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Edited Transcript of AMTB.OQ earnings conference call or presentation 26-Apr-19 1:30pm GMT

Q1 2019 Mercantil Bank Holding Corp Earnings Call

Apr 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Mercantil Bank Holding Corp earnings conference call or presentation Friday, April 26, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Laura Rossi

Mercantil Bank Holding Corporation - IR Officer

* Millar Wilson

Mercantil Bank Holding Corporation - Vice Chairman and CEO

* Al Peraza

Mercantil Bank Holding Corporation - Co-President and CFO

* Miguel Palacios

Mercantil Bank Holding Corporation - EVP and Chief Business Officer

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Conference Call Participants

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* Michael Rose

Raymond James & Associates, Inc. - Analyst

* Brady Gailey

Keefe, Bruyette & Woods, Inc. - Analyst

* Michael Young

SunTrust Robinson Humphrey - Analyst

* Tyler Stafford

Stephens Inc. - Analyst

* Christopher Marinac

FIG Partners, LLC - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Amerant first-quarter 2019 earnings conference call. (Operator Instructions). As a reminder, today's conference is being in recorded.

I would now like to turn the call over to Ms. Laura Rossi, IRO. You may begin.

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Laura Rossi, Mercantil Bank Holding Corporation - IR Officer [2]

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Thank you, operator. Good morning to everyone on the call, and thank you for joining us to review Amerant's first-quarter results. With me this morning are Millar Wilson, Vice Chairman and Chief Executive Officer; Al Peraza, Co-President and Chief Financial Officer; and Miguel Palacios, Executive Vice President and Chief Business Officer.

Before we begin, note that the Company's press release, comments made on today's call, and responses to your questions contain forward-looking statements. The Company's business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control. And, consequently, actual results may differ materially from those expressed or implied.

Please refer to the cautionary notices regarding forward-looking statements in the Company's press release. For more possible risks, please refer to the Company's annual report on form 10-K for the year ended December 31, 2018, as well as to subsequent filings with the SEC. You can access these filings on the SEC's website.

Please note that Amerant has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances, or changes in expectation.

You should also note that the Company's press release, earnings presentation, and today's call includes references to certain adjusted financial measures and other non-GAAP disclosures. Please refer to the back of the Company's recent earnings presentation to see the reconciliation of each non-GAAP financial measure to the most comparable GAAP financial measure.

I will now turn the call over to Mr. Wilson.

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Millar Wilson, Mercantil Bank Holding Corporation - Vice Chairman and CEO [3]

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Good morning, and thank you for joining Amerant's first-quarter 2019 earnings call. On this call, we will provide some insight into the ongoing execution of our business strategy, as well as our efforts to drive shareholder value. I'll begin with our first-quarter 2019 highlights, and then Al will review our financial performance in greater detail. After our prepared remarks, Al, Miguel, and I will address any questions.

Starting on slide 3 and slide 4, we have a summary of our performance for the quarter. Our results reflect the progress we have made in our ongoing transformation from a subsidiary of a larger international financial group to an independent, domestically focused community bank, placing a greater emphasis on profitability rather than the capital preservation sought by our former parent, Mercantil Servicios Financieros.

In fact, this quarter, we issued approximately 2.1 million shares of Class A common stock and used the proceeds to repurchase all of the remaining Class B shares held by our former parent. Mercantil Servicios Financieros no longer has any stake in the Company.

As such, we continue implementing our new strategy as a standalone bank, focused on the following four key areas: executing a relationship-focused strategy to increase core deposits; shifting the mix of our loan portfolio to higher-return, lower-risk domestic loans; attaining a greater share of wallet from new and existing customers; and focusing on driving operational efficiencies and improved customer service.

This new focus has led to strong first-quarter results. We reported first-quarter net income of $13.1 million or $0.30 per diluted share. First-quarter net income included $933,000 of restructuring expenses, approximately $700,000 after-tax, related to the Company's rebranding to Amerant and a more normal tax rate of 21.5%. We estimate that we will incur approximately $3 million to $4 million more of restructuring expenses during 2019 related to the Company's rebranding.

Excluding the rebranding costs included in the first quarter, adjusted net income was $13.8 million or $0.32 per diluted share. Our 39% growth in net income compared to the same quarter last year is reflective of continued strong credit quality and improvement in the net interest margin. Net interest income of $55.4 million was down slightly from the prior quarter, reflecting a recovery on a problem loan recorded during the fourth quarter of 2018 and typical slow loan production in the first quarter of 2019.

Total assets and loans also declined during the period. This reflects our planned reduction of less profitable foreign loans as well as our commitment to growing domestically, which Al will cover in more detail in just a moment. Deposits were also down, largely due to our international customers continuing to spend their US dollar savings in order to cover living expenses, together with a reduction in brokered deposits. These decreases were partially offset by an increase in customer CDs.

