changes to our amended and restated articles of incorporation that would significantly and adversely affect the rights of Class B common stock, or upon a reorganization event, such as a merger, where the Class B common stock does not remain outstanding or the rights and powers of the Class B common stock are changed materially and adversely. If and when we ask our shareholders to approve our recommendation of independent certified accountants for a given fiscal year, holders of shares of our Class B common stock will be entitled to one-tenth of a vote for each share, voting together with the holders of the Class A common stock on the matter.

 

Use of proceeds

The net proceeds to us from the sale of our Class A common stock in this Offering will be approximately $17.9 million, (or approximately $30.2 million if the underwriters exercise in full their option to purchase additional shares of our Class A common stock from us). MSF has agreed to pay all underwriting discounts, commissions and Offering expenses with respect to the Offering. We intend to use all of the net proceeds to us from this Offering to repurchase, as soon as possible after the Offering, approximately 1.42 million shares of our Class B common stock held by the Distribution



 

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Trust on behalf of MSF (or approximately 2.39 million shares of our Class B common stock if the underwriters exercise in full their option to purchase additional shares of our Class A common stock from us) at a 3% discount to the Offering price. This discount reflects the limited voting rights of the Class B common stock. The Company has received Federal Reserve approval for the repurchase of up to all 3,532,457 shares of our Class B common stock held by the Distribution Trust on behalf of MSF.

 

  We will not receive any of the proceeds from the sale of our Class A common stock in this Offering by the selling shareholder. See “Use of Proceeds.”

 

Dividends

We do not anticipate paying dividends on Company Shares in the foreseeable future because we expect to retain our earnings to support our business strategy. The declaration and payment of dividends, if any, will be subject to our board of directors’ discretion and will depend, among other things, upon our results of operations, financial condition, capital adequacy, liquidity, prospects, regulatory limitations, and other factors that our board of directors may deem relevant. If commenced, the declaration and payment of cash dividends may be discontinued at any time at the sole discretion of our board of directors. See “Dividend Policy.”

 

Registration rights

We have a registration rights agreement with MSF. MSF is the selling shareholder in this prospectus pursuant to the registration rights agreement. If not all Retained Shares are sold in the Offering or repurchased with the net proceeds from the Offering, we are obligated to file a resale registration statement under the Securities Act for MSF’s resale, from time to time, of any remaining Retained Shares. Also, if we determine to undertake our own offering of securities, we granted MSF “piggyback” registration rights that would require us to include, subject to certain conditions, any remaining Retained Shares on the same registration statement we use for our own offering. Resales of Retained Shares by MSF are subject to the lock-up provisions described under “Underwriting.” See “Certain Relationships and Related Party Transactions—Registration Rights Agreement.”

 

Directed share program

At our request, the underwriters have reserved for sale at the Offering price up to 25% of the shares (including the underwriters’ option) of our Class A common stock being offered by this prospectus for sale to certain of our employees, customers, directors and other persons resident in the United States designated by the Company who have expressed an interest in purchasing at least $2,500 of our



 

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Class A common stock in this Offering through a directed share program. We do not know if these persons will choose to purchase all or any portion of the reserved shares, but any purchases they do make will reduce the number of shares available to the general public. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus. See “Underwriting—Directed Share Program.”

 

Nasdaq Global Select Market listing

Our Class A common stock and our Class B common stock are listed on the Nasdaq Global Select Market under the trading symbols “AMTB” and “AMTBB,” respectively. Since the Spin-off on August 10, 2018, Company Shares have traded infrequently, and at prices that may not be representative of those that would exist in a more active market. There is no assurance that a more active market for Company Shares will develop following the Offering and, if it develops, no assurances can be made regarding its depth or whether it will continue.

 

Risk factors

Investing in our Class A common stock involves risks. See “Risk Factors” for a discussion of factors that you should carefully consider before making an investment decision.

Except as otherwise indicated, all information in this prospectus:

 

   

gives effect to the stock split and the resulting reduction in our issued and outstanding Company Shares, which was effective October 23, 2018;

 

   

assumes no exercise by the underwriters of their option to purchase additional shares of our Class A common stock from us;

 

   

assumes that our directors and principal shareholders do not purchase any additional Class A common stock in the Offering; and

 

   

excludes the 3.33 million shares of our Class A common stock that are reserved for future issuance under our 2018 Equity and Incentive Compensation Plan, or the 2018 Plan. Approximately $11 million of restricted Class A common stock are expected to be awarded at the Offering price to our officers, employees and directors as a one-time grant in connection with the Offering.



 

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NON-GAAP FINANCIAL MEASURES

This prospectus contains “non-GAAP financial measures” within the meaning of Regulation G promulgated by the SEC. Non-GAAP financial measures are financial measures that are not presented in accordance with generally accepted accounting principles in the U.S., or GAAP, and this prospectus therefore includes a reconciliation of these non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with GAAP.

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

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



 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected financial information derived from our unaudited interim consolidated financial statements as of September 30, 2018 and for the nine months ended September 30, 2018 and 2017 and our audited consolidated financial statements as of December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015. The financial information as of December 31, 2015 has been derived from our audited consolidated financial statements not included herein. The unaudited selected financial information may not reflect our results of operations for our fiscal year ended, or financial condition as of, December 31, 2018, or any other period of time or date. The selected historical financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our unaudited interim consolidated financial statements and our audited consolidated financial statements and the corresponding notes included elsewhere in this prospectus.

Because we completed the Spin-off in August 2018, our historical consolidated financial data included in this prospectus do 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.”

 

     September 30,
2018
     December 31,  
     2017      2016      2015  
     (in thousands)  

Consolidated Balance Sheet

           

Total assets

   $ 8,435,802      $ 8,436,767      $ 8,434,264      $ 8,162,844  

Total investment securities

     1,791,859        1,846,951        2,182,737        2,106,015  

Total loan portfolio (1)

     6,159,279        6,066,225        5,764,761        5,623,222  

Allowance for loan losses

     69,471        72,000        81,751        77,043  

Total deposits

     6,189,503        6,322,973        6,577,365        6,519,674  

Securities sold under agreements to repurchase

                   50,000        73,488  

Junior subordinated debentures

     118,110        118,110        118,110        118,110  

Advances from the FHLB and other borrowings

     1,338,000        1,173,000        931,000        722,250  

Shareholders’ equity

     727,675        753,450        704,737        682,403  


 

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    Nine Months Ended
September 30,
    Year Ended
December 31,
 
    2018     2017     2017     2016     2015  
    (in thousands, except per share amounts and percentages)  

Consolidated Results of Operations

         

Net interest income

  $ 162,255     $ 154,858     $ 209,710     $ 191,933     $ 172,285  

Provision for (reversal of) loan losses

    1,750       8,898       (3,490     22,110       11,220  

Noninterest income

    41,881       56,066       71,485       62,270       54,756  

Noninterest expense

    160,325       152,035       207,636       198,303       192,262  

Net income

    31,403       34,239       43,057       23,579       15,045  

Basic and diluted income per common share (2)

    0.74       0.81       1.01       0.55       0.35  

Cash dividend declared per common share (2)

    0.94                          

Other Financial and Operating Data (3)

         

Profitability Indicators (%)

         

Net interest income / Average total interest earning assets (NIM) (4)

    2.74     2.60     2.63     2.48     2.26

Net income / Average total assets (ROA) (5)

    0.50     0.54     0.51     0.29     0.19

Net income / Average shareholders’ equity (ROE) (6)

    5.63     6.14     5.62     3.29     2.14

Capital Adequacy Ratios

         

Total capital ratio (7)

    12.81     12.92     13.31     13.05     12.91

Tier 1 capital ratio (8)

    11.88     11.74     12.26     11.86     11.78

Tier 1 leverage ratio (9)

    9.95     9.93     10.15     9.62     9.88

Common equity tier 1 capital ratio (CET1) (10)

    10.34     10.21     10.68     10.25     10.12

Tangible common equity ratio (11)

    8.40     8.57     8.70     8.12     8.12

Tangible book value per common share

  $ 16.63     $ 17.11     $ 17.23     $ 16.08     $ 15.56  

Asset Quality Indicators (%)

         

Non-performing assets / Total assets (12)

    0.35     0.47     0.32     0.85     0.95

Non-performing loans / Total loan portfolio (1)(13)

    0.48     0.65     0.44     1.23     1.38

Allowance for loan losses / Total non-performing loans (13)(14)

    233.89     213.13     267.18     115.25     99.55

Allowance for loan losses / Total loan portfolio (1)(14)

    1.13     1.38     1.19     1.42     1.37

Net charge-offs (recoveries) / Average total loan portfolio (15)

    0.10     0.14     0.11     0.32     (0.01 )% 

Efficiency Indicators (%)

         

Noninterest expense / Average total assets (5)

    2.54     2.39     2.45     2.41     2.41

Personnel expense / Average total assets (5)

    1.63     1.54     1.55     1.58     1.53

Efficiency ratio (16)

    78.54     72.08     73.84     78.01     84.68


 

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    Nine Months Ended
September 30,
    Year Ended
December 31,
 
    2018     2017     2017  
    (in thousands, except per share
amounts and percentages)
 

Adjusted Selected Consolidated Results of Operations and Other Data (2)(17)

     

Adjusted noninterest income

  $ 41,881     $ 45,597     $ 61,016  

Adjusted noninterest expense

    154,011       152,035       202,391  

Adjusted net income before income tax

    48,375       39,522       71,825  

Adjusted net income

    37,801       27,090       48,403  

Adjusted basic and diluted income per common share

    0.89       0.64       1.14  

Adjusted net income / Average total assets (ROA) (5)

    0.60     0.43     0.57

Adjusted net income / Average shareholders’ equity (ROE) (6)

    6.78     4.86     6.32

Adjusted noninterest expense / Average total assets (5)

    2.44     2.39     2.38

Adjusted efficiency ratio (18)

    75.45     75.84     74.76

 

(1)

Outstanding loans are net of deferred loan fees and costs, excluding the allowance for loan losses.

(2)

The earnings per common share reflect the stock split which reduced the number of outstanding shares on a one-for-three basis. See Note 22 of our audited consolidated financial statements for more details on the stock split.

(3)

Operating data for the nine months periods ended September 30, 2018 and 2017 have been annualized.

(4)

Net interest margin is defined as net interest income divided by average interest-earning assets, which are loans, investment securities, deposits with banks and other financial assets which yield interest or similar income.

(5)

Calculated based upon the average daily balance of total assets, excluding assets under management and custody.

(6)

Calculated based upon the average daily balance of shareholders’ equity.

(7)

Total capital divided by total risk-weighted assets, calculated according to the standardized capital ratio calculations.

(8)

Tier 1 capital divided by total risk-weighted assets.

(9)

Tier 1 capital divided by quarter to date average assets. Tier 1 capital is composed of common equity tier 1 capital plus outstanding qualifying trust preferred securities of $114.1 million at September 30, 2018, September 30, 2017, December 31, 2017, December 31, 2016 and December 31, 2015.

(10)

Common equity tier 1 capital divided by total risk-weighted assets.

(11)

Tangible common equity is calculated as the ratio of tangible common equity divided by total assets less goodwill and other intangible assets.

(12)

Non-performing assets include all non-performing loans and other real estate owned, or OREO, properties acquired through or in lieu of foreclosure. Non-performing assets were $29.7 million and $39.7 million as of September 30, 2018 and 2017, respectively, and $27.3 million, $71.3 million and $77.8 million as of December 31, 2017, 2016 and 2015, respectively.

(13)

Non-performing loans include all accruing loans past due by more than 90 days, and all non-accrual loans. Non-performing loans were $29.7 million, $39.7 million, $27.0 million, $70.9 million and $77.4 million, as of September 30, 2018 and 2017 and as of December 31, 2017, 2016 and 2015, respectively.

(14)

Allowance for loan losses was $69.5 million, $84.6 million, $72.0 million, $81.8 million and $77.0 million, as of September 30, 2018 and 2017 and December 31, 2017, 2016 and 2015, respectively. See Note 5 of our audited consolidated financial statements and Note 5 of our unaudited interim consolidated financial statements for more details on our impairment models.

(15)

Calculated based upon the average daily balance of the outstanding loan principal balance net of deferred loan fees and costs, excluding the allowance for loan losses.

(16)

Efficiency ratio is the result of noninterest expense divided by the sum of noninterest income and net interest income.

(17)

This presentation contains financial information, including adjusted noninterest expenses, adjusted net income before income taxes, and the other adjusted items shown, determined by methods other than GAAP.



