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 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, mortgage services, 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, wealth management and mortgage lending services are provided by the Bank’s securities broker-dealer, Amerant Investments, the Bank’s Grand-Cayman based trust company subsidiary, the Cayman Bank, and the mortgage company, Amerant Mortgage LLC. The Bank’s primary markets are South Florida, where we are headquartered and operate seventeen banking centers in Miami-Dade, Broward and Palm Beach counties, and Houston, Texas, where we have seven banking centers that serve the nearby areas of Harris, Montgomery, Fort Bend and Waller counties. In addition, we have an LPO in Tampa, Florida. See “Item1-Business” for recent developments.
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, and indicators of financial performance including return on assets (“ROA”) and return on equity (“ 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, as well as premiums or discounts paid on loan purchases, are deferred and recognized over the life of the related loan as an adjustment to interest income in accordance with GAAP.
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.
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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 in 2019; (vi) securities gains or losses; (vii) net gains and losses on early extinguishment of FHLB advances; (viii) income from derivative transaction with customers, and (ix) other noninterest income. In addition, noninterest income in 2021 include a gain of $62.4 million on the sale of the Company’s Headquarters Building which is presented separately in the Company’s consolidated statement of operations and comprehensive income. See “Item 1- Business” for more details.
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 (“AUM”), and account administrative services and ancillary fees during the contractual period.
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.
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 include credit and debit card interchange fees and other fees. In addition, card servicing fees have included credit card issuance fees. In 2019, we revised our card program to continue to serve our card customers, reduce risks and increase the efficiency of a relatively small program. We also entered into referral arrangements with recognized U.S.-based card issuers, which permit us to serve our customers and earn referral fees and share interchange revenue without exposure to credit risk. We ceased to be a direct credit card issuer early in 2020. Prior to that time, credit card issuance fees were generally recognized over the period in which the cardholders were entitled to use the cards.
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 2021 and 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.
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 fee income generated on customer interest rate swaps and other loan level derivatives are primarily dependent on volume of transactions complete with customers and are included in noninterest income.
Mortgage banking income related to Amerant Mortgage Inc., which commenced operations in May 2021, is included as part of other noninterest income.
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Noninterest Expense. Noninterest expense consists 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. Noninterest expenses generally increase as our business grows and whenever necessary to implement or enhance policies and procedures for regulatory compliance, and other purposes.
Salaries and employee benefits include compensation (including severance expenses), employee benefits and employer tax expenses for our personnel. Salaries and employee benefits are partially offset by costs 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.
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, director’s fees, regulatory agency fees, such as OCC examination fees, and other fees related to our business operations. In 2021, professional fees include expenses associated with the outsourcing of our internal audit function which began in the second quarter of 2021.
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 in 2019), community engagement, and other operational expenses. 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 in 2021 include additional salaries and employee benefits, mortgage lending costs and professional and other service fees in connection with Amerant Mortgage Inc.’s ongoing business.
During 2021, 2020 and 2019, we had restructuring expenses of approximately $7.1 million, $11.9 million and $5.0 million, respectively, including: (i) staff reduction costs of $3.6 million, $6.4 million and $1.5 million in 2021, 2020 and 2019, respectively; (ii) legal and consulting fees of $1.7 million in 2021; (iii) a lease impairment charge of $0.8 million in 2021; (iv) branch closure expenses of $0.5 million and $2.4 million in 2021 and 2020, respectively; (v) digital transformation expenses of $0.4 million and $3.1 million in 2021 and 2020, respectively, and (vi) rebranding costs of $3.6 million in 2019.
Restructuring expenses are those incurred for actions designed to implement the Company’s strategy as an independent company. These actions include, but are not limited to reductions in workforce, streamlining operational processes, rolling out the Amerant brand, implementation of new technology system applications, enhanced sales tools and training, expanded product offerings and improved customer analytics to identify opportunities.
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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. We use fully-insured brokered time deposits under $250,000 as part of our liquidity management tools. 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. In 2021, we changed our definition of core deposits to better align its presentation with the Company’s internal monitoring and overall liquidity strategy. Under this new definition, core deposits consist of total deposits excluding all time deposits. In prior periods, the Company used the Federal Financial Institutions Examination Council’s (the “FFIEC”) Uniform Bank Performance Report (the “UBPR”) definition of “core deposits,” which exclude brokered time deposits and retail time deposits of more than $250,000. See “Core Deposits” discussion for more details.
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.
Seasonality. Our loan production, generally, is subject to seasonality, with the lowest volume typically in the first quarter of each year.
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Summary Results
Results for the year ended December 31, 2021 were as follows:
•Net income attributable to the Company was $112.9 million in the year ended December 31, 2021, compared to a net loss attributable to the Company of $1.7 million in the year ended December 31, 2020.
•Return on assets (“ROA”) and return on equity (“ROE”) were 1.50% and 14.19%, respectively, in the year ended December 31, 2021, compared to negative 0.02% and 0.21%, respectively, in the year ended December 31, 2020.
•Net interest income was $205.1 million for the year ended December 31, 2021, up $15.6 million, or 8.2%, from $189.6 million for the year ended December 31, 2020. Net interest margin was 2.90% for the full-year 2021, up 38 basis points from 2.52% for the full-year 2020.
•The Company released $16.5 million from the ALL in the year ended December 31, 2021, compared to a provision for loan losses of $88.6 million in the year ended December 31, 2020. The ratio of allowance for loan losses to total loans held for investment was 1.29% as of December 31, 2021, down from 1.90% as of December 31, 2020. The ratio of net charge-offs to average total loans held for investment in the year ended December 31, 2021 was 0.44%, compared to 0.52% in the year ended December 31, 2020.
•Noninterest income was $120.6 million in the year ended December 31, 2021, up $47.2 million, or 64.2%, compared to $73.5 million in the year ended December 31, 2020. Noninterest income in 2021 included a $62.4 million gain on the sale of the Company’s headquarters building. Noninterest income in 2020 includes a $26.5 million gain on sale of securities.
•Noninterest expense was $198.2 million in the year ended December 31, 2021, up $19.5 million, or 10.9%, compared to $178.7 million in the year ended December 31, 2020. Noninterest expenses include restructuring expenses of approximately $7.1 million in 2021 and $11.9 million in 2020.
•The efficiency ratio was 60.9% in the year ended December 31, 2021, compared to 68.0% in the year ended December 31, 2020.
•Total gross loans, which include loans held for sale, were $5.6 billion at December 31, 2021, down $274.8 million, or 4.7%, compared December 31, 2020. Total deposits were $5.6 billion at December 31, 2021, down $100.8 million, or 1.8%, compared to December 31, 2020.
•Stockholders’ book value per common share attributable to the Company increased to $23.18 at December 31, 2021, compared to $20.70 at December 31, 2020. Tangible book value per common share increased to $22.55 as of December 31, 2021, compared to $20.13 at December 31, 2020. See “Tangible Common Equity and Tangible Book Value Per Common Share” for a reconciliation of these non-GAAP financial measures.
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Results of Operations - Comparison of Results of Operations for the Years Ended December 31, 2021and 2020
Net income(loss)
The table below sets forth certain results of operations data for the years ended December 31, 2021, 2020 and 2019:
Net loss attributable to noncontrolling interest (2,610) — — (2,610) NM — — %
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(1) At December 31, 2021, potential dilutive instruments consist of unvested shares of restricted stock, restricted stock units and performance share units (consisted of unvested shares of restricted stock and restricted stock units at December 31, 2020 and 2019). See Note 22 to our audited annual consolidated financial statements in this Form 10-K for details on the dilutive effects of the issuance of restricted stock, restricted stock units and performance share units on earnings per share in 2021, 2020 and 2019.