On slide 4, our credit and asset quality remains strong, and we did not record any provision for loan losses in the first quarter. Nonperforming assets as a percentage of total assets remained consistent quarter over quarter, increasing by just 4 basis points from the fourth quarter to 0.26%. Our ratio of net charge-offs decreased significantly from the prior quarter, from 0.43% to 0.10% of average net loans.

Our efficiency ratio improved from 79.5% last quarter to 75.7% this quarter. On an adjusted basis, this ratio increased from 69.6% to 74.4% as a result of an increase in operating expenses, which Al will cover in greater detail. Our efforts led to a continued year-over-year improvement in our return on equity and return on assets, which were 6.87% and 0.65%, respectively, at quarter-end. Our profitability metrics continue to improve as we refocus on profitable growth and strategies to increase shareholder value.

And now I will turn the call over to Al, who will go over the quarter in more detail.

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Al Peraza, Mercantil Bank Holding Corporation - Co-President and CFO [4]

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Thank you, Millar. Good morning, everyone. Turning to slide 5, I would like to discuss highlights from our loan portfolio. First-quarter loans of $5.7 billion decreased $176 million compared to the fourth quarter, driven primarily by our planned reduction of financial institution loans, or FI; and non-relationship shared national credit lines, or SNCs, as well as historically slow first-quarter loan production.

We define non-relationship loans as those where the Company does not have a direct relationship with the borrower. This planned reduction in FI and non-relationship SNC loans aligns with our strategy to focus on profitability and return on capital by replacing low-yielding, non-relationship SNC loans with higher-yielding domestic products such as owner-occupied single family, residential, commercial and industrial loans in the domestic market.

Our loan activity is typically lower in the first quarter while most commercial businesses are focused on closing their year, finalizing tax planning and returns, and preparing financial statements. This quarter's production was also impacted as we transitioned our lending salesforce to a relationship-driven business model to capture a greater share of our customers' deposits and wealth management business. The traditionally slower first quarter was the perfect time of the year to make this strategic pivot.

Throughout the year, as our teams are more fully trained in this business model and have sharpened their cross-selling skills, we expect our loan production to improve.

We continue to allow our Latin American FI loan portfolio to run off, and chose to not take on any additional FI exposure. We also sold off several of our non-relationship SNC loans in the first quarter at strong prices, thanks to low market interest rates, and opted out of refinancing some facilities as they matured or were renegotiated. As a result of these actions, our FI and SNC loans shrunk by $41 million and $145.5 million, respectively, compared to last quarter. Over time, we expect to continue to taper off and ultimately eliminate our Latin American FI and non-relationship SNC loans.

The decreases in these portfolios during the quarter was partially offset by net growth in domestic owner-occupied, C&I, and single family residential loans in the amounts of approximately $25 million, $15 million, and $6 million, respectively. Domestic loans comprise more than 96% of the Company's current loan portfolio.

In terms of the geographic mix of the portfolio, we remain committed to growing loans in Florida, Texas, and New York.

Finally, to touch quickly on our CRE loans, the Company's overall portfolio decreased slightly in the first quarter. CRE presently represents $3 billion or approximately 53% of total loans.

Turning to slide 6, you can see that our loan yield has been steadily improving over the last four quarters. Our investment portfolio has also seen a significant increase in yield over the past year. This is due to the repricing of floating rate instruments, which make up approximately 13% of the Company's total investments. The floating portion of the available-for-sale portfolio was over 19% in the fourth quarter of 2019, and we have progressively decreased it to increase the average duration of our assets.

Moving on to slide 7. Total deposits at the end of the first quarter 2019 were $5.9 billion, down 2.4% compared to the end of the fourth quarter of 2018, and down 6.2% compared to the end of the first quarter of 2018. Lower core transaction deposits and a reduction in brokered CD deposits were partially offset by growth in customer CDs. The decrease in core transaction deposits was caused primarily by the anticipated decline in international deposits, primarily from residents of Venezuela, of 3.5% and 13.1% compared to the prior quarter and the same quarter of last year, respectively.

Our customers who reside in Venezuela continue to face difficult economic conditions and increasingly rely on their US dollar deposits to cover living expenses. Nevertheless, we continue our efforts to increase our share of wallet from select international customers with whom we desire to maintain a long-term relationship.

This decrease in international deposits was partially offset by increased deposits from CD customers. In February and March, we implemented a new customer contact strategy for renewing CDs that focused banking center efforts on those clients with the highest risk of not renewing their CDs. By utilizing a CD renewal and re-pricing model, the Company was able to renew approximately $44 million in CDs that had a low probability of renewal at an average interest rate lower than the Company's prevailing promotional interest rate.