 

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The adjusted numbers take out the costs incurred by the Company in 2017 and 2018 related to the Spin-off and certain other non-recurring transactions and events. Spin-off costs, which commenced in the last quarter of 2017 and continued during the quarter ended September 30, 2018, are not deductible for federal and state income tax purposes. The Company believes these adjusted numbers are useful to understand the Company’s performance absent these transactions and events. The following table reconciles these non-GAAP financial measurements to the comparable GAAP financial measurements as of and for periods presented:

 

     Nine Months Ended
September 30,
    Year Ended
December 31,
 
     2018      2017     2017  
     (in thousands, except per share amounts and
percentages)
 

Total noninterest income

   $ 41,881      $ 56,066     $ 71,485  

Less: net gain on sale of New York building

            (10,469     (10,469
  

 

 

    

 

 

   

 

 

 

Adjusted noninterest income

     41,881      $ 45,597       61,016  
  

 

 

    

 

 

   

 

 

 

Total noninterest expenses

   $ 160,325      $ 152,035     $ 207,636  
  

 

 

    

 

 

   

 

 

 

Less Spin-off costs:

       

Legal fees

     3,186              2,000  

Accounting and consulting fees

     1,384              2,400  

Additional contribution to non-qualified deferred compensation plan on behalf of participants to mitigate tax effects of unexpected early distribution (19)

     1,200               

Other expenses

     544              845  
  

 

 

    

 

 

   

 

 

 

Total Spin-off costs

     6,314              5,245  
  

 

 

    

 

 

   

 

 

 

Adjusted noninterest expenses

   $ 154,011        152,035     $ 202,391  
  

 

 

    

 

 

   

 

 

 

Total net income before income tax

   $ 42,061      $ 49,991     $ 77,049  

Plus: Total Spin-off costs

     6,314              5,245  

Less: net gain on sale of New York building

            (10,469     (10,469
  

 

 

    

 

 

   

 

 

 

Adjusted net income before income tax

   $ 48,375      $ 39,522     $ 71,825  
  

 

 

    

 

 

   

 

 

 

Total net income

   $ 31,403      $ 34,239     $ 43,057  

Plus after-tax Spin-off costs:

       

Total Spin-off costs before income tax benefit

     6,314              5,245  

Income tax effect (20)

     84              (2,314
  

 

 

    

 

 

   

 

 

 

Total after-tax Spin-off costs

     6,398              2,931  
  

 

 

    

 

 

   

 

 

 

Less after-tax net gain on sale of New York building:

       

Net gain on sale of New York building before income tax effect

            (10,469     (10,469

Income tax effect (21)

            3,320       3,320  
  

 

 

    

 

 

   

 

 

 

Total after-tax net gain on sale of New York building

            (7,149     (7,149
  

 

 

    

 

 

   

 

 

 

Plus effect of lower rate under the 2017 Tax Act:

       

Remeasurement of net deferred tax assets, other than balances corresponding to items in AOCI

                  8,470  

Remeasurement of net deferred tax assets corresponding to items in AOCI

                  1,094  
  

 

 

    

 

 

   

 

 

 

Total effect of lower rate under the 2017 Tax Act

                  9,564  
  

 

 

    

 

 

   

 

 

 

Adjusted net income

   $ 37,801      $ 27,090     $ 48,403  
  

 

 

    

 

 

   

 

 

 


 

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     Nine Months Ended
September 30,
    Year Ended
December 31,
 
     2018     2017     2017  
     (in thousands, except per share amounts and
percentages)
 

Basic and diluted income per common share

   $ 0.74     $ 0.81     $ 1.01  

Plus: after tax impact of total Spin-off costs

     0.15             0.07  

Plus: effect of lower rate under the 2017 Tax Act

                 0.23  

Less: after-tax net gain on sale of New York building

           (0.17     (0.17
  

 

 

   

 

 

   

 

 

 

Total adjusted basic and diluted income per common share

   $ 0.89     $ 0.64     $ 1.14  
  

 

 

   

 

 

   

 

 

 

Net income / Average total assets (ROA) (5)

     0.50     0.54     0.51

Plus: after tax impact of total Spin-off costs

     0.10           0.03

Plus: effect of lower rate under the 2017 Tax Act

                 0.11

Less: after-tax net gain on sale of New York building

           (0.11 )%      (0.08 )% 
  

 

 

   

 

 

   

 

 

 

Adjusted annualized net income / Average total assets (ROA) (5)

     0.60     0.43     0.57
  

 

 

   

 

 

   

 

 

 

Net income / Average shareholders’ equity (ROE) (6)

     5.63     6.14     5.62

Plus: after tax impact of total Spin-off costs

     1.15           0.38

Plus: effect of lower rate under the 2017 Tax Act

                 1.25

Less: after-tax net gain on sale of New York building

           (1.28     (0.93 )% 
  

 

 

   

 

 

   

 

 

 

Adjusted annualized net income / Average shareholders’ equity (ROE) (6)

     6.78     4.86     6.32
  

 

 

   

 

 

   

 

 

 

Noninterest expense / Average total assets (5)

     2.54     2.39     2.45

Less: effect of total Spin-off costs

     (0.10 )%            (0.07 )% 
  

 

 

   

 

 

   

 

 

 

Adjusted annualized noninterest expense / Average total assets (5)

     2.44     2.39     2.38
  

 

 

   

 

 

   

 

 

 

Efficiency ratio (16)

     78.54     72.08     73.84

Less: effect of total Spin-off costs

     (3.09 )%            (1.86 )% 

Plus: after-tax net gain on sale of New York building

           3.76     2.78
  

 

 

   

 

 

   

 

 

 

Adjusted efficiency ratio (18)

     75.45     75.84     74.76
  

 

 

   

 

 

   

 

 

 

Shareholders’ equity

   $ 727,675     $ 748,252     $ 753,450  

Less: Goodwill and other intangibles

     (21,078     (21,233     (21,186
  

 

 

   

 

 

   

 

 

 

Tangible common shareholders’ equity

   $ 706,597     $ 727,019     $ 732,264  
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 8,435,802     $ 8,503,489     $ 8,436,767  

Less: Goodwill and other intangibles

     (21,078     (21,233     (21,186
  

 

 

   

 

 

   

 

 

 

Tangible assets

   $ 8,414,724     $ 8,482,256     $ 8,415,581  

Common shares outstanding

     42,489       42,489       42,489  
  

 

 

   

 

 

   

 

 

 

Tangible common equity ratio (11)

     8.40     8.57     8.70
  

 

 

   

 

 

   

 

 

 

Tangible book value per common share

   $ 16.63     $ 17.11     $ 17.23  

 

(18)

Adjusted efficiency ratio is the efficiency ratio less the effect of total Spin-off costs and the sale of our New York City building.

(19)

The Spin-off caused an unexpected early distribution for U.S. federal income tax purposes from our deferred compensation plan, which we refer to as our Deferred Compensation Plan. See “Executive Compensation—Executive Deferred Compensation Plan.” This distribution is taxable to plan participants as ordinary income during 2018. We



 

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  are partially compensating plan participants, in the aggregate amount of $1.2 million, for the higher tax expense they will incur as a result of the distribution increasing the plan participants’ estimated effective federal income tax rates by recording a contribution to the plan on behalf of its participants. The after tax net effect of this $1.2 million contribution for the period ended September 30, 2018, was approximately $952,000. As a result of the early taxable distribution to plan participants, we have expensed and deducted for federal income tax purposes, previously deferred compensation of approximately $8.1 million, resulting in an estimated tax credit of $1.7 million, which exceeds the amount of the tax gross-up paid to plan participants.
(20)

Calculated based upon the estimated annual effective combined federal and state income tax rate of 22.10%, which excludes the tax effect of discrete items, and the amount that resulted from the difference between permanent Spin-off costs of $6.7 million for the nine month period ended September 30, 2018 that are non-deductible for federal and state income tax purposes and total Spin-off costs recognized in the unaudited interim consolidated financial statements. The estimated combined annual effective rate applied for the calculation differs from the reported tax rate since it is based on a different mix of statutory tax rates applicable to these expenses and to the rates applicable to the Company and its subsidiaries.

(21)

Calculated based upon an estimated combined federal and state annual effective tax rate of 37.71%.



 

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RISK FACTORS

Investing in our Class A common stock involves risks. You should consider carefully the following risks, together with all the other information in this prospectus, including the financial statements and notes thereto, before you invest in our Class A common stock. If any of the following risks actually materializes, our operating results, financial condition and liquidity could be materially adversely affected. As a result, the trading price of our Class A common stock could decline and you could lose all or part of your investment.

Risks Related to Our Business

The following risks could harm our strategic plan, business, results of operations, liquidity 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 such forward-looking statements.

Our strategic plan and growth strategy may not be achieved as quickly or as fully as we seek.

We have adopted and are in the early stages of implementing our strategic plan to simplify our business model and focus our activities as a community bank serving our domestic customers and select foreign depositors, and wealth management customers. Our plan includes a focus on profitable growth, cross selling to gain a larger share of our respective customers’ business, core deposit generation, loan growth in our local markets, changes in loan mix to higher margin loans, and improving our customer experience, processes, operating efficiency and cost reductions. Our strategic plan includes significant changes, which may require certain changes in our culture and personnel. We seek to identify and serve our customers’ needs better and more broadly, including our valued foreign customers. We are shrinking our Corporate LATAM lending businesses, while seeking higher margin domestic lending opportunities in our markets. The strategic plan’s technology changes and systems conversions involve execution and other risks. Market interest rates may not continue to increase as we have assumed, and all our market and customer initiatives are being made in highly competitive markets. Our plans may take longer than we anticipate to implement, and the results we achieve may not be as successful as we seek, all of which could adversely affect our business results of operations and financial condition. Many of these factors, including interest rates, are not within our control. Additionally, the results of the strategic plan are subject to the other risks described in this prospectus that affects our business. Among other risks described herein, our strategic plan involves the following risks:

 

   

Our focus on domestic lending in highly competitive markets may not meet our objectives, and may pose additional or other risks than low margin loans to foreign financial institutions.

 

   

Our funding has depended on foreign deposits and we may not be able to replace lost low cost foreign deposits with domestic deposits with similar costs and long-term customer relationships.

 

   

Our profitability objectives assume five 25 basis point increases in short-term interest rates through 2020, which may not occur.

 

   

The benefits from our technology investments may take longer than expected and may not be as large as expected, or may require additional investments.

 

   

If we are unable to reduce our cost structure, including through reductions in FTEs, as we anticipate, we may not be able to meet our profitability objectives.

 

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Our strategic plan may take longer than anticipated and may be more expensive to implement than is currently anticipated, and otherwise may achieve less than we expect, any of which could adversely affect our business growth, results of operations and financial conditions.

 

   

Our wealth management business currently relies almost entirely on our Venezuelan customers. Our strategic plan for expanding our wealth management business to U.S.-based customers, in this highly competitive market, may not be as successful as we seek.

 

   

Any significant unanticipated or unusual charges, provisions or impairments, including as a result of any legal proceedings or industry regulatory changes, could adversely affect our ability to implement or realize the expected results of the strategic plan.

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. In addition to the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, or the 2018 Growth Act, 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 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 eight times since December 2015 in 25 basis point increments from 0.25% to 2.25% on September 27, 2018. Although the Federal Reserve considers the target Federal Funds rate its primary means of monetary policy normalization, in September 2017, it also began reducing its securities holdings 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 2017 Tax Act, signed into law by the President on

 

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December 22, 2017, may affect consumer confidence levels from time to time in different directions, and may cause adverse changes in payment behaviors and payment rates, causing increases in delinquencies and default rates, which could affect our charge-offs and provisions for credit losses.

 

   

Our ability to assess the creditworthiness of our customers and those we do business with, and to estimate the values of our assets and collateral for loans may be impaired if the models and approaches we use become less predictive of future behaviors and valuations. The process we use to estimate losses inherent in our credit exposure, or estimate the value of certain assets, requires difficult, 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. The 2018 Growth Act removed Volcker Rule restrictions on banks under $10 billion in assets, and the federal banking agencies have asked for public comment on a proposal that would simplify and tailor compliance requirements relating to the Volcker Rule. See “Supervision and Regulation—Other Legislative and Regulatory Changes.”

Our success depends on general and local economic conditions where we operate.

Our success depends on the economic conditions, generally, especially in the geographic markets we serve. The local economic conditions in our markets have a significant effect on our commercial, real estate and construction loans, the ability of borrowers to repay these loans and the value of the collateral securing these loans. Adverse changes in the economic conditions of the regions where our loans are originated, primarily South Florida, the greater Houston, Texas area and the greater New York City area, especially the five New York City boroughs, and secondarily in four Latin American countries with investment-grade sovereign ratings (Chile, Colombia, Mexico and Peru) and one without an investment-grade sovereign rating (Brazil) where we have trade financing and financial institution credits, could negatively affect our results of operations

 

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and our profitability. As of September 30, 2018 and December 31, 2017, we had $162.1 million and $182.7 million of consumer loans and residential mortgage loans secured by properties in the U.S. outstanding to Venezuelan persons, respectively. This exposure to Venezuelan borrowers includes $28.0 million and $37.6 million of other loans at September 30, 2018 and December 31, 2017, respectively. Further, our loan production, generally, is subject to seasonability, with the lowest volume typically in the first quarter of each year. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition.”

Nonperforming and similar assets take significant time to resolve and may adversely affect our results of operations and financial condition.

At September 30, 2018 and 2017, our nonperforming loans totaled $29.7 million and $39.7 million, respectively, or 0.48% and 0.65% of total loans, respectively. In addition, we had no OREO at September 30, 2018 and September 30, 2017. 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. However, absent changes in current bank regulatory guidance, we may be required to apply CECL beginning January 1, 2020 for bank regulatory purposes. CECL substantially changes how we calculate our allowance for loan losses. We are evaluating CECL and when we will be required to adopt it. We cannot predict when and how it will affect our results of operations and financial condition, including our regulatory capital.

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

 

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that would be received in the sale of an asset or paid to transfer a liability. Considerable judgment is often required in interpreting market data to develop estimates of fair value, and the use of different assumptions or valuation methodologies may have a material effect on the estimated fair value amounts. During periods of market disruption, including periods of significantly rising or high interest rates, rapidly widening credit spreads or illiquidity, it may be difficult to value certain of our securities if trading becomes less frequent or market data becomes less observable. In addition, in times of financial market disruption, certain asset classes that were in active markets with significant observable data may become illiquid. In those cases, the valuation process includes inputs that are less observable and require more subjectivity and management judgment. Valuations may result in estimated fair values which vary significantly from the amount at which the investments may ultimately be sold. Further, rapidly changing and unprecedented credit and equity market conditions could materially affect the valuation of securities in our financial statements and the period-to-period changes in estimated fair value could vary significantly. Decreases in the estimated fair value of securities we hold may have a material adverse effect on our financial condition. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.”