NM - means not meaningful
2021 compared to 2020
In 2021, we reported net income attributable to the Company of $112.9 million, or $3.01 per diluted share, compared to a net loss of $1.7 million, or $0.04 loss per diluted share, in 2020, mainly due to: (i) the $16.5 million reversal of the allowance for loan losses in 2021, compared to a $88.6 million provision for loan losses recorded in 2020, mainly the result of improved macro-economic conditions and upgrades, payoffs and pay-downs of non-performing loans and special mention loans, and decision to sell certain loans from our New York CRE loans portfolio; (ii) higher noninterest income mainly driven by a $62.4 million gain on the sale of the Company’s headquarters building, and (iii) higher net interest income. These results were partially offset by higher noninterest expenses. Net income attributable to the Company excludes a net loss of $2.6 million attributable to a 49% non-controlling interest of Amerant Mortgage Inc. which commenced operations in May 2021. The Company attributed a net loss of $2.6 million to the non-controlling interest on the basis of a $5.3 million net loss for Amerant Mortgage Inc. in 2021, primarily derived from salary and employee benefits, mortgage lending costs and professional and other service fees which are included in our consolidated results of operations.
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Net interest income was $205.1 million in 2021, an increase of $15.6 million, or 8.2%, from $189.6 million in 2020. This was mainly due to lower interest expense as a result of: (i) lower cost of total deposits and FHLB advances, and (ii) lower average balance of time deposits and FHLB advances. In addition, there was an increase in interest income due to higher average yields on total interest earning assets. These results were partially offset by: (i) lower average balance of total interest earning assets; (ii) a higher average balance of Senior Notes as these were issued late in the second quarter of 2020, and (iii) higher average balance of total interest bearing checking and savings accounts. See “-Net interest Income” for more details.
Noninterest income was $120.6 million in 2021, an increase of $47.2 million, or 64.2%, compared to $73.5 million in 2020. These results were mainly due to a gain of $62.4 million on the sale of the Company’s headquarters building in the fourth quarter of 2021. In addition, we had higher other noninterest income, mainly due to: (i) a net gain of $3.8 million on the sale of $95.1 million of PPP loans in the second quarter of 2021; (ii) mortgage banking income of $1.7 million related to Amerant Mortgage Inc. Furthermore, there were increases in brokerage, advisory and fiduciary activity fees and deposits and service fees and loan-level derivative income. These increases were partially offset by a decrease of $23.3 million in net gains on securities, and a net loss of $2.5 million on the early termination of $235 million of FHLB advances in 2021. See “-Noninterest Income” for more details.
Noninterest expense was $198.2 million in 2021, an increase of $19.5 million, or 10.9%, from $178.7 million in 2020. This was primarily driven by higher professional and other services fees mainly driven by the: (i) the onboarding of a new firm as result of the outsourcing of the Company’s internal audit function; (ii) the Clean-up Merger and related transactions; (iii) consulting services received from FIS; (iv) higher recruitment fees, mainly related to the mortgage and private banking businesses, and (v) consulting services in connection with the design of the Company’s new compensation programs. In addition, we had higher salary and employee benefits mainly due to: (i) the absence of the $7.8 million deferral of expenses directly related to PPP loan originations, in accordance with GAAP, in the second quarter of 2020; (ii) higher stock-based compensation as a result of new grants during the year under the Company’s long-term incentive plan, as well as higher performance-based variable compensation during the year, and (iii) new hires, primarily in the mortgage and private banking businesses. The increase in salary and employee benefits in 2021 was partially offset by staff reductions completed at the end of 2020. The increase in noninterest expense also included higher other operating expenses, occupancy and equipment, telecommunication and data processing and FDIC assessments and insurance. See “-Noninterest Expense” for more details.
In 2021, noninterest expenses included approximately $7.1 million in noninterest expenses related to Amerant Mortgage Inc., which commenced operations in May 2021 and had 72 FTEs at December 31, 2021. These expenses included: (i) $5.5 million related to salaries and employee benefits expenses, and (ii) $1.6 million related to mortgage lending costs, professional fees and other noninterest expenses.
In 2021, noninterest expense included restructuring costs of $7.1 million, compared to $11.9 million in 2020. The decrease in restructuring costs in 2021 compared to 2020 was primarily driven by lower staff reductions costs, digital transformation and branch closure expenses.
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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.
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.
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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, 2021, 2020 and 2019. 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 and premiums or discounts paid on loan purchases accounted for as yield adjustments. Average balances represent the daily average balances for the periods presented.
Years Ended December 31,
Interest-earning assets:
Debt securities held for trading 165 5 3.03 % — — — % — — — %
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Years Ended December 31,
Interest-bearing liabilities:
Checking and saving accounts:
Non-interest-bearing liabilities:
Average non-performing loans/ average total loans 1.61 % 1.12 % 0.48 %
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(1) Includes loans held for investment net of the allowance for loan losses and loans held for sale. The average balance of the allowance for loan losses was $101.1 million, $91.5 million and $57.7 million in the years ended December 31, 2021, 2020 and 2019, respectively. The average balance of total loans held for sale was $72.7 million, $37 thousand and $82 thousand in the years ended December 31, 2021, 2020 and 2019, respectively.
(2) Includes average non-performing loans of $90.6 million, $64.8 million and $27.4 million for the years ended December 31, 2021, 2020 and 2019, respectively. Interest income that would have been recognized on these non-performing loans totaled $6.2 million, $2.7 million and $1.4 million in 2021, 2020 and 2019, respectively.
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(3) Includes nontaxable securities with average balances of $46.2 million, $72.2 million and $121.0 million for the years ended December 31, 2021, 2020 and 2019, respectively. The tax equivalent yield for these nontaxable securities was 1.76%, 2.94% and 3.60% for the years ended December 31, 2021, 2020 and 2019, respectively. In 2021, 2020 and 2019, the tax equivalent yield was calculated by assuming a 21% tax rate and dividing the actual yield by 0.79.
(4) Includes nontaxable securities with average balances of $50.2 million, $66.1 million and $80.8 million for the years ended December 31, 2021, 2020 and 2019, respectively. The tax equivalent yield for these nontaxable securities was 2.58%, 2.57% and 3.05% for the years ended December 31, 2021, 2020 and 2019, respectively. In 2021, 2020 and 2019, the tax equivalent yield was calculated assuming a 21% tax rate and dividing the actual yield by 0.79.
(5) The terms of the advance agreement require the Bank to maintain certain investment securities or loans as collateral for these advances.
(6) 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.
(7) Calculated based upon the average balance of total noninterest bearing and interest bearing deposits.
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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 is subject to interest rate risk.”
Increase (Decrease) in Net Interest Income
Attributable to Attributable to
(in thousands) Volume Rate Total Volume Rate Total
Interest income attributable to:
Debt securities held for trading 5 — 5 — — —
Interest expense attributable to:
Checking and saving accounts:
Savings 1 (9) (8) (7) — (7)
Securities sold under agreements to repurchase (1) 1 — — (4) (4)
In 2021, the Company continued to focus on containing NIM pressure by: (i) decreasing cost of funds through strategic repricing of customer time and commercial relationship money market deposits, and (ii) proactively seeking incremental spreads and volumes in our loan originations. In addition, in the second quarter of 2021, the Company reduced interest expense by restructuring $285 million of its fixed-rate FHLB advances. See discussion on net interest income below for more details.
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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.
Net interest income
2021 compared to 2020
In 2021, net interest income was $205.1 million, an increase of $15.6 million, or 8.2%, from $189.6 million in 2020. This was primarily due to a decline in interest expense on total interest bearing liabilities, including declines of 37 basis points in the average cost, and $656.1 million, or 10.6%, in their average balance. These declines were primarily due to: (i) lower cost of total deposits and FHLB advances, and (ii) lower average balance of time deposits and FHLB advances. In addition, there was an increase of 4 basis points in the average yields on total interest earning assets, mainly loans. The increase in net interest income was partially offset by: (i) a decrease of $437.2 million, or 5.8% in the average balance of total interest earning assets; (ii) a higher average balance of Senior Notes as these were issued late in the second quarter of 2020, and (iii) higher average balance of interest bearing checking and savings accounts. Net interest margin was 2.90% in 2021, an increase of 38 basis points from 2.52% in 2020. See discussions further below for more details.
Interest Income. Total interest income was $247.8 million in 2021, a decline of $12.7 million, or 4.9% compared to $260.6 million in 2020, mainly due to a decrease of $437.2 million, or 5.8%, in the average balance of total interest earning assets, mainly debt securities available for sale and loans. This was partially offset by an increase of 4 basis points in the average yield of total interest earning assets, mainly loans. See “—Average Balance Sheet, Interest and Yield/Rate Analysis” for detailed information.
