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Item 7. 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 Data,” our audited consolidated financial statements and related notes included elsewhere in this Form 10-K. 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 Form 10-K, 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 through 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, Amerant Trust, the Bank’s securities broker-dealer subsidiary (see “Amerant Trust Merger” under Item 1.Business), Amerant Investments, the Bank’s Grand-Cayman based trust company subsidiary, the Cayman Bank, and the newly formed mortgage company, Amerant Mortgage. The Bank’s three primary markets are South Florida, where we operate 18 banking centers in Miami-Dade, Broward and Palm Beach counties; the greater Houston, Texas area, where we have 7 banking centers that serve the nearby areas of Harris, Montgomery, Fort Bend and Waller counties and a LPO in Dallas, Texas, which we opened in early 2019; and the greater New York City area, where we also maintain a LPO that focuses on originating CRE loans.

Primary Factors Used to Evaluate Our Business

Results of Operations. In addition to net income or loss, 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 and other borrowings such as repurchase agreements, senior notes and junior subordinated debentures. 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, or NIM; 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 calculated by dividing net interest income for the period by average interest-earning assets during that same period. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and stockholders’ equity, also fund interest-earning assets, NIM includes the benefit of these noninterest-bearing sources of funds. Non-refundable loan origination fees, net of direct costs of originating loans, are deferred and recognized over the life of the related loan as an adjustment to interest income in accordance with GAAP.

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Changes in market interest rates and the interest we earn on interest-earning assets, or which we pay on interest-bearing liabilities, as well as the volumes and the types of interest-earning assets, interest-bearing and noninterest-bearing liabilities and stockholders’ 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 revenue streams: (i) service fees on deposit accounts; (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 and fees for other services provided to the Former Parent and its affiliates; (vi) securities gains or losses; (vii) net gains and losses on early extinguishment of FHLB advances; and (viii) other noninterest income.

Our income from service fees on deposit accounts is affected primarily by the volume, growth and mix of deposits we hold and volume of transactions initiated by customers (i.e. wire transfers). These are affected by prevailing market pricing of deposit services, interest rates, our marketing efforts and other factors.

Our income from brokerage, advisory and fiduciary activities consists of brokerage commissions related to our customers’ trading volume, fiduciary and investment advisory fees generally based on a percentage of the average value of assets under management and custody (“AUMs”), and account administrative services and ancillary fees during the contractual period. Our AUMs totaled $2.0 billion at December 31, 2020, an increase of $156.5 million, or 8.6%, from $1.8 billion at December 31, 2019. This increase in AUM in 2020 was mainly driven by net new assets of $105.0 million, representing an increase of 5.8% in AUM, as the Company’s sales team continued to execute against the Company’s relationship-centric strategy, successfully increasing share of wallet of existing customers and acquiring new customers by leveraging the Company's broad commercial and branch network. In addition, the increase in AUM in 2020, includes the market valuation effect in 2020. The Company remains focused on growing AUM, both domestically and internationally, in efforts to further build up the franchise and strengthen the Company’s fee-driven business.

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

Credit card issuance fees are generally recognized over the period in which the cardholders are entitled to use the cards. Interchange fees, other fees and revenue sharing 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. Card servicing fees have included credit card issuance and credit and debit card interchange and other fees.

We revised our card program to continue to serve our card customers, reduce risks and increase the efficiency of a relatively small program. We entered into referral arrangements with recognized U.S.-based card issuers which will permit us to serve our international and domestic customers and we will earn referral fees and share interchange revenue without exposure to credit risk. Our credit card issuance and interchange fees, and interest, decreased in 2020 compared to 2019, as we ceased to be a direct card issuer early in 2020.

In 2019 and prior periods, we historically provided certain administrative services to the Former Parent’s non-U.S. affiliates under certain administrative and transition service agreements with arms-length terms and pricing. Income from this source was generally based on the direct costs associated with providing the services plus a markup, and reviewed periodically. These fees were paid by our Former Parent and its non-U.S. affiliates in U.S. Dollars. In 2019, we were paid approximately $1.0 million for these services. These administrative and transition services ended in 2019, therefore, we earned no fees for these services in 2020. Our Former Parent’s non-U.S. affiliates have also provided, and continue to provide, certain shareholder services to us under a service agreement.

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Our gains and losses on sales of securities are derived from sales from our securities portfolio and are 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.

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. Our fees income generated on customer interset rate swaps are reported in other noninterest income income.

Noninterest Expense. Noninterest expense consists, among other things of: (i) salaries and employee benefits; (ii) occupancy and equipment expenses; (iii) professional and other services fees; (iv) FDIC deposit and business insurance assessments and premiums; (v) telecommunication and data processing expenses; (vi) depreciation and amortization; and (vii) other operating expenses.

Salaries and employee benefits include compensation (including severance expenses), 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 regulatory agency fees, such as OCC examination fees.

FDIC deposit and business insurance assessments and premiums include deposit insurance, net of any credits applied against these premiums, corporate liability and other business 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 advertising, marketing (including rebranding expenses), community engagement, and other operational expenses. Other operating expenses include the incremental cost associated with servicing the large number of shareholders resulting from the Spin-off. Other operating expenses are partially offset by other operating expenses directly related to the origination of loans, which are deferred and amortized over the life of the related loans as adjustments to interest income in accordance with GAAP.

Noninterest expenses generally increase as our business grows and whenever necessary to implement or enhance policies and procedures for regulatory compliance. During 2020, 2019 and 2018, we incurred in restructuring expenses of approximately $11.9 million , $5.0 million and $6.4 million, respectively, which included: (i) staff reduction costs of $6.4 million, $1.5 million and $4.7 million in 2020, 2019 and 2018, respectively; (ii) digital transformation expenses and branch closure expense of $3.1 million and $2.4 million, respectively, in 2020; (iii) rebranding costs of $3.6 million and $0.4 million in 2019 and 2018, respectively, and (iv) an aggregate $1.3 million in legal, strategy and advisory costs and other costs in 2018.

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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 risks in each category of assets. 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.

We review and update our allowance for loan loss model annually to better reflect our loan volumes, and credit and economic conditions in our markets. The model may differ among our loan segments to reflect their different asset types, and includes qualitative factors, which are updated semi-annually, based on the type of loan.

Capital. Financial institution regulators have established minimum capital ratios for banks 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, including market conditions.

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 fully-insured brokered time deposits under $250,000. In addition, in 2020, the Company began offering interest-bearing deposit products to broker-dealer firms through a third-party deposit broker network, including brokered money market and brokered interest bearing demand deposit accounts. However, we remain focused on relationship-driven core deposits. 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 readily convertible into cash without undue loss, the characteristics and maturities of our assets when compared to the characteristics of our liabilities and other factors.

Material Trends and Developments

COVID-19 Pandemic

On March 11, 2020, the World Health Organization recognized an outbreak of a novel strain of the coronavirus, COVID-19, as a pandemic.

On March 13, 2020, the President of the Unites States of America (U.S.) declared a national state of emergency. In response to this outbreak, the governments of many states, cities and municipalities in the U.S., including the States of Florida, New York and Texas, have taken preventative or protective actions, such as imposing restrictions on business operations and advising or requiring individuals to limit or forego their time outside of their homes.

Business Continuity Plan Activated

The health and well-being of the Company’s employees, customers, and local communities remains paramount while the Company continues to provide the necessary services and products to customers with minimal disruption.

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On March 16, 2020, we activated the Company's well-established Business Continuity Plan, or BCP. The BCP has effectively ensured the Company's resilient platform continues to operate during these extraordinary times, and has allowed us to continue providing the quality of products and services our customers have come to expect. The plan is supported and complemented by a robust business continuity governance framework, life safety program and annual enterprise-wide exercise and training program. The Company’s BCP plan is framed based on industry best practices and regulatory guidelines and is subject to periodic testing and independent audits. On June 3, 2020, the Company started Phase 1 of reintroducing employees working remotely back to the workplace. As a result, banking centers returned to regular business hours, following strict federal, state and local government guidelines supporting the safety of our employees and our customers. In the third quarter of 2020, we began to roll out a new phase of reintroducing an increased number of employees back to the office, excluding those who face challenges related to the COVID-19 pandemic that would prevent them from returning. To support these efforts, we have ramped up safety protocols, including implementing staggered schedules, in an abundance of caution to protect the health and safety of our employees. The Company’s banking centers continue to operate on a regular schedule under strict federal, state and local government safety guidelines. The Company continues to focus on serving customers without interruption, while maintaining a safe environment.

Supporting Our Communities

Beginning on March 26, 2020, we began providing an array of tangible and meaningful support measures to support our customers and communities during the COVID-19 pandemic. These measures include waiving the Bank’s ATM fees for customers and non-customers, late payment fees on all consumer and business loans, and deposit account fees on a case-by-case basis. Measures related to waiving of fees, with the exception of late payment fees on loans, were discontinued during the third quarter. The Bank is also refraining from reporting negative information such as past due balances to credit bureaus, and, importantly, offering individualized loan payment assistance such as interest payment deferral and forbearance options. Additionally, in April 2020, the Bank increased its mobile check deposit limits. All of these efforts align with regulatory guidance aimed at helping customers and communities, while remaining prudent and manageable, and will continue until further notice.

CARES Act

On March 27, 2020, the CARES Act, an approximately $2.0 trillion COVID-19 response bill, to provide emergency economic relief to individuals, small businesses, mid-size companies, large corporations, hospitals and other public health facilities, and state and local governments, was enacted. The CARES Act allocated the SBA $350.0 billion to provide loans of up to $10.0 million per small business as defined in the CARES Act. On April 2, 2020, the Bank began participating in the SBA’s PPP, by providing loans to these businesses to cover payroll, rent, mortgage, healthcare, and utilities costs, among other essential expenses. On April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act, adding funding to the PPP, was enacted. On July 4, 2020, new legislation was signed into law that extended the availability of loans from June 30, 2020 until August 8, 2020. On August 8, 2020, legislation providing funds through the PPP program expired. As of December 31, 2020, total PPP loans were $198.5 million, representing over 2,000 loans approved. Approximately 90% of these loans were under $350,000 each and represented approximately 51% of the PPP loan balances.The Company estimates as of December 31, 2020, there were $95.4 million of deposits related to PPP loans primarily funded in the second quarter of 2020. In January 2021, the Company started to process new applications and obtain approvals from the SBA in round three of the PPP authorized under a new law enacted on December 27, 2020.

Main Street Lending

The Company originated loans as part of the MSLP in the fourth quarter of 2020. Under this program, which ran through January 8, 2021, the Federal Reserve purchased 95% of each qualifying loan originated by the Company under such program to small and mid-sized businesses. In the fourth quarter of 2020, the Company received fees of approximately $0.5 million from the origination of $56.3 million of loans in this program as of December 31, 2020.

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Loan Loss Reserve and Mitigation Programs

On March 26, 2020, the Company began offering loan payment relief options to customers impacted by the COVID-19 pandemic, including deferral and/or forbearance options. These programs continued in the second third and fourth quarters of 2020. Loans which have been modified under these programs totaled $1.1 billion as of December 31, 2020. As of December 31, 2020, $43.4 million, or 0.7% of total loans, were still under the deferral and/or forbearance period. The balance as of December 31, 2020 includes $15.8 million of loans under a second deferral and $26.8 million under a third deferral, which the Company began to selectively offer as additional temporary loan modifications under programs that allow it to extend the deferral and/or forbearance period beyond 180 days. In accordance with accounting and regulatory guidance, loans to borrowers benefiting from these measures are not considered TDRs. The Company is closely monitoring the performance of these loans under the terms of the temporary relief granted.

The following table summarizes the loan balances in these programs as of December 31, 2020, September 30, 2020, June 30, 2020 and May 1, 2020:

(in thousands)

The Company performed a comprehensive review of its loan exposures by industry to identify those most susceptible to increased credit risk as a result of the COVID-19 pandemic. The Company estimated the outstanding loan portfolio is represented by loans to borrowers in industries, or with collateral values, that are potentially more vulnerable to the financial impact of the pandemic to be approximately 45% at December 31, 2020, compared to 33% at March 31, 2020. The Company estimates approximately 67% of these loans are secured with real estate collateral at December 31, 2020, compared to 49% at March 31, 2020.

The Company recorded a provision for loan losses of $88.6 million in 2020, compared to a reversal of loan losses of $3.2 million in 2019.The increase in provision for loan losses in 2020 was mainly driven by additional specific reserve requirements due to loan portfolio deterioration as well as estimated probable losses reflecting deterioration in the macro-economic environment as a result of the COVID-19 pandemic across multiple impacted sectors.

The Company consistently reviews its existing credit approval practices to ensure that sound and prudent underwriting standards continue to drive the Company’s business relationships. As a result, the Company enhanced the monitoring of its entire loan portfolio and has proactively increased the frequency of periodic reviews and conversations with loan customers in anticipation of their future needs, which aligns with our relationship-centric banking model.

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Risks and Uncertainties

The COVID-19 pandemic has severely restricted the level of economic activity in the U.S. and around the world since March 2020. Several states and cities across the U.S., including the States of Florida, New York and Texas and cities where we have banking centers, LPOs and where our principal place of business is located, have also implemented quarantines, restrictions on travel, “shelter at home” orders, and restrictions on types of business that may continue to operate. While some of these measures and restrictions have been lifted and most businesses began to reopen, the Company cannot predict when restrictions currently in place may be lifted, or whether restrictions that have been lifted will need to be imposed or tightened in the future if viewed as necessary due to public health concerns. Given the uncertainty regarding the spread and severity of the COVID-19 pandemic and its adverse effects on the U.S. and global economies, the impact to the Company’s financial statements cannot be accurately predicted at this time. See—Risk Factors under Part I, Item 1A in this Form 10-K.

Seasonality

Our loan production, generally, is subject to seasonality, with the lowest volume typically in the first quarter of each year.

Summary Results

The summary results for the year ended December 31, 2020 include the following (See Item 6, “ Selected Financial Data” for an explanation of non-GAAP financial measures):

•Net loss for the full-year 2020 was $1.7 million, compared to net income of $51.3 million in full-year 2019. Net loss for the full-year 2020 was primarily driven by $88.6 million in provision for loan losses during the period. Diluted loss per share of $0.04 in 2020, compared to diluted income per share of $1.20 in 2019 on a GAAP basis.