The determination of the amount of impairments varies by investment type and is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available. We reflect any changes in impairments in earnings as such evaluations are revised. However, historical trends may not be indicative of future impairments. In addition, any such future impairments or allowances could have a materially adverse effect on our earnings and financial position. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.”

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 September 30, 2018 and December 31, 2017, respectively, which represents the excess of consideration paid over the fair value of the net assets of a savings bank acquired in 2006. 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

 

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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 September 30, 2018, we had net DTAs with a book value of $22.8 million, based on a U.S. corporate income tax rate of 21%. In December 2017 we had a remeasurement of net DTAs and recorded $9.6 million in additional tax expense and a corresponding reduction in net income as a result of the 2017 Tax Act. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.”

Defaults by or deteriorating asset quality of other financial institutions could adversely affect us.

We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, central clearinghouses, commercial banks, investment banks, hedge funds and investment funds, our correspondent banks and other financial institutions, especially those in the Latin American countries where we make such loans. Many of these transactions expose us to credit risk in the event of the default of our counterparty. In addition, with respect to secured transactions, credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices insufficient to recover the full amount of the loan or derivative exposure due to us. We also may have exposure to these financial institutions in the form of unsecured debt instruments, derivatives and other securities. Further, potential action by governments and regulatory bodies in response to financial crises affecting the global banking system and financial markets, such as nationalization, conservatorship, receivership and other intervention, whether under existing legal authority or any new authority that may be created, or lack of action by governments and central banks, as well as deterioration in the banks’ creditworthiness, could adversely affect the value and/or liquidity of these instruments, securities, transactions and investments or limit our ability to trade with them. Any losses or impairments to the carrying value of these investments or other changes may materially and adversely affect our results of operations and financial condition.

In addition we maintain credit relationships with large financial institutions that we believe are of high quality primarily in Brazil, Chile, Colombia 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.

Our operations are subject to risk of loss from unfavorable fiscal, monetary and political developments in the U.S. and other countries where we do business.

Our businesses and earnings are affected by the fiscal, monetary and other policies and actions of various U.S. and non-U.S. governmental and regulatory authorities. Changes in these are beyond our control and are difficult to predict and, consequently, changes in these policies could have negative effects on our activities and results of operations.

Our Corporate LATAM segment is subject to risks inherent in making loans and executing transactions with counterparties located in Latin America. Our domestic business, including loans, deposits and wealth management, services persons from or dependent upon businesses or wealth from Venezuela and other Latin American countries, and are, therefore, subject to risk inherent to those countries. These risks include, among others, effects from slow or negative growth or recessionary or worse economic conditions, inflation and hyperinflation, currency controls and volatility, and the risk of loss from unfavorable political, legal or other developments, including social or political instability, in the countries or regions in which such counterparties operate, as well as the other risks and considerations as described further below.

 

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Various countries or regions in which we, our counterparties or our customers operate or invest have in the past experienced severe economic disruptions particular to those countries or regions. In some cases, concerns regarding the fiscal condition of one or more countries and currency and exchange controls and other measures adopted by one country could cause other countries in the same region or beyond to experience a contraction of available credit, market and price volatility, illiquidity and reduced cross-border trading and financing activity.

Our results of operations from international activities and customers from other countries may be subject to adverse changes as a result of the above considerations, as well as possible governmental actions, including expropriation, nationalization, confiscation of assets, price controls, capital controls, exchange controls, and changes in laws and regulations. The effects of these changes could be magnified in smaller, less liquid and more volatile foreign markets.

Conducting business and having customers in countries with less developed legal and regulatory regimes, or with currency controls, often requires devoting significant additional resources to understanding, and monitoring changes in, local laws and regulations, as well as compliance with local laws and regulations and implementing and administering related risk policies and procedures. We can also incur higher costs, and face greater compliance risks, in structuring and operating our businesses outside the U.S. to comply with U.S. anti-corruption, anti-money laundering and other laws, regulations and sanctions. Failure to comply with such rules in our international activities could adversely affect our results of operations and regulatory relations in the U.S. and elsewhere.

Changes in the real estate markets, including the secondary market for residential mortgage loans, may adversely affect us.

Notwithstanding changes made in the 2018 Growth Act, 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 FHA, and the FHA’s relatively low capital and reserves for losses, the current levels of home sales, and the risks of interest rates increasing materially from historically low

 

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levels, as well as the 2017 Tax Act, could also have serious adverse effects on the mortgage markets and our mortgage operations. Such adverse effects could include, among other things, price reductions in single family home values, further adversely affecting the liquidity and value of collateral securing commercial loans for residential acquisition, construction and development, as well as residential mortgage loans that we hold, mortgage loan originations and gains on sale of mortgage loans. In the event our allowance for loan losses is insufficient to cover such losses, if any, our earnings, capital and liquidity could be adversely affected.

Fannie Mae and Freddie Mac restructuring may adversely affect the mortgage markets and our sales of mortgages we originate.

Fannie Mae and Freddie Mac remain in conservatorship, and although legislation has been introduced at various times to restructure Fannie Mae and Freddie Mac to take them out of conservatorship and substantially change the way they conduct business in the future, no proposal has been enacted. Through 2017, all of Fannie Mae and Freddie Mac’s earnings above a specified capital reserve have been swept into the U.S. Department of the Treasury, or the Treasury Department, and have not been available to build Fannie Mae’s and Freddie Mac’s capital. At the end of 2017, the capital reserve was increased to $3 billion for each of Fannie Mae and Freddie Mac.

In February 2018, Fannie Mae reported that the 2017 Tax Act had reduced its DTAs, and that it had a net worth deficit of $3.7 billion as of December 31, 2017. To eliminate its net worth deficit, the Treasury Department provided Fannie Mae with $3.7 billion of capital in the first quarter of 2018. Fannie Mae reported that it had a net worth of $7.0 billion as of September 30, 2018. Freddie Mac had a net worth deficit of $312 million at December 31, 2017, and the Treasury Department provided Freddie Mac with $312 million of capital in the first quarter of 2018. Freddie Mac reported that it had a net worth of $5.6 billion as of September 30, 2018.

Since Fannie Mae and Freddie Mac dominate the residential mortgage markets, any changes in their structure and operations, as well as their respective capital, could adversely affect the primary and secondary mortgage markets, and our residential mortgage businesses, our results of operations and the returns on capital deployed in these businesses.

We may be contractually obligated to repurchase mortgage loans we sold to third-parties on terms unfavorable to us.

As a routine part of our business, we originate mortgage loans that we subsequently sell to investors. We do not currently originate mortgage loans for direct sale to any governmental agencies and government sponsored enterprises, or GSEs, such as Fannie Mae or Freddie Mac, but expect to make such direct sales in the future. In connection with the sale of these loans to private investors and GSEs, we make customary representations and warranties, the breach of which may result in our being required to repurchase the loan or loans. Furthermore, the amount paid may be greater than the fair value of the loan or loans at the time of the repurchase. No mortgage 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,

 

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among other things. These may adversely affect our costs to service residential mortgage loans, and together with the Basel III Capital Rules, may decrease the returns on our MSRs.

The CFPB and the bank regulators continue to bring enforcement actions and develop proposals, rules and practices that could increase the costs of providing mortgage servicing. Historically, we have not serviced mortgage loans for others. However, if we were to provide servicing in the future, regulation of mortgage servicing could make it more difficult and costly to timely realize the value of collateral securing such loans upon a borrower default.

Our concentration of CRE loans could result in further increased loan losses, and adversely affect our business, earnings, and financial condition.

CRE is cyclical and poses risks of possible loss due to concentration levels and risks of the assets being financed, which include loans for the acquisition and development of land and residential construction. The federal bank regulators released guidance in 2006 on “Concentrations in Commercial Real Estate Lending.” The guidance defines CRE loans as exposures secured by raw land, land development and construction (including 1-4 family residential construction), multi-family property, and non-farm nonresidential property, where the primary or a significant source of repayment is derived from rental income associated with the property (that is, loans for which 50% or more of the source of repayment comes from third-party, non-affiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property. Loans to real-estate investment trusts, or REITs, and unsecured loans to developers that closely correlate to the inherent risks in CRE markets would also be considered CRE loans under the guidance. Loans on owner occupied CRE are generally excluded.

The Bank’s portfolio of CRE loans was 347.5% of its risk-based capital, or 49.4% of its total loans, as of September 30, 2018 compared to 324.7% of its risk-based capital, or 47.08% of its total loans, as of September 30, 2017. The banking regulators continue to scrutinize CRE lending and further addressed their concerns over CRE activity in December 2016, requiring banks with higher levels of CRE loans to implement more robust underwriting, internal controls, risk management policies and portfolio stress testing, as well as higher levels of allowances for possible losses and capital levels as a result of CRE lending growth and exposures. Lower demand for CRE, and reduced availability of, and higher costs for, CRE lending could adversely affect our CRE loans and sales of our OREO, and therefore our earnings and financial condition, including our capital and liquidity.

As of September 30, 2018, approximately 54% of total CRE loans were in Miami-Dade, Broward and Palm Beach counties, Florida, 18% were in the greater Houston, Texas area, and 23% were in the greater New York City area, including all five boroughs. The remainder were in other Florida, Texas and New York/New Jersey markets. 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.

 

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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 NIM as our cost of funds increases relative to the spread we can earn on our assets. In addition, net interest income could be affected by asymmetrical changes in the different interest rate indexes, given that not all of our assets or liabilities are priced with the same index. The Federal Reserve Normalization Policy, which is gradually increasing the Federal Reserve’s target Federal Funds rates and decreasing the Federal Reserve’s holdings of securities, may have unpredictable effects on the shape of the yield curve and longer term interest rates.

The production of mortgages and other loans and the value of collateral securing our loans, are dependent on demand within the markets we serve, as well as interest rates. Increases in interest rates generally decrease the market values of fixed-rate, interest-bearing investments and loans held, the value of mortgage and other loans produced and the value of loans sold, mortgage loan activities and the collateral securing our loans, and therefore may adversely affect our liquidity and earnings, to the extent not offset by potential increases in our NIM.

The 2017 Tax Act, including its fiscal stimulus, limitations on the deductibility of residential mortgage interest and business interest expenses and other changes, could have mixed effects on economic activity and reduce the demand for loans and increase competition among lenders for loans. This act could also promote inflation and higher interest rates.

Many of our loans and our obligations for borrowed money are priced based on variable interest rates tied to the London Interbank Offering Rate, or LIBOR. We are subject to risks that LIBOR may no longer be available as a result of the United Kingdom’s Financial Conduct Authority ceasing to require the submission of LIBOR quotes in 2021.

The potential cessation of LIBOR quotes in 2021 creates substantial risks to the banking industry, including us. Unless alternative rates can be negotiated, our floating rate loans, funding and derivative obligations that specify the use of a LIBOR index, will no longer adjust and may become fixed rate instruments at the time LIBOR ceases to exist. This would adversely affect our asset/liability management and could lead to more asset and liability mismatches and interest rate risk unless appropriate LIBOR alternatives are developed. It could also cause confusion that could disrupt the capital and credit markets as a result of confusion or uncertainty.

The Federal Reserve has sponsored the Alternative Reference Rates Committee, or ARRC, which serves as a forum to coordinate and track planning as market participants currently using LIBOR consider (a) transitioning to alternative reference rates where it is deemed appropriate and (b) addressing risks in legacy contracts language given the possibility that LIBOR might stop. On April 3, 2018, the Federal Reserve began publishing three new reference rates, including the Secured Overnight Financing Rate, or SOFR. ARRC has recommended SOFR as the alternative to LIBOR, and published fallback interest rate consultations for public comment and a Paced Transition Plan to SOFR use. The Financial Stability Board has taken an interest in LIBOR and possible replacement indices as a matter of risk management. The International Organisation of Securities Commissions, or IOSCO, has been active in this area and is expected to call on market participants to have backup options if a reference rate, such as LIBOR, ceases publication. The International Swap Dealers Association has published guidance on interest rate bench marks and alternatives in July and August 2018. It cannot be predicted whether SOFR or another index or

 

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indices will become a market standard that replaces LIBOR, and if so, the effects on our customers, or our future results of operations or financial condition.

Liquidity risks could affect operations and jeopardize our financial condition.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, proceeds from loan repayments or sales, and other sources could have a substantial negative effect on our liquidity. Our funding sources include Federal Funds purchased, securities sold under repurchase agreements, core and non-core deposits (domestic and foreign), and short-and long-term debt. We maintain a portfolio of securities that can be used as a source of liquidity. We are also members of the Federal Home Loan Bank of Atlanta, or FHLB, and the Federal Reserve Bank of Atlanta, where we can obtain advances collateralized with eligible assets. There are other sources of liquidity available to us or the Bank should they be needed, including our ability to acquire additional non-core deposits (such as reciprocal deposit programs such as the Certificate of Deposit Account Registry Service, or CDARS, and brokered deposits). We may be able, depending upon market conditions, to otherwise borrow money or issue and sell debt and preferred or common securities in public or private transactions. Our access to funding sources in amounts adequate to finance or capitalize our activities on terms which are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or the economy in general. Our ability to borrow or obtain funding, if needed, could also be impaired by factors that are not specific to us, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.