Interest income on loans in 2021 was $216.1 million, a decrease of $4.8 million, or 2.2%, compared to $220.9 million in 2020. This was primarily due to a decrease of $202.3 million, or 3.5%, in the average balance of loans in in 2021 over the same period in 2020, mainly driven by loan prepayments and the sale and forgiveness of PPP loans in 2021. This was partially offset by an increase of 6 basis points in average yields on loans, primarily driven by: (i) higher-yielding consumer loans purchased throughout 2020 and 2021, and (ii) an increase in prepayment penalties of $0.5 million. The increase in average yields was partially offset by the full effect in 2021 of the Federal Reserve’s emergency rate cuts in March 2020. See “—Average Balance Sheet, Interest and Yield/Rate Analysis” for detailed information.
Interest income on debt securities available for sale was $27.0 million in 2021, a decrease of $7.0 million, or 20.7%, compared to $34.0 million in 2020. This was mainly due to a decrease of $249.7 million, or 17.3%, in their average balance and a 9 basis points decline in average yields. These results were mainly driven by high prepayment activity of primarily mortgage-backed securities, sales completed throughout 2020 and 2021, and lower reinvestment rates. In 2021, we continue with our strategy of insulating the investment portfolio from prepayment risk. As of December 31, 2021, corporate debt securities comprised 30.4% of the available-for-sale portfolio, up from 24.6% at December 31, 2020. As of December 31, 2021, floating rate investments represent only 10.6% of our investment portfolio (this includes debt securities available for sale and held to maturity and equity securities with readily determinable fair value not held for trading) compared to 13.6% at December 31, 2020. In addition, recomposition towards high duration, and natural extension of the mortgage portfolio, has increased the overall duration to 3.6 years at December 31, 2021 from 2.4 years at December 31, 2020. See “—Average Balance Sheet, Interest and Yield/Rate Analysis” for detailed information.
Interest Expense. Interest expense was $42.7 million in 2021, a decrease of $28.3 million, or 39.9%, compared to $71.0 million in 2020. This was primarily due to: (i) lower average cost of total deposits and FHLB advances, and (ii) a decrease of $656.1 million, or 10.6%, in the average balance of total interest bearing liabilities, driven by lower
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average balance of time deposits and FHLB advances. These results were partially offset by: (i) a higher average balance of Senior Notes which were issued late in the second quarter of 2020, and (ii) a higher average balance of total interest bearing checking and savings accounts.
Interest expense on deposits was $27.9 million in 2021, a decrease of $25.4 million or 47.7%, compared to $53.3 million in 2020. This was primarily due to a 47 basis point decline in the average rates paid on deposits. In addition, there was a decline of $691.9 million or 29.3%, in the average balance of time deposits. These declines were partially offset by a higher average balance of total interest bearing checking and savings accounts. See below a detailed explanation of changes by major deposit category:
•Time deposits. Interest expense on total time deposits decreased $22.0 million, or 48.1%, in 2021 compared to 2020. This was mainly driven by a decrease of $691.9 million, or 29.3%, in their average balance and decrease of 52 basis points in their average cost. The decline in the average balance of time deposits includes decreases of $462.8 million, $156.5 million and $72.7 million, in customer certificates of deposits (“CDs”), brokered deposits and online CDs, respectively. These declines reflect the Company’s continued efforts to aggressively lower CD rates and focus on increasing core deposits and emphasizing multiproduct relationships versus single product higher-cost CDs.
•Interest bearing checking and savings accounts. Interest expense on total interest bearing checking and savings accounts decreased $3.4 million, or 45.5%, in 2021 compared to 2020, mainly due to a decrease of 15 basis points in the average cost. This was partially offset by an increase of $304.2 million, or 11.5%, in their average balance in 2021 compared to the same period in 2020, mainly driven by: (i) third-party interest-bearing domestic brokered deposits with an average balance of $119.8 million in 2021 compared to $27.3 million in 2020; (ii) higher average domestic personal accounts, and (iii) an increase of $85.6 million, or 4.3%, in the average balance of international accounts, including increases of $67.4 million or 4.1%, and $18.2 million, or 5.3%, in personal and commercial accounts, respectively. These increases in average balances in 2021 include the effect of several initiatives taken by the Company. In 2021, we added key personnel in treasury management and other business areas to continue growing low cost deposits. In addition, we have continued to work on enhancing a completely digital onboarding platform to facilitate the opening of deposit accounts and improve the customer experience. Specifically, in 2021, we entered in to arrangements with Alloy and ClickSWITCH®. In 2021, we tested a digital promotional campaign with a cash bonus for opening a new Value Checking account, and raised nearly $10 million in new deposits. In addition, in 2021 the Company commenced a new relationship, which allows us to capture municipal funds. Furthermore, in 2021, we implemented Zelle® Commercial, being one of the first community banks to implement this P2P payment platform. See “Item 1. Business- Our Company- Business Developments” for additional information on new digital platforms and other deposit-related initiatives.
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Interest expense on FHLB advances decreased $4.6 million, or 34.7%, in 2021 compared to the same period of 2020. This was mainly as a result of a decrease of $294.1 million, or 26.3%, in the average balance, and a decline of 14 basis points in the average cost of these borrowings. In May 2021, the Company restructured $285 million of its fixed-rate FHLB advances. This restructuring consisted of changing the original maturity at lower interest rates. The new maturities of these FHLB advances range from 2 to 4 years compared to original maturities ranging from 2 to 8 years. The Company incurred an early termination and modification penalty of $6.6 million which was deferred and is being amortized over the term of the new advances, as an adjustment to the yields. We recognized $1.2 million included as part of interest expense on FHLB advances, resulting from the amortization of the $6.6 million modification penalty. In addition, in the second quarter of 2021, the Company repaid $235 million of FHLB advances. As a result of this repayment, the Company incurred a loss of $2.5 million recorded as part of noninterest income. These 2021 transactions combined contributed to the decrease in interest expense in 2021 and will represent annual savings of approximately $3.6 million. Also, the decrease in interest expense on FHLB advances in 2021 includes the effect of the $420 million restructuring completed in April 2020.
Interest expense on junior subordinated debentures decreased $0.1 million, or 3.3%, in 2021 compared to the same period last year, mainly driven by a decline of $2.2 million, or 3.3%, in the average balance outstanding. This decline in the average balance resulted from the redemption of $26.8 million of trust preferred securities (fixed interest rate - 8.90%) issued by the Commercebank Capital Trust I (“Capital Trust I”) and related subordinated debt in the first quarter of 2020. In 2021 and 2020, the Company recognized additional interest expense of $0.9 million and $0.3 million, respectively, in connection with interest rate swap contracts that were used to hedge the variable cash flows associated with the our junior subordinated debentures. See Note 11 to our audited financial statements in this Form 10-K for more details on these interest rate swap contracts.
Interest expense on Senior Notes increased $1.8 million, or 91.4%, to $3.8 million in 2021 compared to $2.0 million in 2020. This result was mainly driven by an increase of $28.1 million, or 91.4%%, in the average balance, as these Senior Notes were issued late in the second quarter of 2020. See “—Capital Resources and Liquidity Management” for detailed information on the issuance of Senior Notes.
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.
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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.
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.
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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.
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.
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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)
Owner occupied — (75) — — (25)
International Loans (1):
Recoveries
Domestic Loans:
Real estate loans
Commercial real estate (CRE)
Nonowner occupied $ — $ — $ — $ 39 $ 717
Multi-family residential — — — — —
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Years Ended December 31,
International Loans (1):
Real Estate
Single-family residential — — — 4 10
______________
(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 $ — $ — $ —
Other countries with less than $1,000 — 34 62
Consumer loans and overdrafts:
Other countries with less than $1,000 — 20 635
Total international charge offs (2) $ — $ 303 $ 5,095
______________
(1) Increase in charge-offs during 2019 is primarily related to the credit card portfolio phased out..
(2) There were no international charge-offs in 2021.