•Net interest income for the full-year 2020 was $189.6 million, down 11.0% compared to $213.1 million in 2019. The NIM for full-year 2020 declined to 2.52% from 2.85%, primarily attributed lower yields on interest earning assets, partially offset by lower costs of deposits and wholesale funding as well as higher average balance of earning assets.

•The Company recorded a provision of loan losses for $88.6 million during 2020, compared to a $3.2 million release of provision during 2019. The ratio of ALL to total loans was 1.90% as of December 31, 2020, up from 0.91% at the end of 2019. The ratio of net charge-offs to average total loans in 2020 was 0.52%, up from 0.11% in 2019.

•Noninterest income was $73.5 million for the full-year of 2020, up 28.6% from $57.1 million in 2019, driven by gains on sale of securities during 2020 and an increase in broker, advisory and fiduciary fee income, partially offset by a $1.7 million loss on the sale of the Beacon Operations Center recorded in 2020. Also included in 2019 was a $2.8 million gain on the sale of vacant Beacon land .

•Noninterest expense was $178.7 million for the full-year 2020, down 14.6% from $209.3 million in 2019, mainly driven by lower salaries and employee benefits resulting from staff reductions, changes to variable and long-term incentive programs, and deferred PPP loan origination costs from loans originated in 2020. Partially offsetting these declines were additional staff reduction costs, digital transformation expenses, depreciation and amortization expense in connection with branch closures in 2020 and higher FDIC assessment and insurance expenses. Adjusted noninterest expense for the full-year 2020 was $166.8 million, down 18.3% compared to $204.3 million for 2019.

•The efficiency ratio was 68.0% (63.0% adjusted for restructuring costs and the one-time loss on sale of the Beacon operations center) for the full-year 2020, compared to 77.5% (76.4% adjusted for restructuring costs and the gain on sale of vacant Beacon land in 2019).

•Total loans were $5.8 billion on December 31, 2020, up $98.0 million or 1.7% compared to December 31, 2019. Total deposits were $5.7 billion on December 31, 2020, down $25.5 million, or 0.4% from $5.8 billion at year-end 2019.

•Stockholders’ book value per common share increased to $20.70 at December 31, 2020, representing an 7.0% improvement compared to $19.35 for 2019. Tangible book value per common share rose to $20.13, a 6.8% improvement compared to $18.84 at year-end 2019, which includes accretion of $0.75, or 3.85%%, to the Company’s tangible book value per common share at the close of 2020 as a result of the Tender Offer.

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Results of Operations - Comparison of Results of Operations for the Years Ended December 31, 2020and 2019

Net (loss) income

The table below sets forth certain results of operations data for the years ended December 31, 2020, 2019 and 2018:

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(1) At December 31, 2020, 2019 and 2018, potential dilutive instruments consist of unvested shares of restricted stock and restricted stock units totaling 248,750, 530,620 and 794,529, respectively, mainly related to the Company’s IPO in 2018. See Note 21 to our audited annual consolidated financial statements in this Form 10-K for details on the dilutive effects of the issuance of restricted stock on earnings per share in 2020, 2019 and 2018.

2020 compared to 2019

In 2020, the Company reported a net loss of $1.7 million, or $0.04 diluted loss per share, compared to a net income of $51.3 million, or $1.20 per diluted earnings per share in 2019. The net loss in 2020 is mainly attributable to: (i) the $88.6 million provision for loan losses in 2020 compared to a reversal of loan losses of $3.2 million in 2019, and (ii) a decrease of $23.5 million in net interest income compared to 2019. These results were partially offset by: (i) a decline of $30.6 million in noninterest expense compared to 2019 primarily due to lower salaries and employee expenses; (ii) an increase of $16.4 million in noninterest income mainly driven by higher net gains on securities in 2020, and (iii) the income tax benefit of $2.6 million in 2020 compared to an income tax expense of $12.7 million in 2019.

Net interest income declined to $189.6 million in 2020 from $213.1 million in 2019, a decrease of $23.5 million or 11.0%, mainly as a result of lower average yields on interest earning assets.This was partially offset by lower deposit and lower wholesale funding costs and higher average interest-earning asset balances. See “-Net interest Income” for more details.

The Company recorded a provision for loan losses of $88.6 million in 2020, compared to a reversal of loan losses of $3.2 million in 2019, primarily due to the estimated probable losses reflecting deterioration of our loan portfolio due to the COVID-19 pandemic and specific reserves requirements on a commercial loan relationship in 2020. See “-Analysis of the Allowance for Loan Losses” for more details.

Noninterest income increased to $73.5 million in 2020 from $57.1 million in 2019, an increase $16.4 million, or 28.6%. This increase was mainly the result of higher net gains of securities which increased $24.4 million in 2020 partially offset by lower other noninterest income. See “-Noninterest Income” for more details.

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Noninterest expense decreased to $178.7 million in 2020 from $209.3 million in 2019, a decrease of $30.6 million, or 14.6%, mainly as result of: (i) lower salary and employee benefits mainly driven by staff reductions and lower stock-based compensation expense, a $7.8 million deferral of expenses directly related to the origination of PPP loans in accordance with GAAP, and lower incentives associated with variable and long-term bonus programs; (ii) lower other operating expenses and, (iii) lower professional and other services fees. This was partially offset by higher depreciation and amortization expense, higher FDIC assessments and insurance expense and higher occupancy and equipment expenses. In 2020 and 2019, noninterest expense included $11.9 million and $5.0 million, respectively, in restructuring costs, consisting primarily of staff reduction costs, digital transformation expenses and branch closure expenses (staff reduction costs and rebranding costs in 2019). The Company implemented no staffing changes in 2020 directly related to the COVID-19 pandemic. See “-Noninterest Expense” for more details.

The Company recorded an income tax benefit of $2.6 million in 2020 compared to an income tax expense of $12.7 million in 2019, mainly due to the deferred tax benefit recorded in 2020 as a result of an increase in the allowance for loan losses in 2020.

Adjusted net income in 2020 was $3.7 million, or $0.09 per diluted earnings per share, a decrease of $49.4 million, or 93.0%, compared to adjusted net income of $53.1 million, or $1.24 per diluted earnings per share in 2019. In 2020, adjusted net income excludes a loss of $1.7 million on the sale of the Beacon Operations Center and restructuring costs totaling $11.9 million ($2.8 million gain on sale of the vacant Beacon land and restructuring costs of $5.0 million in 2019). Operating income was $57.3 million million in 2020, down $1.0, or 1.7%, from $58.3 million in 2019. Operating income excludes provisions for loan losses or reversals, net gains on securities and income tax expense or benefit. See “Item 6. Selected Financial Data - Non-GAAP Financial Measures Reconciliation” for a reconciliation of these non-GAAP financial measures to their GAAP counterparts.

2019 compared to 2018

Net income of $51.3 million and $1.20 diluted earnings per share in 2019 increased $5.5 million, or 12.0% from net income of $45.8 million and $1.08 diluted earnings per share reported in 2018.

The increase in net income is mainly attributable to: (i) lower noninterest expense compared to 2018 mostly related to lower restructuring and Spin-off costs, (ii) higher noninterest income mostly related to derivative contracts sold to loan customers, and (iii) a larger release of provision for loan loses compared to 2018. These results were partially offset by lower net interest income as the cost of deposits increased.

Net interest income declined from $219.0 million in 2018 to $213.1 million in 2019, a decrease of $6.0 million or 2.7%, mainly as a result of higher deposit costs, mostly related to time and money market deposits, as an increasing amount of foreign deposits were replaced by domestic deposits throughout the year, partially offset by higher average yields on interest earning-assets.

Noninterest income increased $3.2 million in 2019, or 6.0% compared to 2018, mainly as a result of a one-time net gain of $2.8 million on the sale of vacant Beacon land and higher fees on derivative contracts sold to loan customers. In addition, we had securities gains of $2.6 million in 2019, including an aggregate gain of $1.9 million on the sale of available for sale securities and a $0.7 million benefit from the adoption of a new accounting standard applicable to marketable equity securities. These increases were partially offset by lower brokerage, advisory and fiduciary fees, lower data processing and other fees for services provided to affiliates of the Former Parent, a net loss on the early termination of FHLB advances, lower deposit and service fees, and lower cards and trade financing service fees. See “-Noninterest Income” for more details.

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Noninterest expense decreased $5.7 million in 2019, or 2.6% compared to 2018, mainly as result of: (i) lower salary and employee benefit costs, (ii) lower legal and accounting and professional fees compared to the previous year when the Company completed the Spin-off, and (iii) lower FDIC related costs. Partially offsetting these reductions were higher compensation expenses related to the 2018 restricted IPO grants, resulting in $5.9 million of amortization expense in 2019. Noninterest expense includes $5.0 million of restructuring expenses in 2019, compared to $6.4 million of restructuring costs and $6.7 million of Spin-off costs in 2018. There were no Spin-off costs in 2019.

The Company released provisions of $3.2 million to the allowance for loan losses in 2019, compared to a provision of $0.4 million in 2018. The release was primarily driven by a lower loan balance and a commercial loan recovery of $0.9 million, partially offset by loss factor adjustments and an increase of $3.2 million in specific reserves.

Adjusted net income in 2019 was $53.1 million, or $1.25 adjusted earnings per share and $1.24 per adjusted diluted earnings per share, 8.3% lower than adjusted net income reported in 2018. In 2019, adjusted net income excludes a $2.8 million gain on sale of the vacant Beacon land and restructuring costs totaling $5.0 million. In 2018, adjusted net income excludes Spin-off costs of $6.7 million and restructuring costs of $6.4 million.

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Average Balance Sheet, Interest and Yield/Rate Analysis

The following tables present average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the years ended December 31, 2020, 2019 and 2018. 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.

Years Ended December 31,

Interest-earning assets:

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Years Ended December 31,

Interest-bearing liabilities:

Checking and saving accounts:

Non-interest-bearing liabilities:

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(1) Average non-performing loans of $64.8 million, $27.4 million and $30.8 million for the years ended December 31, 2020, 2019 and 2018, respectively, are included in the average loan portfolio, net balance. Interest income that would have been recognized on these non-performing loans totaled $2.7 million, $1.4 million and $0.9 million in 2020, 2019 and 2018, respectively.

(2) Includes nontaxable securities with average balances of $72.2 million, $121.0 million and $176.1 million for the years ended December 31, 2020, 2019 and 2018, respectively. The tax equivalent yield for these nontaxable securities was 2.94%, 3.60% and 3.48% for the years ended December 31, 2020, 2019 and 2018, respectively. In 2020, 2019 and 2018, the tax equivalent yield was calculated by assuming a 21% tax rate and dividing the actual yield by 0.79.

(3) Includes nontaxable securities with average balances of $66.1 million, $80.8 million and $87.8 million for the years ended December 31, 2020, 2019 and 2018, respectively. The tax equivalent yield for these nontaxable securities was 2.57%, 3.05% and 2.28% for the years ended December 31, 2020, 2019 and 2018, respectively. In 2020, 2019 and 2018, the tax equivalent yield was calculated assuming a 21% tax rate and dividing the actual yield by 0.79.

(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, deposits with banks and other financial assets, which yield interest or similar income.

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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

Attributable to Attributable to

(in thousands) Volume Rate Total Volume Rate Total

Interest income attributable to:

Interest expense attributable to:

Checking and saving accounts:

Securities sold under agreements to repurchase — (4) (4) (1) — (1)

In 2020, the Company repriced customer time and relationship money market deposits at lower rates, sought lower-rate alternatives to replace brokered CDs, actively implemented floor rates in the loan portfolio, assessed risk and increased spreads during extensions and renewals in order to optimize yields, looked for additional opportunities through indirect lending programs, maximized high-yield investments by purchasing higher-yielding financial institutions subordinated debt, and effectively managed its professional funding sources as liquidity remained high during the period. Also, in 2020, the Company reduced interest expense by restructuring $420 million in FHLB advances and redeemed $28.1 million of its junior subordinated debt. In addition, the Company reduced asset sensitivity via duration. See discussion on net interest income below for further details.

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In 2019, the Company completed its planned strategic exit from foreign financial institutions (“FI”) loans and non-relationship shared national credit facilities or SNCs, resulting in lower average loan balances compared to 2018. Loan yields increased on improved loan mix and higher market rates during the first half of 2019. The securities portfolio experienced a slight decline as we experienced higher prepayments on SBA securities and commercial mortgage-backed securities (“CMBS”). The cost of deposits increased as declining low-cost foreign deposits were replaced with higher-cost domestic retail and brokered time deposits, resulting in higher interest expense. The Company experienced lower average rates on advances from the FHLB and junior subordinated debentures as it took proactive steps in 2019 to lower the rates paid on borrowings. See discussion on net interest income below for further details.

Net interest income

2020 compared to 2019

In 2020, we earned $189.6 million of net interest income, a decrease of $23.5 million, or 11.0%, from $213.1 million in 2019. The decrease in net interest income was primarily driven by a 73 basis point decline in the average yield on interest-earning assets resulting from the Federal Reserve rate reductions and cuts, including the emergency rate cuts in March 2020 and the declines in the benchmark interest rate in the second half of 2019. These results were partially offset by: (i) a decrease of 45 basis points in average rates paid on total interest bearing liabilities mainly driven by lower costs of total deposits and FHLB advances, as well as lower interest expense due to the redemption of trust preferred securities and related junior subordinated debt in the third quarter of 2019 and first quarter of 2020, (ii) a 1.0% decrease in the average balance of total interest bearing liabilities partially offset by an increase in the average balance of time deposits and the expense associated with the Senior Notes issued in the second quarter of 2020, and (iii) a 0.7% increase in the average balance of interest-earning assets mainly due to higher loan balances and higher cash balances at the Federal Reserve . Net interest margin decreased to 2.52% in 2020, a decline of 33 basis points from 2.85% in 2019 .