The Company is an entity separate and distinct from the Bank. The Federal Reserve Act, Section 23A, limits our ability to borrow from the Bank, and the Company generally relies on dividends paid from the Bank for funds to meet its obligations, including under its outstanding trust preferred securities. The Bank’s ability to pay dividends is limited by law, and may be limited by regulatory action to preserve the Bank’s capital adequacy. Any such limitations could adversely affect the Company’s liquidity.

Certain funding sources may not be available to us and our funding sources may prove insufficient and/or costly to replace.

Although we have historically been able to replace maturing deposits and advances, we may not be able to replace these funds in the future if our financial condition or general market conditions change. The use of brokered deposits has been particularly important for the funding of our operations. If we are unable to issue brokered deposits, or are unable to maintain access to other funding sources, our results of operations and liquidity would be adversely affected. Our ability to accept, renew or replace brokered deposits without prior regulatory approval will be limited if the Bank does not remain well-capitalized.

Alternative funding to deposits may carry higher costs than sources currently utilized. If we are required to rely more heavily on more expensive and potentially less stable funding sources, profitability and liquidity could be adversely affected. We may determine to seek debt financing in the future to achieve our long-term business objectives. Any Company or Bank debt that is to be treated as capital for bank regulatory purposes requires prior Federal Reserve approval, which the Federal Reserve may not grant. Additional borrowings, if sought, may not be available to us, or if available, may not be on acceptable terms. The availability of additional financing will depend on a variety of factors such as market conditions, the general availability of credit, our credit ratings and our credit capacity. In addition, the Bank may seek to sell loans as an additional source of liquidity. If additional financing sources are unavailable or are not available on acceptable terms, our profitability and future prospects could be adversely affected.

 

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Our Venezuelan deposit concentration means conditions in Venezuela could adversely affect our operations.

At September 30, 2018, 45.20% of our deposits, or approximately $2.8 billion, were from Venezuelan residents. The Bank’s Venezuelan deposits declined 28.69% from December 31, 2015 to September 30, 2018. These declines were due in part to actions by the Company to reduce its compliance costs and from economic conditions in Venezuela that adversely affected our Venezuelan customers’ wealth and use of deposits to fund living expenses. All of the Bank’s deposits are denominated in Dollars. Adverse economic conditions in Venezuela may continue to adversely affect our Venezuelan deposit base and our ability to retain and grow these relationships, as customers rely on their Dollar deposits to spend without being able to earn additional Dollars. Venezuela’s currency controls and its official currency exchange rates for converting Bolivars into Dollars diverge widely from open market exchange rates. According to the International Monetary Fund’s World Economic Outlook, Venezuela’s annual inflation rate is projected to exceed 13,000% in 2018 and more recent estimates project an annual inflation rate of 1,370,000% in 2018 and 10,000,000% in 2019. All of these factors greatly influence our Venezuelan customers’ access to Dollars and their ability to replenish the Dollars they consume.

Although foreign depositors may not seek as high yielding deposits as domestic customers, 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 and its profit and risk objectives. If these strategies are unsuccessful, or economic conditions or other conditions worsen in Venezuela or our regulators restrict the Bank from taking its customers’ deposits, our volume of deposits from Venezuelan sources may decline further. A significant or sudden decline in our deposits from Venezuelan customers could adversely affect our results of operations and financial condition, including liquidity.

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

Our brokered deposits at September 30, 2018 were 10.4% of total deposits. Wholesale funding, including FHLB advances and brokered deposits, represented 27.5% of our funding at September 30, 2018. Our wholesale funding has increased 17.3% since 2016. The FDIC adjusts its deposit insurance assessments by up to 10 basis points annually for $10 billion and larger 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 eight times between December 2015 and September 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,

 

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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 further 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.

Substantially all our revenue from trust, brokerage and investment advisory services currently is from Venezuelan customers. Economic and other conditions in Venezuela may adversely affect the amounts of assets we manage or custody, and the trading volumes of our Venezuelan customers, reducing fees and commissions we earn from these businesses.

Our future success is dependent on our ability to compete effectively in highly competitive markets.

The banking markets in which we do business are highly competitive and our future growth and success will depend on our ability to compete effectively in these markets. We compete for deposits, loans, and other financial services in our markets with other local, regional and national commercial banks, thrifts, credit unions, mortgage lenders, trust services providers and securities advisory and brokerage firms. Marketplace lenders operating nationwide over the internet are also growing rapidly. Many of our competitors offer products and services different from us, and have substantially greater resources, name recognition and market presence than we do, which benefits them in attracting business. In addition, larger competitors may be able to price loans and deposits more aggressively than we are able to and have broader and more diverse customer and geographic bases to draw upon. The Dodd-Frank Act allows others to branch into our markets more easily from other states. Failures of other banks with offices in our markets and small institutions wishing to sell or merge due to cost pressures could also lead to the entrance of new, stronger competitors in our markets.

Technological changes affect our business, and we may have fewer resources than many competitors to invest in technological improvements.

The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services, and a growing demand for mobile and other phone and computer banking applications. In addition to allowing us to service our clients better, the effective use of technology may increase efficiency and may enable financial institutions to reduce costs and the risks associated with fraud and other operational risks. Largely unregulated “fintech” businesses have increased their participation in the lending and payments businesses, and have increased competition in these businesses. This trend is expected to continue for the foreseeable future. Our future success will depend, in part, upon our ability to use

 

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technology to provide products and services that meet our customers’ preferences and which create additional efficiencies in operations, while avoiding cyberattacks and disruptions, and data breaches. Our strategic plan contemplates simplifying and improving our information technology, and making significant additional capital investments in technology. We may not be able to effectively implement new technology-driven products and services as quickly or at the costs anticipated. Such technology may prove less effective than anticipated, and conversion issues may increase the costs of the new technology and delay its use. 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.”

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, cyberattacks, unforeseen problems encountered while implementing major new computer systems, 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 “—The Bank continues to provide certain services to MSF’s subsidiaries, even after the Spin-off, which could present additional regulatory and operational risks to us.”

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 cyberattacks, such as denial of service attacks, hacking, terrorist activities or identity theft. Financial institutions and their service providers are regularly attacked, some of which have involved sophisticated and targeted attack methods, including use of stolen access credentials, malware, ransomware, phishing, structured query language injection attacks, and distributed denial-of-service attacks, among others. Such cyberattacks 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.

 

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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. Such losses and claims may not be covered by our insurance. In addition to the immediate costs of any failure, interruption or security breach, including those at our third-party service providers, these events could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

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 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 CECL include 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.

 

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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 our 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.

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, including regulations and policies applicable to U.S. commercial banks. 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

 

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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 are subject to a successful cyberattack or 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 cyberattacks 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.

Severe weather, natural disasters, acts of war or terrorism, theft, government expropriation or other external events could have significant effects on our business.

Severe weather and natural disasters, including hurricanes, tornados, earthquakes, fires, droughts and floods, acts of war or terrorism, theft, government expropriation, condemnation or other external events could have a significant effect on our ability to conduct business. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. Although management has established disaster recovery and business continuity policies and procedures, the occurrence of any such event could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations. Our business is concentrated in three markets—South Florida, the greater Houston, Texas area and the greater New York City area, which may increase our risks from storms. For example, in Fall 2017, both the greater Houston, Texas area and South Florida were struck by major hurricanes within days of each other.

Future acquisitions and expansion activities may disrupt our business, dilute shareholder value and adversely affect our operating results.

While we seek continued organic growth, we may consider the acquisition of other businesses. To the extent that we grow through acquisitions, we cannot assure you that we will be able to adequately or profitably manage this growth. Acquiring other banks, banking centers, or businesses, as well as other geographic (domestic and international) and product expansion activities, involve various risks, including:

 

   

risks of unknown or contingent liabilities;

 

   

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;

 

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exposure to potential asset quality issues with acquired institutions;

 

   

difficulties, expenses and delays in integrating the operations and personnel of acquired institutions;

 

   

potential disruptions to our business;

 

   

possible loss of key employees and customers of acquired institutions;

 

   

potential short-term decreases in profitability; and

 

   

diversion of our management’s time and attention from our existing operations and business.

Attractive acquisition opportunities may not be available to us in the future.

We expect that other banking and financial companies, many of which have significantly greater resources, will compete with us to acquire financial services businesses. This competition could increase prices for potential acquisitions that we believe are attractive. Also, acquisitions are subject to various regulatory approvals. If we fail to receive the appropriate regulatory approvals, we will not be able to consummate an acquisition that we may believe is in our best interests. Additionally, regulatory approvals could contain conditions that reduce the anticipated benefits of a contemplated transaction. Among other things, our regulators consider our capital levels, liquidity, profitability, regulatory compliance, including anti-money laundering efforts, levels of goodwill and intangibles, management and integration capacity when considering acquisition and expansion proposals. Any acquisition could be dilutive to our earnings and shareholders’ equity per share of our common stock.

Litigation and regulatory investigations are increasingly common in our businesses and may result in significant financial losses and/or harm to our reputation.

We face risks of litigation and regulatory investigations and actions in the ordinary course of operating our businesses, including the risk of class action lawsuits. Plaintiffs in class action and other lawsuits against us may seek very large and/or indeterminate amounts, including punitive and treble damages. Due to the vagaries of litigation, the outcome of a litigation matter and the amount or range of potential loss at particular points in time may normally be difficult to ascertain. We do not have any material pending litigation or regulatory matters affecting us.

A substantial legal liability or a significant federal, state or other regulatory action against us, as well as regulatory inquiries or investigations, could harm our reputation, result in material fines or penalties, result in significant legal costs, divert management resources away from our business, and otherwise have a material adverse effect on our ability to expand on our existing business, financial condition and results of operations. Even if we ultimately prevail in the litigation, regulatory action or investigation, our ability to attract new customers, retain our current customers and recruit and retain employees could be materially and adversely affected. Regulatory inquiries and litigation may also adversely affect the prices or volatility of our securities specifically, or the securities of our industry, generally.

Our associates may take excessive risks which could negatively affect our financial condition and business.

As a banking enterprise, we are in the business of accepting certain risks. The associates who conduct our business, including executive officers and other members of management, sales

 

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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, including those needed to implement our business strategy. 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 as a result of the recent Spin-off. However, there may be new positions which we may need to fill as we 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. Rules implementing the executive compensation provisions of the Dodd-Frank Act may limit the type and structure of compensation arrangements into which we may enter with certain of our employees and officers. In addition, proposed rules under the Dodd-Frank Act would prohibit the payment of “excessive compensation” to our executives. Our regulators may also restrict compensation through rules and practices intended to avoid risks. These restrictions could negatively affect our ability to compete with other companies in recruiting and retaining key personnel.

We are subject to extensive regulation that could limit or restrict our activities and adversely affect our earnings.

We and our subsidiaries are regulated by several regulators, including the Federal Reserve, the 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, or DIF, not shareholders. The financial services industry also is subject to frequent legislative and regulatory changes and proposed changes. In addition, the interpretations of regulations by regulators may change and statutes may be enacted with retroactive impact. From time to time, regulators raise issues during examinations of us which, if not determined satisfactorily, could have a material adverse effect on us. Compliance with applicable laws and regulations is time consuming and costly and may affect our profitability.

The current President and the majority party in both houses of Congress have promoted and supported enacting regulatory relief for the banking industry. The nature, effects and timing of administrative and legislative change, including the 2018 Growth Act, and possible changes in regulations or regulatory approach resulting from the midterm elections, cannot be predicted. The federal bank regulators and the Treasury Department, as well as the Congress and the President,

 

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are evaluating the regulation of banks, other financial services providers and the financial markets and such changes, if any, could require us to maintain more capital and liquidity, and restrict our activities, which could adversely affect our growth, profitability and financial condition. Our consumer finance products, including residential mortgage loans, are subject to CFPB regulations and evolving standards reflecting CFPB releases, rule-making and enforcement actions. If our assets grow to $10 billion or more, we will become subject to direct CFPB examination.

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 all these minimum levels currently and on a fully phased-in basis 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.

If we fail to remain “well capitalized,” for bank regulatory purposes, including meeting the Basel III Capital Rule’s conservation buffer, could affect customer confidence, and our:

 

   

ability to grow;

 

   

costs of and availability of funds;

 

   

FDIC deposit insurance premiums;

 

   

ability to raise, rollover or replace brokered deposits;

 

   

ability to make acquisitions or engage in new activities;

 

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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.

The 2018 Growth Act provides that qualifying banks with less than $10 billion in consolidated assets that satisfy the “Community Bank Leverage Ratio” of between 8% and 10% are deemed to satisfy applicable risk based capital requirements necessary to be considered “well capitalized.” Though this provision may provide us relief from certain capital adequacy requirements in the future, we may be unable to qualify for such relief if our total consolidated assets exceed $10 billion or the federal banking agencies determine that our risk profile disqualifies us from such relief.

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.”

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 September 30, 2018 and December 31, 2017, we had $114.1 million of trust preferred securities outstanding that were issued before May 19, 2010, and that have maturity dates between 2028 and 2036.

Should we determine it is advisable, or should our regulators require us, to raise additional capital, we would not be able to issue additional trust preferred securities, as only bank holding companies with assets of less than $500 million are permitted to continue to issue trust preferred securities and include them as Tier 1 capital. Instead, we would have to issue non-cumulative preferred stock or common equity, which are Tier 1 capital. Subordinated notes meeting Basel III Capital Rules may be issuable as Tier 2 capital. To the extent we issue new equity or securities convertible into Company Shares, it could dilute our existing shareholders. Dividends on any preferred stock we may issue, unlike distributions paid on trust preferred securities, would not be tax deductible, and the preferred stock would have a preference in liquidation and in dividends to our common stock. See “Supervision and Regulation.”

We may need to raise additional capital in the future, but that capital may not be available when it is needed or on favorable terms.