2021 compared to 2020
The Company released $16.5 million from the ALL in 2021, compared to a provision for loan losses of $88.6 million in 2020. The $16.5 million release from the ALL in 2021 was primarily attributable to: (i) a release of approximately $13.9 million due to improved macro-economic conditions, as the Florida and Texas economies continue to recover from the COVID-19 pandemic; (ii) a release of approximately $4.4 million due to the loan portfolio reduction; (iii) a release of $2.3 million in connection with a $4.8 million payment collected in the fourth quarter of 2021 on the loan relationship with a Miami-based U.S. coffee trader (“the Coffee Trader”), and (iv) a release of $1.6 million due to the change in classification of approximately $238 million of loans from our New York CRE portfolio, as we decided to sell these loans in 2021. These results were partially offset by a provision of approximately $5.7 million as a result of the net effect of upgrades and downgrades during the period.
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During 2021, charge-offs decreased $3.1 million, or 10.0%, compared to the previous year. In 2021, charge-offs included: (i) $11.1 million related to two non-owner occupied loans, including $7.9 million related to a single-tenant loan in New York which was sold in the fourth quarter of 2021, and $3.2 million related to a loan in New York transferred to OREO in the third quarter of 2021; (ii) $13.2 million primarily related to commercial loans, mainly comprised of $5.7 million in connection with the Coffee Trader, and a total of $5.6 million related to four commercial loans over $1 million each, and (iii) an aggregate of $3.1 million of charge-offs related to consumer loans purchased under indirect lending programs. In 2020, charge-offs included: (i) a $19.3 million charge off related to 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 ratio of net charge-offs over the average total loan portfolio held for investment was 0.44% in 2021 compared to 0.52% in 2020.
As of December 31, 2021, the loan relationship with the Coffee Trader had an outstanding balance of approximately $9.1 million, compared to $19.6 million as of December 31, 2020. In the fourth quarter of 2021, the Company collected $4.8 million related to this loan relationship, which contributed to a release of $2.3 million in specific reserves. As of December 31, 2021, the Company had a specific ALL on this relationship of $4.2 million compared to $12.2 million as of December 31, 2020. We continue to closely monitor the liquidation process.
While it continues being 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. In the third quarter of 2021, the Company ceased to offer customized temporary loan payment relief options, including interest-only payments and forbearance options, which are not considered TDRs.
2020 compared to 2019
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.
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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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 debt securities of $4.3 million, $26.5 million and $1.9 million in the years ended December 31, 2021, 2020 and 2020, respectively. In addition, includes realized losses of $42 thousand on the sale of a mutual fund with a fair value of $23.4 million at the time of the sale in the year ended December 31, 2021, and unrealized loss of $0.6 million, and unrealized gains of $0.5 million and $0.7 million in the years ended December 31, 2021, 2020 and 2019, respectively, related to the change in market value of mutual funds.
(3) Income from interest rate swaps and other derivative transactions with customers.
(4) Includes: (i) a gain of $3.8 million on the sale of PPP loans in 2021; (ii) mortgage banking income related to Amerant Mortgage Inc. of $1.7 million in 2021; (iii) a loss of $1.7 million on the sale of the Beacon Operations Center in 2020, and (iv) a gain of $2.8 million on the sale of vacant Beacon land in 2019. Other sources of income in the periods shown include: income from foreign currency exchange transactions with customers, rental income, and valuation income on the investment balances held in the non-qualified deferred compensation plan.
NM - means not meaningful
2021 compared to 2020
Total noninterest income increased $47.2 million, or 64.2%, in 2021compared to 2020. These results were mainly due to a gain of $62.4 million on the sale of the Company’s headquarters building further described below. In addition, there were increases in other noninterest income, brokerage, advisory and fiduciary activity fees and deposits and service fees. Furthermore, there was an increase of $0.8 million, or 24.5%, in loan-level derivative income. These increases were partially offset by a decrease of $23.3 million in net gains on securities, and a net loss of $2.5 million on the early termination of $235 million of FHLB advances in 2021.
In 2021, the Company sold its headquarters building in Coral Gables Florida for $135 million and realized a pretax gain of $62.4 million, net of direct transaction costs of $2.6 million. The property had an approximate carrying value of $69.9 million at the time of sale. The Company leased-back the property for an 18-year term at market rates.
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Other noninterest income increased $6.4 million, or 180.7%, in 2021 compared to 2020, mainly due to: (i) a net gain of $3.8 million on the sale of $95.1 million of PPP loans in the second quarter of 2021, and (ii) mortgage banking income of $1.7 million. Amerant Mortgage Inc. continues to execute on its growth strategy. In the fourth quarter of 2021, AMTM received 166 applications and funded 61 loans totaling $32.04 million. Total mortgage loans held for sale were $14.9 million as of December 31, 2021. For the full year 2021, AMTM received 299 applications and funded 109 loans totaling $52.6 million.
Brokerage, advisory and fiduciary activity fees increased $1.7 million, or 9.8%, in 2021 compared to 2020, mainly driven by an increase in AUM in our clients’ advisory accounts as we continue to expand the sale of these products. In addition, we had increased commissions on mutual fund trading, higher trailer fees, and higher balances of margin brokerage accounts. Our AUM totaled $2.22 billion at December 31, 2021, an increase of $248.8 million, or 12.6%, from $1.97 billion at December 31, 2020, primarily driven by increased market value as well as net new assets of $106.7 million in 2021. Net new assets represented 42.9% of the total increase in AUM compared to December 31, 2020. This was mainly driven by an increase in share of wallet atributed to the continued execution of the Company’s relationship-centric strategy. The Company remains focused on growing AUM, both domestically and internationally. In October 2021, the Company launched Marstone, an online wealth management platform which is expected to further improve banking relationships by empowering our customers to fully understand their financial position, plans and outlook.
Deposits and service fees increased $1.4 million, or 8.7%, in 2021 compared to 2020, mainly driven by higher service charge fee income and higher wire transfer fees from increased activity.
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.
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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) In the year ended December 31, 2021, includes expenses on derivative transactions with clients of $1.0 million and $0.3 million in the years ended December 31, 2021 and 2020, respectively. We had no expenses related to derivative transactions with clients in the year ended December 31, 2019.
(2) 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.
2021 compared to 2020
Noninterest expense decreased $19.5 million, or 10.9%, in 2021 compared to 2020, primarily driven by higher professional and other services fees, salary and employee benefits, other operating expenses, occupancy and equipment, telecommunication and data processing and FDIC assessments and insurance. These increases were partially offset by lower depreciation and amortization expense.
Noninterest expenses in 2021 include a total of $7.1 million related to Amerant Mortgage Inc., including salaries and employee benefits of $5.5 million, mortgage lending costs of $0.6 million and professional and other service fees of $0.7 million.
Professional and other services fees increased $6.5 million, or 47.9%, in 2021 compared to 2020, mainly driven by: (i) fees in connection with the outsourcing of the Company’s internal audit function which began in the second quarter of 2021; (ii) $0.8 million of legal and other fees in connection with the Clean-up Merger completed in 2021, and related transactions; (iii) $0.7 million of fees for consulting services received in connection with the engagement of FIS; (iv) higher recruitment fees, mainly in connection with new hires in the mortgage and private banking businesses, and (v) consulting services in connection with the design of the Company’s new compensation programs. The increase in professional and other services fees in 2021 also included $0.7 million in higher costs related to derivative transactions with customers.
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Salaries and employment benefits increased $6.1 million, or 5.5%, in 2021 compared to 2020, mainly due to: (i) the absence in 2021 of the $7.8 million deferral of expenses directly related to PPP loan originations, in accordance with GAAP, in the second quarter of 2020; (ii) $3.4 million in connection with stock-based compensation compensation mainly as a result of new grants under the Company’s long-term incentive plan in February 2021; (iii) adjustments to the Company’s performance-based variable compensation program in 2021, at expected performance levels, after having curtailed them in 2020 due to the COVID-19 pandemic, and (iv) additional salaries and employee benefits in connection with new hires, primarily in the mortgage and private banking business. These results were partially offset by: (i) $2.7 million decrease in severance expenses, and (ii) lower salaries and employee benefits associated with staff reduction completed at the end of 2020. Salaries and employment benefits in 2021 include $3.6 million of severance expenses, mainly in connection with the departure of our Chief Operating Officer in the second quarter of 2021, and the elimination of various support functions and other actions during the year in connection with the Company’s ongoing transformation and efficiency improvement efforts.