Interest Income. Total interest income was $260.6 million in 2020 compared to $313.0 million in 2019. The $52.4 million, or 16.7%, decline in total interest income was primarily due to lower yields of interest-earning assets as result of the aforementioned Federal Reserve rate reductions and cuts. This was partially offset by higher average balances of interest-earning assets driven by higher loan balances and higher cash balances at the Federal Reserve. See “—Average Balance Sheet, Interest and Yield/Rate Analysis” for detailed information.

Interest income on loans in the year ended December 31, 2020 was $220.9 million compared to $263.0 million in 2019. The $42.1 million, or 16.0%, decline was primarily due to a 79 basis points decrease in average yields, partially offset by a 1.0% increase in the average balance of loans during the year ended December 31, 2020 over 2019, mainly as a result of PPP loans primarily originated in the second quarter of 2020 as well as higher-yielding consumer loans purchased throughout 2020. In addition, the decrease in interest income on loans in 2020 includes a decline of $0.7 million related to lower prepayment penalties collected on loans in 2020 compared to 2019.

Interest income on the available for sale debt securities portfolio decreased $6.4 million, or 15.9%, to $34.0 million in 2020 compared to $40.4 million in 2019. This decrease was mainly due to a 33 basis point decline in the average yields accompanied by a decline of 4.2% in the average balance of available for sale debt securities. These results include the effect of a surge in prepayments on available for sale debt securities, mainly mortgage-related securities, of around $270.1 million in 2020 driven by lower market rates and higher refinancing demand. During 2020, the Company purchased $261.5 million in higher yielding corporate securities, including $138.8 million in financial institutions subordinated debt. Also, during 2020, the Company proactively managed its investment securities portfolio as an economic hedge against the declining market interest rates. This resulted in an increase in securities gains of $24.4 million in 2020, mainly gains on sale of available for sale debt securities, which exceeded the decline of $23.5 million in net interest income in 2020.

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Interest Expense. Interest expense on interest-bearing liabilities decreased $28.9 million, or 28.9%, to $71.0 million in 2020 compared to $99.9 million in 2019, primarily due to lower cost of FHLB advances and deposits, lower interest expense due to the aforementioned redemptions of trust preferred securities, and lower average balances of total interest-bearing liabilities. The decreases in average rates paid and average balances of total interest bearing liabilities were partially offset by an increase in the average balance of time deposits and the Senior Notes issued in the second quarter of 2020.

Interest expense on deposits decreased to $53.3 million in the year ended December 31, 2020 compared to $68.4 million for the comparable period of 2019. The $15.0 million, or 22.0%, decrease was primarily due to a 29 basis point decrease in the average rate paid on total deposits, mainly the result of lower average rates paid on money market deposit accounts and time deposits. In addition, there was a 0.6% decline in the average balance of total deposits, mainly lower average balance of checking and savings accounts partially offset by higher average balance of time deposits. Average total time deposits increased $15.8 million, or 0.7%, mainly as a result of our efforts to capture online deposits. Average online deposits increased $116.2 million, or 128.7%, to $206.4 million in 2020 compared to $90.3 million in 2019. The increase in the average balance of total time deposits in 2020, was partially offset by decreases in the average balance of customer certificates of deposits (“CDs”) and brokered CDs of $71.5 million, or 4.3%, and $28.9 million, or 4.8%, respectively. As of December 31, 2020, the Company had $523.7 million of time deposits maturing in the first three months of 2021, which the Company expects to reprice at lower market rates. This is expected to decrease the average cost of CDs by approximately 30bps. Average total checking and savings account balances decreased $47.2 million, or 1.8%, mainly driven by a decline of $153.8 million, or 7.1%, in the average balance of international accounts. The decline in average international deposits includes a decline of $163.2 million, or 9.0%, in personal accounts and an increase of $9.3 million, or 2.8%, in commercial accounts. The overall decline in average personal accounts is primarily due to the continued outflow of funds of our Venezuelan customers as difficult living conditions in their country persist. In 2020, the pace of utilization of deposits from Venezuelan residents declined compared to 2019, mainly attributable to: (i) lower economic activity in Venezuela as a result of health measures implemented in the country due to the COVID-19 pandemic and (ii) the Company’s sale efforts which continued to strengthen existing relationships and expansion of the Company’s banking products and services. The decrease in average total checking and savings account balances was partially offset by new third-party interest-bearing domestic brokered deposits with an average balance of $27.3 million in 2020 as well as higher average personal domestic deposits.

Interest expense on FHLB advances and other borrowings decreased $11.2 million, or 45.9%, in 2020 compared to 2019. This is the result of a decrease of 96 basis points in the average rate paid on these borrowings along with a decrease of 1.6% in the average balances. In April 2020, the Company modified maturities on $420.0 million fixed-rate FHLB advances, resulting in 26 bps of annual savings for this portfolio representing an estimated $2.4 million of cost savings in 2020. See — Capital Resources and Liquidity Management for detailed information. Advances from the FHLB are used to actively manage the Company’s funding profile by match funding CRE loans. At December 31, 2020, all FHLB advances bear fixed interest rates raging from 0.62% to 2.42%. In addition, in 2019 the Company terminated interest rate swaps that had been designated as cash flow hedges to manage interest rate exposure on FHLB advances. As a result, the Company recorded a credit of approximately $1.4 million against interest expense on FHLB advances in 2020 ($1.2 million in 2019). See “—Capital Resources and Liquidity Management” for detailed information.

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Interest expense on junior subordinated debentures decreased by $4.7 million in 2020, or 64.7%, compared to 2019, mainly driven by a decline of $42.4 million, or 38.9%, in the average balance outstanding in connection with the redemption of the trust preferred securities issued by Commercebank Capital Trust III subsidiary (“Capital Trust III”), Commercebank Statutory Trust II subsidiary (“Statutory Trust II”), and Commercebank Capital Trust I (“Capital Trust I”) and related subordinated debt. On July 31, 2019 and September 7, 2019, the Company redeemed all $10.0 million of its outstanding 10.18% trust preferred securities issued by Capital Trust III, and all $15.0 million of its outstanding 10.60% trust preferred securities issued by its Statutory Trust II. On January 30, 2020, the Company redeemed all $26.8 million of its outstanding 8.90% trust preferred capital securities issued by Capital Trust I. These redemptions are expected to reduce the Company’s annual pretax interest expense by approximately $5.0 million. See “—Capital Resources and Liquidity Management” for detailed information. Additionally, on August 8, 2019 the Company entered into five interest rate swap contracts with notional amounts totaling $64.2 million, that were designed as cash flow hedges, to manage the exposure of floating interest payments on all of the Company’s variable-rate junior subordinated debentures. These cash flow hedges took advantage of the inverted yield curve to reduce the Company’s interest expense. The Company will continue to explore the use of hedging activities to manage its interest rate risk.

During 2020, we completed a $60.0 million offering of Senior Notes with a fixed-rate coupon of 5.75%. During 2020, interest expense on these Senior notes totaled $2.0 million compared to none in 2019. See “—Capital Resources and Liquidity Management” for detailed information.

2019 compared to 2018

In 2019, we earned $213.1 million of net interest income, a decrease of $6.0 million, or 2.7%, from $219.0 million of net interest income earned in 2018. The decrease in net interest income was due primarily to a 5.2% decrease in the average balance of interest-earning assets, partially offset with a 26 basis point increase in the average yield on interest-earning assets. In addition, the 6.6% decrease in average interest-bearing liabilities was accompanied by a 25 basis point increase in average rates paid. Net interest margin improved 7 basis points from 2.78% in 2018 to 2.85% in 2019.

Interest Income. Total interest income was $313.0 million in 2019 compared to $309.4 million in 2018. The $3.6 million, or 1.2%, increase in total interest income was primarily due to higher average rates on loans and securities, as well as higher average yields earned on interest-earning assets. These improvements were partially offset by a decrease in the average balance of loans as the Company completed its strategic exit from non-relationship SNCs and foreign FI loans, and a decrease in the average balances of available for sale securities.

Interest income on loans in the year ended December 31, 2019 was $263.0 million compared to $257.6 million in 2018. The $5.4 million, or 2.1%, increase was primarily due to a 31 basis points increase in average yields, partially offset with a 4.6% decrease in the average balance of loans during the year ended December 31, 2019 over 2018, mainly the result of the aforementioned strategic run-off.

Interest income on the available for sale securities portfolio decreased $2.3 million, or 5.5%, to $40.4 million in 2019 compared to $42.8 million in 2018. This decrease was primarily attributable to a decline of 7.0% in the average volume of securities available for sale mostly driven by higher prepayments on SBA and CMBS securities. Higher yields on securities available for sale, which increased an average of 4 basis points in 2019 compared to the same period in 2018, partially offset the lower average held during the period.

Interest Expense. Interest expense on interest-bearing liabilities increased $9.6 million, or 10.6%, to $99.9 million in 2019 compared to $90.3 million in 2018, primarily due to higher average interest rates on deposits, partially offset by lower average deposit account balances and lower rates and balances on advances from the FHLB and junior subordinated debentures.

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Interest expense on deposits increased to $68.4 million in the year ended December 31, 2019 compared to $55.8 million for the comparable period of 2018. The $12.6 million, or 22.6%, increase was primarily due to a 33 basis point increase in the average rate paid on total deposits, primarily consisting of a 43 basis point increase in the average rate paid on time deposits.

The average rate increase experienced on deposits resulted primarily from the decline of low-cost international deposits replaced by higher cost domestic deposits mostly consisting of time deposits. The decrease of $347.5 million, or 11.4%, in average total interest bearing checking and saving account balances is primarily the result of a decline of $433.0 million, or 16.8%, in the average balance of international accounts, partially offset by higher average domestic deposits. The decline in average international deposits includes $75.4 million, or 18.9%, in commercial accounts and $357.6 million, or 16.4%, in personal accounts. The overall decline in average commercial and personal accounts is primarily due to the continued outflow of funds of our Venezuelan customers as living conditions in their country remain challenging, and the Venezuelan economy is further dollarized.

Interest expense on FHLB advances and other borrowings decreased $2.1 million, or 8.1%, in 2019 compared to 2018. This is the result of a decrease of 5.5% in the average balances along with a decrease of 6 basis points in the average rate paid on these borrowings. Advances from the FHLB are used to actively manage the Company’s funding profile by match funding CRE loans. FHLB advances bear fixed interest rates from 0.71% to 3.23%, and variable interest rates based on 3-month LIBOR, which decreased to 1.91% at December 31, 2019 from 2.82% at December 31, 2018. At December 31, 2019, $1,085.0 million (87.9%) of FHLB advances were fixed rate and $150.0 million (12.1%) were variable rate. Beginning in the first quarter of 2019, the Company terminated interest rate swaps designated as cash flow hedges to manage interest rate exposure on FHLB advances, resulting in a credit of approximately $1.2 million against interest expense on FHLB advances. Additionally, the Company executed fixed-rate longer term advances with callable features to lower the cost of professional funding. The Company also redeemed $25 million of its most expensive fixed-rate trust preferred securities and executed swaps on the remaining variable rate trust preferred securities, resulting in a decrease of 7.9% in the average balances and a 24 basis point decrease in the average rate paid on these liabilities.

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Analysis of the Allowance for Loan Losses

Set forth in the table below are the changes in the allowance for loan losses for each of the periods presented.

Years Ended December 31,

Charge-offs

Domestic Loans:

Real estate loans

Commercial real estate (CRE)

Nonowner occupied $ — $ — $ (5,839) $ (97) $ (94)

Owner occupied (75) — — (25) (24)

International Loans (1):

Recoveries

Domestic Loans:

Real estate loans

Commercial real estate (CRE)

Multi-family residential — — — — 1

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Years Ended December 31,

International Loans (1):

Real Estate

Single-family residential — — 4 10 21

______________

(1) Includes transactions in which the debtor or the customer is domiciled outside the U.S., even when the collateral is located in the U.S.

Set forth in the table below is the composition of international loan charge-offs by country for each of the periods presented.

Years Ended December 31,

Commercial loans:

Brazil $ — $ — $ 1,473

Other countries with less than $1,000 34 62 —

Consumer loans and overdrafts:

Other countries with less than $1,000 20 635 —

______________

(1) Increase in charge-offs during 2019 is primarily related to the credit card portfolio being phased out.

2020 compared to 2019

During 2020 charge-offs increased to $30.9 million, compared to $8.8 million in 2019. The increased during 2020 was mainly driven by: (i) a $19.3 million charge off related to certain loan agreements with a Miami-based U.S. coffee trader (“the Coffee Trader”); (ii) a $5.0 million commercial loan to a building contractor (iii) $1.9 million on a commercial loan to a South Florida food wholesale borrower; (iv) $2.0 million related to three unsecured commercial loans and (v) $0.4 million related to multiple credit cards due to the discontinuation of the Company’s credit card products. The aforementioned $0.4 million in credit card charge-offs had already been reserved and the Company did not experience any unanticipated losses during 2020. During 2020, recoveries decreased to $0.9 million compared to $2.5 million one year ago, mainly attributable to a $0.9 million recovery in 2019 related to one commercial loan.The ratio of net charge-offs to average total loan portfolio during 2020 increased 41 basis points, to 0.52% in 2020 from 0.11% in 2019.

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The Company recorded a provision for loan losses of $88.6 million in 2020, compared to a reversal of loan losses of $3.2 million in 2019.The increase in provision during 2020 includes additional specific reserves as a result of loan portfolio deterioration and downgrades during the period. These specific reserves requirements include: (i) $31.5 million related to the aforementioned Coffee Trader loan relationship; (ii) $9.2 million related to a commercial loan to a food wholesaler in the cruise industry, and (iii) $5.0 million related to a commercial loan to a building contractor. Also, the increase in provision during 2020 includes $38.3 million driven by estimated probable losses reflecting deterioration in the macro-economic environment as a result of the COVID-19 pandemic across multiple impacted sectors. The ALL associated with the COVID-19 pandemic totaled $14.8 million at December 31, 2020.