We anticipate that our current capital resources will satisfy our capital requirements for the foreseeable future under currently effective regulatory capital rules. We may, however, need to

 

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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 September 30, 2018 and December 31, 2017, our total assets were $8.4 billion. Based on our current total assets and growth strategy, we anticipate our total assets may exceed $10 billion within the next five years. In addition to our current regulatory requirements, banks with $10 billion or more in total assets are:

 

   

examined directly by the CFPB with respect to various federal consumer financial laws;

 

   

subject to reduced dividends on the Bank’s holdings of Federal Reserve Bank of Atlanta common stock;

 

   

subject to limits on interchange fees pursuant to the “Durbin Amendment” to the Dodd-Frank Act;

 

   

subject to enhanced prudential regulation, to the extent not reduced or eliminated as a result of the 2018 Growth Act;

 

   

subject to annual Dodd-Frank Act self-administered stress testing, or DFAST, or similar stress testing, to the extent not reduced or eliminated by the 2018 Growth Act; and

 

   

no longer treated as a “small institution” for FDIC deposit insurance assessment purposes.

Compliance with these additional ongoing requirements may necessitate additional personnel, the design and implementation of additional internal controls, or the incurrence of other significant expenses, any of which could have a material adverse effect on our business, financial condition or results of operations. Our regulators have requested us to engage in stress testing similar to DFAST before the Bank reached $10 billion in total assets, and we expect to continue such testing notwithstanding changes to the DFAST test thresholds by the 2018 Growth Act. Our regulators may also consider our preparation for compliance with these regulatory requirements in the course of examining our operations generally or when considering any request from us or the Bank. It is unclear whether these expectations may change as a result of the 2018 Growth Act.

The Federal Reserve may require us to commit capital resources to support the Bank.

As a matter of policy, the Federal Reserve, which examines us, expects a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. The Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank. In addition, the Dodd-Frank Act amended the Federal Deposit Insurance Corporation Act to require that all companies that control a FDIC-insured depository institution serve as a source of financial strength to the depository institution. Under this requirement, we could be required to provide financial assistance to the Bank should it experience financial distress, even if further investment was not otherwise warranted. See “Supervision and Regulation.”

 

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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 Financial Crimes Enforcement Network, or FinCEN, which was established as part of the Treasury Department to combat money laundering, is authorized to impose significant civil money penalties for violations of anti-money laundering rules. FinCEN has engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, or DOJ, Drug Enforcement Administration, and U.S. Internal Revenue Service, which we refer to as the IRS.

There is also regulatory scrutiny of compliance with the rules of the Treasury Department’s Office of Foreign Assets Control, or OFAC. OFAC administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals, including sanctions against foreign countries, regimes and individuals, terrorists, international narcotics traffickers, and those involved in the proliferation of weapons of mass destruction. Executive Orders have sanctioned the Venezuelan government and entities it owns, and certain Venezuelan persons. In addition, the OCC has broad authority to bring enforcement action and to impose monetary penalties if it determines that there are deficiencies in the Bank’s compliance with anti-money laundering 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 September 30, 2018, $2.8 billion, or 45.20%, of our total deposits were from residents of Venezuela. Our total loan exposure to international markets, primarily financial institutions in Brazil, Chile, Colombia and Peru, was $561.7 million, or 9.12%, of our total loans, at September 30, 2018.

In recent years, we have expended significant management and financial resources to further strengthen our anti-money laundering compliance program. Although we believe our anti-money laundering and OFAC compliance programs, and our current policies and procedures and staff dedicated to these activities, are sufficient to comply with applicable rules and regulations, continued enhancements are ongoing and 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 fail to prevent violations of law or the policies, procedures and systems of the financial institutions that we may acquire in the future are deficient, we would be subject to liability, including fines and formal regulatory enforcement actions, including possible cease and desist orders, restrictions on our ability to pay dividends, regulatory limitations on implementing certain aspects of our business plan, including acquisitions or banking center expansion, and require us to expend additional resources to cure any deficiency, which could materially and adversely affect us.

Failures to comply with the fair lending laws, CFPB regulations or the Community Reinvestment Act, or CRA, could adversely affect us.

The Bank is subject to, among other things, the provisions of the Equal Credit Opportunity Act, or ECOA, and the Fair Housing Act, both of which prohibit discrimination based on race or color, religion, national origin, sex and familial status in any aspect of a consumer, commercial credit or residential real estate transaction. The DOJ and the federal bank regulatory agencies have

 

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issued an Interagency Policy Statement on Discrimination in Lending to provide guidance to financial institutions in determining whether discrimination exists and how the agencies will respond to lending discrimination, and what steps lenders might take to prevent discriminatory lending practices. Failures to comply with ECOA, the Fair Housing Act and other fair lending laws and regulations, including CFPB regulations, could subject us to enforcement actions or litigation, and could have a material adverse effect on our business financial condition and results of operations. Our Bank is also subject to the CRA and periodic CRA examinations by the OCC. The CRA requires us to serve our entire communities, including low- and moderate-income neighborhoods. Our CRA ratings could be adversely affected by actual or alleged violations of the fair lending or consumer financial protection laws. Even though we have maintained an “outstanding” CRA rating since 2000, we cannot predict our future CRA ratings. Violations of fair lending laws or if our CRA rating falls to less than “satisfactory” could adversely affect our business, including expansion through branching or acquisitions.

Risks Related to Our Recent Spin-off from, and Continuing Relationships with, MSF

We are changing our brand from the “Mercantil” brand to Amerant, 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 are rebranding our businesses as Amerant.

We believe our association with MSF has provided us with greater name recognition among our customers from Latin America, including those with homes or businesses in the U.S. MSF’s reputation and financial strength have 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. As a result of the recent Spin-off, we have licensed the Mercantil name and brand from MSF without charge for a transition period of up to 12 months after the Spin-off. The use of our new brand will result in additional costs, such as signage, and may result in potential loss of customer recognition and business. We will also need to redesign our internet webpage, mobile application and e-mail addresses as part of our transition to a new name, which could cause some customer confusion even when customers are redirected automatically to the new addresses. See “Certain Relationships and Related Party Transactions” and “Supervision and Regulation.”

We will incur incremental costs as a separate, public company.

Although we maintained separate systems and conducted operations largely with our own staff separate from MSF and its other affiliates prior to the Spin-off, the recent Spin-off required us to incur additional personnel and other expenses as a standalone public company. Such expenses include, but are not limited to, SEC reporting, additional internal controls testing and reporting, and investor relations. These initiatives involve additional management time 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 will expend additional time and resources to comply with rules and regulations that previously did not apply to us.

As a separate, public company, the various rules and regulations of the SEC, as well as the listing standards of the Nasdaq Global Select Market, where the Company Shares are listed, require

 

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us to implement additional corporate governance practices and adhere to a variety of reporting requirements. Compliance with these public company obligations increases our legal and financial compliance costs and places 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 is now 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 market prices for our Company Shares.

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.

Because we completed the Spin-off in August of 2018, our historical consolidated financial data included in this prospectus does not necessarily reflect the financial condition, results of operations or cash flows we would have achieved as a standalone company during the periods presented or those we will achieve in the future. In addition, significant increases may occur in our cost structure as a result of the Spin-off, including costs related to public company reporting, investor relations and compliance with the Sarbanes-Oxley Act. Also, we anticipate incurring material expenses in connection with rebranding our business. We recently completed a comprehensive strategic planning process to evaluate how we conduct business, including how to focus on our domestic U.S. business while better serving our valued foreign customers, reducing costs, and increasing core deposits, fee income, margins, and the number of services we provide per household and our profitability. As a result of these matters, among others, it may be difficult for investors to compare our future results to historical results or to evaluate our relative performance or trends in our business.

We expect to incur additional shareholder communication and maintenance expenses as a result of the Spin-off, even if our expense reduction measures are completed.

We expect to incur additional shareholder reporting, communication and maintenance expenses related to the large number of shareholders, most of whom reside outside the U.S., we have as a result of the Spin-off. Our foreign shareholders will cause these expenses to be higher than desirable, except to the extent we can reduce these expenses through various measures, including electronic delivery consistent with SEC rules and shareholder consents.

MSF’s planned sales of the 19.9% of our Class A common stock and Class B common stock it holds may adversely affect the trading price of our common stock, present risks, and may otherwise adversely affect us.

MSF currently expects to dispose of the 19.9% of our Class A and Class B common stock held as Retained Shares in the Distribution Trust during the two years beginning March 15, 2018. We have agreed to file one or more registration statements with the SEC following the Spin-off, including Company Shares registered for sale in this Offering, to facilitate MSF’s disposition of Retained Shares. We have agreed to cooperate in any such resales at MSF’s expense. If MSF’s Retained Shares are not substantially sold as a result of this Offering, MSF may also sell Retained

 

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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, including in this Offering, may be subject to various conditions, including receipt of any necessary regulatory and other approvals, and satisfactory market conditions. There is currently a limited market for our Company Shares on the Nasdaq Global Select Market and it is unknown whether an active market will develop, or be sufficiently liquid to absorb MSF’s contemplated sales outside a public offering by us that includes up to all of MSF’s Retained Shares. The existence of the Retained Shares and the intended resales of such shares could adversely affect the market prices for both classes of our common stock.

MSF operates in a hyperinflationary economy subject to currency controls and is subject to regulation by the Federal Reserve and Venezuela authorities. Accordingly, the timing and amounts of MSF’s disposition of the Retained Shares, and the prices it realizes from such sales, could be affected by events beyond MSF’s or our control, which could adversely affect the Company and the market for Company Shares.

As a result of the Spin-off, certain of our directors may have actual or potential conflicts of interest because of their MSF equity ownership or their positions with MSF and us.

MSF and the Company have three common directors, one of which is also our Chairman. Combined, these shared persons beneficially own approximately 15.99% and 12.36% of the total outstanding shares of our Class A and Class B common stock, respectively, without giving effect to the Offering. These persons’ families control additional Company Shares. Our Chairman, who also is MSF’s Chairman, is resigning as our Chairman upon the closing of this Offering but will continue to be a Company director. Two of our other directors intend to resign as MSF directors upon the closing of this Offering, but will continue to be Company directors. These relationships and financial interests may create actual or perceived conflicts of interest when these persons 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, including in connection with the Spin-off, this Offering or the disposition of the Retained Shares by MSF. See “Risks Related to Ownership of Our Common Stock—Our shares will be eligible for future sale, which may cause our stock price to decline” and “Ownership of our Stock.”

We may have actual or potential conflicts with respect to new directors we may add following this Offering.

Patriot, a private equity fund specializing in bank investments, has expressed an interest in purchasing, in this Offering, between approximately 5.0% and 9.9% of the Company’s Class A common stock outstanding after the Offering. Patriot has requested that, following such investment in the Offering, the Company consider an additional independent director for nomination at the Company’s annual shareholders’ meeting in 2019, including, among possibly others, a person suggested by Patriot. Patriot has informed the Company that it owns a significant, but non-control ownership interest in, and Patriot’s managing partner is a director of, U.S. Century Bank, which is a direct competitor of the Company in South Florida. This poses potential business and regulatory conflicts and issues, which will have to be resolved in connection with any new director suggested by Patriot. These issues will be considered further with respect to any nominee suggested by Patriot. There is no assurance that such conflicts can be resolved, or that any necessary regulatory approvals can be obtained for a candidate suggested by Patriot to serve as a Company director, and

 

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that the Company and Patriot can reach agreement on such person and their related rights and obligations. See “Summary—Recent Developments—Chairman and Directors” and “Certain Relationships and Related Party Transactions.”

The Bank continues to provide certain services to MSF’s subsidiaries, even 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, the Bank continues to provide certain of these services on a transitional basis, following the Spin-off, on the same terms (including pricing) in effect as of the Spin-off, and which are compliant with Federal Reserve Regulation W. This contractual obligation could present future regulatory and operational risks to us, including with respect to compliance with U.S. anti-money laundering laws and Federal Reserve Regulation W. The terms of these arrangements may also be changed if the Federal Reserve or OCC view these arrangements as inappropriate, including under their policy statement on parallel-owned banking organizations.

MSF currently is deemed to retain “control” over us and the Bank for Federal Reserve and BHC Act purposes, which, together with the controlling shareholder base we have in common with MSF, likely will lead to restrictions and limitations upon the relationships and transactions between MSF and us, which may adversely affect our business and results of operations.

MSF is still deemed by the Federal Reserve to retain “control” of us under the BHC Act following the Spin-off, due to its Retained Shares and interlocking directors and officer. This “control” may end when the Federal Reserve determines that sufficient Retained Shares have been sold in this Offering and from redemptions of our Class B common stock from MSF using proceeds of this Offering, provided the interlocking directors and officers are not deemed to have “control” over our management or policies. Until a determination by the Federal Reserve that MSF no longer “controls” us, MSF will remain a bank holding company, and 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.”

We and the Company Shares could be affected adversely by events and regulations affecting MSF while it is deemed to “control” us.