This quarter, we also began to explore funding alternatives outside our current deposit footprint through online CDs. While this initiative is in its early stages, we are excited to explore new geographies to expand our existing customer CD footprint.

Due to the deposit mix shifting towards more expensive domestic deposits, our average cost of deposits in the first quarter rose by 7 basis points compared to the prior quarter. We estimate that approximately half of this average cost increase is attributed to replacing very low-cost foreign deposits with domestic CDs. We continue to proactively focus on our core domestic deposit growth gathering, and improved pricing models to compensate for our declining Venezuelan deposits.

Turning to slide 8. The net interest margin improved 1 basis point in the first quarter compared to the prior period, which included a $1 million recovery of interest on a nonperforming international loan that paid off. However, the net interest income was $55.4 million in the first quarter, down 2.4% from last quarter, primarily due to the decrease in average loan and investment balances and the recovery, as previously discussed.

We are pleased with the steady improvement in net interest income and net interest margin over the past year, driven in part by an improved asset mix and higher market rates. As you can see, we have grown interest income by approximately 5.3% from the first quarter of last year, and improved NIM by more than 25 basis points over the same period. We expect this trend to continue in the coming quarters as we execute our strategies to improve our interest-earning asset mix and our deposit costs. Also, we believe that the Federal Reserve's pause in its normalization policy may also relieve pricing pressure on deposits.

On slide 9, our first-quarter noninterest income of $13.2 million was up almost 10% from the previous quarter. This is attributed to a gain of $557,000 on an early extinguishment of debt, and an increase in commissions of $337,000 on interest rate swaps sold to customers, versus a $1 million loss on securities sold during the prior quarter.

In February 2019, the US placed restrictions on the trading of Venezuelan securities not previously restricted. These restrictions have effectively eliminated our customers' trading in those securities and have negatively affected our fee income. During 2018, the Company earned approximately $1.5 million in fees from customers trading in these securities. We expect these trading restrictions to continue for the foreseeable future. As a result, brokerage and management fees of $3.7 million during the first quarter were down almost $200,000 from the year-ago period.

Finally, deposit and service fees were down $345,000, due primarily to lower wire transfer activity.

Total assets under management increased from $1.6 billion at the end of the fourth quarter to $1.7 billion at March 31, as we continue to focus on domestic growth and efforts to mitigate international runoff.

Turning to slide 10. First-quarter noninterest expense was $51.9 million, a decrease of 5% over the prior quarter. However, in order to better understand our core noninterest expense level, we present on the next slide adjusted figures.

On slide 11, we show first-quarter adjusted noninterest expense of $51 million, an increase of 6.5% over the prior quarter, largely driven by more normal overall marketing expenses of approximately $2 million, plus a $1.5 million compensation expense resulting from the amortization of the restricted stock issued in December 2018 to management and key personnel.

These higher costs were partially offset by lower salaries and employee benefits in the first quarter of 2019 of approximately $1.1 million resulting from the workforce reduction programs announced in the fourth quarter, additional reductions during this quarter, as well as a reduction in the utilization of temporary staff. The aforementioned normal marketing expenses and the compensation expense related to the restricted share grants during the quarter were the primary contributors to the increase in the adjusted efficiency ratio.

Now turning to slide 12, our overall credit quality remains strong, as nonperforming asset levels and net charge-offs remain low. Nonperforming assets totaled $20.5 million or 0.26% of total assets, up from 0.22% at the end of last quarter, mainly related to the nonperformance of a single commercial loan in Florida of $2.4 million.

Net charge-offs for the quarter remain low at only 0.10% of the average loan portfolio balance, significantly below the 0.43% reported in the fourth quarter, mainly associated with one nonperforming CRE loan in the Houston market affected by hurricane flooding. Although our allowance for loan losses declined to $60.3 million compared to $61.8 million last quarter, the ratio of the allowance to total loans increased to 1.05%. No loan loss provision was recorded during the first quarter.

Moving to slide 13, we continue to be asset sensitive. However, given recent developments and market interest rate expectations, we have begun to work on reducing our interest rate sensitivity to declining rates. Given the continuous flattening of the yield curve, low inflation expectations, and stability of the Fed funds rate, we have progressively been substituting our floating rate assets with fixed rate assets throughout the quarter.

The average duration of our loans in our portfolio increased slightly as we did not renew maturing floating-rate loans, such as FI and non-relationship SNC loans, and instead funded fixed rate loans with longer maturities. The average duration of our investment portfolio also increased in the first quarter as we have been replacing floating rate investments for fixed rate. And we unwound $280 million in interest rate swap contracts early in the quarter when rates were higher than they are today. These measures increased the effective duration of our available-for-sale portfolio to 3.47 from 3.0 in the fourth quarter.

Now I will turn it back to Millar, who will provide some color on what to expect for the rest of 2019.

