UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2022~~March 31, 2023


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-38290

Sterling Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Michigan		38-3163775
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

One Towne Square, Suite 1900

Southfield, Michigan 48076

(248) 355-2400

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common ~~stock, no par value per share~~Stock	SBT	~~NASDAQ~~Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐		Accelerated filer ☐☒		Non~~Non~~--accelerated filer ☒☐		Smaller reporting company ☒
						Emerging growth company ☒☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~November 4, 2022,~~May 1, 2023, ~~50,800,012~~50,791,553 shares of the registrant’s Common Stock were outstanding.

Table of Contents

STERLING BANCORP, INC.

QUARTERLY REPORT ON FORM 10-Q

INDEX

PART I — FINANCIAL INFORMATION		Page
Item 1.	Financial Statements (Unaudited)	2
	Condensed Consolidated Balance Sheets as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022	2
	Condensed Consolidated Statements of ~~Income~~Operations for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~	3
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~	4
	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~	5
	Condensed Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~	6
	Notes to the Condensed Consolidated Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3738
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	6259
Item 4.	Controls and Procedures	6461

PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	6562
Item 1A.	Risk Factors	6663
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6665
Item 6.	Exhibits	6766
Exhibit Index
SIGNATURES		6867

Table of Contents

Sterling Bancorp, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

(dollars in thousands)

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

September 30,

December 31,


2022

2021
Assets




Cash and due from banks

$
352,404

$
411,676
Interest-bearing time deposits with other banks

1,183

1,183
Investment securities

353,219

313,879
Loans held for sale

8,833

64,987
Loans, net of allowance for loan losses of $45,362 and $56,548

1,636,266

1,956,266
Accrued interest receivable

7,061

7,696
Mortgage servicing rights, net

1,842

2,722
Leasehold improvements and equipment, net

6,585

7,421
Operating lease right-of-use assets

15,467

18,184
Federal Home Loan Bank stock, at cost

20,288

22,950
Cash surrender value of bank-owned life insurance

8,448

33,033
Deferred tax asset, net

23,907

21,426
Other assets

12,401

15,407
Total assets

$
2,447,904

$
2,876,830

Liabilities and Shareholders’ Equity

Liabilities




Noninterest-bearing deposits

$
70,063

$
63,760
Interest-bearing deposits

1,880,951

2,197,975
Total deposits

1,951,014

2,261,735
Federal Home Loan Bank borrowings

50,000

150,000
Subordinated notes, net

65,290

65,343
Operating lease liabilities

16,664

19,400
Accrued expenses and other liabilities

35,335

36,725
Total liabilities

2,118,303

2,533,203

Shareholders’ Equity




Preferred stock, authorized 10,000,000 shares; no shares issued and outstanding

—

—
Common stock, no par value, authorized 500,000,000 shares; issued and outstanding 50,800,012 shares at September 30, 2022 and 50,460,932 shares at December 31, 2021

83,295

82,157
Additional paid-in capital

14,560

14,124
Retained earnings

252,482

248,243
Accumulated other comprehensive loss

(20,736)

(897)
Total shareholders’ equity

329,601

343,627
Total liabilities and shareholders’ equity

$
2,447,904

$
2,876,830


	March 31,		December 31,
	2023		2022
Assets
Cash and due from banks	$	419,219	$	379,798
Interest-bearing time deposits with other banks		934		934
Debt securities available for sale, at fair value (amortized cost $365,622 and $370,489)		342,534		343,558
Equity securities		4,712		4,642
Loans held for sale		37,979		7,725
Loans, net of allowance for credit losses of $38,565 and $45,464		1,513,481		1,613,385
Accrued interest receivable		7,617		7,829
Mortgage servicing rights, net		1,703		1,794
Leasehold improvements and equipment, net		6,139		6,301
Operating lease right-of-use assets		13,916		14,800
Federal Home Loan Bank stock, at cost		20,288		20,288
Company-owned life insurance		8,553		8,501
Deferred tax asset, net		20,065		23,704
Other assets		14,408		11,476
Total assets	$	2,411,548	$	2,444,735

Liabilities and Shareholders’ Equity
Liabilities
Noninterest-bearing deposits	$	46,496	$	53,041
Interest-bearing deposits		1,875,326		1,900,996
Total deposits		1,921,822		1,954,037
Federal Home Loan Bank borrowings		50,000		50,000
Subordinated notes, net		65,253		65,271
Operating lease liabilities		15,089		15,990
Accrued expenses and other liabilities		43,874		46,810
Total liabilities		2,096,038		2,132,108

Shareholders’ equity
Preferred stock, authorized 10,000,000 shares; no shares issued and outstanding		—		—
Common stock, no par value, authorized 500,000,000 shares; issued and outstanding 50,808,116 shares and 50,795,871 shares at March 31, 2023 and December 31, 2022, respectively		83,295		83,295
Additional paid-in capital		14,906		14,808
Retained earnings		234,048		234,049
Accumulated other comprehensive loss		(16,739)		(19,525)
Total shareholders’ equity		315,510		312,627
Total liabilities and shareholders’ equity	$	2,411,548	$	2,444,735

See accompanying notes to condensed consolidated financial statements.