The scope of the Federal Reserve’s regulation of MSF following the Distribution and during the time that MSF is deemed to “control” us for BHC Act purposes is uncertain. For example, the Venezuela official exchange rate mandated for use in preparing MSF’s financial statements has previously enabled MSF to comply with Federal Reserve requirements as a “qualified foreign banking organization,” or QFBO. As a result of changes to Venezuela exchange rates and hyperinflation, MSF is currently expected to lose QFBO status at the beginning of 2020. Additionally, changes in Venezuela’s exchange rates coupled with its hyperinflation caused MSF to exceed $50 billion in total consolidated assets and it thereby became subject to the Federal

 

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Reserve’s enhanced prudential standards. Although the 2018 Growth Act raised the asset threshold for the applicability of enhanced prudential standards to $250 billion, Venezuela’s currency exchange rates and hyperinflation could cause MSF to become subject to such standards in the future. MSF has filed and expects to continue to file, as long as MSF “controls” us, tailored or similar resolution plans and pay the applicable fees for such plans. If MSF is deemed to “control” us if it loses QFBO status or becomes subject to enhanced prudential standards, the scope and nature of the adverse effects on us cannot be predicted, since there is little or no historical precedent for such an event. If this event occurs before MSF’s sale or disposition of sufficient Retained Shares to eliminate MSF’s “control” of us, a forced disposition of MSF’s remaining Company Shares may result. A forced disposition could be at a time, and at prices and terms, and to persons, that could adversely affect us and our other shareholders.

A change in control of MSF while it controls us would likely adversely affect us, our business and the Company Shares.

A change in control of MSF while it controls us could adversely affect relations between MSF and us, could subject us to possible sanctions, and adversely affect market perceptions and the values of the Company Shares. The Separation Agreement and the Distribution Trust Agreement, dated as of March 12, 2018, as amended by Amendment No. 1, dated as of June 12, 2018, which we refer to collectively as the Distribution Trust Agreement, accordingly provide that upon a “change in control” of MSF, including an expropriation or takeover of MSF or MSF’s Retained Shares, beneficial ownership of such Retained Shares in the Distribution Trust will be delivered to and vest in us immediately prior to the change in control. A successful challenge to such terms could adversely affect us and the Company Shares.

We may find it desirable to include Retained Shares and/or to repurchase Company Shares from MSF, reducing proceeds to us from this Offering or any other offering of our Company Shares.

We and MSF have entered into a registration rights agreement with respect to MSF’s Retained Shares, including piggyback registration rights in the event of any public offering, such as this Offering. We have included the Retained Shares, and listed MSF as the selling shareholder, in this prospectus, in accordance with our obligations under the registration rights agreement. We are well capitalized, and believe that an important reason to consider future offerings is to increase market liquidity for our Class A common stock, generally, and to significantly reduce MSF’s ownership of Company Shares and eliminate its “control” of us under the BHC Act. We are only considering possible public offerings of Class A common stock, which is our only voting security, which the Federal Reserve scrutinizes most closely in “control” determinations under the BHC Act. If MSF cannot sell all its Class A Retained Shares in this Offering or future offerings, we may find it desirable to repurchase the remaining Class A Retained Shares. Similarly, we expect to repurchase Class B Retained Shares with proceeds from this Offering or other offerings of our Class A common stock. These scenarios will reduce the proceeds of any offering to us and may require offering proceeds to be used for Retained Share repurchases, instead of furthering our strategic growth and cost reduction initiatives. All repurchases of Retained Shares will be subject to prior notice to, and approval by, the Federal Reserve. The Company has received Federal Reserve approval for the repurchase of up to all 3,532,457 shares of our Class B common stock held by the Distribution Trust on behalf of MSF.

Risks Related to Ownership of Our Common Stock

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. We have outstanding an aggregate of 19,814,991.66

 

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shares of our Class A common stock and 14,218,595.66 shares of our Class B common stock, not including the Retained Shares. The Company Shares are freely tradeable without restriction or further registration under the Securities Act, except for shares held by our “affiliates.”

The Distribution Trust continues to hold 4,922,477.66 shares of our Class A common stock and 3,532,456.66 shares of our Class B common stock as Retained Shares. MSF has advised us that it intends to sell or dispose of such Retained Shares within two years following the Distribution, including through this Offering.

The principal shareholders of MSF, who, prior to the Offering, beneficially own approximately 37.51% of our Class A common stock and approximately 15.07% of our Class B common stock, are deemed to be our affiliates, together with our directors and executive officers. Such persons have indicated their intent not to dispose of their Company Shares until MSF is deemed by the Federal Reserve to no longer “control” us under the BHC Act as a result of MSF’s ownership of our Company Shares. A limited market exists for our Company Shares on the Nasdaq Global Select Market, 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 further registered offerings of our Company Shares, we have granted MSF “piggyback” registration rights that would require us to include certain of its Retained Shares on the same registration statement we use for our own offering. The sales of significant amounts of Company Shares or the perception in the market that this may occur may reduce the market price of our Company Shares.

A limited market exists for Company Shares on the Nasdaq Global Select Market. An active trading market may not develop or continue for the Company Shares, which could adversely affect the market price and market volatility of those shares.

Your ability to sell or purchase our common stock depends upon the existence of an active trading market for our common stock. There is currently a limited market for shares of our Class A and Class B common stock and there is no assurance that an active market will develop or be sustained. The concentration of ownership of Company Shares by shareholders in Venezuela, Venezuela currency controls and the difficulties of establishing U.S. Dollar transaction and investment accounts, may limit Venezuelans’ ability to buy or sell Company Shares, and the development of an active market prior or subsequent to this Offering. Although our Class A common stock and our Class B common stock are listed on the Nasdaq Global Select Market under the trading symbols “AMTB” and “AMTBB,” respectively, limited trading has occurred since the Distribution on August 10, 2018. If an active trading market does not develop, you may be unable to sell or purchase shares of our common stock at the volume, price and time that you desire.

Whether or not the purchase or sale prices of our common stock reflect a reasonable valuation of our common stock may depend on an active trading market developing, and thus the price you receive for a thinly-traded stock such as our common stock, may not reflect its true or intrinsic value. The 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.

We expect to issue more Class A common stock in the future which may dilute holders of Class A common stock.

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

 

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Federal Reserve purposes, therefore we expect future issuances of Company Shares will be Class A common stock. These new issuances of Class A common stock, as well as their voting rights, may dilute the interests of our Class A shareholders, and 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.

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.

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 shareholder 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 amended and restated 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, and vote together with our Class A common shareholders on a combined basis, on approval of our auditors for a given fiscal year, if we present such a proposal for shareholder consideration. As a result, virtually all matters submitted to our shareholders 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.

Certain provisions of our amended and restated articles of incorporation and amended and restated bylaws, Florida law, and U.S. banking laws could have anti-takeover effects by delaying or preventing a change of control that you may favor.

Certain provisions of our amended and restated articles of incorporation and amended and restated bylaws, as well as Florida law, and the BHC Act, and Change in Bank Control Act, could delay or prevent a change of control that you may favor.

 

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Our amended and restated articles of incorporation and amended and restated bylaws include certain provisions that could delay a takeover or change in control of us, including:

 

   

the exclusive right of our board to fill any director vacancy;

 

   

advance notice requirements for shareholder proposals and director nominations;

 

   

provisions limiting the shareholders’ ability to call special meetings of shareholders or to take action by written consent; and

 

   

the ability of our board to designate the terms of and issue new series of preferred stock without shareholder approval, which could be used, among other things, to institute a rights plan that would have the effect of significantly diluting the stock ownership of a potential hostile acquirer, likely preventing acquisitions that have not been approved by our board.

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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Our stock price may fluctuate significantly.

We cannot predict the prices at which our Company Shares will continue to trade. The market prices of our Company Shares may fluctuate widely, depending on many factors, some of which may be beyond our control, including:

 

   

actual or anticipated fluctuations in our operating results due to factors related to our business;

 

   

the success or failure of our business strategies;

 

   

quarterly or annual earnings and earnings expectations for our industry, and for us;

 

   

our ability to obtain financing as needed;

 

   

our announcements or our competitors’ announcements regarding new products or services, enhancements, significant contracts, acquisitions or strategic investments;

 

   

changes in accounting standards, policies, guidance, interpretations or principles;

 

   

changes in tax laws, including the 2017 Tax Act;

 

   

the failure of securities analysts to cover our Company Shares;

 

   

changes in earnings estimates by securities analysts;

 

   

the operating and stock price performance of other comparable companies;

 

   

investor perceptions of the Company and the banking industry;

 

   

our profile, dividend policy or market capitalization may not fit the investment objectives of MSF’s current shareholders;

 

   

events affecting MSF, including hyperinflation and currency controls, and government regulation of MSF in the U.S., Venezuela and other countries where MSF conducts business;

 

   

the timing and amounts of MSF’s planned dispositions of the Retained Shares;

 

   

the intent of our shareholders to hold or sell their Company Shares;

 

   

fluctuations in the stock markets or in the values of financial institution stocks, generally;

 

   

changes in laws, rules and regulations, including banking laws and regulations, affecting our business; and

 

   

general economic conditions and other external factors.

Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations could also adversely affect the trading price of our Company Shares.

 

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

As a newly independent company, and our history as part of MSF, we face strategic risk. Strategic risk is the risk to current or anticipated earnings, capital, liquidity, or franchise or enterprise value arising from adverse business decisions, poor implementation of business decisions, or lack of responsiveness to changes in the competitive landscape that is the banking and financial services industries in which we operate. We may have insufficient capital and insufficiently qualified personnel or culture to implement, as quickly as we seek, our strategy changes, including core deposit and fee income growth, improved margins, broader service to our customers, cost reductions and profitability increases.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the price of our common stock, including our Class A common stock, and trading volume could decline.

The trading market for our common stock, including our Class A common stock, depends in part on the research and reports that securities or industry analysts publish about us or our business. If few or no securities or industry analysts cover us, the trading price for our common stock would be negatively impacted. If one or more of the analysts who covers us downgrades our common stock or publishes incorrect or unfavorable research about our business, the price of our common stock would likely decline. If one or more of these analysts ceases coverage of the Company or fails to publish reports on us regularly, or downgrades our common stock, demand for our common stock could decrease, which could cause the price of our common stock or trading volume to decline.

We do not currently intend to pay dividends on our common stock, including our Class A common stock.

We do not intend to pay any dividends to holders of our common stock for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future, and the performance of an investment in our common stock will depend upon any future appreciation in its value. It is unknown whether our common stock will decline or appreciate in value.

Our internal controls and disclosure controls could have deficiencies or weaknesses.

We regularly review our internal controls for deficiencies and weaknesses. Although we seek to prevent, discover and promptly cure any deficiencies in internal controls, as a relatively new public company, we may determine that we have material weaknesses or significant deficiencies in the future. If we are unable to remediate such weaknesses or deficiencies, including deficiencies previously identified, we may be unable to accurately report our financial results, or report them within the timeframes required by law or Nasdaq rules. Failure to comply with the SEC internal controls regulations could also potentially subject us to investigations or enforcement actions by the SEC or other regulatory authorities. If we fail to implement and maintain effective internal controls over financial reporting, our disclosure controls and our ability to accurately and timely report our financial results could be impaired, which could result in late filings of our periodic reports under the Securities Exchange Act of 1934, or the Exchange Act, restatements of our consolidated financial statements, or suspension or delisting of our common stock from the Nasdaq Global Select Market. Such events could cause investors to lose confidence in our reported financial information, the trading price of our shares of common stock could decline and our access to the capital markets or other financing sources could be limited.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Various of the statements made herein under the captions “Summary”, “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Business” and elsewhere, are “forward-looking statements” within the meaning of, and subject to, the protections of Section 27A of the Securities Act and Section 21E of the Exchange Act.

Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause the actual results, performance, achievements or financial condition of the Company to be materially different from future results, performance, achievements or financial condition expressed or implied by such forward-looking statements. You should not expect us to update any forward-looking statements. These forward-looking statements should be read together with the “Risk Factors” included in this Offering Registration Statement, the Spin-off Registration Statement and our other reports filed with the SEC.

All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “point to,” “project,” “could,” “intend,” “target” and other similar words and expressions of the future. These forward-looking statements may not be realized due to a variety of factors, including, without limitation:

 

   

our ability to successfully execute our strategic plan, manage our growth and achieve our performance targets which assume, among other things, modestly increasing interest rates over the next two years, and continued growth in our domestic loans, funded with domestic deposits, increased cross-selling of services, increased efficiency and cost savings;

 

   

the effects of future economic, business, and market conditions and changes, domestic and foreign, especially those affecting our Venezuela depositors, including seasonality;

 

   

business and economic conditions, generally, and especially in our primary market areas;

 

   

obtaining a Federal Reserve determination that MSF is not in control of the Company for BHC Act purposes;

 

   

our ability to successfully manage our credit risks and the sufficiency of our allowance for possible loan losses;

 

   

the failure of assumptions and estimates, as well as differences in, and changes to, economic, market, and credit conditions, including changes in borrowers’ credit risks and payment behaviors;

 

   

compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities and tax matters, and our ability to maintain licenses required in connection with mortgage origination, sale and servicing operations;

 

   

compliance with the Bank Secrecy Act, OFAC rules and anti-money laundering laws and regulations, especially given our exposure to Venezuela customers;

 

   

governmental monetary and fiscal policies;

 

   

the effectiveness of our enterprise risk management framework, including internal controls;

 

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fluctuations in the values of the securities held in our securities portfolio;

 

   

the risks of changes in interest rates on the levels, composition and costs of deposits, loan demand, and the values and liquidity of loan collateral, securities, and interest-sensitive assets and liabilities, and the risks and uncertainty of the amounts realizable;

 

   

changes in the availability and cost of credit and capital in the financial markets, and the types of instruments that may be included as capital for regulatory purposes;

 

   

changes in the prices, values and sales volumes of residential and CRE;

 

   

the effects of competition from a wide variety of local, regional, national and other providers of financial, investment, trust and other wealth management services and insurance services, including the disruption effects of financial technology and other competitors who are not subject to the same regulations as the Company and the Bank;

 

   

the failure of assumptions and estimates underlying the establishment of allowances for possible loan losses and other asset impairments, losses, valuations of assets and liabilities and other estimates;

 

   

the risks of mergers, acquisitions and divestitures, including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings from such transactions;

 

   

changes in technology or products that may be more difficult, costly, or less effective than anticipated;

 

   

the effects of war or other conflicts, acts of terrorism, hurricanes or other catastrophic events that may affect general economic conditions;

 

   

the effect of recent and future legislative and regulatory changes, including changes in banking, securities, tax and trade laws and regulations, and their application by our regulators;

 

   

our ability to continue to increase our core domestic deposits, and reduce the percentage of foreign concentration;

 

   

the occurrence of fraudulent activity, data breaches or failures of our information security controls or cybersecurity-related incidents that may compromise our systems or customers’ information;

 

   

interruptions involving our information technology and telecommunications systems or third-party servicers;

 

   

changes in our senior management team and our ability to attract, motivate and retain qualified personnel consistent with our strategic plan;

 

   

the costs and obligations associated with being a public company;

 

   

our ability to maintain our strong reputation;

 

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claims or legal actions to which we may be subject; and

 

   

the other factors and information in this Offering Registration Statement and other filings we make with the SEC under the Exchange Act and Securities Act, including the Spin-off Registration Statement. See “Risk Factors” in this Offering Registration Statement and the Spin-off Registration Statement.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this prospectus. Because of these risks and other uncertainties, our actual future financial condition, results, performance or achievements, or industry results, may be materially different from the results indicated by the forward-looking statements in this prospectus. In addition, our past results of operations are not necessarily indicative of our future financial condition, results. You should not rely on any forward-looking statements as predictions of future events.