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Millar Wilson, Mercantil Bank Holding Corporation - Vice Chairman and CEO [5]

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Thank you, Al. Now turning to our goals on slide 14. Assuming current market trends in the US continue, we anticipate further growth in domestic loans, particularly as the new loan production office in Dallas starts to generate business; and we expand later this year in Broward, Miami-Dade, and Palm Beach counties, Florida, through our branch openings in Miami Lakes, Davie, Delray Beach, and Boca Raton. These new branches will feature a new, smaller format supported by enhanced digital marketing tools and technology.

In CRE, the $128 million in pre-payments received during the quarter opened space under our CRE limits to pursue new business. Additionally, we have traditionally participated in club CRE deals and are now getting ready to lead syndicated transactions with our strong customer base and in partnership with other financial institutions with which we have extensive experience in club deals. This new activity will also generate noninterest income in the form of administration and arrangement fees.

Through the implementation of our strategy, we expect growth in our domestic deposits as we focus on a high-touch relationship approach. This includes pricing initiatives and tools to capture increased share of wallet of our existing customers along with our new branch concept. In addition, given our transition to higher-margin lending products, we expect net interest income to continue to grow while our allowance for loan losses should remain stable, given our strong asset quality.

In our wealth management unit, we continue to focus on leveraging this platform with our domestic customer base. We expect cost savings in that unit as we focus more on the domestic market.

In summary, our first-quarter results reflect the progress we have made in our ongoing transformation to an independent, domestically focused community bank. As we look ahead to the remainder of the year, we will continue to focus on our strategy, which prioritizes driving profitable growth and higher returns.

With that, we will be happy to take any of your questions.

Operator, please open the line for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Michael Rose, Raymond James.

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Michael Rose, Raymond James & Associates, Inc. - Analyst [2]

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Maybe if we just start on the expense side. I know you guys have the retirement programs. Can you just give somewhat of an update there, and then what other levers you expect to pull on the expense side? And maybe what the run rate for expenses should be for the year? Thanks.

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Al Peraza, Mercantil Bank Holding Corporation - Co-President and CFO [3]

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Sure. Michael, as you know, we are only one quarter into the 6- to 8-quarter journey we embarked on in December. As such, it's pretty early to give guidance on our noninterest income as well as noninterest expense. Several of the figures that we provided are starting to show progress on our goals. For example, we already cited the $1.1 million savings in salary costs. That is essentially the involuntary program that was announced in December, as well as the BIRP, the retirement program. And not all the savings are baked into the results yet. We expect second quarter to actually be greater savings than the $1.1 million.

At the same time, we are continuing to look at our back office. We're continuing to look at all our operations, and we are constantly identifying opportunities for cost savings. So we expect those to start getting cooked in in subsequent quarters throughout this year.

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Michael Rose, Raymond James & Associates, Inc. - Analyst [4]

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Okay. That's helpful. Just moving to the loan side, it looks like, if I take the domestic loans from the slide deck, it looks like the foreign loans were down about $71 million; they are about 4% of total loans now. I know the bulk of those was going to mature and pay off within the next 12 months. Is that still the goal? And I guess when I look at the domestic growth this quarter, I'm probably a little bit surprised to see Texas down, so maybe some color there.

I guess the question is, when would you expect, based on the scheduled maturities on the foreign side for the loan portfolio, on totality to actually inflect? Thanks.

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Miguel Palacios, Mercantil Bank Holding Corporation - EVP and Chief Business Officer [5]

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Hi, Michael. This is Miguel. Mainly, as you know, we're running off, and we did accelerate the run-off during the first quarter. I think that we did almost $80 million more than we were [planning] to do, which was great. And also we have a few remaining, around $70 million, on those international loans. Only eight of those are FI, which will be running off soon, and the rest are the typical SNCs that should be running off or being sold during the remaining of the three quarters.

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Michael Rose, Raymond James & Associates, Inc. - Analyst [6]

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Okay. Maybe just one final one for me. With the interest rate backdrop clearly having changed and still obviously a lot of work to do on the expense and loan front, is it still realistic that you guys think you can hit a 1% ROA in the 6- to 8-quarter time frame? Or has the interest rate backdrop changed that dynamic in any way? Thanks.

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Al Peraza, Mercantil Bank Holding Corporation - Co-President and CFO [7]

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No. Yes, again, it's somewhat early, but we are sticking with our target to reach the running 1% ROA. The guidance we had given before was 6 to 8 quarters. Given the Fed's pause, some of this decline that we're going to be experiencing in the international trading fees, it may be closer to the 8 quarters, but we're still very optimistic. I mean, the trading activity income, that was a headwind that we were not anticipating in December.

But at the same time, we hadn't baked into our numbers in December the additional fee income that we will probably be generating from the loan syndications. We're a very active CRE lender in some of our markets. We're a prime participant in a lot of some of these club deals. And we feel that we're going to be able to be a lead in a lot of those deals, and that's going to open up fee income; that's going to open up capacity for us to continue to serve our CRE customers.