Table of Contents

Sterling Bancorp, Inc.

Condensed Consolidated Statements of ~~Income~~Operation (Unaudited)

(dollars in thousands, except per share amounts)


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2022		2021		2022		2021		2023		2022
Interest income
Interest and fees on loans	$	20,975	$	27,348	$	65,589	$	88,716	$	22,160	$	23,868
Interest and dividends on investment securities and restricted stock		1,945		375		4,133		1,150		2,456		835
Other interest		1,925		253		2,931		743		4,807		215
Total interest income		24,845		27,976		72,653		90,609		29,423		24,918

Interest expense
Interest on deposits		3,724		3,541		8,070		15,479		9,809		2,330
Interest on Federal Home Loan Bank borrowings		253		826		919		2,511		245		352
Interest on subordinated notes		1,329		972		3,383		3,157		1,693		964
Total interest expense		5,306		5,339		12,372		21,147		11,747		3,646

Net interest income		19,539		22,637		60,281		69,462		17,676		21,272
Provision (recovery) for loan losses		(4,357)		397		(9,755)		(2,146)
Net interest income after provision (recovery) for loan losses		23,896		22,240		70,036		71,608
Provision for (recovery of) credit losses										674		(4,289)
Net interest income after provision for (recovery of) credit losses										17,002		25,561

Non-interest income
Service charges and fees		124		120		351		423		94		122
Gain on sale of mortgage loans held for sale		—		151		200		619
Unrealized losses on equity securities		(184)		(24)		(590)		(99)
Gain on sale of branch office		—		1,417		—		1,417
Net servicing loss		(384)		(31)		(118)		(1,369)
Income on cash surrender value of bank-owned life insurance		87		325		670		960
Loss on the sale of investment securities										(2)		—
Gain (loss) on sale of mortgage loans held for sale										(25)		197
Unrealized gain (loss) on equity securities										71		(236)
Net servicing income										59		443
Income earned on company-owned life insurance										80		328
Other		—		100		586		291		1		557
Total non-interest income		(357)		2,058		1,099		2,242		278		1,411

Non-interest expense
Salaries and employee benefits		9,336		2,774		24,522		19,300		9,410		9,617
Occupancy and equipment		2,112		2,395		6,441		6,840		2,112		2,142
Professional fees		5,756		4,024		17,979		18,500		3,221		5,157
FDIC assessments		316		417		1,031		1,636		257		369
Data processing		725		403		2,292		1,189		738		805
Net recovery of mortgage repurchase liability		(145)		(298)		(670)		(963)
Net provision for (recovery of) mortgage repurchase liability										120		(213)
Other		3,521		1,361		8,943		5,852		1,979		1,546
Total non-interest expense		21,621		11,076		60,538		52,354		17,837		19,423

Income before income taxes		1,918		13,222		10,597		21,496
Income tax expense		742		3,665		6,358		6,162
Net income	$	1,176	$	9,557	$	4,239	$	15,334
Income (loss) before income taxes										(557)		7,549
Income tax expense (benefit)										(54)		2,289
Net income (loss)									$	(503)	$	5,260

Income per share, basic and diluted	$	0.02	$	0.19	$	0.08	$	0.31
Income (loss) per share, basic and diluted									$	(0.01)	$	0.10

Weighted average common shares outstanding:
Basic		50,400,412		50,167,295		50,326,951		50,010,341		50,444,463		50,191,288
Diluted		50,572,931		50,262,686		50,523,076		50,079,931		50,444,463		50,406,123

See accompanying notes to condensed consolidated financial statements.

Table of Contents

Sterling Bancorp, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(dollars in thousands)


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2022		2021		2022		2021		2023		2022
Net income	$	1,176	$	9,557	$	4,239	$	15,334
Other comprehensive loss, net of tax:
Unrealized losses on investment securities, arising during the period, net of tax effect of $(2,632), $(89), $(7,515) and $(61), respectively		(7,154)		(230)		(19,839)		(158)
Net income (loss)									$	(503)	$	5,260
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on investment securities, arising during the period, net of tax effect of $1,054 and $(2,933), respectively										2,785		(7,543)
Reclassification adjustment for loss included in net income of $2 and $-, respectively, included in loss on sale of investment securities, net of tax effect of $1 and $-, respectively										1		—
Total other comprehensive income (loss)										2,786		(7,543)
Comprehensive income (loss)	$	(5,978)	$	9,327	$	(15,600)	$	15,176	$	2,283	$	(2,283)

See accompanying notes to condensed consolidated financial statements.