All written or oral forward-looking statements that are made by us or are attributable to us are expressly qualified in their entirety by this cautionary notice. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update, revise or correct any forward-looking statement, whether as a result of new information, future developments or otherwise.

 

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USE OF PROCEEDS

The net proceeds to us from the sale of our Class A common stock in this Offering will be approximately $17.9 million (or approximately $30.2 million if the underwriters exercise in full their option to purchase additional shares of our Class A common stock from us). MSF has agreed to pay all underwriting discounts, commissions and Offering expenses with respect to the Offering.

We will not receive any of the proceeds from the sale of our Class A common stock in this Offering by the selling shareholder.

We intend to use all of the net proceeds to us from this Offering to repurchase, as soon as possible after the Offering, approximately 1.42 million shares of our Class B common stock held by the Distribution Trust on behalf of MSF (or approximately 2.39 million shares of our Class B common stock if the underwriters exercise in full their option to purchase additional shares of our Class A common stock from us) at a 3% discount to the Offering price. This discount reflects the limited voting rights of the Class B common stock. The Company has received Federal Reserve approval for the repurchase of up to all 3,532,457 shares of our Class B common stock held by the Distribution Trust on behalf of MSF.

Pending the final use of proceeds from this Offering as described above, we plan to invest the net proceeds that we receive in this Offering in short-term high quality interest-bearing securities, including government and investment-grade debt securities and money market funds.

 

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CAPITALIZATION

The following table sets forth our capitalization, including regulatory capital ratios, on a consolidated basis, as of September 30, 2018:

 

   

on an actual basis and

 

   

on an as adjusted basis to give effect to the net proceeds from the sale by us of 1,377,523 shares of our Class A common stock in this Offering (assuming the underwriters do not exercise their purchase option) at the Offering price per share of $13.00, and assuming that all the net proceeds of this Offering will be used to repurchase 1,420,127 shares of our Class B common stock held by MSF.

 

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You should read the following table in conjunction with the sections titled “Selected Historical Consolidated Financial Data,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

     As of September 30, 2018  
     Actual     As Adjusted  
    

(in thousands, except per
share data

and percentages;
unaudited)

 

Shareholders’ equity

    

Class A common stock, $0.10 par value, 400,000,000 shares authorized, 24,737,470 shares outstanding actual and 26,114,993 shares outstanding as adjusted (1)

   $ 2,474     $ 2,612  

Class B common stock, $0.10 par value, 100,000,000 shares authorized, 17,751,053 shares outstanding actual and as adjusted (1)

     1,775       1,775  

Additional paid in capital

     367,505       385,275  

Treasury stock (2)

     —         (17,908

Retained earnings

     379,232       379,232  

Accumulated other comprehensive loss

     (23,311     (23,311
  

 

 

   

 

 

 

Total shareholders’ equity

   $ 727,675     $ 727,675  
  

 

 

   

 

 

 

Consolidated Company Capital ratios (3):

    

Common equity tier 1 capital ratio (4)

     10.34     10.34

Total capital ratio (5)

     12.81     12.81

Tier 1 capital ratio (6)

     11.88     11.88

Tier 1 leverage ratio (7)

     9.95     9.95

Tangible common equity ratio (8)

     8.40     8.40

Bank Capital ratios (3):

    

Common equity tier 1 capital ratio (4)

     11.40     11.40

Total capital ratio (5)

     12.33     12.33

Tier 1 capital ratio (6)

     11.40     11.40

Tier 1 leverage ratio (7)

     9.58     9.58

Tangible common equity ratio (8)

     9.30     9.30

 

(1)

References in this section to the number of our Company Shares outstanding after this Offering are based on shares of our Company Shares issued and outstanding as of September 30, 2018. Excludes shares subject to the underwriters’ option to purchase additional shares of our Class A common stock from us.

(2)

Reflects repurchase of 1,420,127 shares of Class B common stock using the cost method.

(3)

Calculated based on regulatory requirements and reports.

(4)

Common equity tier 1 capital divided by total risk-weighted assets.

(5)

Total capital divided by total risk-weighted assets, calculated according to the standardized capital ratio calculations.

(6)

Tier 1 capital divided by total risk-weighted assets.

(7)

Tier 1 capital divided by fourth quarter’s average assets. Tier 1 capital is composed of common equity tier 1 capital plus outstanding trust preferred securities of $114.1 million at September 30, 2018.

(8)

Tangible common equity ratio is a non-GAAP financial measure. The tangible common equity ratio is defined as the ratio of tangible common equity divided by total assets less goodwill and other intangible assets.

 

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DIVIDEND POLICY

We do not anticipate paying any dividends to holders of our common stock in the foreseeable future because we expect to retain earnings to support our business plan, including the proposed repurchase of Retained Shares from MSF, as described in this prospectus. See “Use of Proceeds.” 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, liquidity capital adequacy, cash requirements, prospects, regulatory capital and limitations, and other factors that our board of directors may deem relevant. The payment of cash dividends, if commenced, may be discontinued at any time at the sole discretion of our board of directors.

 

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the “Selected Financial Information,” our audited consolidated financial statements, our unaudited interim consolidated financial statements and related notes included elsewhere in this prospectus. 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 prospectus, may cause actual results to differ materially from those projected in the forward looking statements.

Overview

Our Company

We are a bank holding company headquartered in Coral Gables, Florida. We provide individuals and businesses a comprehensive array of deposit, credit, investment, wealth management, retail banking and fiduciary services. We serve customers in our United States markets and select international customers. These services are offered primarily through the Bank and its Trust Company and Investment Services subsidiaries The Bank’s primary markets are South Florida, where we operate 15 banking centers in Miami-Dade, Broward and Palm Beach counties; the greater Houston, Texas area where we have eight banking centers that serve nearby areas of Harris, Montgomery, Fort Bend and Waller counties; and the New York City area where we have a loan production office in Midtown Manhattan. We have no foreign offices.

We report our results of operations through four segments: Personal and Commercial Banking, which we refer to as PAC, Corporate LATAM, Treasury and Institutional. 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 the 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, administrative and support 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 expenses, ROA and ROE.

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 FHLB advances, junior subordinated debentures and other forms of indebtedness. Net interest income typically is the most significant contributor to our revenues and net income. To evaluate net interest income, we measure and monitor: (i) yields on our loans and other interest-earning assets; (ii) the costs of our deposits and other funding sources; (iii) our net interest spread; (iv) our net interest margin; 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. NIM is

 

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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, NIM 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 volumes 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, NIM 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) income from brokerage, advisory and fiduciary activities; (iii) benefits from and changes in cash surrender value of bank-owned life insurance, or BOLI, policies; (iv) card and trade finance servicing fees, (v) data processing, rental income and fees for other services provided to MSF and its affiliates, (vi) securities gains or losses, and (vii) other noninterest income.

Our income from service fees on deposit accounts is affected primarily by the volume, growth and mix of deposits we hold. These are affected by prevailing market conditions, including interest rates, generally, and for deposit products, our marketing efforts and other factors.

Our income from brokerage, advisory and fiduciary activities consists of brokerage commissions related to the trading volume of our customer’s transactions, fiduciary and investment advisory fees generally based on a percentage of the average value of assets under management and custody, and account administrative services and ancillary fees during the contractual period. Our assets under management and custody accounts declined $63.8 million, or 3.65%, to $1.69 billion at September 30, 2018 from $1.75 billion at December 31, 2017, primarily due to our decision to close certain foreign customer accounts.

Income from changes in the cash surrender value of our BOLI policies represents the amount that may be realized under the contracts with the insurance carriers, which are nontaxable.

Card servicing fees include credit card issuance and credit and debit cards interchange fees. Credit card issuance fees are generally recognized over the period in which the cardholders are entitled to use the cards. Interchange fees are recognized when earned. Trade finance servicing fees, which primarily include commissions on letters of credit, are generally recognized over the service period on a straight line basis.

We have historically provided certain administrative services to MSF’s 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. We will continue to provide these services for transition periods of 12-18 months after the Spin-off, unless sooner terminated. All services are billed by us and paid by MSF’s non-U.S. affiliates in Dollars. For the nine months ended September 30, 2018, we were paid approximately $1.7 million for these services. MSF’s non-U.S. affiliates do not currently provide any material services to us for which they are compensated.

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. Generally, 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.

 

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Our gains or losses on sales of property and equipment are recorded at the date of the sale and presented as other noninterest income or expense in the period they occur.

Noninterest Expense. Noninterest expense includes, among other things: (i) salaries and employee benefits; (ii) occupancy and equipment expenses; (iii) professional and other services fees; (iv) FDIC deposit insurance and regulatory assessments; (v) telecommunication and data processing expenses; (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 and equipment, including leasehold improvements made to our leased properties.

Other operating expenses include the incremental cost associated with servicing the large number of shareholders we have post-Spin-off, offset to the extent such shareholders consent to electronic delivery of documents that we are required by SEC rules to send to shareholders.

Noninterest expenses generally increase as our business grows and whenever necessary to implement or enhance policies and procedures for regulatory compliance. On October 24, 2018, our Bank, Trust Company and Investment Services subsidiaries opened under the “Amerant” name and brand, or the “New Brand.” We expect to incur approximately $6 to $7 million in 2018 and 2019 to rebrand our organization. Of this amount, approximately $1.2 million is expected to be spent for signage that will be capitalized and amortized over the remaining lives of owned buildings and over the remaining terms of leased facilities. Approximately $250,000 of software costs will be amortized over three years. The remainder will be expensed.

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.

 

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Annually, our allowance for loan loss model is reviewed and updated to better reflect our loan volumes, and credit and economic conditions in our markets. The model may differ among our segments, and includes qualitative factors, which are updated semi-annually, based on the type of loan.

Capital. Financial institution regulators have established guidelines for minimum capital ratios for banks, thrifts and bank holding companies.

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 conditions; (vi) the Tier 1 capital ratio, the total capital ratio, the Tier 1 leverage ratio, and the CET1 capital ratio; and (vii) other factors.

Liquidity. Our deposit base consists primarily of personal and commercial accounts maintained by individuals and businesses in our primary markets and select international core depositors. 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 amount of cash and liquid securities we hold, the availability of assets to be readily converted into cash without undue loss, 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 eight times since December 2015 in 25 basis point increments from 0.25% to 2.25% on September 27, 2018.

General and Administrative Expenses. We expect to continue incurring increased noninterest expenses related to building out and modernizing our operational infrastructure, marketing and other administrative expenses to execute our strategic initiatives, costs associated with establishing de novo banking centers, expenses to hire additional personnel and other costs required to continue our growth.

 

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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.”

Discussion and Analysis of the Nine Months Ended September 30, 2018 and September 30, 2017 and the Years Ended December 31, 2017, 2016 and 2015

Average Balance Sheet, Interest and Yield/Rate Analysis

The following tables present average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the nine months ended September 30, 2018 and 2017 and 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 periods presented.