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Miguel Palacios, Mercantil Bank Holding Corporation - EVP and Chief Business Officer [8]

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Michael, also -- it's Miguel -- I think it's important to mention that even though it has been a typical slow first quarter, we have a very good -- or pipeline that is also being created in the commercial segment that is bringing derivatives and swaps that will boost our fee income for the next two quarters. That's something that the team is working hard. As you know, we have done some changes on the behavior, and that is taking to place now.

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Michael Rose, Raymond James & Associates, Inc. - Analyst [9]

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Okay, I'll hop back in the queue. Thanks for taking my questions.

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Operator [10]

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Brady Gailey, KBW.

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Brady Gailey, Keefe, Bruyette & Woods, Inc. - Analyst [11]

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So I know you mentioned the decline in the financial institution loans and the SNC loans. But what -- I'm guessing the financial institution loans is pretty much almost down to zero now. And then the SNC balances, I think you were at around $600 million last quarter. So this quarter, that would take you down closer to the $450 million mark. Do those numbers sound correct?

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Miguel Palacios, Mercantil Bank Holding Corporation - EVP and Chief Business Officer [12]

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Yes. The SNCs today, at the end of the quarter, is around $460 million. As I mentioned, they will be running off. But the ones that are not core are the ones that we will be running completely, which is the $131 million within the number that I mentioned.

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Al Peraza, Mercantil Bank Holding Corporation - Co-President and CFO [13]

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Yes, the relationship SNCs, we're keeping those. Because those are SNCs where we actually have a relationship with the customer, with the sponsor.

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Brady Gailey, Keefe, Bruyette & Woods, Inc. - Analyst [14]

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All right. And then I think in addition to SNCs, you had club deals of around $210 million last quarter. Is that number roughly the same in 1Q?

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Miguel Palacios, Mercantil Bank Holding Corporation - EVP and Chief Business Officer [15]

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Yes. A little bit lower, that number, around $180 million. And those are the ones that we're going to keep. We might increase, as mentioned by Miller and Al. As we grow and improve our -- deepen relationship with the existing CRE customer and even middle-market customer, we're going to be able to syndicate those club deals and get the income that before we were not part of it.

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Brady Gailey, Keefe, Bruyette & Woods, Inc. - Analyst [16]

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All right. And then just on the net interest margin, you all saw some nice expansion this quarter. I know that's a big piece of you all's story. You're talking about continued NIM expansion. You're trying to reduce your asset sensitivity, given the new rate backdrop. How should we think about the magnitude of NIM expansion from here?

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Al Peraza, Mercantil Bank Holding Corporation - Co-President and CFO [17]

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Well, given the Fed's easing, we would still expect improvement in our NIM, but it will be a moderate improvement throughout the year. Certainly, we are extremely close already to the 3% mark that we had laid out for ourselves to be at very early in the year. And we expect to cross that mark and continue to increase modestly throughout the year as we continue the rebalancing, as we continue the efforts to control and somewhat reduce the cost of our funding of our deposits.

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Brady Gailey, Keefe, Bruyette & Woods, Inc. - Analyst [18]

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Okay. Great. Thanks, guys.

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Operator [19]

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Michael Young, SunTrust.

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Michael Young, SunTrust Robinson Humphrey - Analyst [20]

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Wanted to dig a little deeper, maybe just on the deposit side and deposit funding. I appreciate the color you provided already on the CVs repricing, et cetera. But could you maybe just give us a little more color on expectations for bringing over some of the commercial deposits, the lower-cost deposits potentially? And then any updated thoughts around what you think new CD pricing will be relative to maybe your back book?

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Miguel Palacios, Mercantil Bank Holding Corporation - EVP and Chief Business Officer [21]

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Okay. Hi, it's Miguel. As you know, we have been focusing on the last four months on the change of behavior from lenders to RM. And also in the same time, we have been training the branch team and the salesforce into a new vertical that we believe that are richer in deposits. We also created a tool that is mainly a dashboard where they can see where they could focus better. And by doing that, we have seen an improvement with creation of new core deposit.

In the past, we saw that the loan to deposits in the commercial segments were below the 15%. Now, in this quarter, we have seen improvements already, reaching almost 20%. We're trying to repeat the same for the middle-market segment.

And also we have changed the incentive plan on the retail side, mainly focusing more in -- and core deposit, [loss] cost of fund, and the creation of bundle, also new products that will help to improve the number.

In addition to that, we have created several products for the commercial team that are going to be deployed sooner, like the cash sweep and secured cash sweep, and cash [vault] that would generate additional increase on our deposit base.