Table of Contents

Sterling Bancorp, Inc.

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

(dollars in thousands)


								Accumulated											Accumulated
				Additional				Other		Total					Additional				Other		Total
	Common Stock			Paid-in		Retained		Comprehensive		Shareholders’		Common Stock			Paid-in		Retained		Comprehensive		Shareholders’
	Shares	Amount		Capital		Earnings		Income (Loss)		Equity
Balance at January 1, 2021	49,981,861	$	80,807	$	13,544	$	224,853	$	387	$	319,591
Net income	—		—		—		2,325		—		2,325
Repurchase of restricted shares to pay employee tax liability	(8,536)		—		(46)		—		—		(46)
Stock-based compensation	36,082		—		105		—		—		105
Other comprehensive loss	—		—		—		—		(59)		(59)
Balance at March 31, 2021	50,009,407	$	80,807	$	13,603	$	227,178	$	328	$	321,916
Net income	—		—		—		3,452		—		3,452
Issuance of shares of common stock for cash ($4.50 per share) (Note 9)	300,000		1,350		—		—		—		1,350
Stock-based compensation	165,774		—		193		—		—		193
Other comprehensive income	—		—		—		—		131		131
Balance at June 30, 2021	50,475,181	$	82,157	$	13,796	$	230,630	$	459	$	327,042
Net income	—		—		—		9,557		—		9,557
Stock-based compensation	(117)		—		196		—		—		196
Other comprehensive loss	—		—		—		—		(230)		(230)
Balance at September 30, 2021	50,475,064	$	82,157	$	13,992	$	240,187	$	229	$	336,565
												Shares	Amount		Capital		Earnings		Income (Loss)		Equity
Balance at January 1, 2022	50,460,932	$	82,157	$	14,124	$	248,243	$	(897)	$	343,627	50,460,932	$	82,157	$	14,124	$	248,243	$	(897)	$	343,627
Net income	—		—		—		5,260		—		5,260	—		—		—		5,260		—		5,260
Repurchase of restricted shares to pay employee tax liability	(13,383)		—		(84)		—		—		(84)	(13,383)		—		(84)		—		—		(84)
Stock-based compensation	49,284		—		146		—		—		146	49,284		—		146		—		—		146
Other comprehensive loss	—		—		—		—		(7,543)		(7,543)	—		—		—		—		(7,543)		(7,543)
Balance at March 31, 2022	50,496,833	$	82,157	$	14,186	$	253,503	$	(8,440)	$	341,406	50,496,833	$	82,157	$	14,186	$	253,503	$	(8,440)	$	341,406

Balance at January 1, 2023												50,795,871	$	83,295	$	14,808	$	234,049	$	(19,525)	$	312,627
Cumulative-effect adjustment of a change in accounting principle, net of tax, on adoption of ASU 2016-13 (Note 2)												—		—		—		778		—		778
Cumulative-effect adjustment of a change in accounting principle, net of tax, on adoption of ASU 2022-02 (Note 2)												—		—		—		(276)		—		(276)
Net loss	—		—		—		(2,197)		—		(2,197)	—		—		—		(503)		—		(503)
Repurchase of restricted shares to pay employee tax liability	(16,345)		—		(112)		—		—		(112)	(12,166)		—		(75)		—		—		(75)
Issuance of shares of common stock to defined contribution retirement plan (Note 9)	160,978		1,138		—		—		—		1,138
Stock-based compensation	176,746		—		239		—		—		239	24,411		—		173		—		—		173
Other comprehensive loss	—		—		—		—		(5,142)		(5,142)
Balance at June 30, 2022	50,818,212	$	83,295	$	14,313	$	251,306	$	(13,582)	$	335,332
Net income	—		—		—		1,176		—		1,176
Repurchase of restricted shares to pay employee tax liability	(1,299)		—		(8)		—		—		(8)
Stock-based compensation	(16,901)		—		255		—		—		255
Other comprehensive loss	—		—		—		—		(7,154)		(7,154)
Balance at September 30, 2022	50,800,012	$	83,295	$	14,560	$	252,482	$	(20,736)	$	329,601
Other comprehensive income												—		—		—		—		2,786		2,786
Balance at March 31, 2023												50,808,116	$	83,295	$	14,906	$	234,048	$	(16,739)	$	315,510

See accompanying notes to condensed consolidated financial statements.