As of December 31, 2020, the loan relationship with the Coffee Trader had an outstanding balance of approximately $19.6 million unchanged from September 30, 2020, after recording the $19.3 million charge-off reported in the third quarter of 2020. As disclosed by the Company on a current report on Form 8-K filed on July 16, 2020, management considered it necessary and prudent to provide, as of the close of the second quarter of 2020, for a loan loss reserve for this indebtedness which it initially estimated at approximately $17.0 million. During the second half of 2020, based on the evaluation of additional information from the assignee leading the liquidation proceedings for the Coffee Trader, management considered it necessary and prudent to provide for an additional $11.6 million specific loan loss reserve for these loans. As a result, the Company now maintains a specific loan loss reserve of $12.2 million as of December 31, 2020 on this relationship. We continue to closely monitor the liquidation process and, as more information becomes available, management may decide to adjust the loan loss reserve for this indebtedness.

While it is difficult to estimate the extent of the impact of the COVID-19 pandemic on the Company’s credit quality, we continue to proactively and carefully monitor the Company’s credit quality practices, including examining and responding to patterns or trends that may arise across certain industries or regions. Importantly, while the Company continues to offer deferral and/or forbearance options, which are not considered TDRs, it will continue to assess its willingness to offer such programs over time.

The concentration of the loan portfolio remains stable compared to December 31, 2019. Except for loans to the real estate industry, the loan portfolio remains well diversified with the highest industry concentration representing 10.3% of total loans, down from 12.0% at December 31, 2019. At December 31, 2020, the Company’s CRE loan portfolio represented 48.6% of total loans, down from 51.7% at December 31, 2019. These loans had an estimated weighted average LTV of 60% and an estimated weighted average Debt Service Coverage Ratio (DSCR) of 1.7x at December 31, 2020. Importantly, CRE loans to top tier customers, which are those considered to have the greatest strength and credit quality, represented approximately 41% of the CRE loan portfolio at that date, unchanged from December 31, 2019.

2019 compared to 2018

During 2019, charge-offs decreased to $8.8 million, compared to $12.6 million in 2018. The decrease during 2019 is primarily attributed to lower charge-offs in CRE and C&I loans, as compared to 2018. These decreases were partially offset by $5.0 million in charge-offs of international credit cards as a result of the product sunset announced throughout the year. Additionally, recoveries increased to $2.5 million in 2019, compared to $1.9 million during 2018, mainly attributable to one commercial loan of $0.9 million. As a result, the ratio of net charge-offs / average total loan portfolio during 2019 decreased 7 basis points, to 0.11% in 2019 from 0.18% in 2018.

The Company released $3.2 million from the allowance for loan losses during 2019. This compares to a $0.4 million provision for loan losses during 2018. The release was primarily driven by lower loan balances and a commercial loan recovery of $0.9 million, partially offset by loss factor adjustments and the increase of $3.2 million in specific reserves for the $11.9 million multiple loan relationship to the food wholesale borrower discussed in the credit quality section.

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Noninterest Income

The table below sets forth a comparison for each of the categories of noninterest income for the periods presented.

Years Ended December 31, Change

Amount % Amount % Amount % Amount % Amount %

__________________

(1) Changes in cash surrender value of BOLI are not taxable.

(2) Includes net gain on sale of securities of $26.5 million and $1.9 million in the years ended December 31, 2020 and 2019, respectively, and net loss on sale of securities of 1.0 million in the year ended December 31, 2018, and unrealized gains of $0.5 million and $0.7 million in the years ended December 31, 2020 and 2019, respectively, related to the change in market value of mutual funds.

(3) Includes a loss of $1.7 million on the sale of the Beacon Operations Center in the year ended December 31, 2020, a gain of $2.8 million on the sale of vacant Beacon land in the year ended December 31, 2019, income from derivative and foreign currency exchange transactions with customers, rental income, and valuation income on the investment balances held in the non-qualified deferred compensation plan.

2020 compared to 2019

Total noninterest income increased $16.4 million, or 28.6%, in 2020 compared to 2019. These results were mainly driven by: (i) higher net gains on securities of $24.4 million in 2020; (ii) an increase of $2.0 million in brokerage, advisory and fiduciary activity fees; and (iii) a lower net loss on early extinguishment of FHLB advances recorded in 2019. The $2.0 million increase in brokerage, advisory and fiduciary activity fees was primarily due to the AUM growth in our advisory services as well as higher volume of customer trading activity following increased market volatility mainly due to the COVID-19 pandemic in 2020.

The increase in noninterest income was partially offset by: (i) the absence of a gain of $2.8 million on the sale of vacant Beacon land in 2020; (ii) a loss of $1.7 million on the sale of the Beacon Operations Center in 2020; (iii) 2.6 million in lower cards and trade finance servicing fees mainly due to the closing of the credit card product; (iv) a $2.0 million decline in income from derivative transactions due to lower customer activity; (v) lower deposit and service fees mainly due to lower wire transfer fees primarily driven by the economic slowdown in connection with the COVID-19 pandemic and the implementation of Zelle® in October 2019 and, (vi) the absence of fees for other services previously provided to the Former Parent.

Adjusted noninterest income in 2020 was $75.2 million, up $20.9 million, or 38.4%, compared to $54.3 million in 2019. Adjusted noninterest income in 2020 excludes a one-time loss of $1.7 million on the sale of the Beacon operations center. Adjusted noninterest income in 2019 excludes a one-time gain of $2.8 million on the sale of vacant Beacon land.

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2019 compared to 2018

Total noninterest income increased $3.2 million, or 6.0%, in 2019 compared to 2018. These results were mainly driven by an increase of $3.7 million in income from derivative contracts sold to loan customers, a $2.8 million gain on the sale of the vacant Beacon land in 2019, an aggregate gain of $1.9 million on the sale of available for sale securities, mainly municipal bonds and floating-rate corporate securities, and a $0.7 million benefit from the recently-adopted ASU applicable to marketable equity securities.

The increase in noninterest income was partially offset by: (i) a decline of $1.9 million in brokerage, advisory and fiduciary fees as a result of lower customer trading volume due to the trading restrictions on Venezuelan securities, (ii) $1.6 million lower data processing and fees for other services due to the discontinuation of services to our Former Parent, (iii) a net loss of $0.9 million on the early termination of FHLB advances compared to a net gain of $0.9 million in 2018, (iv) $0.7 million lower deposit and service fees as a result of lower wire transfer fees and (v) $0.5 million lower cards and trade financing service fees, primarily due to the phase out of out credit card program.

Noninterest Expense

The table below presents a comparison for each of the categories of noninterest expense for the periods presented.

Years Ended December 31, Change

Amount % Amount % Amount % Amount % Amount %

____________

(1) Includes $5.3 million in expenses in the year ended December 31, 2020 related to the 2020 Voluntary Plan and the 2020 Involuntary Plan approved in October 2020 ($4.7 million in the year ended December 31, 2018 related to the 2018 Voluntary Plan and the 2020 Involuntary Plan approved in October 2018).

(2) Includes an additional expense of $1.1 million for the remaining lease obligation in connection with the closure of two of our branches in the year ended December 31 2020.

(3) Professional and other services fees includes expenses on derivative contracts.

(4) Includes a charge of $1.3 million for the accelerated amortization of leasehold improvements in connection with the closure of one our branches in the year ended December 31, 2020.

(5) Includes advertising, marketing, charitable contributions, community engagement, postage and courier expenses, amounts which mirror the valuation income or loss on the investment balances held in the non-qualified deferred compensation plan in order to adjust the liability to participants in the plan, and provisions for possible losses on contingent loans.

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2020 compared to 2019

Noninterest expense decreased $30.6 million, or 14.6%, in 2020 compared to 2019, primarily as a result of lower salary and employee benefits, lower other operating expenses and lower professional and other services fees. These decreases were partially offset by higher depreciation and amortization expense, higher FDIC assessments and insurance expense and higher occupancy and equipment expenses.

The decrease in salaries and employment benefits of $25.9 million, or 18.9%, in 2020 compared to 2019 was mainly driven by: (i) staff reductions throughout the year as well as lower stock-based compensation expense; (ii) the deferral in accordance with GAAP of $7.8 million during the second quarter of 2020 of expenses directly related to the origination of PPP loans; and (iii) changes to the variable and long-term incentive compensation programs. This was partially offset by $4.9 million in higher severance expenses in 2020 compared to 2019, mainly driven by the 2020 Voluntary Plan and the 2020 Involuntary Plan approved in October 2020. Our full time equivalent employees, or FTEs, were 713 at December 31, 2019, down 116, or 14.0%, from 829 at the close of 2019.

The decrease of $2.7 million, or 16.5%, in professional and other services fees during 2020 compared to 2019 was mainly the result of lower legal and accounting fees, partially offset by higher consulting fees of $1.6 million in connection with the Company’s digital transformation.

Other operating expenses decreased by $7.7 million, or 49.9%, during 2020 compared to 2019, mainly due to: (i) the absence of rebranding costs in 2020 compared to $3.6 million of rebranding costs in 2019 related to the Company’s transformation efforts and (ii) slowed down marketing activity due to the COVID-19 pandemic in 2020.

The increase of $2.3 million or 32.3% in depreciation and amortization expense in 2020 compared to 2019, was mainly driven by a charge of $1.3 million for the accelerated amortization of leasehold improvements in connection with the closure of one our branches in 2020.

FDIC assessments and insurance expense increased by $2.1 million in 2020, or 51.9%, compared to 2019, primarily due to higher FDIC assessments rates in 2020 and lower credits received in 2020.

The increase of $1.4 million or 8.8% in occupancy and equipment expense in 2020 compared to 2019, was mainly driven by an additional expense of $1.1 million for the remaining lease obligation in connection with the closure of two of our branches in 2020.

During 2020, the Company remained focused on driving efficiencies across the organization while improving the banking journey and experience for customers, particularly through improved digital capabilities. In 2020, the Company completed the rollout of the Salesforce® Customer Relationship Management (“CRM”). Also, in 2020, the Company launched the first phase of nCino® loan origination platform for commercial use and expect to rollout the second and final phase in the first quarter of 2021. nCino loan origination platform for retail use is expected to be rollout in the third quarter of 2021. Salesforce is a customizable platform that will enable the Company to integrate its marketing campaigns, onboarding processes and customer service. nCino will be fully integrated with Salesforce and will enable customers, portfolio managers and underwriters to collaborate in real-time. These important launches provide the digital foundation for the Company’s relationship-driven growth strategy and maximize efficiency and productivity seamlessly in the loan origination process.

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Restructuring costs in 2020 include digital transformation expenses of $3.1 million, branch closure expenses of $2.4 million, and staff reduction costs of $6.4 million ($1.5 million of staff reduction costs and $3.6 million of rebranding costs in 2019). Digital transformation expenses in 2020 consisted of $1.6 million of professional and service fees and $1.5 million of telecommunication and data processing expenses. We had no digital transformation expenses in 2019. The $2.4 million in branch closure expenses in 2020 resulted from the Company closing one banking center in Fort Lauderdale, FL and another in Woodlands, TX on October 30, 2020.These closures are the result of extensive profitability analyses of the Company’s retail banking network and current and expected individual contributions towards the Company's strategic goals.

Adjusted noninterest expense in 2020 was $166.8 million, down $37.5 million, or 18.3%, compared to $204.3 million in 2019. Adjusted noninterest expense in 2020 and 2019, exclude the aforementioned restructuring costs.

2019 compared to 2018

Noninterest expense decreased $5.7 million, or 2.6%, in 2019 compared to 2018, primarily as a result of lower salary and employee benefits, lower professional and other service fees related to the Spin-off and restructuring activities, lower FDIC assessment and insurance costs and a favorable depreciation adjustment of $0.7 million in connection with our Beacon Operations Center. These decreases were partially offset by stock-based compensation in 2019, higher rebranding costs, and expenses connected with the redemption earlier this year of trust preferred securities and related subordinated debt.

The decrease in salaries and employment benefits of $4.4 million, or 3.1%, in 2019 compared to 2018 was mainly driven by staff reductions throughout the year, $3.2 million lower severance costs, and the $1.2 million paid in 2018 to participants of the non-qualified deferred compensation plan to partially mitigate tax effects of unexpected early distribution due to the Spin-off in 2018. This was partially offset by $5.9 million in stock-based compensation costs mainly related to the shares of restricted stock awarded in December 2018 and $2.0 million in additional costs of the Company’s LTIP tied to performance against strategic performance targets established for the 2016-2019 period. Our full time equivalent employees, or FTEs, were 829 at December 31, 2019, down 82, or 9.0%, from 911 at the close of 2018.

The decrease of $3.0 million, or 2.0%, in professional and other services fees during 2019 compared to 2018 was mainly the result of legal and strategy advisory costs associated with our restructuring activities during 2018 and legal, accounting and consulting fees associated with the Spin-off in 2018. These results were partially offset by $0.8 million in stock-based compensation to directors in 2019.

FDIC assessments and insurance expense decreased by $2.2 million in 2019. The decrease was primarily due to lower FDIC assessment costs due to credits received, the absence of the FICO assessment and lower average balances.

Other operating expenses increased $5.1 million, or 48.8%, during 2019 compared to 2018, mainly due to $3.2 million higher rebranding costs in 2019 and expenses connected with the redemption earlier this year of trust preferred securities and related subordinated debt.

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Income Taxes

The table below sets forth information related to our income taxes for the periods presented.

(in thousands, except percentages) Years Ended December 31, Change

Current tax expense:

______________

N/M means not meaningful.

2020 compared to 2019

We recorded an income tax benefit of $2.6 million in 2020 compared to an income tax expense of $12.7 million in 2019. The change is mainly due to the deferred tax benefit recorded in the period as a result of an increase in the deferred tax asset driven by the increase in the allowance for loan losses in 2020 compared to 2019. The effective tax rate, however, increased in 2020 to 60.27% from 19.83% in 2019. The increase in the effective tax rate in 2020 is primarily due to the rate differential on deferred items.

As of December 31, 2020, the Company’s net deferred tax asset was $11.7 million, an increase of $6.2 million, or 113.3% compared to $5.5 million as of December 31, 2019. This result was mainly driven by the net increase of $58.7 million in the allowance for loan losses recorded during 2020 compared to 2019, which increased the related net deferred tax asset by $14.1 million in 2020. This was partially offset by an increase of $27.7 million in net unrealized holding gains on available for sale securities during 2020, which decreased the related net deferred tax asset by $6.8 million in 2020.