At December 31, 2021, our FTEs were 763, a net decrease of 50 FTEs, or 7.0% compared to 713 FTEs at December 31, 2020. The 763 FTEs at December 31, 2021 include the new staff associated with Amerant Mortgage Inc., which had 72 FTEs at December 31, 2021. In addition, as a result of the Company’s agreement with FIS, there were 80 FTEs who moved to FIS, reducing the Company’s total FTEs to 683 effective January 1, 2022.
Other operating expenses increased $4.0 million, or 51.9%, in 2021compared to 2020, mainly due to: (i) a $2.1 million increase in advertising, marketing and other expenses, and (ii) the absence in 2021 of the deferral of other operating expenses directly related to PPP loan originations in 2020.
Occupancy and equipment expenses increased $2.7 million, or 15.5%, in 2021 compared to 2020, mainly driven by: (i) $2.0 million rent expense associated the Beacon Operations Center, as the Company sold and leased-back the property for a two-year term in the fourth quarter of 2020; (ii) a ROU asset impairment of $0.8 million in connection with the lease in our former NY LPO, and (iii) additional rent expense associated with the Company’s headquarters building, as the Company sold and leased-back the property for an eighteen-year term in the fourth quarter of 2021. These increases were partially offset by lower real estate taxes paid mainly in connection with the aforementioned sale of the Beacon operations center. In 2021, occupancy and equipment expenses include $0.5 million related to the lease termination of a branch in Fort Lauderdale, Florida in 2021, compared to expenses of $1.1 million in 2020 in connection with the closure of two branches in 2020.
Telecommunication and data processing increased $2.0 million, or 15.6%, in 2021 compared to 2020, this was primarily due to higher expenses related to: (i) higher computer software consulting expenses, including expenses related to online banking services, and (ii) higher software services mainly related to maintenance support for new platforms in connection with our digital transformation.
FDIC assessments and insurance expense increased $0.3 million, or 4.6%, in 2021 compared to 2020, mainly due to the absence of credits received in 2020. This was partially offset by a decrease in expense in 2021 due to lower average balances and FDIC assessment rates.
Depreciation and amortization expense decreased $2.1 million, or 22.5%, in 2021 compared to 2020, mainly driven by: (i) lower expenses resulting from the aforementioned sales of the Beacon Operations Center in 2020 and the Company’s headquarters building in 2021, and (ii) lower additional expenses related to branch closures in 2021 compared to 2020. Depreciation and amortization expenses in 2021 and 2020 include $0.4 million lower expenses in connection with the sale of the Company’s headquarters in 2021, and a charge of $1.3 million for the accelerated amortization of leasehold improvements in connection with the closure of one branch in Houston, Texas in 2020, respectively.
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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.
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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:
______________
NM - means not meaningful
2021 compared to 2020
We recorded an income tax expense of $33.7 million in 2021 compared to an income tax benefit of $2.6 million in 2020. These results were mainly driven by: (i) a provision for income tax expense of $16.1 million related to the $62.4 million gain on sale of the Company’s headquarters building in 2021, and (ii) a deferred tax expense recorded in the period mainly due to a decrease in allowance for loan losses. The effective income tax rate was 23.41% in 2021 compared to 60.27% in 2020. The decrease in the effective income tax rate in 2021 is primarily due to the rate differential on deferred items.
As of December 31, 2021, the Company’s net deferred tax asset was $11.3 million, a decrease of $0.4 million, or 3.3% compared to $11.7 million as of December 31, 2020. This decrease was mainly driven by the tax effect of:(i) the net decrease of $41.0 million in the allowance for loan losses, and (ii) the new deferred tax liability related to right-of-use assets on operating leases. This was partially offset by the tax effect of: (i) the new deferred tax asset associated with operating lease obligations; (ii) a decrease of $21.5 million in net unrealized holding gains on debt securities available for sale during 2021, and (iii) a decrease in the deferred tax liability related to depreciation and amortization expense. The Company adopted new guidance on leases in 2021 which created new temporary differences.
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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.
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Financial Condition - Comparison of Financial Condition as of December 31, 2021 and December 31, 2020
Assets. Total assets were $7.6 billion as of December 31, 2021, a decline of $132.5 million, or 1.7%, compared to $7.8 billion at December 31, 2020. The decrease in total assets in 2021 compared to 2020 includes $233.8 million, or 4.1% in lower total loans, including loans held for sale, and net of the allowance for loan losses. This decrease in total loans was partially offset by: (i) an increase of $59.8 million, or 27.9% in cash and cash equivalents, and (ii) an increase of $(1.3) million, or (1.4)% in other assets mainly driven by the adoption of the new accounting guidance on leases. See “—Average Balance Sheet, Interest and Yield/Rate Analysis” for detailed information, including changes in the composition of our interest-earning assets, and Note 1 to our consolidated audited financial statements in this Form 10-K for more details on the new guidance on leases.
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.
Cash and Cash Equivalents
2021 compared to 2020
Cash and cash equivalents totaled $274.2 million at December 31, 2021, an increase of $59.8 million, or 27.9%, from $214.4 million at December 31, 2020. This was mainly attributable to higher balances at the Federal Reserve.
Cash flows provided by operating activities was $67.4 million in the year ended December 31, 2021. This was primarily driven by the net income before attribution of non-controlling interest of $110.3 million recorded during the period which includes a pretax gain of $62.4 million on the sale of the Company’s headquarter building in 2021.
Net cash provided by investing activities was $385.3 million during the year ended December 31, 2021, mainly driven by: (i) maturities, sales, calls and paydowns of debt securities available for sale, debt securities held to maturity, equity securities with readily determinable fair value not held for trading, and FHLB stock totaling $446.4 million, $39.7 million, $23.5 million and $22.1 million, respectively; (ii) proceeds from loan sales totaling $166.3 million, including $95.1 million of PPP loans sold in the second quarter of 2021 and $49.4 million related to NY loans sold in the fourth quarter of 2021; (iii) net proceeds of $132.4 million in connection with the sale in 2021 of the Company’s headquarters building, and (iv) an aggregate net decrease of $93.3 million in loans held for investment and loans held for sale carried at the lower of cost or estimated fair value. These proceeds were partially offset by purchases of debt securities available for sale and held to maturity totaling $425.9 million and $100.4 million, respectively. See “Our Company” for more information on the sale of the Company’s headquarters building.
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In the year ended December 31, 2021, net cash used in financing activities was $392.9 million, mainly driven by: (i) a net decrease of $703.7 million in time deposits; (ii) $244.1 million in net repayments of FHLB advances; (iii) an aggregate of $36.3 million in connection with the repurchases of Class A common stock completed in 2021, including $27.9 million repurchased under the Class A Common Stock Repurchase Program and $8.5 million million of shares cash out in accordance with the terms of the Merger, and (iv) the $9.6 million repurchase of shares of Class B common stock in 2021, under the Class B Common Stock Repurchase Program. See “Capital Resources and Liquidity Management” for more details on transactions related to FHLB advances, the Merger, and common stock repurchase programs. These disbursements were partially offset by a net increase of $603.0 million in total demand, savings and money market deposit balances. See “Deposits” for more information on this change.
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.
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.
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.
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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 held for investment for the periods presented.
December 31,
Total loans, gross (1) / Total assets 72.9 % 75.2 % 71.9 %
Total loans, net (3) / Total assets 72.0 % 73.8 % 71.3 %
_______________
(1) Total loans, gross is the principal balance of outstanding loans, including loans held for investment and loans held for sale, net of unamortized deferred nonrefundable loan origination fees and loan origination costs, and unamortized premiums paid on purchased loans, excluding the allowance for loan losses. At December 31, 2021, the Company had $143.2 million in loans held for sale carried at the lower of cost or estimated fair value and $14.9 million in mortgage loans held for sale carried at fair value. There were no loans held for sale at December 31, 2020 and 2019.
(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, including loans held for investment and held for sale, net of unamortized deferred nonrefundable loan origination fees and loan origination costs, and unamortized premiums paid on purchased loans, excluding the allowance for loan losses
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The table below summarizes the composition of loans held for investment 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)
International Loans:
Real estate loans
Loans to depository institutions and acceptances — 7 5 49,000 481,183
__________________
(1) Mostly comprised of loans secured by cash or U.S. Government securities
(2) Includes customers’ overdraft balances totaling $0.6 million, $0.7 million, $1.3 million, $1.0 million and $1.8 million at each of the dates presented.