Table of Contents

~~STERLING BANCORP, INC.~~Sterling Bancorp, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(dollars in thousands)


	Nine Months Ended				Three Months Ended
	September 30,				March 31,
	2022		2021		2023		2022
Cash Flows From Operating Activities
Net income	$	4,239	$	15,334
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (recovery) for loan losses		(9,755)		(2,146)
Net income (loss)					$	(503)	$	5,260
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Provision for (recovery of) credit losses						674		(4,289)
Deferred income taxes		5,034		1,009		2,394		3,494
Gain on sale of branch office		—		(1,417)
Unrealized losses on equity securities		590		99
Net amortization (acrretion) on investment securities		(342)		1,229
Loss on sale of investment securities						2		—
Unrealized (gain) loss on equity securities						(71)		236
Net amortization (accretion) on investment securities						(491)		86
Depreciation and amortization on leasehold improvements and equipment		1,162		1,395		352		391
Net principal payments (originations) of loans held for sale		2,284		(9,385)
Originations, net of principal payments, of loans held for sale						(2,667)		(698)
Proceeds from sale of mortgage loans held for sale		1,831		19,179		2,979		1,518
Gain on sale of loans held for sale		(200)		(619)
Net recovery of mortgage repurchase liability		(670)		(963)
Increase in cash surrender value of bank-owned life insurance, net of premiums		(292)		(404)
(Gain) loss on sale of loans originated for investment and loans held for sale						25		(197)
Net provision for (recovery of) mortgage repurchase liability						120		(213)
Increase in cash surrender value of company-owned life insurance, net of premiums						(52)		(130)
Valuation allowance adjustments and amortization of mortgage servicing rights		891		2,939		91		(157)
Stock-based compensation		640		494		173		146
Other		82		475		55		(17)
Change in operating assets and liabilities:
Accrued interest receivable		635		2,635		212		1,041
Other assets		2,214		1,588		(2,340)		(1,586)
Accrued expenses and other liabilities		(812)		4,549		(4,426)		(3,687)
Net cash provided by operating activities		7,531		35,991
Net cash provided by (used in) operating activities						(3,473)		1,198

Cash Flows From Investing Activities
Maturities of interest-bearing time deposits with other banks		—		6,216
Maturities and principal receipts of investment securities		80,551		121,958		5,358		12,352
Sales of investment securities						2,977		—
Purchases of investment securities		(147,493)		(23,237)		(2,979)		(73,632)
Proceeds received from redemption of Federal Home Loan Bank stock		2,662		—		—		2,662
Net decrease in loans		380,865		441,787		70,008		142,123
Purchases of portfolio loans		(67,127)		(179,341)
Principal payments received on commercial real estate loans held for sale		2,529		—		10		2,515
Proceeds from the sale of commercial real estate loans originated for investment		67,584		—		—		49,610
Proceeds received from settlement of bank-owned life insurance policies		24,877		—
Cash paid on sale of branch office		—		(63,545)
Purchases of leasehold improvements and equipment		(326)		(2,321)		(190)		(114)
Net cash provided by investing activities		344,122		301,517		75,184		135,516

Cash Flows From Financing Activities
Net decrease in deposits		(310,721)		(716,897)		(32,215)		(61,563)
Proceeds from FHLB advances		35,000		—
Repayment of FHLB advances		(135,000)		(11,000)
Proceeds from issuance of shares of common stock		—		1,350
Cash paid for surrender of vested shares to satisfy employee tax liability		(204)		(46)		(75)		(84)
Net cash used in financing activities		(410,925)		(726,593)		(32,290)		(61,647)
Net change in cash and due from banks		(59,272)		(389,085)		39,421		75,067
Cash and due from banks at beginning of period		411,676		998,497		379,798		411,676
Cash and due from banks at end of period	$	352,404	$	609,412	$	419,219	$	486,743

Supplemental cash flows information
Cash paid for:
Interest	$	11,872	$	38,156	$	11,424	$	3,768
Income taxes		1,779		11		25		82
Noncash investing and financing activities:
Right-of-use assets obtained in exchange for new operating lease liabilities		—		3,186
Shares of common stock issued in satisfaction of Company’s matching contribution in defined contribution retirement plan		1,138		—
Transfer of residential real estate loans to loans held for sale						34,581		—
Transfer of residential real estate loans from loans held for sale						3,906		—

See accompanying notes to condensed consolidated financial statements.

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements ~~(Unaudited)~~

(dollars in thousands, except share and per share amounts)

Note 1—Nature of Operations and Basis of Presentation

Nature of Operations

Sterling Bancorp, Inc. (unless stated otherwise or the context otherwise requires, together with its subsidiaries, the “Company”) is a unitary thrift holding company that was incorporated in 1989 and the parent company of its wholly owned subsidiary, Sterling Bank and Trust, F.S.B. (the “Bank”). The Company’s business is conducted through the Bank, which was formed in 1984. The Bank originates residential and commercial real estate loans, construction loans, commercial ~~lines of credit~~and industrial loans and other consumer loans and provides deposit products, consisting primarily of checking, savings and term certificate accounts. It also engages in mortgage banking activities and, as such, acquires, sells and services residential mortgage loans. The Bank operates through a network of 28 branches of which 26 branches are located in San Francisco and Los Angeles, California with the remaining branches located in New York, New York and Southfield, Michigan.