2019 compared to 2018

We recorded income tax expense of $12.7 million in 2019 compared to $11.7 million in 2018. The effective tax rate, however, decreased in 2019 to 19.83% from 20.38% in 2018. The decrease in the effective tax rate in 2019 is primarily due to the windfall tax benefit related to stock-based compensation expense.

As of December 31, 2019, the Company’s net deferred tax asset was $5.5 million, a decline of $10.8 million compared to $16.3 million as of December 31, 2018. This decrease was mainly driven by an increase of $42.7 million in net unrealized holding gains on available for sale securities during 2019.

Financial Condition - Comparison of Financial Condition as of December 31, 2020 and December 31, 2019

Assets. Total assets were $7.8 billion as of December 31, 2020, a decline of $214.5 million, or 2.7%, compared to $8.0 billion at December 31, 2019, mainly driven by a decrease of $366.8 million, or 21.1% in total investment securities primarily due to maturities, sales, calls, and prepayments of available for sale debt securities. This was partially offset by an increase of $93.1 million, or 77% in cash and cash equivalents and an increase of $39.3 million, or 0.7%, in loans held for investment net of allowance for loan losses. The $39.3 million, or 0.7%, increase in loans held for investment net of allowance for loan losses was mainly driven by an increase in consumer loans and single family residential loans and includes PPP loans originated in 2020. See “—Loans”, for detailed information. This was partially offset by an increase in the allowance for loan losses in 2020 mainly due to the provision for loan losses of $88.6 million recorded in 2020. See “—Analysis of the allowance for loan losses, for detailed information.

Total assets were $8.0 billion as of December 31, 2019, a decline of $138.9 million, or 1.7%, compared to December 31, 2018. These results were mainly driven by a decrease of $166.3 million in loans held for investment net of the allowance for loan losses as foreign loans and non-relationship SNCs continued their planned decline. This was partially offset by an increase of $35.6 million in cash and cash equivalents.

The changes in our loan portfolio in 2020 were mainly the result of the Company’s efforts to increase the loan portfolio yields by purchasing higher-yielding consumer loans through indirect lending programs. The changes in our loan portfolio in 2019 reflect the execution of the Company’s strategy to reduce its foreign loan exposure, increase its domestic lending activities and the profitability on its interest-earning assets. See “—Average Balance Sheet, Interest and Yield/Rate Analysis” for detailed information, including changes in the composition of our interest-earning assets.

Cash and Cash Equivalents

2020 compared to 2019

Cash and cash equivalents increased to $214.4 million at December 31, 2020, from $121.3 million at December 31, 2019, an increase of $93.1 million, or 76.7%.This was mainly attributable to higher balances at the Federal Reserve as a part of preventive business measures to mitigate the potential negative impact of the COVID-19 pandemic.

Cash flows provided by operating activities were $57.2 million in the year ended December 31, 2020. This was primarily attributed to the net loss of $1.7 million which included the non-cash provision for loan losses of $88.6 million. Operating income was $57.3 million in 2020, which excludes the non-cash provision for loan losses and other items. See “Non-GAAP Financial Measures Reconciliation” for a reconciliation of these non-GAAP financial measures to their GAAP counterparts.

Net cash provided by investing activities was $286.3 million during the year ended December 31, 2020, mainly driven by maturities, sales and calls of debt securities available for sale and FHLB stock totaling $782.0 million and $18.7 million, respectively, and proceeds from loan sales totaling $71.6 million. These proceeds were partially offset by purchases of available for sale debt securities totaling $399.2 million and a net increase in loans of $199.9 million mainly due to an increase in consumer loans and single family residential loans as well as PPP loans originated in 2020. See “—Loans”, for detailed information.

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In the year ended December 31, 2020, net cash used in financing activities was $250.5 million, mainly driven by: (i) a net decrease of $378.8 million in time deposits; (ii) $185.1 million in net repayments of FHLB advances; (iii) the redemption of $28.1 million of junior subordinated debentures in the first quarter of 2020, and (iv) an aggregate of $69.4 million in connection with the repurchases of Class B Common Stock completed in the first and fourth quarters of 2020. These disbursements were partially offset by a net increase of $353.3 million in total demand, savings and money market deposit balances and net proceeds of $58.4 million from the issuance of Senior Notes in the second quarter of 2020. See “Capital Resources and Liquidity Management” for more details on transactions related to FHLB advances, senior debt, junior subordinated debt, and common stock repurchases.

2019 compared to 2018

Cash flows provided by operating activities were $78.4 million in the year ended December 31, 2019. This was primarily attributed to the net income earned and the termination of interest rate swaps designated as cash flow hedges, which resulted in $8.9 million of proceeds.

Net cash provided by investing activities was $205.8 million during the year ended December 31, 2019, mainly driven by maturities, sales and calls of debt securities available for sale and FHLB stock totaling $497.7 million and $40.5 million, respectively, and proceeds from loan sales totaling $267.8 million. These proceeds were partially offset by purchases of available for sale debt securities totaling $445.9 million, a net increase in loans of $98.3 million, purchases of FHLB stock totaling $43.2 million and a net cash outflow of $14.4 million associated with the acquisition of the Cayman Bank.

In the year ended December 31, 2019, net cash used in financing activities was $248.6 million. These activities included a $308.8 million net decrease in total demand, savings and money market deposit balances, the $28.5 million repurchase of Class B common stock completed in the first quarter of 2019 and the redemption of $25.9 million in junior subordinated debentures in the third quarter of 2019. These disbursements were partially offset by $18.8 million higher time deposits and $29.2 million in net proceeds from the issuance of Class A common stock in the first quarter of 2019, which were used to purchase Class B common stock.

Loans

Loans are our largest component of interest-earning assets. The table below depicts the trend of loans as a percentage of total assets and the allowance for loan losses as a percentage of total loans for the periods presented.

December 31,

Total loans, gross (1) / Total assets 75.2 % 71.9 % 72.9 %

Allowance for loan losses / Total loans, gross (1) (2) 1.90 % 0.91 % 1.04 %

Total loans, net (3) / Total assets 73.8 % 71.3 % 72.1 %

_______________

(1) Total loans, gross is the principal balance of outstanding loans held for investment net of deferred loan origination costs, net of deferred fees, but not net of the allowance for loan losses.

(2) See Note 5 to our audited consolidated financial statements for more details on our impairment models.

(3) Total loans, net is the principal balance of outstanding loans held for investment net of deferred loan origination costs, net of deferred fees, and net of the allowance for loan losses.

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The composition of our CRE loan portfolio by industry segment at December 31, 2020, 2019 and 2018 is depicted in the following table:

December 31,

_______________

(1) Includes loans generally granted to finance the acquisition or operation of non-owner occupied properties such as retail shopping centers, free-standing single-tenant properties, and mixed-use properties primarily dedicated to retail, where the primary source of repayment is derived from the rental income generated from the use of the property by its tenants.

The table below summarizes the composition of our loan portfolio by type of loan as of the end of each period presented. International loans include transactions in which the debtor or customer is domiciled outside the U.S., even when the collateral is U.S. property. All international loans are denominated and payable in U.S. Dollars.

December 31,

Domestic Loans:

Real estate loans

Commercial real estate (CRE)

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December 31,

International Loans:

Real estate loans

Owner occupied — — — — —

__________________

(1) Mostly comprised of loans secured by cash or U.S. Government securities

(2) Includes customers’ overdraft balances totaling $0.7 million, $1.3 million, $1.0 million, $1.8 million and $1.7 million at each of the dates presented.

(3) There were no outstanding credit card balances as of December 31, 2020. At December 31, 2019, 2018, 2017 and 2016, balances are mostly comprised of credit card extensions of credit to customers with deposits with the Bank. The Company phased out its legacy credit card products in the first quarter of 2020 to further strengthen its credit quality.

(4) Secured by real estate properties located in the U.S.

(5) International customers’ overdraft balances were de minimis at each of the dates presented.

As of December 31, 2020, the loan portfolio increased $98.0 million, or 1.7%, to $5.8 billion, compared to $5.7 billion at December 31, 2019. Domestic loans increased by $116.5 million, or 2.1%, as of December 31, 2020, compared to December 31, 2019. The increase in total domestic loans includes net increases of $169.2 million, $115.6 million and $53.1 million in consumer loans, single-family residential loans and owner occupied loans, respectively.This was partially offset by declines of $134.8 million and $86.7 million in domestic domestic CRE loans and commercial loans, respectively, mainly driven by a reduction in lower yielding non-relationship loans, and lower economic activity and more stringent credit underwriting standards associated with the COVID-19 pandemic. The decrease in domestic commercial loans was partially offset by approximately $198.5 million in PPP loans, originated during 2020. The increase in domestic consumer loans includes $165.8 million in high-yield indirect consumer loans purchased during 2020. The increase in domestic single-family residential loans was mainly driven by a significant increase in refinancing demand of loans originated by other institutions as a result of low market rates. Loans to international customers, primarily from Latin America, declined by $18.5 million, or 10.8%, as of December 31, 2020, compared to December 31, 2019, mainly driven by a reduction of $17.2 in single-family residential loans from Venezuela primarily due to payoffs during 2020.

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In 2019, the loan portfolio decreased $175.8 million, or 3.0%, to $5.7 billion, compared to $5.9 billion at December 31, 2018. As part of our business strategy, loans to international customers, primarily from Latin America, declined by $128.3 million, or 42.8%, as of December 31, 2019, compared to December 31, 2018. Domestic loans decreased by $47.5 million, or 0.85%, as of December 31, 2019, compared to December 31, 2018. This decline is mainly attributed to net decreases of $116.6 million and $73.3 million in domestic C&I loans and CRE loans, respectively, partially offset by net increases of $117.0 million and a $29.4 million in owner-occupied real estate loans and domestic single family residential loans, respectively. The decline in our loan balances in 2019 was mainly driven by the completion of our strategic run-off of foreign FI loans and sales or non-renewals of non-relationship SNCs as well as higher loan prepayments. Excluding the run-off of non-relationship SNCs, domestic loans grew by 3.7% during the year, primarily from relationship loans. While we successfully exited from non-strategic loans more rapidly than originally anticipated, we remained focused on capturing a larger share of relationship loans with their added potential to generate customer deposits and wealth management business. In addition, we focused on promoting our jumbo loan program which contributed to the increase in our single-family loan portfolio in 2019 with respect to 2018.

As of December 31, 2020, loans under syndication facilities declined $107.4 million, or 19.1%, to $454.9 million compared to $562.3 million at December 31, 2019, mainly driven by a reduction in lower-yielding non-relationship loans. In September 2018, the Company updated its application of the definition of “highly leveraged transactions,” or HLTs, to include unfunded commitments as part of the leverage ratio calculation in accordance with the “Interagency Guidance on Leveraged Lending” issued on March 22, 2013.As of December 31, 2020, syndicated loans that financed HLTs were $19.2 million, or 0.3% of total loans, compared to $35.7 million, or 0.6% of total loans, as of December 31, 2019.

The following is a brief description of the composition of our loan classes:

Commercial Real Estate (CRE) loans. We provide a mix of variable and fixed rate CRE loans. These are loans secured by non-owner occupied real estate properties and land development and construction loans.

Loans secured by non-owner occupied real estate properties are generally granted to finance the acquisition or operation of CRE properties. The main source of repayment of these real estate loans is derived from cash flows or conversion of productive assets and not from the income generated by the disposition of the property held as collateral. These mainly include rental apartment (multifamily) properties, office, retail, warehouses and industrial facilities, and hospitality (hotels and motels) properties mainly in South Florida, the greater Houston, Texas area and the greater New York City area, especially the five New York City boroughs. Concentrations in these non-owner occupied CRE loans are subject to heightened regulatory scrutiny. See “Risk Factors— Our concentration of CRE loans could result in further increased loan losses, and adversely affect our business, earnings, and financial condition.”

Land development and construction loans includes loans for land acquisition, land development, and construction (single or multiple-phase development) of single residential or commercial buildings, loans to reposition or rehabilitate commercial properties, and bridge loans mainly in the South Florida, the greater Houston, Texas area and the greater New York City area, especially the five New York City boroughs. Typically, construction lines of credit are funded based on construction progress and generally have a maturity of three years or less.

Owner-occupied. Loans secured by owner-occupied properties are typically working capital loans made to businesses in the South Florida and the greater Houston, Texas markets. The source of repayment of these commercial owner-occupied loans primarily comes from the cash flow generated by the occupying business and the real estate collateral serves as an additional source of repayment. These loans are assessed, analyzed, and structured essentially in the same manner as commercial loans.

Single-Family Residential. These loans include loans to domestic and foreign individuals primarily secured by their personal residence in the U.S., including first mortgage, home equity and home improvement loans, mainly in South Florida and the greater Houston, Texas markets. These loans have terms common in the industry. However, loans to foreign clients have more conservative underwriting criteria and terms.

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Commercial loans. We provide a mix of variable and fixed rate C&I loans. These loans are made to a diverse range of business sizes, from the small-to-medium-sized to middle market and large companies. These businesses cover a diverse range of economic sectors, including manufacturing, wholesale, retail, primary products and services. We provide loans and lines of credit for working capital needs, business expansions and for international trade financing. These loans include working capital loans, asset-based lending, participations in SNCs (loans of $100 million or more that are shared by two or more institutions), purchased receivables and SBA loans, among others. The tenors may be either short term (one year or less) or long term, and they may be secured, unsecured, or partially secured. Typically, lines of credit have a maturity of one year or less, and term loans have maturities of five years or less. In 2020, the Company began participating in the SBA’s PPP, by providing loans to businesses to cover payroll, rent, mortgage, healthcare, and utilities costs, among other essential expenses.

Commercial loans to borrowers in similar businesses or products with similar characteristics or specific credit requirements are generally evaluated under a standardized commercial credit program. Commercial loans outside the scope of those programs are evaluated on a case-by-case basis, with consideration of any exposure under an existing commercial credit program. The Bank maintains several commercial credit programs designed to standardize underwriting guidelines, and risk acceptance criteria, in order to streamline the granting of credits to businesses with similar characteristics and common needs. Some programs also allow loans that deviate from credit policy underwriting requirements and allocate maximum exposure buckets to those loans. Loans originated through a program are monitored regularly for performance over time and to address any necessary modifications.