(3) Includes indirect lending loans purchased with an outstanding balance of $297.0 million and $170.9 million as of December 31, 2021 and 2020, respectively, net of unamortized premium paid of $9.1 million and $4.8 million as of December 31, 2021 and 2020, respectively. There were no indirect lending loans at any of the other periods shown.
(4) There were no outstanding credit card balances as of December 31, 2021 and 2020. At December 31, 2019, 2018 and 2017, 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.
(5) Secured by real estate properties located in the U.S.
(6) International customers’ overdraft balances were de minimis at each of the dates presented.
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The composition of our CRE loan portfolio held for investment by industry segment at December 31, 2021, 2020 and 2019 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.
(2) Includes $345.5 million related to the New York portfolio. These loans have maturities ranging from less than one year to eight years.
The table below summarizes the composition of our loans held for sale by type of loan as of the end of each period presented
Real estate loans held for sale carried at the lower of cost or fair value
Commercial real estate
Non-owner occupied $ 110,271 $ — $ — $ — $ —
Multi-family residential 31,606 — — — —
Single-family residential — — — — 5,611
Owner occupied 1,318 — — — —
Single-family residential, carried at fair value(1) 14,905 — — — —
Total loans held for sale (2)(3) $ 158,100 $ — $ — $ — $ 5,611
__________________
(1)In 2021, Loans held for sale in connection with Amerant Mortgage Inc. ongoing business.
(2)Remained current and in accrual status as of December 31, 2021.
(3)We had no international loans held for sale at any of the periods shown.
In 2021, in connection with the closing of our former NYC LPO, the Company elected to market and sell a portion of the loan portfolio held for investment to shorten duration and significantly reduce the number of loans being serviced. Therefore, in 2021, the Company classified around $238 million of real estate loans as held for sale carried at the lower of cost or estimated fair value. These loans had been previously carried at their original cost. During the fourth quarter of 2021, the Company sold $49.4 million of these loans at par, and collected approximately $46.0 million in full or partial satisfaction of these loans. Subsequently in February 2022, the Company completed the sale of approximately $57.3 million of these loans at their par value.
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As ofDecember 31, 2021, we had CRE loans held for sale carried at the lower of cost or estimated fair value totaling $141.9 million, including $85.4 million, $31.6 million and $25.0 million in the retail, multifamily and office segments, respectively.
During May 2021, Amerant Mortgage Inc. started taking loan applications. It also acquired an Idaho-based mortgage operation which allows it to operate its mortgage business nationally with direct access to important federal housing agencies. At December 31, 2021 there were $14.9 million in single-family residential loans held for sale carried at their estimated fair value.
As of December 31, 2021, total loans, including loans held for sale, were $5.6 billion, down $274.8 million, or 4.7%, compared to $5.8 billion at December 31, 2020. Domestic loans decreased $221.5 million, or 3.9%, as of December 31, 2021, compared to December 31, 2020. The decrease in total domestic loans includes net decreases of $312.9 million, or 11.0% and $160.7 million, or 14.6%, in domestic CRE loans and commercial loans, respectively, primarily attributable to loan prepayments, PPP loan sales, and lower loan production which continued to be challenged as a result of the COVID-19 pandemic despite early signs of recovery in economic activity during 2021. In addition, lower loan production includes the effect of the closing of our former NYC CRE loan production office, as the Company ceased to originate loans in that market.
The net decrease in total loans during 2021 was partially offset by net increases of $179.7 million, or 74.3%, $58.6 million, or 10.8%, and $16.7 million, or 1.8%, in domestic consumer loans, single-family residential loans and owner occupied loans, respectively. As of December 31, 2021, domestic consumer loans included $297.0 million of high-yield indirect loans, an increase of $126.1 million, or 73.8%% from $170.9 million at December 31, 2020. In 2021, the Company purchased $289.6 million in high-yield indirect consumer loans, compared to $202.7 million purchased in 2020.
As of December 31, 2021, total PPP loans outstanding were $2.7 million, or 0.05% of total loans, compared to $198.5 million, or 3.4% of total loans as of December 31, 2020. The Company originated $91.7 million in new PPP loans in 2021, and received $190 million of prepayments in connection with PPP loan forgiveness applications, in line with program guidelines. PPP loan forgiveness is provided for under the CARES Act and consists of full payment by the Small Business Administration of the unpaid principal balance and accrued interest after loan forgiveness to eligible borrowers has been approved. In addition, in 2021, the Company sold to a third party, in cash, PPP loans with an outstanding balance of approximately $95.1 million, and realized a pre-tax gain on sale of approximately $3.8 million. The Company retained no loan servicing rights on these PPP loans.
Loans to international customers, primarily from Latin America, declined $53.3 million, or 34.8%, as of December 31, 2021, compared to December 31, 2020, mainly driven by: (i) $22.1 million, or 25.5% decrease in residential loans from Venezuela customers primarily due to payoffs, and (ii) a $28.2 million, or 55.2% decrease in commercial loans which matured during the period.
As of December 31, 2021, loans under syndication facilities were $389.0 million, a decline of $65.9 million, or 14.5%, compared to $454.9 million at December 31, 2020, mainly driven bypaydowns and payoffs of lower-yielding non-relationship loans. As of December 31, 2021, syndicated loans that financed “highly leveraged transactions”, or HLT, were $17.1 million, or 0.3% of total loans, compared to $19.2 million, or 0.3% of total loans, as of December 31, 2020.
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In 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.
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 Shared National Credit facilities, or 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. In early January 2021, a third round of PPP loans provided additional stimulus relief to small businesses and individuals who were self-employed or independent contractors.
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. Since 2019, we have 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. Beginning in 2020, consumer loans include indirect unsecured personal loans to well qualified individuals we purchase from recognized third parties personal loan originators. All consumer loans are denominated and payable in U.S. Dollars. In 2020, we wound down our credit card program to further strengthen the Company’s credit quality and, as a result, there are no credit card receivables outstanding after December 31, 2019.
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The tables below set forth the unpaid principal balance of loans held for investment by type, by interest rate type (fixed-rate and variable-rate) and by original contractual loan maturities as of December 31, 2021:
Fixed-Rate
Real estate loans
Commercial real estate (CRE)
Land development and construction loans — 43 — 43
Loans to financial institutions and acceptances 500 — — 500
Variable-Rate
Real estate loans
Commercial real estate (CRE)
Loans to financial institutions and acceptances — 13,210 — 13,210
Total Loans Held For Investment
Real estate loans
Commercial real estate (CRE)
Loans to financial institutions and acceptances 500 13,210 — 13,710
__________________
(1) Includes a total of $324.7 million of fixed-rate loans (mainly comprised of 66% single-family residential and 29% owner occupied), and $309.5 million of variable-rate loans (mainly comprised of 86% single-family residential and 9% owner occupied), maturing in 10 years or more. Fixed-rate and variable-rate loans maturing in 15 years or more represent 62.3% of total fixed-rate and 72.2% of total variable-rate loans maturing in 10 years or more, respectively, and correspond primarily to single-family residential loans.
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Loans held for investment include a total of $1.3 billion, or 23.4% of total loans, which mature after December 31, 2022 and are priced based on variable interest rates tied to the LIBOR. In December of 2019, the Company 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. During 2021, the Company completed its assessment of all third party-provided products, services, and systems that would be affected by any changes to references to LIBOR, including changes to all relevant systems. Beginning in January 2022, the Company started referencing new loans and other products, including loan-level derivatives, to the Secured Overnight Financing Rate (“SOFR”). The Company expects to begin migrating identified existing loans and derivative contracts from LIBOR to SOFR gradually during 2022.
The tables below set forth the unpaid principal balance of total loans held for sale by type, by interest rate type (fixed-rate and variable-rate) and by original contractual loan maturities as of December 31, 2021:
Fixed-Rate
Real estate loans
Commercial real estate (CRE)
Variable-Rate
Real estate loans
Commercial real estate (CRE)
Total Loans Held For Sale
Real estate loans
Commercial real estate (CRE)
__________________
(1) Loans held for sale carried at their estimated fair value originated by Amerant Mortgage Inc.