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Al Peraza, Mercantil Bank Holding Corporation - Co-President and CFO [22]

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Michael, if I may add -- I touched upon it -- but we're developing a lot of pricing techniques where we're trying to renew CDs, trying to find the sweet spot that the CDs will renew at and won't just go to the bank next door. It doesn't necessarily always have to be the highest promotional rate. And we're having a fair amount of success in also being able to identify and actually call those customers where the probability of renewal wasn't that low. That's going to put less pressure on having to advertise for new CD money, for instance, if you're more successful in retaining the ones you've got.

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Michael Young, SunTrust Robinson Humphrey - Analyst [23]

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Okay. And maybe could you just talk about, on the CD front, the duration? We've heard a lot of talk about seeing the CD promotion rates come down, and some of the longer duration CDs being maybe -- the advertised specials being removed from the market. So can you just talk about your strategy in terms of how short or long do you plan to be in the CD space, and any opportunities that you're seeing to be able to put on some new CDs at relatively cheaper prices?

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Miguel Palacios, Mercantil Bank Holding Corporation - EVP and Chief Business Officer [24]

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Yes. In general terms, based on the new strategy and the methodology that we are using, and seeing what the market is doing, we're not now the best promoting rate in the market, unless it's the online CD. At the branch level, what we're doing -- we lowered it between 25 to 40 basis points our CDs, and are focused mainly -- or what it has been the attraction is between one year and 15 months. And also we still have seen some people interested in the five-year term.

But our best approach will be that if we don't have through relationship and we don't allow -- if we allow them to bring into our bundled products, then we're going to be improving our relationship. What we have done is that we created different bundles for money market, for DDA, and for CDs. And the only way to be placed on a better, more competitive is to have your core transactional account with us. So that blend will improve also our cost of funds.

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Michael Young, SunTrust Robinson Humphrey - Analyst [25]

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Okay. And just last one for me on the international deposits. I think you mentioned they declined about 14% this quarter. Could you just talk about any color you can provide on -- is that your expectation continuing for the rest of the year, or do you think that will moderate somewhat? And then any influencing factors that you guys keep an eye out for that could influence that to be either higher or lower?

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Al Peraza, Mercantil Bank Holding Corporation - Co-President and CFO [26]

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Yes, if we annualize the 3.5% drop that we had this quarter, you're right; it's 14%. That's a little bit more than what we were anticipating in December, which was closer to around the 9% mark. But we still feel that it's going to get closer to the 9%.

We don't feel that that's going to be increasing. Because at the same time, we're doing a lot of efforts to get a greater share of wallet from a lot of those customers. We cannot certainly contain some of that slight of people taking their money out to live, and that is generally primarily impacting the smaller accounts. But we still see a great opportunity to capture a greater share of wallet from our higher-net-worth customers.

One good example of how more resilient that upper echelon of customers is, is the fact that our assets under management actually increased slightly. I mean, there were some domestic that is already being generated in there. But generally our assets under manager, our more wealthy Venezuelan customers, those funds tend to be very stable. So we feel that we have -- we're going to be working to unleash that untapped potential on some of our higher-net-worth international customers to mitigate, to a certain extent, that utilization of funds to live in our lower customers.

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Miguel Palacios, Mercantil Bank Holding Corporation - EVP and Chief Business Officer [27]

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Yes. In addition to what Al's also mentioned is that during this transformation, the RMs on the wealth management team, they also have been, let's say, forced to transform, becoming more hunters than they were in the past. So they are forced by their own merits to deepen relationship and bring and expand the share of wallet.

The majority of those customers in the wealth management -- we are not the only institution that they work with. So there are several funds that we can still attract to this institution and more with the new branding, and really start in next month. We believe that that will improve a lot our sales and our speech into the market.

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Al Peraza, Mercantil Bank Holding Corporation - Co-President and CFO [28]

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Underlying all of those efforts, generally we're achieving successes is where we've essentially changed the compensation structures of a lot of the individuals, whether it's the wealth management reps or whether it's our relationship officers selling swaps and interest rate contracts. By honing in, by really refining those compensation schemes, we're achieving the desired results.

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Michael Young, SunTrust Robinson Humphrey - Analyst [29]

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All right. Thanks for all that. I appreciate it.

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Operator [30]

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Tyler Stafford, Stephens.

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Tyler Stafford, Stephens Inc. - Analyst [31]

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Just a couple follow-up for me. Sticking with just the deposits, what's the average cost of the foreign deposits for the first quarter?

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Al Peraza, Mercantil Bank Holding Corporation - Co-President and CFO [32]

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The average cost of the foreign deposits continue to be extremely low. They are in the neighborhood of about 35 basis points. It's really unchanged from it was, essentially, in December.