The Company is headquartered in Southfield, Michigan, and its operations are in the financial services industry. Management evaluates the performance of the Company’s business based on one reportable segment, community banking.

The Company is subject to regulation, examination and supervision by the Board of Governors of the Federal Reserve System (the “FRB” or “Federal Reserve”). The Bank is a federally chartered stock savings bank that is subject to regulation, supervision and examination by the Office of the Comptroller of the Currency (“OCC”) of the U.S. Department of Treasury and the Federal Deposit Insurance Corporation (“FDIC”) and is a member of the Federal Home Loan Bank (“FHLB”) system.

In July 2021, the Company completed the sale of the Bellevue, Washington branch office to First Federal Savings & Loan Association of Port Angeles (“First Federal”), a Washington state chartered bank. The sale included the transfer of customer deposit accounts of $65,437 located at the branch, as well as the transfer of all branch premises and equipment. The transaction resulted in a net cash payment to First Federal of $63,545. The Company recorded a gain on the sale of $1,417 during the three and nine months ended September 30, 2021.

Basis of Presentation

The condensed consolidated balance sheet as of ~~September 30, 2022,~~March 31, 2023, and the condensed consolidated statements of ~~income,~~operations, comprehensive income (loss), changes in shareholders’ equity and cash flows for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ are unaudited. The unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and reflect all adjustments, in the opinion of management, of a normal recurring nature that are necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. The financial data and other financial information disclosed in these notes to the condensed consolidated financial statements related to these periods are also unaudited. The results of operations for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 are not necessarily indicative of the results that may be expected for the year ended December 31, ~~2022~~2023 or for any future annual or interim period. The condensed consolidated balance sheet at December 31, ~~2021~~2022 included herein was derived from the audited financial statements as of that date. The accompanying unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2021,~~2022, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on March ~~31, 2022~~16, 2023 (the ~~“2021~~“2022 Form 10-K”).

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share amounts)

Note 2—Adoption of New Accounting Standards

In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2022-02, Financial Instruments – Credit Losses ( Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”), which eliminates the accounting guidance for troubled debt restructurings by creditors and enhances disclosure requirements for certain loan refinancings and restructurings made to borrowers experiencing financial difficulty. Under the new guidance, creditors should evaluate all loan modifications to determine if they result in a new loan or a continuation of the existing loan under the general loan modification guidance. Public business entities are required to disclose current-period gross write-offs by year of origination for loan financing receivables and net investment in leases. The Company adopted the provisions of ASU 2022-02 on January 1, 2023, along with its adoption of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) as discussed in Note 3—Summary of Significant Accounting Policies. On the date of adoption, the Company recorded a cumulative effect adjustment of $276, net of tax, to decrease the opening balance of retained earnings as of January 1, 2023, for the initial application of ASU 2022-02. The cumulative effect adjustment represents the difference between the allowance previously determined under the troubled debt restructuring model and the allowance determined under the new credit loss accounting model for existing troubled debt restructuring loans on the adoption date.

In June 2016, the FASB issued ASU 2016-13 (and subsequent amendments), which significantly changes estimates for credit losses related to financial assets measured at amortized cost, including loan receivables and other contracts, such as off-balance sheet credit exposure, specifically, loan commitments and standby letters of credit, financial guarantees, and other similar instruments. The guidance replaced the current incurred loss accounting model with an expected loss model, which is referred to as the current expected credit loss (“CECL”) model. The CECL model requires the measurement of the lifetime expected credit losses on financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Additionally, ASU 2016-13 requires credit losses on available for sale debt securities to be presented as an allowance rather than as a write-down. The guidance requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio.

The Company adopted ASU 2016-13 on January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while amounts for prior periods continue to be reported in accordance with previously applicable accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Company recorded a cumulative effect adjustment of $778, net of tax, to increase the opening balance of retained earnings as of January 1, 2023, for the initial application of CECL. Upon adoption, the allowance for credit losses for loans decreased by $1,651 primarily driven by the allowance for credit losses on the construction loan portfolio due to the short contractual maturities of the loans in this portfolio segment (all construction loans mature in 2023). This was partially offset by an increase in the allowance for credit losses in both our residential real estate and commercial real estate portfolio segments which have longer contractual maturities. In addition, the Company established a liability for unfunded commitments of $579.