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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 $21.1 million, $13.3 million and $15.2 million as of December 31, 2021, 2020 and 2019 respectively.
(2) Includes mortgage loans for single-family residential properties located in the U.S. totaling $64.6 million, $86.7 million and $104.0 million as of December 31, 2021, 2020 and 2019, 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, 2021 and 2020. As of December 31, 2019, include credit card balances $7.8 million.
(4) Includes loans to borrowers in other countries which do not individually exceed one percent of total assets in 2021, 2020 and 2019.
As of December 31, 2021, 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 $21.1 million.
(2) Includes mortgage loans for single-family residential properties located in the U.S.
(3) Includes loans to borrowers in other countries which do not individually exceed one percent of total assets in 2021.
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Loans by Economic Sector
The table below summarizes the concentration in our loans held for investment 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 1 — % 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 59%, 60% and 64% of the retail trade sector at year-end 2021, 2020 and 2019, 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 17.2%, 12.6% and 9.0% of the total in 2021, 2020 and 2019, respectively.
As of December 31, 2021, the Company had $158.1 million of loans held for sale in the construction and real estate economic sector. There were no loans held for sale at December 31, 2020 and 2019.
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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. These programs continued throughout 2020 and in the six months ended June 30, 2021. In the third quarter of 2021, the Company ceased to offer these loan payment relief options, including interest-only and/or forbearance options. 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) indirect consumer loans purchased in 2021 and 2020; (ii) mortgage loans for and secured by single-family residential properties located in the U.S in all years presented; and (iii) credit card receivables to cardholders for whom charge privileges have been stopped as of December 31, 2019. The total allowance for loan losses for credit card receivables, after the charge-offs, was at $1.8 million at December 31, 2019. We discontinued or credit card programs in 2020 and the outstanding credit card balances at the close of 2019 were repaid during the first quarter of 2020. There are no credit card balances or allowance for the credit card product in 2021 and 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 2021, the changes in the allocation of the ALL were driven by loan composition changes, primarily as a result of: (i) the increase in domestic consumer loans in 2021 mainly derived from indirect consumer loan purchased in 2021 and 2020, and (ii) the reduction of the CRE portfolio in 2021 mainly the result of our decision to close our former NY LPO. In addition, the change in allocation of the ALL in 2021, includes changes due to the estimated impact of the COVID-19 pandemic among the respective impacted portfolios, mainly domestic real estate, commercial and consumer loans. The ALL associated with the COVID-19 pandemic was $14.1 million as of December 31, 2021, compared to $14.8 million from December 31, 2020.
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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)
Multifamily residential — 11,340 — — —
International Loans: (3)
Real estate loans
Commercial loans — — — — 6,447
Past Due Accruing Loans(4)
Domestic Loans:
Real estate loans
Single-family residential $ — $ — $ — $ 54 $ 112
Owner occupied — 220 — — —
Consumer loans and overdrafts 8 1 — — —
International Loans (3):
Real estate loans
Single-family residential — — — 365 114
Consumer loans and overdrafts — — 5 884 —
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__________________
(1) Includes loan modifications that meet the definition of TDRs, which may be performing in accordance with their modified loan terms. As of December 31, 2021, 2020 and 2019, non-performing TDRs include $9.1 million, $8.4 million and $9.8 million, respectively, in a multiple loan relationship to a South Florida borrower.
(2) As of December 31, 2021 and 2020, includes $9.1 million and $19.6 million, respectively, in a commercial relationship placed in nonaccrual status during the second quarter of 2020. During the third quarters of 2021 and 2020, the Company charged off $5.7 million and $19.3 million, respectively, against the allowance for loan losses as result of the deterioration of this commercial relationship. In addition, in connection wit this loan relationship, the Company collected a partial principal payment of $4.8 million in the fourth quarter of 2021.
(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, 2021, non-performing assets decreased $28.6 million, or 32.5%, compared to December 31, 2020. This was primarily driven: (i) $27.8 million in charge-offs against the allowance for loan losses, including $11.2 million related to five commercial loans, $11.1 million related to two non-owner occupied loans, and $3.1 million related to purchased indirect consumer loans; (ii) the sale of two non-owner occupied loans totaling $19.1 million; (iii) $17.0 million in loans placed back in accrual status, including three multi-family residential loans totaling $11.4 million, one single-residential family loan of $2.7 million, one commercial loan of $2.7 million and one owner occupied loan of $0.2 million, and (iv) other paydowns/payoffs during 2021. These decreases were partially offset by the placement in non accrual status of: (i) three non-owner occupied loans totaling $39.9 million, and (ii) one commercial loan of $2.7 million.
In the third quarter of 2021, the Company received one CRE property guaranteeing a New York loan with a carrying amount of $12.1 million, which was among the loans placed in non accrual status in 2021, and transferred it to OREO at the net of its fair value less cost to sell of approximately $9.4 million. As a result of this transaction, the Company charged-off $3.2 million against the allowance for loan losses in the third quarter of 2021.
In January 2022, the Company collected a partial payment of around $9.8 million on one commercial nonaccrual loan of $12.4 million. Also, in January 2022, the Company charged-off the remaining balance of this loan of $2.5 million against its specific reserve at December 31, 2021.
There were $17.0 million in loans which were placed back in accrual status in 2021. As a result, the Company will recognize, as an adjustment to the yield, $1.8 million for the remaining average maturity of these loans of 5 years. We recognized no interest income on nonaccrual loans during 2021, 2020 and 2019. Additional interest income that we would have recognized on these nonaccrual loans had they been current in accordance with their original terms was $6.2 million, $2.7 million and $1.4 million, respectively, in these years. We recognized interest income on loans modified under troubled debt restructurings of $0.1 million, $36 thousand and $0.2 million during the years ended December 31, 2021, 2020 and 2019, respectively. At December 31, 2021, 2020 and 2019, there were $2.9 million, $0.3 million and $0.3 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.
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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.
The Company’s loans by credit quality indicators at December 31, 2021, 2020 and 2019 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) As of December 31, 2021 and 2020, includes $9.1 million and $19.6 million in a commercial relationship placed in nonaccrual status and downgraded during the second quarter of 2020. As of December 31, 2021, Substandard loans included $4.9 million, and doubtful loans include $4.2 million, related to this commercial relationship (Substandard loans included $7.3 million and doubtful loans include $12.3 million as of December 31, 2020). During the third quarters of 2021 and 2020, the Company charged off $5.7 million and $19.3 million against the allowance for loan losses as result of the deterioration of this commercial relationship. In addition, in connection wit this loan relationship, the Company collected a partial principal payment of $4.8 million in the fourth quarter of 2021.
2021 compared to 2020
Classified loans, which includes substandard and doubtful loans, totaled $51.4 million at December 31, 2021, compared to $88.5 million at December 31, 2020. This decrease of $37.2 million, or 42.0%, compared to December 31, 2020, was primarily driven by: (i) $27.8 million in charge-offs against the allowance for loan losses, including $11.2 million related to five commercial loans, $11.1 million related to two non-owner occupied loans, and $3.1 million related to purchased consumer loans; (ii) the sale of two non-owner occupied loans totaling $19.1 million; (iii) $17.0 million in loans placed back in accrual status, including three multi-family residential loans totaling $11.4 million, one single-residential family loan of $2.7 million, one commercial loan of $2.7 million and one owner occupied loan of $0.2 million; and (iv) around $15.9 million in paydowns/payoffs during 2021. These decreases were partially offset by the placement in non accrual status of: (i) three non-owner occupied loans totaling $39.9 million, and (ii) one commercial loan of $2.7 million.
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Special mention loans as of December 31, 2021 totaled $74.1 million, a decrease of $44.7 million, or 37.6%, from $118.8 million as of December 31, 2020. This decrease was primarily due to: (i) $28.0 million in paydowns/payoffs; (ii) $15.3 million in upgrades to pass rating, including four owner occupied loans totaling $13.3 million and two commercial loans totaling $2.0 million, and (iii) a decrease of $13.5 million due to downgrades to classified rating, including $12.1 million related to a loan that was further downgraded to substandard and ultimately transferred to OREO in the third quarter of 2021, and one commercial loan of $1.4 million. The decrease in special mention during the period was offset by $13.4 million due to downgrades from pass to special mention rating, including two non-owner occupied loans totaling $8.0 million and two commercial loans totaling $4.4 million.