 

    Nine Months Ended September 30,  
    2018     2017  
   

Average

Balances

   

Income/

Expense

   

Yield/

Rates

   

Average

Balances

   

Income/

Expense

   

Yield/

Rates

 
    (in thousands, except percentages)  

Interest-earning assets:

           

Loan portfolio, net (1)

  $ 5,941,904     $ 188,894       4.26   $ 5,815,205     $ 162,847       3.75

Securities available for sale (2)

    1,656,669       32,216       2.60     1,930,096       34,538       2.39

Securities held to maturity (3)

    88,615       1,204       1.82     12,735       175       1.84

Federal Reserve Bank and FHLB stock

    70,870       3,213       6.09     60,393       2,326       5.17

Deposits with banks

    150,531       1,945       1.73     160,455       1,228       1.02
 

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-earning assets

    7,908,589       227,472       3.85     7,978,884       201,114       3.37
   

 

 

       

 

 

   

Total non-interest-earning assets less allowance for loan losses

    515,022           509,172      
 

 

 

       

 

 

     

Total assets

  $ 8,423,611         $ 8,488,056      
 

 

 

       

 

 

     

 

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    Nine Months Ended September 30,  
    2018     2017  
   

Average

Balances

   

Income/

Expense

   

Yield/

Rates

   

Average

Balances

   

Income/

Expense

   

Yield/

Rates

 
    (in thousands, except percentages)  

Interest-bearing liabilities:

           

Checking and saving accounts –

           

Interest bearing DDA

  $ 1,423,390     $ 413       0.04   $ 1,657,643     $ 284       0.02

Money market

    1,221,646       9,111       1.00     1,338,897       6,471       0.64

Savings

    430,535       54       0.02     479,841       57       0.02
 

 

 

   

 

 

     

 

 

   

 

 

   

Total checking and saving accounts

    3,075,571       9,578       0.42     3,476,381       6,812       0.26

Time deposits

    2,363,152       30,403       1.72     1,979,359       18,864       1.27
 

 

 

   

 

 

     

 

 

   

 

 

   

Total deposits

    5,438,723       39,981       0.98     5,455,740       25,676       0.63

Securities sold under agreements to repurchase

    141       2       1.90     42,926       1,662       5.20

Advances from the FHLB and other borrowings (4)

    1,186,945       19,217       2.16     950,570       13,359       1.88

Junior subordinated debentures

    118,110       6,017       6.85     118,110       5,559       6.32
 

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing liabilities

    6,743,919       65,217       1.29     6,567,346       46,256       0.94
   

 

 

       

 

 

   

Total non-interest-bearing liabilities

    936,520           1,176,937      
 

 

 

       

 

 

     

Total liabilities

    7,680,439           7,744,283      

Shareholders’ equity

    743,172           743,773      
 

 

 

       

 

 

     

Total liabilities and shareholders’ equity

  $ 8,423,611         $ 8,488,056      
 

 

 

       

 

 

     

Excess of average interest-earning assets over average interest-bearing liabilities

  $ 1,164,670         $ 1,411,538      
 

 

 

       

 

 

     

Net interest income

    $ 162,255         $ 154,858    
   

 

 

       

 

 

   

Net interest rate spread

        2.56         2.43

Net interest margin (5)

        2.74         2.60

Ratio of average interest-earning assets to average interest-bearing liabilities

    117.27         121.49    

 

(1)

Average non-performing loans of $32.7 million and $55.9 million for the nine months ended September 30, 2018 and 2017, respectively, are included in the average loan portfolio, net balance.

(2)

Includes nontaxable securities with average balances of $174.7 million and $159.8 million for the nine months ended September 30, 2018 and 2017, respectively. The tax equivalent yield for these nontaxable securities for the nine months ended September 30, 2018 and 2017 was 4.01% and 3.87%, respectively.

(3)

Includes nontaxable securities with average balances of $88.5 million and $12.7 million for the nine months ended September 30, 2018 and 2017, respectively. The tax equivalent yield for these nontaxable securities for the nine months ended September 30, 2018 and 2017 was 2.30% and 2.83%, respectively.

(4)

The terms of the advance agreement require the Bank to maintain certain investment securities or loans as collateral for these advances.

(5)

Net interest margin is defined as net interest income divided by average interest-earning assets, which are loans, securities available for sale and held to maturity, deposits with banks and other financial assets, which yield interest or similar income.

 

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    Year Ended December 31,  
    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:

                 

Loan 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

  $ 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      

Shareholders’ equity

    766,083           717,727           704,223      
 

 

 

       

 

 

       

 

 

     

Total liabilities and shareholders’ 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         $ 1,659.87      
 

 

 

       

 

 

       

 

 

     

Net interest income

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

 

 

       

 

 

       

 

 

   

 

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    Year Ended December 31,  
    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)  

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 loan portfolio, net balance.

(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
 
     Nine Months Ended September 30,  
     2018 vs 2017  
     Attributable To  
     Volume     Rate     Total  
     (In thousands)  

Interest income attributable to:

      

Loans portfolio, net

   $ 4,751     $  21,296     $  26,047  

Securities available for sale

     (6,535     4,213       (2,322

Securities held to maturity

     1,396       (367     1,029  

Federal Reserve Bank and Federal Home Loan Bank stock

     542       345       887  

Deposits with banks

     (101     818       717  
  

 

 

   

 

 

   

 

 

 

Total interest-earning assets

   $ 53     $ 26,305     $ 26,358  
  

 

 

   

 

 

   

 

 

 

 

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     Increase (Decrease) in
Net Interest Income
 
     Nine Months Ended September 30,  
     2018 vs 2017  
     Attributable To  
     Volume     Rate      Total  
     (In thousands)  

Interest expense attributable to:

       

Checking and saving accounts –

       

Interest Bearing DDA

   $ (47)     $ 176      $ 129  

Money market

     (750     3,390        2,640  

Savings

     (10     7        (3
  

 

 

   

 

 

    

 

 

 

Total checking and saving accounts

     (807     3,573        2,766  

Time deposits

     4,874       6,665        11,539  
  

 

 

   

 

 

    

 

 

 

Total deposits

     4,067       10,238        14,305  

Securities sold under repurchase agreements

     (2,225     565        (1,660

Advances from the FHLB

     4,444       1,414        5,858  

Junior Subordinated Debentures

           458        458  
  

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     6,286       12,675        18,961  
  

 

 

   

 

 

    

 

 

 

Increase (decrease) in Net Interest Income

   $ (6,233   $ 13,630      $ 7,397  
  

 

 

   

 

 

    

 

 

 

Net interest income increased $7.4 million in the nine months ended September 30, 2018 compared to the same period a year ago. This increase resulted from higher interest income due to loan portfolio growth and higher average rates, partially offset by lower interest income from securities available for sale mainly due to lower average balances. The increase in interest income was partially offset by higher interest expense mostly due to higher average time deposit balances and rates, increases in the average volume of advances from the FHLB and higher average rates on checking and saving accounts.

 

     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:

    

Loan 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  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

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     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 expense attributable to:

            

Checking and saving accounts:

            

Interest bearing DDA

   $ (74   $ (185   $ (259   $ (146   $ (388   $ (534

Money market

     (462     1,055       593       (210     1,140       930  

Savings

     (7     (36     (43     (10     (40     (50
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total checking and saving accounts

     (543     834       291       (366     712       346  

Time deposits

     3,979       6,232       10,211       4,108       4,452       8,560  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

     3,436       7,066       10,502       3,742       5,164       8,906  

Securities sold under repurchase agreements

     (1,389     12       (1,377     (384     13       (371

Advances from the FHLB

     3,940       3,324       7,264       831       1,353       2,184  

Junior subordinated debentures

           327       327             261       261  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

   $ 5,987     $ 10,729     $ 16,716     $ 4,189     $ 6,791     $ 10,980  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in net interest income

   $ 5,930     $ 11,847     $ 17,777     $ (558   $ 20,206     $ 19,648  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

In 2017, the decrease in securities available for sale was attributable to an asset mix rebalance where the reduction of investments was used to fund new loan production.

In 2017 and 2016, checking and savings accounts decreased due to migration to time deposit products. Given current interest rate levels, clients are inclined to seek higher rate products such as time deposits. These lower volumes of checking and savings accounts also resulted from our foreign depositors reducing their transactional accounts, which also reduced our concentration of large depositors. Increases in interest rates in these years caused our total interest expenses on these deposits to increase. The volumes of and rates paid on time deposits, including brokered certificates of deposits, also increased.

 

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Results of Operations

Comparison of Results of Operations for the Nine Months Ended September 30, 2018 and 2017

Net income

The table below sets forth certain results of operations data for the nine months ended September 30, 2018 and 2017:

 

     Nine months ended
September 30,
    Change  
           2018                 2017           2018 vs 2017  
     (in thousands, except per share amounts and
percentages)
 

Net interest income

   $ 162,255     $ 154,858     $ 7,397       4.78

Provision for loan losses

     1,750       8,898       (7,148     (80.33 )% 
  

 

 

   

 

 

   

 

 

   

Net interest income after provision for loan losses

     160,505       145,960       14,545       9.97

Noninterest income

     41,881       56,066       (14,185     (25.30 )% 

Noninterest expense

     160,325       152,035       8,290       5.45
  

 

 

   

 

 

   

 

 

   

Net income before income tax

     42,061       49,991       (7,930     (15.86 )% 

Income tax

     (10,658     (15,752     5,094       (32.34 )% 
  

 

 

   

 

 

   

 

 

   

Net income

   $ 31,403     $ 34,239     $ (2,836     (8.28 )% 
  

 

 

   

 

 

   

 

 

   

Basic and diluted earnings per share (1)

   $ 0.74     $ 0.81     $ (0.07  
  

 

 

   

 

 

   

 

 

   

 

(1)

At September 30, 2018 and 2017, we had no outstanding dilutive instruments issued. Consequently, the basic and diluted earnings per share are equal in each of the periods presented. Earnings per share reflect the reverse stock split. See Note 1 of our unaudited interim consolidated financial statements for more information.

Results of Operations for the nine months ended September 30, 2018 compared to Results of Operations for the nine months ended September 30, 2017

The following discussion of our results of operations compares the nine months ended September 30, 2018 and 2017.

Net Income. Our net income of $31.4 million and $0.74 basic and diluted earnings per share in the nine months ended September 30, 2018 declined $2.8 million, or 8.28% from net income of $34.2 million and $0.81 basic and diluted earnings per share reported in the same period of 2017.

This decrease is mainly attributable to (i) lower noninterest income as a result of a one-time net gain of $10.5 million on the sale of the Bank’s New York building in the same quarter a year ago; (ii) provisions for the costs associated with the Spin-off totaling $6.3 million in the nine months ended September 30, 2018; (iii) higher salary and employee benefit costs and telecommunications and data processing expenses, and (iv) lower income from brokerage, advisory and fiduciary activities. These results were partially offset by higher net interest income, and a lower provision for loan losses on improved credit quality trends.

Higher yields and a changing mix of interest-earning assets helped to partially offset the decline in net income, despite lower average volume. Interest expense on deposits continued its expected increase, mainly on added average volume of time deposits and higher average interest

 

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rates across all major deposit types. These factors resulted in an increase in net interest income, which improved from $154.9 million in the nine months ended September 30, 2017 to $162.3 million in the nine months ended September 30, 2018, an increase of $7.4 million or 4.78%. See “-Average Balance Sheet, Interest and Yield/Rate Analysis” for detailed information.

As a result of improved credit quality trends in certain loan portfolio segments, we added provisions to the allowance for loan losses of only $1.8 million in the nine months ended September 30, 2018, compared to a provision to the allowance of $8.9 million in the same period of 2017. These improvements were partially offset by additional provision for loan loss associated with one restructured CRE loan with a balance of $10.2 million and that became impaired during the nine months ended September 30, 2018.

Adjusted net income for the nine months ended September 30, 2018 was $37.8 million, or $0.89 per basic and diluted share which is 39.06% higher than during the same period in 2017. Adjusted net income excludes Spin-off costs of $6.3 million in the current nine-month period and the one-time net gain of $10.5 million on the sale of the Bank’s New York building in the same period of 2017.

Net interest income. In the nine months ended September 30, 2018, we earned $162.3 million of net interest income, an increase of $7.4 million, or 4.78%, from $154.9 million of net interest income earned in the same period of 2017. The increase in net interest income was due primarily to a 48 basis point improvement in the average yield on interest-earning assets, partially offset by a 0.88% decrease in the average balance of interest-earning assets. In addition, average interest-bearing liabilities showed a 2.69% increase accompanied by a 35 basis point increase in average rates paid. Net interest margin improved 14 basis points from 2.60% in the nine months ended September 30, 2017 to 2.74% in the same period of 2018.

Interest income. Total interest income was $227.5 million in the nine months ended September 30, 2018 compared to $201.1 million for the same period of 2017. The $26.4 million, or 13.11%, increase in total interest income was primarily due to higher average balances in loans and securities held to maturity, as well as higher average yields earned on interest-earning assets. These improvements were partially offset by a decrease in the average balance of available for sale securities during the nine months ended September 30, 2018 with respect to the same period of 2017, in part due to the redeployment of proceeds from such securities into loans.

Interest income on loans in the nine months ended September 30, 2018 was $188.9 million compared to $162.8 million for the comparable period of 2017. The $26.0 million, or 15.99%, increase was primarily due to a 51 basis points increase in average yields and a 2.18% increase in the average balance of loans in the nine months ended September 30, 2018 over the same period in 2017, mainly the result of growth in the real estate loan portfolio. See “—Average Balance Sheet, Interest and Yield/Rate Analysis” for detailed information.

Interest income on the available for sale securities portfolio decreased $2.3 million, or 6.72%, to $32.2 million in the nine months ended September 30, 2018 compared to $34.5 million in the comparable period of 2017. This decrease was primarily attributable to a decline of 14.17% in the average volume of securities available for sale. Higher yields on securities available for sale, which increased an average of 21 basis points in the nine months ended September 30, 2018 compared to the same period in 2017, offset the lower amount of such securities held during the period.

Interest expense. Interest expense on interest-bearing liabilities increased $19.0 million, or 40.99%, to $65.2 million in the nine months ended September 30, 2018 compared to $46.3 million

 

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in the comparable period of 2017, primarily due to higher average time deposits and FHLB advances, and higher average interest rates generally, partially offset by lower average total checking and saving account balances.

Interest expense on deposits increased to $40.0 million in the nine months ended September 30, 2018 compared to $25.7 million for the comparable period of 2017. The $14.3 million, or 55.71%, increase was primarily due to a 35 basis point increase in the average rate paid on total deposits, and a 19.39% increase in average time deposit balances offset by lower average total checking and saving account balances which decreased 11.53%. The