The details of the changes and quantitative impact on the financial statement line items in the condensed consolidated balance sheet as of January 1, 2023 for the adoption of ASU 2016-13, along with the adoption of ASU 2022-02, were as follows:



	Prior to		Adjustments for		Adjustments for		After
	Adoption		ASU 2016-13		ASU 2022-02		Adoption
Assets:
Allowance for credit losses – loans	$	45,464	$	(1,651)	$	380	$	44,193
Liabilities:
Liability for unfunded commitments		—		579		—		579
Pretax cumulative effect adjustment of a change in accounting principle		—		(1,072)		380		—
Less: income taxes		—		294		(104)		—
Cumulative effect adjustment of a change in accounting principle, net of tax		—	$	(778)	$	276		—

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share amounts)

The loan portfolio is pooled into segments with similar characteristics and risk profiles for which the probability of default/loss given default methodology is then applied. The Company utilizes a 24-month economic forecast. For all classes of financial assets deemed collateral dependent, the Company elected the practical expedient to estimate the expected credit losses based on the respective collateral’s fair value less cost to sell.

The Company also made an accounting policy election to not measure an allowance for credit losses on accrued interest receivable and to present accrued interest receivable separately from the related financial asset on the condensed consolidated balance sheet.

The Company’s available for sale debt securities are comprised of debt, mortgage-backed securities and collateralized mortgage obligations. The debt, mortgage-backed securities and the majority of the collateralized mortgage obligations are issued by the U.S. government, its agencies and government-sponsored enterprises. Management has concluded that the long history with no credit losses from these issuers indicates an expectation that nonpayment of the amortized cost is zero. Thus, the Company has not recorded an allowance for credit losses for its available for sale debt securities at the date of adoption.

As stated, the comparative prior period information presented before January 1, 2023 has not been adjusted and continues to be reported under the Company’s historical allowance for loan losses policies as described in Note 2 to the consolidated financial statements in the 2022 Form 10-K.

Note 3— Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying condensed consolidated financial statements have been prepared in conformity with ~~accounting principles generally accepted in the United States of America (“~~U.S. ~~GAAP”).~~GAAP. The condensed consolidated financial statements include the results of Sterling Bancorp, Inc. and its wholly-owned subsidiaries.

All significant intercompany accounts and transactions have been eliminated in consolidation.

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~~STERLING BANCORP, INC.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~(dollars in thousands, except share and per share amounts)~~

Use of Estimates

The preparation of the ~~condensed~~ consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Due to the inherent uncertainty involved in making estimates, actual results reported in the future periods may be based upon amounts that could differ from those estimates.

Concentration of Credit Risk

The loan portfolio consists primarily of residential real estate loans, which are collateralized by real estate. At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, residential real estate loans accounted for ~~85%~~83% and ~~83%~~84%, respectively, of total gross loans. In addition, most of these residential loans and other commercial loans have been made to individuals and businesses in the state of California, which are dependent on the area economy for their livelihoods and servicing of their loan obligation. At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, approximately ~~83% and 85%, respectively,~~81% of gross loans ~~was~~were originated with respect to properties or businesses located in the state of California.

In March 2020, the Bank permanently discontinued its Advantage Loan program. Loans originated under this program comprised a significant component of the Bank’s total loan originations. Advantage Loan Program loans (including residential real estate loans held for sale of $7,279 and $11,359 at September 30, 2022 and December 31, 2021, respectively, of which $3,657 and $8,671 were on nonaccrual status as of those respective dates) totaled $937,225 and $1,185,458, or 65% and 69% of gross residential loans, at September 30, 2022 and December 31, 2021, respectively. Refer to Note 16—Commitments and Contingencies.

~~Employee Retention Credits Under the Cares Act~~

The Company evaluated its eligibility for the employee retention credits (“ERC”) offered under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) in the third quarter of 2021 and determined it qualified for the ERC for the first three quarters of 2021. The Company qualified for the ERC because its gross receipts (which consisted of total interest income and other fees from banking activities and services) decreased more than 20% in 2021 from each of the respective quarters of 2019. The ERC was a refundable tax credit against certain employment taxes.

The Company accounted for the ERC by analogy to International Accounting Standards 20 (“IAS 20”). Under IAS 20, the credit is recognized on a systematic basis over the periods in which the entity recognizes the payroll expenses for which the grant (tax credit) is intended to compensate when there is reasonable assurance that the entity will comply with any conditions attached to the grant and the grant will be received. The Company has made an accounting policy election to record the ERC benefit as a reduction to payroll expenses.

During the three and nine months ended September 30, 2021, the Company recorded a benefit of $6,529 resulting in a net reduction of salaries and employee benefits expense in the condensed consolidated statements of income. The Company initially recorded a grant receivable of $6,529 and has received refunds or credits of $886, with a remaining receivable of $5,643 which is recorded in other assets in the condensed consolidated balance sheet at September 30, 2022. The Company expects to receive the balance of the refunds within the near term.