On March 26, 2020, the Company began offering loan payment relief options to customers impacted by the COVID-19 pandemic, including interest only and/or forbearance options. These programs continued throughout 2020 and in the six months ended June 30, 2021. In the third quarter of 2021, the Company ceased to offer these loan payment relief options, including interest-only and/or forbearance options. Loans which have been modified under these programs totaled $1.1 billion as of December 31, 2021. As of December 31, 2021, $37.1 million, or 0.7% of total loans, were still under the deferral and/or forbearance period, a decrease of $6.3 million, or 14.5% compared to $43.4 million, or 0.7% at December 31, 2020. This decrease was primarily due to $31.3 million in loans that resumed regular payments after deferral and/or forbearance periods, and $12.1 million in a CRE loan that was transferred to OREO. This was partially offset by new modifications in 2021, which we selectively offered as additional temporary loan modifications under programs that allow the deferral and/or forbearance periods to extend beyond 180 days. These new modifications include $37.1 million at December 31, 2021 which consist of two CRE retail loans in New York that will mature in the first quarter of 2022.
Additionally, 100% of the loans under deferral and/or forbearance are secured by real estate collateral with average Loan to Value (“LTV”) of 74%. All loans that have moved out of forbearance status have resumed regular payments, except for the CRE loan previously discussed that was transferred to OREO in 2021. In accordance with accounting and regulatory guidance, loans to borrowers benefiting from these measures are not considered TDRs. The Company continues to closely monitor the performance of the remaining loans in deferral and/or forbearance periods under the terms of the temporary relief granted.
While it continued being difficult to estimate the extent of the impact of the COVID-19 pandemic on the Company’s credit quality in 2021, 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.
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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Potential problem loans at December 31, 2021, 2020 and 2019 included:
Real estate loans
Commercial real estate (CRE)
Nonowner occupied $ — $ 744 $ 762
Multi-family residential — — —
Land development and construction loans 94 — —
Single-family residential 95 — —
Loans to depository institutions and acceptances — — —
Consumer loans and overdrafts (1) 13 — 9
________
(1) Corresponds to international consumer loans.
At December 31, 2021, total potential problem loans increased $0.5 million, or 51.5%, compared to December 31, 2020. The decrease is mainly attributed to one $1.4 million commercial loan downgraded to substandard accrual during the period offset by the pay off of one CRE non-owner occupied loans of $0.7 million.
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.
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 whenever appropriate.
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The following table sets forth the book value and percentage of each category of securities at December 31, 2021, 2020 and 2019. The book value for debt securities classified as available for sale and equity securities with readily determinable fair value not held for trading represents fair value. The book value for debt securities classified as held to maturity represents amortized cost.
Amount % Amount % Amount %
(in thousands, except percentages)
Debt securities available for sale:
_________________
(1) As of December 31, 2021, 2020 and 2019 corporate debt securities include $12.5 million, $17.1 million and $5.2 million, respectively, in “investment-grade” quality securities issued by foreign corporate entities. The securities issuers were from Japan and Canada in three different sectors in 2021 and 2020, and from Japan in the financial services sector in 2019. 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, 2021, 2020 and 2019, debt securities in the financial services sector issued by domestic corporate entities represent 3.1%, 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) As of December 31, 2020, 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. During the fourth quarter of 2021, the Company sold this mutual which had a fair value of $23.4 million at the time of the sale.
(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, 2021, total securities decreased $31.3 million, or 2.3%, to $1.3 billion compared to $1.4 billion as of December 31, 2020. The decrease in 2021 was mainly driven by: (i) maturities, sales and calls totaling $531.7 million, mainly debt securities available for sale, and (ii) net unrealized holding losses on debt securities available for sale of $21.5 million. These results were partially offset by purchases totaling $530.8 million, including purchases of debt securities available for sale and held to maturity of $425.9 million and $100.4 million, respectively.
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As of December 31, 2021, total available for sale debt securities includes residential and commercial mortgage-backed securities with amortized cost of $654.7 million and $123.5 million, respectively, and fair value of $661.3 million and $123.8 million, respectively. 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, 2021, total debt securities held to maturity includes residential and commercial mortgage-backed securities with total fair values of $88.7 million ($89.4 million - amortized cost) and $30.4 million ($28.8 million - amortized cost), 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.
The following table sets forth the book value, scheduled maturities and weighted average yields for our securities portfolio at December 31, 2021. 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
U.S. treasury securities 2,502 0.34 % 2,502 0.34 % — — % — — % — — % — — %
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The investment portfolio’s average effective duration was 3.6, 2.4 and 3.8 years as of December 31, 2021, 2020 and 2019, respectively. The increase in effective duration in 2021 compared to 2020 was primarily the result of higher longer term rates, and sales of shorter duration holdings being replaced with longer duration investments throughout the year. 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.
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, 2021, 2020 and 2019. 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 were $6.8 billion at December 31, 2021, a decrease of $180.9 million, or 2.6%, compared to $7.0 billion at December 31, 2020. This net decrease includes: (i) a net reduction of $240.4 million, or 22.9%, in advances from the FHLB, mainly due to the early repayment of $235 million of these borrowings in May 2021, and (ii) a net reduction of $100.8 million, or 1.8% in total deposits, mainly due to the decrease in time deposits. See “Capital Resources and Liquidity Management” and “Deposits” for more details on the changes of FHLB advances and total deposits.
The net decrease in total liabilities in 2021 was partially offset by a net increase in other liabilities of $23.3 million or 28.1%, mainly as a result of the adoption of the new accounting guidance on leases. See Note 1 to our audited consolidated financial statements in this Form 10-K for more details on the new guidance on leases.
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.
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.
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Deposits
Total deposits were $5.6 billion at December 31, 2021, a decrease of $100.8 million, or 1.8%, compared to December 31, 2020. The decline in deposits in 2021 was mainly driven by a decrease of $703.7 million, or 34.5%, in time deposits. This was partially offset by an increase of $603.0 million or 16.3%, in core deposits, including: (i) an increase of $311.1 million, or 35.7%, in noninterest bearing transaction accounts; (ii) an increase of $277.4 million, or 22.6% in interest bearing transaction accounts, and (iii) an increase of $14.5 million, or 0.9%, in savings and money market deposit accounts.
The decline in time deposits balances in 2021 compared to 2020 was primarily attributable to a $499.3 million, or 32.3%, reduction in customer CDs compared to December 31, 2020, as the Company continued to aggressively lower CD rates and focus on increasing core deposits and emphasizing multi-product relationships versus single product higher-cost CDs. This decline in customer CDs includes a $101.1 million, or 50.9%, reduction in online CD balances. In addition, brokered time deposits decreased $204.4 million, or 41.4%, in 2021 compared to December 31, 2020.
The increase in transaction account balances in 2021 compared to 2020 includes $645.7 million or 18.2%, in higher customer account balances, partially offset by a total decrease of $42.8 million in brokered interest bearing and money market deposits.
Domestic deposits decreased $65.7 million, or 2.1%, in 2021 to $3.1 billion at December 31, 2021 from $3.2 billion at December 31, 2020. Foreign deposits decreased $35.1 million, or 1.4%, in 2021 from $2.5 billion at December 31, 2020. See discussions further below.
We continue to move closer toward achieving our stated deposit growth targets, which include maintaining the loan to deposit ratio under 100%, and reducing the brokered deposits to total deposits ratio to 5%. In 2021, we added key personnel in treasury management and other business areas to continue growing low cost deposits. In addition, we have continued to work on enhancing a completely digital onboarding platform to facilitate the opening of deposit accounts and improve the customer experience. Specifically, in 2021, we entered in to arrangements with Alloy and ClickSWITCH®. In 2021, we tested a digital promotional campaign with a cash bonus for opening a new Value Checking account, and raised nearly $10 million in new deposits. In addition, in 2021 the Company commenced a new relationship, which allows us to capture municipal funds. Furthermore, in 2021, we implemented Zelle® Commercial, being one of the first community banks to implement this P2P payment platform. See “Item 1.Business- Our Company- Business Developments” for additional information on new digital platforms and other deposit-related initiatives.
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.