Loans to financial institutions and acceptances. These loans primarily include trade financing facilities through letters of credits, bankers’ acceptances, pre and post-export financing, and working capital loans, among others. These loans are generally granted for terms not exceeding one year. In 2019, we substantially reduced this activity.

Consumer loans and overdrafts. These loans include open and closed-end loans extended to domestic and foreign individuals for household, family and other personal expenditures. These loans include automobile loans, personal loans, or loans secured by cash or securities and revolving credit card agreements. These loans have terms common in the industry for these types of loans, except that loans to foreign clients have more conservative underwriting criteria and terms. All consumer loans are denominated and payable in U.S. Dollars. In 2019, we announced the wind down of our credit card program to further strengthen the Company’s credit quality. We have stopped charge privileges to all cardholders, reimbursed unearned annual membership fees, and required repayment of all remaining balances by January 2020.During the first quarter of 2020, the remaining balances related to the credit card product were repaid, therefore, there are no outstanding credit card balances as of December 31, 2020.

The tables below set forth the unpaid principal balance of loans by type, by interest rate type (fixed-rate and variable-rate) and by original contractual loan maturities as of December 31, 2020:

Fixed-Rate Loans

Real estate loans

Commercial real estate (CRE)

Land development and construction loans — — — —

Loans to financial institutions and acceptances 3,507 — — 3,507

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Variable Rate Loans

Real estate loans

Commercial real estate (CRE)

Loans to financial institutions and acceptances — 13,129 — 13,129

Total Loan Portfolio

Real estate loans

Commercial real estate (CRE)

__________________

(1) Includes a total of $272.7 million of fixed-rate loans (mainly comprised of 63.6% single-family residential and 33.5% owner occupied), and $301.6 million of variable-rate loans (mainly comprised of 92.6% single-family residential and 6.7% owner occupied), maturing in 10 years or more. Fixed-rate and variable-rate loans maturing in 15 years or more represent 60.1% of total fixed-rate and 83.3% of total variable-rate loans maturing in 10 years or more, respectively, and correspond primarily to single-family residential loans.

(2) Includes a total of $1.5 billion, or 26.3% of total loans, which mature after December 31, 2021 and are priced based on variable interest rates tied to the LIBOR. In December of 2019, the Asset/Liability Committee appointed a management team charged with the responsibility of monitoring developments related to the proposed alternative reference interest rates to replace LIBOR and guide the Company through the potential discontinuation of LIBOR. In 2020, the Company launched the LIBOR cessation project to identify and quantify LIBOR exposure in all product categories and lines of business, both on- and off-balance-sheet. In addition, the project team assessed all third-party-provided products, services, and systems for LIBOR exposure to ensure their readiness. The Company will also be embarking on addressing amendments to legacy loans and derivative contracts that require updated LIBOR cessation fallback language.

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Foreign Outstanding

The table below summarizes the composition of our international loan portfolio by country of risk for the periods presented. All of our foreign loans are denominated in U.S. dollars, and bear fixed or variable rates of interest based upon different market benchmarks plus a spread.

December 31,

_________________

(1) Consists of outstanding principal amounts, net of collateral of cash, cash equivalents or other financial instruments totaling $13.3 million, $15.2 million and $19.5 million as of December 31, 2020, 2019 and 2018 respectively.

(2) Includes mortgage loans for single-family residential properties located in the U.S. totaling $86.7 million, $104.0 million and $129.0 million as of December 31, 2020, 2019 and 2018, respectively. Based upon the diligence we customarily perform to "know our customers" for anti-money laundering, OFAC and sanctions purposes, and a review of the Executive Order issued by the President of the United States on August 5, 2019 and the related Treasury Department Guidance, we believe that the U.S. economic embargo on certain Venezuelan persons will not adversely affect our Venezuelan customer relationships, generally.

(3) There were no outstanding credit card balances as of December 31, 2020. As of December 31, 2019 and 2018, include credit card balances $7.8 million and $27.2 million, respectively.

(4) Includes loans to borrowers in other countries which do not individually exceed one percent of total assets in 2020, 2019 and 2018.

As of December 31, 2020, the maturities of our outstanding international loans were as follows:

(in thousands) Less than 1 year(1) 1-3 Years(1) More than 3 years(1) Total(1)

_________________

(1) Consists of outstanding principal amounts, net of collateral of cash, cash equivalents or other financial instruments totaling $13.3 million.

(2) Includes mortgage loans for single-family residential properties located in the U.S. totaling $86.7 million.

(3) There were no outstanding credit card balances as of December 31, 2020.

(4) Includes loans to borrowers in other countries which do not individually exceed one percent of total assets in 2020.

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Loans by Economic Sector

The table below summarizes the concentration in our loan portfolio by economic sector as of the end of the periods presented.

December 31,

Amount % of Total Amount % of Total Amount % of Total

Manufacturing:

Services:

Non-financial public sector 472 — % — — % — — %

_________________

(1) Consists mainly of domestic non-bank financial services companies.

(2) Comprised mostly of CRE loans throughout South Florida, the greater Houston, Texas area, and New York.

(3) Gasoline stations represented approximately 60%, 64% and 66% of the retail trade sector at year-end 2020, 2019 and 2018, respectively.

(4) Primarily loans belonging to industrial sectors not included in the above sectors, which do not individually represent more than 1 percent of the total loan portfolio, and consumer loans which represented around 2% of the total.

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Loan Quality

We use what we believe is a comprehensive methodology to monitor credit quality and manage credit concentrations within our loan portfolio. Our underwriting policies and practices govern the risk profile and credit and geographic concentrations of our loan portfolio. We also believe we employ a comprehensive methodology to monitor our intrinsic credit quality metrics, including a risk classification system that identifies possible problem loans based on risk characteristics by loan type, as well as the early identification of deterioration at the individual loan level. We also consider the evaluation of loan quality by the OCC, our primary regulator.

Analysis of the Allowance for Loan Losses

Allowance for loan losses. The allowance for loan losses represents our estimate of the probable and reasonably estimable credit losses inherent in loans held for investment as of the respective balance sheet dates.

Our methodology for assessing the appropriateness of the allowance for loan losses includes a general allowance for performing loans, which are grouped based on similar characteristics, and a specific allowance for individual impaired loans or loans considered by management to be in a high-risk category. General allowances are established based on a number of factors, including historical loss rates, an assessment of portfolio trends and conditions, accrual status and general economic conditions, including in the local markets where the loans are made.

Loans may be classified but not considered impaired due to one of the following reasons: (1) we have established minimum Dollar amount thresholds for loan impairment testing, which results in loans under those thresholds being excluded from impairment testing and therefore not included in impaired loans and; (2) classified loans may be considered nonimpaired because, despite evident weaknesses, collection of all amounts due is considered probable.

Problem Loans. Loans are considered delinquent when principal or interest payments are past due 30 days or more. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Once a loan to a single borrower has been placed in nonaccrual status, management reviews all loans to the same borrower to determine their appropriate accrual status. When a loan is placed in nonaccrual status, accrual of interest and amortization of net deferred loan fees or costs are discontinued, and any accrued interest receivable is reversed against interest income. Typically, the accrual of interest on loans is discontinued when principal or interest payments are past due 90 days or when, in the opinion of management, there is a reasonable doubt as to collectability in the normal course of business. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent that cash is received and the loan’s principal balance is deemed collectible. Loans are restored to accrual status when loans become well-secured and management believes full collectability of principal and interest is probable.

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A loan is considered impaired when, based on current information and events, it is more likely than not that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans include loans on nonaccrual status and performing restructured loans. A loan is placed in nonaccrual status when management believes that collection in full of the principal amount of the loan or related interest is in doubt. Management considers that collectability is in doubt when any of the following factors is present, among others: (1) there is a reasonable probability of inability to collect principal, interest or both, on a loan for which payments are current or delinquent for less than ninety days; and (2) when a required payment of principal, interest or both is delinquent for ninety days or longer, unless the loan is considered well secured and in the process of collection in accordance with regulatory guidelines. Income from loans on nonaccrual status is recognized to the extent cash is received and when the loan’s principal balance is deemed collectible. Depending on a particular loan’s circumstances, we measure impairment of a loan based on an analysis of the most probable source of repayment, including the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent. A loan is considered collateral dependent when repayment of the loan is based solely on the liquidation of the collateral. Fair value, where possible, is determined by independent appraisals, typically on an annual basis. Between appraisal periods, the fair value may be adjusted based on specific events, such as if deterioration of quality of the collateral comes to our attention as part of our problem loan monitoring process, or if discussions with the borrower lead us to believe the last appraised value no longer reflects the actual market for the collateral. The impairment amount on a collateral-dependent loan is charged-off to the allowance for loan losses if deemed not collectible and the impairment amount on a loan that is not collateral-dependent is set up as a specific reserve.

In cases where a borrower experiences financial difficulties and we make certain concessionary modifications to contractual terms, the loan is classified as a troubled debt restructuring, or TDR. These concessions may include a reduction of the interest rate, principal or accrued interest, extension of the maturity date or other actions intended to minimize potential losses. Loans restructured at a rate equal to or greater than that of a new loan with comparable risk at the time the loan is modified may be excluded from restructured loan disclosures in years subsequent to the restructuring if the loans are in compliance with their modified terms. A restructured loan is considered impaired despite its accrual status and a specific reserve is calculated based on the present value of expected cash flows discounted at the loan’s effective interest rate or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent.

In 2020, the Company began offering customized loan payment relief options as a result of the impact of the COVID-19 pandemic, including deferral and forbearance options. Consistent with accounting and regulatory guidance, temporary modifications granted under these programs are not considered TDRs. See discussion further below for more information on these modifications.

Allocation of Allowance for Loan Losses

In the following table, we present the allocation of the allowance for loan losses by loan segment at the end of the periods presented. The amounts shown in this table should not be interpreted as an indication that charge-offs in future periods will occur in these amounts or percentages. These amounts represent our best estimates of losses incurred, but not yet identified, at the reported dates, derived from the most current information available to us at those dates and, therefore, do not include the impact of future events that may or not confirm the accuracy of those estimates at the dates reported. Our allowance for loan losses is established using estimates and judgments, which consider the views of our regulators in their periodic examinations. We also show the percentage of each loan class, which includes loans in nonaccrual status.

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December 31,

Domestic Loans

International Loans (2)

__________________

(1) Includes: (i) credit card receivables to cardholders for whom charge privileges have been stopped as of December 31, 2019; (ii) mortgage loans for and secured by single-family residential properties located in the U.S. The total allowance for loan losses for credit card receivables, after the charge-offs, was at $1.8 million at December 31, 2019. Outstanding credit card balances were repaid during the first quarter of 2020, therefore, there is no allowance for the credit card product as of December 31, 2020.

(2) Includes transactions in which the debtor or customer is domiciled outside the U.S. despite all collateral being located in the U.S.

In 2020, the changes in the composition of the ALL were primarily driven by the allocation of the loan loss provisions increase due to the estimated impact of the COVID-19 pandemic among the respective impacted portfolios, mostly domestic real estate, domestic commercial and domestic consumer. In addition, the allocation of the ALL in 2020 reflects loan composition changes compared to 2019, primarily driven by purchases in 2020 of domestic consumer loans and the discontinuation of the international credit cards in 2019.

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Non-Performing Assets

In the following table, we present a summary of our non-performing assets by loan class, which includes non-performing loans by portfolio segment, both domestic and international, and OREO, at the dates presented. Non-performing loans consist of (1) nonaccrual loans where the accrual of interest has been discontinued; (2) accruing loans ninety days or more contractually past due as to interest or principal; and (3) restructured loans that are considered TDRs.

December 31,

Non-Accrual Loans(1)

Domestic Loans:

Real estate loans

Commercial real estate (CRE)

Land development and construction loans — — — — 2,719

International Loans: (3)

Real estate loans

Past Due Accruing Loans(4)

Domestic Loans:

Real estate loans

Single-family residential $ — $ — $ 54 $ 112 $ 116

Owner occupied 220 — — — —

Commercial loans — — — — —

Consumer loans and overdrafts 1 — — — —

International Loans (3):

Real estate loans

Single-family residential — — 365 114 —

Consumer loans and overdrafts — 5 884 — 370

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__________________

(1) Includes loan modifications that met the definition of TDRs, which may be performing in accordance with their modified loan terms. As of December 31, 2020 and 2019, non-performing TDRs include $8.4 million and $9.8 million, respectively, in a multiple loan relationship to a South Florida borrower.

(2) As of December 31, 2020, includes a $19.6 million commercial relationship placed in nonaccrual status during the second quarter of 2020. During the third quarter of 2020, the Company charged off $19.3 million against the allowance for loan losses as result of the deterioration of this commercial relationship.

(3) Includes transactions in which the debtor or customer is domiciled outside the U.S., despite all collateral being located in the U.S.

(4) Loans past due 90 days or more but still accruing.

At December 31, 2020, non-performing assets increased $55.2 million, or 167.3%, compared to December 31, 2019. This increase was mainly due to the placement in non-accrual status of: (i) the Coffee Trader loan relationship totaling $19.6 million at December 31, 2020, net of a $19.3 million charge-off recorded in 2020 and a partial payment of $0.9 million collected in 2020; (ii) one commercial loan for $13.1 million to a food wholesaler with exposure to the cruise industry; (iii) a $7.7 million commercial relationship to a building contractor, including two commercial loans totaling $5.5 million and a $2.2 million owner-occupied loan; (iv) $5.0 million composed of four commercial loans with outstanding balances below $1.5 million to customers in the airline service provider industry, and electronic wholesaler/distributor industry; (v) $6.0 million in multiple single-family residential loans (vi) three multi-family loans totaling $11.3 million, and (vii) one CRE retail loan of $6.5 million. These increases were partially offset by $7.6 million corresponding to paydowns and payoffs in 2020.