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Tyler Stafford, Stephens Inc. - Analyst [33]

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Okay, got it. And then just --

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Al Peraza, Mercantil Bank Holding Corporation - Co-President and CFO [34]

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No pressure (multiple speakers)

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Tyler Stafford, Stephens Inc. - Analyst [35]

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Yes. And then we maybe danced around it a little bit on a few of the earlier questions, but just the average cost for the new dollar of domestic deposits coming onto the bank today. What is that rate, just generally speaking?

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Miguel Palacios, Mercantil Bank Holding Corporation - EVP and Chief Business Officer [36]

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Well, it depends on the product. If we're talking about CD, it will be around between 225 and 250. (multiple speakers) And this is if -- depending on the money market, and if the customer goes through the bundled product, they could be between the 225, 240.

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Tyler Stafford, Stephens Inc. - Analyst [37]

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Okay, got it. Thanks.

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Miguel Palacios, Mercantil Bank Holding Corporation - EVP and Chief Business Officer [38]

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But our mainly focused is, as mentioned before, growing our DDA and low cost of funds in both segments, the retail and commercial.

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Tyler Stafford, Stephens Inc. - Analyst [39]

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So that leads to my next question, just last question on the margin. What was the average non-interest-bearing balances for the first quarter?

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Al Peraza, Mercantil Bank Holding Corporation - Co-President and CFO [40]

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Hold on a second here, I have that. I got that here. Hold on second.

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Tyler Stafford, Stephens Inc. - Analyst [41]

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Okay.

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Al Peraza, Mercantil Bank Holding Corporation - Co-President and CFO [42]

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Okay. So if we looked at this quarter, the average -- both international and domestic, we are looking at roughly about 1%, 0.99%. That's including DDAs. Excluding DDAs, it would be closer to about 1.16%.

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Tyler Stafford, Stephens Inc. - Analyst [43]

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I'm sorry, just the -- do you just have the -- just the dollar of average non-interest-bearing deposit balances?

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Al Peraza, Mercantil Bank Holding Corporation - Co-President and CFO [44]

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Okay. It's about $700 million. But you have to keep in mind, if we look at back in -- also in December, where we had disclosed that even our money market accounts could almost be considered as non-interest-bearing, as well, because the average cost of our money market accounts is around 5 basis points. So you really have to take our money market accounts and our non-interest-bearing to really come up to really a large percentage of our deposits that are nearly interest-free.

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Tyler Stafford, Stephens Inc. - Analyst [45]

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Sure. Got it. Okay. Thanks for that. And then just last one for me, just want to clarify one of the earlier answers about just the SNC expectations, SNCs balance expectations. So when you are complete with running off the non-relationship SNCs, what would you characterize or size up as the relationship SNC balances that you expect to keep on a go-forward basis, assuming no growth or any --

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Miguel Palacios, Mercantil Bank Holding Corporation - EVP and Chief Business Officer [46]

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I would say around $350 million, $400 million.

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Tyler Stafford, Stephens Inc. - Analyst [47]

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Okay. So $300 million to $400 million are relationships?

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Miguel Palacios, Mercantil Bank Holding Corporation - EVP and Chief Business Officer [48]

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(multiple speakers) Yes, those are relationship. And mainly that increase should be focused on strong key relationship, mainly on the middle market and real estate segment where we have even the wealth management side of the customers.

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Tyler Stafford, Stephens Inc. - Analyst [49]

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Yes, okay. So just to clarify: what's the total dollar SNCs today?

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Miguel Palacios, Mercantil Bank Holding Corporation - EVP and Chief Business Officer [50]

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Total total?

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Tyler Stafford, Stephens Inc. - Analyst [51]

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Total total.

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Miguel Palacios, Mercantil Bank Holding Corporation - EVP and Chief Business Officer [52]

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$465 million.

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Tyler Stafford, Stephens Inc. - Analyst [53]

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And then $300 million to $400 million of that are the relationships that you expect to keep?

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Miguel Palacios, Mercantil Bank Holding Corporation - EVP and Chief Business Officer [54]

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Yes.

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Tyler Stafford, Stephens Inc. - Analyst [55]

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Okay, got it. Thank you, guys.

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Operator [56]

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Christopher Marinac, FIG Partners.

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Christopher Marinac, FIG Partners, LLC - Analyst [57]

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Wanted to ask about new hires on the commercial lending side. Has there been enough turnover in South Florida to have additional hires, or is that part of your plan this year? And then perhaps just talk additional in Texas.

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Miguel Palacios, Mercantil Bank Holding Corporation - EVP and Chief Business Officer [58]

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Well, that's a very interesting question. I do believe that the biggest challenge that the banking system will have is the talent. We have seen a slow turnaround or turnover of the commercial [or a rent]. We are trying to improve mainly on creating a group for the wealth management team. We already have been working with several interviews. And we should have, for the second semester, a new structure for our domestic team on the wealth management side.