We recognized no interest income on nonaccrual loans during 2020, 2019 and 2018. Additional interest income that we would have recognized on these nonaccrual loans had they been current in accordance with their original terms was $2.7 million, $1.4 million and $0.9 million, respectively, in these years. We recognized interest income on loans modified under troubled debt restructurings of $36 thousand, $0.2 million and $0.2 million during the years ended December 31, 2020, 2019 and 2018, respectively. At December 31, 2020, 2019 and 2018, there were $0.3 million, $0.3 million and $1.2 million, respectively of TDRs which were all accruing interest at these dates.

We utilize an asset risk classification system in compliance with guidelines established by the U.S. federal banking regulators as part of our efforts to monitor and improve asset quality. In connection with examinations of insured institutions, examiners have the authority to identify problem assets and, if appropriate, classify them or require a change to the rating assigned by our risk classification system. There are four classifications for problem assets: “special mention,” “substandard,” “doubtful,” and “loss.” Special mention loans are loans identified as having potential weakness that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects of the loan. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full questionable and there is a high probability of loss based on currently existing facts, conditions and values. An asset classified as loss is not considered collectable and is of such little value that the continuance of carrying a value on the books is not warranted.

We sometimes use the term “classified loans” to describe loans that are substandard and doubtful, and we use the term “criticized loans” to describe loans that are special mention and classified loans.

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The Company’s loans by credit quality indicators at December 31, 2020, 2019 and 2018 are summarized in the following table. We have no purchased credit-impaired loans.

Real estate loans

Commercial real estate (CRE)

Multi-family residential — 11,340 — 11,340 — — — — — — — —

_________

(1) There were no loans categorized as “Loss” as of the dates presented.

(2) Balances have been updated from the original balances reported in the Company’s press release, dated January 29, 2021, relating to its financial results for the fourth quarter and year ended December 31, 2020. This was due to downgrades resulting from ongoing reviews that took place during the preparation of the Company’s Form 10-K for the year ended December 31, 2020.

(3) As of December 31, 2020, includes $19.6 million in a commercial relationship placed in nonaccrual status and downgraded during the second quarter of 2020. As of December 31, 2020, Substandard loans include $7.3 million and doubtful loans include $12.3 million, related to this commercial relationship. During the third quarter of 2020, the Company charged off $19.3 million against the allowance for loan losses as result of the deterioration of this commercial relationship.

2020 compared to 2019

At December 31, 2020, criticized loans increased $138.6 million, or 201.8%, compared to December 31, 2019. The increase is composed of a $52.8 million, or 147.8%, increase in classified loans and a $85.8 million, or 260.2%, increase in special mention loans, compared to December 31, 2019. The $52.8 million, or 147.8%, increase in classified loans includes increases of $30.5 million, or 99.3%, and $22.3 million, or 448.7%, in substandard and doubtful loans, respectively. See discussions below.

At December 31, 2020, special mention loans increased $85.8 million, or 260.2%, compared to December 31, 2019, mainly due to downgrades to special mention of: (i) one non-owner occupied loan of $29.9 million in the CRE retail industry; (ii) one commercial loan for $21.6 million related to a service provider in the airline industry; (iii) one commercial loan totaling $15.6 million related to a manufacturer/trader of industrial grade steel; (iv) two owner occupied loans totaling $14.8 million, one in the graphic design industry and one to a bowling entertainment center, and (v) four non-owner occupied loans totaling $17.0 million operating in the CRE retail industry. This increase was partially offset by: (i) $11.7 million in upgrades during the period corresponding mainly to three non-owner occupied loans totaling $9.3 million; (ii) $6.4 million in paydowns and payoffs, and (iii) a charge-off of $1.5 million related to one commercial loan to a distributor of office equipment. All special mention loans remain current.

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At December 31, 2020, substandard loans increased $30.5 million, or 99.3%, compared to December 31, 2019. This increase included the downgrade of the $39.8 million Coffee Trader loan relationship (out of which $31.6 million were further downgraded to the doubtful classification and $0.9 million was collected as a partial payment, as a result, $7.3 million remained in the substandard classification at December 31, 2020). Also, in 2020, we downgraded a $13.1 million loan to a food wholesaler with exposure to the cruise industry (out of which $9.2 million were further downgraded to the doubtful classification in 2020, therefore, $3.9 million remained in the substandard classification at December 31, 2020). In addition, in 2020, the Company downgraded one CRE retail loan of $6.5 million, including $2.2 million further downgraded to the doubtful classification and $4.3 million that remained in the substandard classification as of December 31, 2020. Other downgrades during the period mainly included: (i) a $7.7 million commercial relationship to a building contractor composed of two commercial loans totaling $5.5 million and a $2.2 million owner-occupied loan; (ii) $5.0 million composed of four commercial loans with outstanding below $1.5 million to customers in the airline service provider industry, and electronic wholesaler/distributor industry; (iii) $6.0 million in multiple single-family residential loans, and (iv) three multi-family loans totaling $11.3 million. These increases were partially offset by: (i) the further downgrade to doubtful of $5.0 million corresponding to one of the commercial loans to the building contractor mentioned above, and (ii) $7.6 million corresponding paydowns and payoffs.

At December 31, 2020, doubtful loans increased by $22.3 million, or 448.7%%, mainly driven by the downgrade to doubtful of $31.6 million included in the aforementioned Coffee Trader loan relationship (of which $19.3 million were charged-off, therefore, $12.3 million remained in the doubtful classification at December 31, 2020). Also, the increase in doubtful loans in 2020, includes $9.2 million related to the aforementioned commercial loan of $13.1 million to a food wholesaler with exposure to the cruise industry and $2.2 million related to the aforementioned CRE retail loan of $6.5 million. Other main increases correspond to: (i) one commercial loan for $5.0 million downgraded to doubtful and charged-off, tied to the $7.7 million building contractor relationship mentioned in the previous section, and (ii) one commercial loan of $1.1 million to an electronics distributor. The increase in doubtful loans was partially offset by: (i) a charge off of $1.9 million related to a commercial loan tied to the South Florida food wholesale relationship previously mentioned, and (ii) the charge-off of one commercial loan for $1.0 million.

On March 26, 2020, the Company began offering customized loan payment relief options as a result of the impact of COVID-19, including deferral and forbearance options. Initial deferrals were mainly for 90 days, second deferrals for an additional 90 days and third deferrals above 180 days. Loans which have been modified under these programs totaled $1.1 billion as of December 31, 2020. In accordance with accounting and regulatory guidance, loans to borrowers benefiting from these measures are not considered TDRs.

As of December 31, 2020, $43.4 million, or 0.7% of total loans, were still under the deferral and/or forbearance period. The balance as of December 31, 2020 includes $15.8 million of loans under a second deferral and $26.8 million under a third deferral, which the Company began to selectively offer as additional temporary loan modifications under programs that allow it to extend the deferral and/or forbearance period beyond 180 days.

Additionally, 97.5% of the loans under deferral and/or forbearance are backed by real estate collateral with average Loan to Value (“LTV”) of 61.7% and 99.6% of loans out of forbearance have resumed regular payments. Notably, the Company now has no deferrals and/or forbearance in its hotel loan portfolio. As of December 31, 2020 this portfolio represented 3.3% of total loans. The Company continues to closely monitor the performance of the remaining loans under the terms of the temporary relief granted.

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While it is difficult to estimate the extent of the impact of the COVID-19 pandemic on the Company’s credit quality, we continue to proactively and carefully monitor the Company’s credit quality practices, including examining and responding to patterns or trends that may arise across certain industries or regions. Importantly, while the Company continues to offer customized temporary loan payment relief options, including deferral and forbearance options, which are not considered TDRs, it will continue to assess its willingness to offer such programs over time.

2019 compared to 2018

At December 31, 2019, criticized loans increased $19.3 million, or 39.0%, compared to December 31, 2018. The increase is composed of a $5.8 million, or 19.5%, increase in classified loans and a $13.5 million, or 69.0%, increase in special mention loans, compared to December 31, 2018, respectively.

The increase in classified loans is mainly attributed to the $11.9 million multi-loan relationship with the South Florida food wholesale borrower previously mentioned, one owner-occupied loan of $1.9 million, one commercial loan of $2.4 million, and one CRE loan of $0.8 million. These increases were partially offset by the upgrade of one single-family loan for $0.7 million, the charge-off of credit cards totaling $5.3 million, one commercial loan charged-off for $0.6 million, and pay downs of two owner-occupied loans totaling $1.9 million, one commercial loan for $0.9 million, and one single-family residential loan for $0.6 million.

The increase in special mention loans is mainly attributed to a $10.0 million condo construction relationship SNC loan in New York City, three commercial loan relationships totaling $4.4 million, four owner occupied loans totaling $7.7 million, and two CRE loans totaling $5.7 million downgraded to special mention during the period. This was partially offset by the downgrades from special mention, including $9.4 million of loans related to the food wholesale borrower previously mentioned, one CRE loan for $0.8 million, one owner-occupied loan relationship for $2.0 million, and the upgrade of one owner occupied loan for $2.2 million. Management believes that these individual loan downgrades are not reflective of an overall negative trend. We continue to closely monitor the performance and status of these loans.

At December 31, 2019, approximately 95% of our credit card holders were foreign, mostly Venezuelan, and the card receivables were reflecting the stresses in the Venezuelan economy. In April 2019, we revised our credit card program to further strengthen the Company’s overall credit quality. We stopped charge privileges to our riskiest cardholders and required repayment of their balances by November 2019. In October 2019, we curtailed charge privileges to the remaining cardholders and required repayment of their balances by January 2020. All amounts deemed uncollectible were charged off during 2019. Charge-offs during 2019 were $5.3 million. At December 31, 2019, the outstanding balance and the assigned allowance for loan losses after the charge-offs was $11.1 million and $1.8 million, respectively. At December 31, 2019, there were no credit cards classified as substandard. All the remaining credit card balances were repaid during the first quarter of 2020.

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Potential problem loans at December 31, 2020, 2019 and 2018 included:

Real estate loans

Commercial real estate (CRE)

Single-family residential — — —

Loans to depository institutions and acceptances — — —

Consumer loans and overdrafts (1) — 9 5,144

________

(1) Corresponds to international consumer loans.

At December 31, 2020, total potential problem loans decreased $1.8 million, or 62.8%, compared to December 31, 2019. The decrease is mainly attributed to one loan for $1.8 million to a food wholesaler which was placed in non-accrual status during the period.

At December 31, 2019, total potential problem loans decreased $9.5 million, or 77.1%, compared to December 31, 2018. The decrease is mainly attributed to two owner-occupied loans totaling $2.5 million placed on non-accrual status, two owner-occupied loans totaling $2.6 million that were paid off, three commercial loans totaling $0.5 million that were paid off or paid down, and the charge-offs of credit cards mentioned above. This decreases were partially offset by the addition of one CRE loan for $0.8 million.

Securities

Our investment decision process is based on an approved investment policy and several investment programs. We seek a consistent risk adjusted return through consideration of the following four principles:

•investment quality;

•liquidity requirements;

•interest-rate risk sensitivity; and

•potential returns on investment

The Bank’s board of directors approves the Bank’s and related companies ALCO investment policy and programs which govern the investment process. The ALCO oversees the investment process monitoring compliance to approved limits and targets. The Company’s investment decisions are based on the above-mentioned four principles, other factors considered relevant to particular investments and strategies, market conditions and the Company’s overall balance sheet position. ALCO regularly evaluates the investments’ performance within the approved limits and targets. The Company proactively manages its investment securities portfolio as a source of liquidity and as an economic hedge against declining interest rates.

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The following table sets forth the book value and percentage of each category of securities at December 31, 2020, 2019 and 2018. The book value for debt securities classified as available for sale and equity securities represents fair value. The book value for debt securities classified as held to maturity represents amortized cost. As a result of the adoption of a new accounting standards on financial instruments, in 2019, the Company reclassified its equity securities out of the available for sale category , as previously presented in prior periods, into equity securities with readily determinable fair value not held for trading.

Amount % Amount % Amount %

(in thousands, except percentages)

Debt securities available for sale:

Commercial paper — — % — — % 12,410 0.7 %

_________________

(1) December 31, 2020, 2019 and 2018 include $17.1 million, $5.2 million and $36.2 million, respectively, in “investment-grade” quality securities issued by corporate entities. The securities issuers were from Japan and Canada in three different sectors in 2020, from Japan in the financial services sector in 2019 and from Europe and Japan in three different sectors in 2018. The Company limits exposure to foreign investments based on cross border exposure by country, risk appetite and policy. All foreign investments are denominated in U.S. Dollars.

(2) As of December 31, 2020 and 2019, debt securities in the financial services sector issued by domestic corporate entities represent 2.7% and 1.3% of our total assets, respectively.

(3) Includes securities issued by U.S. government and U.S. government sponsored agencies.

(4) Includes an open-end fund incorporated in the U.S. The Fund's objective is to provide a high level of current income consistent with the preservation of capital and investments deemed to be qualified under the Community Reinvestment Act.

(5) Includes investments in FHLB and Federal Reserve Bank stock. Amounts correspond to original cost at the date presented. Original cost approximates fair value because of the nature of these investments.

As of December 31, 2020, total securities decreased by $366.8 million, or 21.1%, to $1.4 billion compared to $1.7 billion as of December 31, 2019. This decrease in 2020, was mainly driven by maturities, sales and calls totaling $530.6 million and paydowns of $285.2 million, mainly debt securities available for sale. The $285.2 million in paydowns include the effect of a surge in prepayments in 2020 as a result of lower market rates and increased refinancing demand. These results were partially offset by purchases of $409.1 million, including the purchase $261.5 million of higher yielding corporate securities. Included in the aforementioned $261.5 million are $138.8 million consisting of financial institutions subordinated debt.

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As of December 31, 2020, total available for sale debt securities includes residential and commercial mortgage-backed securities with amortized cost of $647.0 million and $123.9 million, respectively, and fair value of $666.7 million and $128.4 million, respectively. As of December 31, 2019, total available for sale debt securities includes residential and commercial mortgage-backed securities with amortized cost of $888.1 million and $150.9 million, respectively, and fair value of $894.0 million and $151.5 million, respectively.