On the commercial side, we have had -- out of the 20-something RMs that we have, we have seen some layoffs for lack of production, mainly in Houston. Two of those were let go at the beginning of the year, and we already working on interviews. And also we already hired for the Dallas LPO. And we continue seeing a lot of possible candidates and more when you have this merge between the big banks that were announced. We're taking advantage and we are seeing a lot of traffic on that sense.

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Christopher Marinac, FIG Partners, LLC - Analyst [59]

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Great. That's helpful. Thank you for that background. And then just a follow-up on credit quality. I know it's a little early on the CECL process for next year and the future years, but do you have a sense of whether your reserves will ultimately be very strong relative to your loss rates, just because you've got a history of limited losses? And just curious if you had any kind of initial perspective as CECL comes into focus.

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Al Peraza, Mercantil Bank Holding Corporation - Co-President and CFO [60]

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Yes, well, CECL won't apply to us. As an emerging growth company, it's not going to apply to us until 2022. We're already working on it. We've adopted an implementation plan. We selected a recognized software solution vendor, and we're in the process now of implementing and validating the models for each of the portfolio. But it's too early. It's still too early for us to anticipate or really give any guidance whether -- what effect CECL is going to have on us, so -- two years out, down the road.

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Christopher Marinac, FIG Partners, LLC - Analyst [61]

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Now, that's a fair point, Al. Thanks very much, guys.

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Operator [62]

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(Operator Instructions). Michael Rose, Raymond James.

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Michael Rose, Raymond James & Associates, Inc. - Analyst [63]

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Just two quick follow-ups. I don't know if I missed this, but did you give any color on the commercial loan that would move the NPL this quarter? What geography was it in? And maybe what industry was it in? And any color around why it was moved there? Thanks.

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Miguel Palacios, Mercantil Bank Holding Corporation - EVP and Chief Business Officer [64]

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You are talking about $2.4 million in commercial in Florida?

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Michael Rose, Raymond James & Associates, Inc. - Analyst [65]

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Correct.

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Miguel Palacios, Mercantil Bank Holding Corporation - EVP and Chief Business Officer [66]

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That was mainly a C&I type of ABL transaction we're monitoring, not any particular. Our portfolio team continues to do a great job on monitoring the whole portfolio. We don't see or foresee any particular change. What we are doing and what is important is what we are calibrating all our programs, in particular in the CRE side.

We're taking a little more conservative approach adjusting those programs, mainly the service coverage. And as you know, we are very conservative on that side. But we don't see or foresee concerns and we will be stable, but we are cautiously monitoring the whole portfolio. So I have no concern at this moment, even though we're always focused on trying to avoid any surprise.

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Michael Rose, Raymond James & Associates, Inc. - Analyst [67]

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Okay. Was that loan a SNC or a club credit?

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Miguel Palacios, Mercantil Bank Holding Corporation - EVP and Chief Business Officer [68]

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No, no, no. That's $2.4 million; that's a typical commercial relationship, not related to SNC.

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Michael Rose, Raymond James & Associates, Inc. - Analyst [69]

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Okay. And then just one follow-up, just back to the expenses. So maybe, Al, let me ask it another way. You guys had 911 full-time equivalent employees at the end of the fourth quarter. What was that number at the end of the first quarter, if you have it?

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Al Peraza, Mercantil Bank Holding Corporation - Co-President and CFO [70]

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It's in one of the slides. Let's see.

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Michael Rose, Raymond James & Associates, Inc. - Analyst [71]

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Oh, it is? If it is, I'm sorry if I missed it.

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Al Peraza, Mercantil Bank Holding Corporation - Co-President and CFO [72]

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Yes, it's 889.

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Michael Rose, Raymond James & Associates, Inc. - Analyst [73]

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889? Okay. Sorry I missed that. Thanks for the clarification.

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Al Peraza, Mercantil Bank Holding Corporation - Co-President and CFO [74]

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It's on slide 10.

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Michael Rose, Raymond James & Associates, Inc. - Analyst [75]

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Got it, there it is. Thanks, guys. Appreciate it.

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Operator [76]

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(Operator Instructions). And I'm showing (technical difficulty) questions at this time.

I'd like to turn the call back to Millar Wilson, CEO, for closing remarks.

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Millar Wilson, Mercantil Bank Holding Corporation - Vice Chairman and CEO [77]

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Let me close by thanking all of you for joining our first-quarter conference call. I'm pleased with our first-quarter 2019 results. I'm Proud of our team for its execution of our transformation strategy to become an independent, domestically focused community bank.

As I mentioned before, the four key elements of our transformation are: deepening our customer relationships, shifting the mix of our loan portfolio, attaining a greater share of wallet, and driving operational efficiencies and customer service. We look forward to continuing to build on these successes in 2019 and beyond.

Thank you very much. Operator?

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Operator [78]

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Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.