As of December 31, 2020, total debt securities held to maturity includes residential and commercial mortgage-backed securities with total fair values of $29.5 million ($28.7 - amortized cost) and $31.6 million ($29.5 million - amortized cost), respectively. As of December 31, 2019, total debt securities held to maturity includes residential and commercial mortgage-backed securities with total fair values of $43.8 million ($43.8 - amortized cost) and $30.8 million ($30.1 million - amortized cost), respectively.

The following table sets forth the book value, scheduled maturities and weighted average yields for our securities portfolio at December 31, 2020. Similar to the table above, the book value for debt securities classified as available for sale and equity securities with readily determinable fair value not held for trading is equal to fair market value; The book value for debt securities classified as held to maturity is equal to amortized cost.

Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield

Debt securities available for sale

The investment portfolio’s average duration was 2.4, 3.8 and 3.4 years as of December 31, 2020, 2019 and 2018, respectively. These estimates are computed using multiple inputs that are subject, among other things, to changes in interest rates and other factors that may affect prepayment speeds. Contractual maturities of investment securities are adjusted for anticipated prepayments of amortizing U.S. government sponsored agency debt and enterprise debt securities, which shorten the average lives of these investments.

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Management evaluates securities for other-than-temporary impairment, or OTTI, at least semi-annually, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as an impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: OTTI related to credit losses, which must be recognized in the income statement; and OTTI related to other factors, such as interests rate changes which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. As a result of the adoption of new accounting standards on financial instruments, any changes in the fair value of equity securities with readily determinable fair value not held for trading are recognized through earnings.

Goodwill. Goodwill was $19.5 million as of December 31, 2020 and 2019 and $19.2 million at December 31, 2018. Goodwill represents the excess of consideration paid over the fair value of the net assets of a savings bank acquired in 2006, and the Cayman Bank acquired in 2019.

Liabilities. Total liabilities decreased $163.2 million, or 2.3%, to $7.0 billion at December 31, 2020 compared to $7.2 billion at December 31, 2019. This was primarily driven by: (i) a $185.0 million, or 15.0%, net decrease in advances from the FHLB; (ii) the $28.1 million redemption of junior subordinated debentures in the first quarter of 2020, and (iii) a net decline of $25.5 million, or 0.4% in total deposits, including a decline of $378.8 million in time deposits partially offset by an increase of $353.3 million in all other deposits. This was partially offset by the $58.6 million outstanding amount of Senior Notes issued in the second quarter of 2020.

Total liabilities decreased $226.2 million, or 3.1%, to $7.2 billion at December 31, 2019 compared to $7.4 billion at December 31, 2018. This decrease was mainly driven by a decline in total deposits, which include lower international deposits partially offset by increased domestic deposits, and the $25.9 million redemption of junior subordinated debentures.

See discussion on deposits further below and “Capital Resources and Liquidity Management” for more detail on the redemption of trust preferred securities and related junior subordinated debt, and Senior Debt.

Deposits

Total deposits decreased $25.5 million, or 0.4%, to $5.7 billion at December 31, 2020 compared to $5.8 billion at December 31, 2019. This was mainly due to a $378.8 million , or 15.6%, decrease in time deposits, including declines of $210.6 million, or 12.0%, and $168.2 million or 25.4%, in customer CDs and brokered CDs, respectively. The decrease in customer CDs compared to December 31, 2019 was partially offset by an increase of $61.1 million, or 44.5%, in online CDs. In 2020, the Company focused on lowering CD rates and increasing lower-cost core deposits. Specifically, the Company continued to prioritize multi-product relationships, which are not based on single product high-cost CDs. In addition, in 2020, as part of our efforts to retain customers with higher probabilities of renewal at lower market rates, we renewed approximately $408.3 million at rates that were lower than the highest rates paid in our markets.

The decrease in total deposits in 2020 was partially offset by increases of $131.7 million , or 12.0%, in interest bearing, $112.6 million, or 7.6%, in savings and money market deposit accounts and $108.9 million, or 14.3%, in noninterest bearing transaction accounts. These increases were mainly driven by: (i) $140.3 million in interest-bearing brokered deposits which the Company began to offer in 2020 to broker-dealer firms through a third party deposit network; (ii) $95.4 million in deposits related to the funds from PPP loans primarily originated in the second quarter of 2020, which the Company estimates small business customers have not fully utilized, and (iii) $68.8 million related to the offering of reciprocal deposits products to certain customers who want to make their deposits in excess of $250,000 fully eligible for FDIC insurance.

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Domestic deposits increased $81.1 million, or 2.6%, in 2020 to $3.2 billion at December 31, 2020 from $3.1 billion at December 31, 2019. Foreign deposits decreased $106.6 million, or 4.0%, in 2020 to $2.5 billion at December 31, 2020 from $2.6 billion at December 31, 2019. See discussion further below for detailed information.

Total deposits decreased $275.5 million, or 4.6%, to $5.8 billion at December 31, 2019 compared to $6.0 billion at December 31, 2018. In 2019, decreases of $189.7 million (14.7%) in interest bearing, $113.4 million (7.1%) in savings and money market account deposits and $5.6 million (0.7%) in noninterest bearing transaction accounts, were partially offset by a $33.2 million (1.4%) increase in time deposits. These changes in deposits and deposit mix were largely affected by declines in deposits from Venezuelan customers, as discussed below. Total brokered deposits in 2019 increased by $40.3 million in 2019 compared to 2018. The increase of $33.2 million in time deposits includes $12.9 million in deposits acquired from the Cayman bank, $20.3 million in brokered time deposits, and $86.3 million in online CD deposits, partially offset by a decline of $86.3 million in retail time deposits. We endeavor to retain customers with higher probabilities of renewal at lower-than-market rates, and focus on renewing CDs with lower probability of renewal through targeted promotions. These efforts led to time deposit renewals of approximately $345.5 million in 2019 at rates that were lower than the highest rates paid in our markets. In addition, we ramped up our efforts to raise online deposits within and outside our footprint and we expect this to continue to grow in 2020. In 2019, the Company rolled out CD campaigns designed to target our Venezuelan customers and capture greater share of wallet as well as a number of strategies to capture more domestic deposits and provide a better banking experience for all our customers.

Deposits by Country of Domicile

The following table sets forth the deposits by country of domicile of the depositor as of the dates presented.

December 31,

Foreign:

___________

(1) Includes brokered deposits of $634.5 million, $682.4 million, $642.1 million, $780.0 million and $690.9 million at December 31, 2020, 2019, 2018, 2017 and 2016, respectively.

(2) Based upon the diligence we customarily perform to "know our customers" for anti-money laundering, OFAC and sanctions purposes, and a review of the Executive Order issued by the President of the United States on August 5, 2019 and the related Treasury Department Guidance, we believe that the U.S. economic embargo on certain Venezuelan persons will not adversely affect our Venezuelan customer relationships, generally.

Our domestic deposits have increased every year in the period shown above, while our total foreign deposits, especially deposits from Venezuelans, have declined during the same period. Most of the Venezuelan withdrawals from deposit accounts at the Bank are believed to be due to the effect of adverse economic conditions in Venezuela on our Venezuelan resident customers. In 2020, the pace of utilization of deposits from Venezuelan residents decreased compared to the year ended December 31, 2019, primarily attributable to lower economic activity in Venezuela due to health measures implemented in the country as a result of the COVID-19 pandemic. Additionally, in 2018 and 2017, the Bank selectively closed accounts held by Venezuelan and other international customers with approximately $272.4 million of deposits to reduce its compliance costs and risks.

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The following table shows the increase or (decrease), during the year our domestic and foreign deposits, including Venezuelan resident customer deposits:

Years Ended December 31,

(in thousands, except percentages) Amount % Amount % Amount % Amount %

Foreign (1):

___________

(1) The Bank selectively closed deposit accounts held by Venezuelan and other international customers with balances of approximately $76.4 million in 2018 and $196.1 million in 2017, to reduce its compliance costs and risks. No accounts held by Venezuelan or other international customers were preemptively closed in 2020 and 2019 to reduce compliance costs and risks. We believe our deposit de-risking process is complete.

During the year ended December 31, 2020, domestic deposits increased $81.1 million, or 2.6%, to $3.2 billion compared to $3.1 billion at December 31, 2019. This was mainly driven by the aforementioned increases due to new brokered interest bearing deposits products, deposits related to PPP loans and reciprocal deposits.

During the year ended December 31, 2020, deposits of customers domiciled in Venezuela decreased by $151.6 million, or 6.7%, to close at $2.1 billion from $2.3 billion at December 31, 2019. In 2020, while customers in Venezuela continue to use their deposits to cover every day expenses, the pace of utilization of these deposits declined in 2020 compared to the year ended December 31, 2019. This decline is primarily attributable to: (i) lower economic activity in Venezuela due to the COVID-19 pandemic and (ii) the Company’s increased engagement with customers and sales efforts which continued to strengthen existing relationships and the expansion of the Company’s banking products and services.

In 2020, total foreign deposits, which include deposits from other countries in addition to Venezuela, decreased by $106.6 million compared to December 31, 2019 ( $396.0 million in 2019 compared to December 31, 2018), representing a decay rate of 4.0% in 2020 compared to 13.1% in 2019.While there was a decline in foreign deposits in 2020, the pace of such decline continues to slow compared to year ended December 31, 2019. This improvement reflects the aforementioned increased engagement with customers and sales efforts. In addition, the pace of utilization of deposits from Venezuelan residents decreased in 2020 due to the aforementioned impact of the COVID-19 pandemic in the Venezuelan economy.

The Company continued to focus on deepening existing customer relationships to capture additional share of wallet in 2020. New strategies geared towards increasing profitability include a focus on cross selling treasury management products and fees charged. In 2020, the Company executed on initiatives such as improving customer engagement through targeted call campaigns and daily customer contact as well as training sales teams to ensure alignment. Additionally, the Company’s participation in the SBA’s PPP has opened the door to a number of prospective commercial lending opportunities and new customer deposit relationships that the Company is well-positioned to capture. The Company has begun to see the benefits of these initiatives to win additional share of wallet materialize.

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The Bank uses the FFIEC’s Uniform Bank Performance Report, or UBPR, definition of core deposits, which consists of all accounts under $250,000. Core deposits, which exclude brokered time deposits and retail time deposits of more than $250,000, were $4.4 billion, $4.3 billion and $4.7 billion as of December 31, 2020, 2019 and 2018, respectively. Core deposits represented 77.4%, 75.4% and 77.5% of our total deposits at those dates, respectively.

We utilize brokered deposits and, as of December 31, 2020 and 2019, we had $634.5 million and $682.4 million in brokered deposits, which represented 11.1% and 11.9%, respectively, of our total deposits. Brokered deposits decreased by $47.9 million, or 7.0%, in 2020 compared to December 31, 2019, mainly due to matured brokered CDs which were not replaced during 2020. This was partially offset by interest-bearing deposit products offered to broker-dealer firms in 2020 through a third-party deposit broker network. These deposits reached $140.3 million at December 31, 2020, including $132.0 million and $8.3 million in brokered money market deposits and interest bearing demand deposits, respectively. At December 31, 2019, the Company had an aggregate of $20.0 million in brokered interest bearing and noninterest bearing demand deposits which matured in January 2020.The Company has not historically sold brokered CDs in denominations over $100,000.

Deposits by Type: Average Balances and Average Rates Paid

The following table sets forth the average daily balance amounts and the average rates paid on our deposits for the periods presented.

Years Ended December 31,

(in thousands, except percentages) Amount Rates Amount Rates Amount Rates

Interest bearing deposits:

Checking and saving accounts:

___________

(1) Includes reciprocal deposits and brokered deposits with average balances of $40.5 million (average rate - 0.08%) and $1.6 million (average rate - 0.33%), respectively, in the year ended December 31, 2020. There were no interest bearing reciprocal deposits and brokered deposit balances in 2019 and 2018.

(2) Includes brokered deposits with an average balance of $25.6 million (average rate - 0.33%) in the year ended December 31, 2020.There were no money market brokered deposits in 2019 and 2018.

(3) Includes brokered deposits with average balances of $570.8 million, $599.7 million and $707.9 million in the years ended December 31, 2020, 2019 and 2018, respectively. The average rate paid on these deposits was 2.21%, 2.34% and 2.05% in the years ended December 31, 2020, 2019 and 2018, respectively.

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Large Fund Providers

At December 31, 2020 and 2019, our large fund providers, defined as third-party customer relationships with balances of over $10.0 million, included eleven and eight deposit relationships, respectively, with total balances of $349.0 million and $116.9 million, respectively. In 2020, new third-party customer relationships with balances of over $10 million mainly included: (i) $140.3 million related to the aforementioned interest-bearing deposit products to broker-dealer firms; (ii) $50.1 million in reciprocal deposits, and (iii) $28.0 million in deposits from trust customer accounts. The $50.1 million in reciprocal deposits are part of the previously mentioned $68.8 million growth in reciprocal deposit account balances in 2020. Additionally, at December 31, 2020 and 2019 deposits from the Former Parent or its non-U.S. affiliates totaled $5.6 million and $7.9 million, respectively.

Large Time Deposits by Maturity

The following table sets forth the maturities of our time deposits with individual balances equal to or greater than $100,000 as of the dates presented.

December 31,

Short-Term Borrowings. In addition to deposits, we use short-term borrowings, such as FHLB advances, and less frequently, advances from other banks, as a source of funds to meet the daily liquidity needs of our customers and fund growth in earning assets. Short-term borrowings have maturities of 12 months or less as of the reported period-end. All of our outstanding short-term borrowings at December 31, 2020, 2019 and 2018 corresponded to FHLB advances. There were no other borrowings or repurchase agreements outstanding as of December 31, 2020, 2019 and 2018.

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Table of Contents

The following table sets forth information about the outstanding amounts of our short-term borrowings at the close of and for years ended December 31, 2020, 2019 and 2018.

Years Ended December 31,

AMTB US Equity

AMTB · 10-K · period ended 2020-12-31

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

AMTB US Equity☆

AMTB · 10-K · period ended 2020-12-31

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

AMTB US Equity