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~~STERLING BANCORP, INC.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~(dollars in thousands, except share and per share amounts)~~

~~Recently Issued Accounting Guidance Not Yet Adopted~~

~~In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2022-02,~~ ~~Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures,~~ which eliminates the accounting guidance for troubled debt restructurings by creditors in ASC 310-40, Receivables – Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings involving borrowings that are experiencing financial difficulty. Specifically, rather than applying the troubled debt restructuring recognition and measurement guidance, creditors will evaluate all loan modifications to determine if they result in a new loan or a continuation of the existing loan. Also, losses associated with troubled debt restructurings should be incorporated in a creditor’s estimate of its allowance for credit losses. Public business entities are required to disclose current-period gross write-offs by year of origination for loan financing receivables and net investment in leases. For entities that have not yet adopted ASU 2016-13, ~~Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“2016-13”)~~~~, ASU 2022-02 is effective when the entity adopts the guidance in ASU 2016-13. The Company is currently evaluating this ASU, along with its adoption of ASU 2016-13, as discussed below.~~

In June 2016, the FASB issued ASU No. 2016-13, which is intended to improve financial reporting by requiring recording of credit losses on loans and other financial instruments on a more timely basis. The guidance will replace the current incurred loss accounting model with an expected loss approach and requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The guidance requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In April 2019, the FASB issued ASU No. 2019-04, ~~Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,~~ which clarifies the scope of the credit losses standard and addresses issues related to accrued interest receivable balances and recoveries, among other things. In May 2019, the FASB issued ASU No. 2019-05, ~~Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief.~~ The amendments provide entities with an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis, upon adoption of Topic 326. In November 2019, the FASB issued ASU No. 2019-10, ~~Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates~~. This update deferred the effective dates of Topic 326 to January 1, 2023 for certain entities including smaller reporting companies as defined by the SEC. The Company, as a smaller reporting company as of the relevant measuring period, qualified for this extension.

At this time, a cross-functional implementation team consisting of individuals from accounting, finance, servicing and information systems is working with the Company’s loan system vendor and consultants, and an application to create credit loss estimation models and processes has been developed. The historical data set for model development has been finalized, and the credit loss estimation models have been developed and tested. The Company is working to finalize the assessment and documentation of processes and internal controls as well as adjustments to qualitative factors. In addition, the Company has engaged a third party to perform a model validation. The Company will run the new credit loss estimation models under the new internal controls in parallel with the current allowance for loan losses model to understand the differences in the models and assess the impact of the change. The Company expects to recognize a cumulative effect adjustment to the opening balance of retained earnings as of January 1, 2023, the beginning of the first reporting period in which ASU No. 2016-13 is effective. The Company has not yet determined the magnitude of any such one-time cumulative adjustment or of the overall impact of ASU No. 2016-13 on its condensed consolidated financial statements.

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements ~~(Unaudited)~~

(dollars in thousands, except share and per share amounts)

In December 2019, the Company terminated a loan product consisting of one-, three-, five- or seven-year adjustable-rate mortgages that required a down payment of at least 35% (also referred to herein as “Advantage Loan Program loans”) which continues to be the largest portion of gross residential loans. An internal review of the Advantage Loan Program indicated that certain employees engaged in misconduct in connection with the origination of a significant number of such loans, including with respect to verification of income, the amount of income reported for borrowers, reliance on third parties and related documentation. Refer to Note 15—Commitments and Contingencies.

Advantage Loan Program loans (including residential real estate loans held for sale of $36,234 and $6,181 at March 31, 2023 and December 31, 2022, of which $26,074 and $1,942 were on nonaccrual status as of those respective dates) totaled $824,033 and $880,373, or 62% and 63% of gross residential loans, at March 31, 2023 and December 31, 2022, respectively.

Investment Securities

Debt Securities(Effective January 1, 2023)

Debt securities are classified as either available for sale or held to maturity. Management determines the classification of the debt securities when they are purchased.

All debt securities were categorized as available for sale as of March 31, 2023 and December 31, 2022. Debt securities available for sale are stated at fair value, with unrealized gains and losses reported in accumulated other comprehensive loss, net of income taxes. The amortized cost of debt securities is adjusted for amortization of premiums (noncallable) and accretion of discounts. The Company amortizes premiums and accretes discounts using the effective interest method over the contractual life of the individual securities or, in the case of asset-backed securities, using the effective yield method over the estimated life of the individual securities.

Interest income includes amortization or accretion of purchase premium or discount. Gains and losses realized on the sales of available for sale debt securities are recorded on the settlement date and determined using the specific identification method.

For available for sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For available for sale debt securities that do not meet the aforementioned criteria, the Company evaluates at the individual security level whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of income taxes.

Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit losses. Losses are charged against the allowance for credit losses when management believes the uncollectibility of an available for sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Accrued interest receivable on available for sale debt securities is recorded separately from the amortized cost basis of the debt securities in the condensed consolidated balance sheets and is excluded from the estimate of credit losses.

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share amounts)

Equity Securities

Equity securities with readily determinable fair values are stated at fair value with unrealized and realized gains and losses reported in income. Those equity securities without readily determinable fair values are recorded at cost less any impairments, adjusted for subsequent observable price changes in orderly transactions for an identical or similar investment of the same issuer. Any changes in the carrying value of the equity investments are recognized in income.

Management performs a qualitative assessment each reporting period to identify impairment of equity securities without readily determinable fair values. When a qualitative assessment indicates that an impairment exists, management determines the fair value of the investment and if the fair value is less than the investment’s carrying value, an impairment charge is recorded in income equal to the difference between the fair value and the carrying amount of the investment.

Loans Held for Sale

The Company originates certain loans intended for sale in the secondary market. Loans held for sale are carried at the lower of amortized cost or fair value on an individual loan basis. The fair value of loans held for sale are primarily determined based on quoted prices for similar loans in active markets or outstanding commitments from third-party investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to non-interest income in the condensed consolidated statements of operations.

Performing residential real estate loans that are held for sale are generally sold with servicing rights retained. The carrying value of mortgage loans sold is reduced by the amount allocated to the servicing right. On the sale of an originated loan, the servicing right is recorded at its estimated fair value. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold and are recorded as a component of non-interest income.

Loans that are originated and classified as held for investment are periodically sold in order to manage liquidity, asset credit quality, interest rate risk or concentration risk. Loans that are reclassified into loans held for sale from loans held for investment, due to a change in intent, are recorded at the lower of cost or fair value.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at amortized cost, net of the allowance for credit losses. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts, and deferred loan fees and costs. Accrued interest receivable related to loans is recorded separately from the amortized cost basis of loans on the condensed consolidated balance sheets and is excluded from the estimate of credit losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct loan origination costs, are deferred and amortized over the contractual lives of the respective loans as a yield adjustment using the effective interest method. Other credit-related fees are recognized as fee income, as a component of non-interest income.

Interest income on loans is accrued as earned using the interest method over the term of the loan. The accrual of interest income is discontinued at the time the loan is 90 days past due or earlier if conditions warrant and placed on nonaccrual status. In all cases, loans are placed on nonaccrual status at an earlier date if collection of principal or interest is considered doubtful. All interest accrued and not received for loans placed on nonaccrual status is reversed against interest income. Any payments received on nonaccrual loans are applied to interest income on a cash basis if the loan is considered well secured. Otherwise, all payments received are applied first to outstanding loan principal amounts and then to the recovery of the charged off loan amounts. Any excess is treated as a recovery of interest and fees. Loans are returned to accrual status after all principal and interest amounts contractually due are made and future payments are reasonably assured.

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share amounts)

Allowance for Credit Losses - Loans (Effective January 1, 2023)

The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of held for investment loans to present the net amount expected to be collected on the loans. The allowance for credit losses is adjusted through a charge (recovery) to provision for (recovery of) credit losses in the condensed consolidated statements of operations. When the Company determines that all or a portion of a loan is uncollectible, the appropriate amount is written off, and the allowance for credit losses is reduced by the same amount. The Company applies judgment to determine when a loan is deemed uncollectible; however, generally a loan will be considered uncollectible no later than when all efforts at collection have been exhausted. Subsequent recoveries, if any, are credited to the allowance for credit losses when received. Portions of the allowance for credit losses may be allocated for specific credits; however, the entire allowance for credit losses is available for any credit that, in management’s judgment, should be charged off.

The Company estimates the allowance for credit losses on loans based on the underlying loans’ amortized cost. If the collection of principal becomes uncertain, the Company stops accruing interest and reverses the accrued but unpaid interest against interest income. The Company has made a policy election to exclude accrued interest receivable from the measurement of the allowance for credit losses. The allowance for credit losses process involves procedures to appropriately consider the unique characteristics of the Company’s portfolio segments. The allowance for credit losses is measured on a collective (pool) basis for portfolios of loans with similar risk characteristics and risk profiles. The Company’s portfolio segments include the following: (i) commercial real estate, (ii) commercial construction, (iii) commercial and industrial, (iv) residential real estate and (v) home equity lines of credit. These portfolio segments were identified based on their common characteristics: loan type/purpose of loan, underlying collateral type, historical/expected credit loss patterns, availability of credit quality indicators (i.e., FICO, risk rating, delinquency) and completeness of the historical information. Loans which do not share risk characteristics — generally, nonaccrual commercial and construction loans, and collateral-dependent loans where the borrower is experiencing financial difficulty — are individually assessed for credit loss. The Company has elected, as a practical expedient, to measure the allowance for credit losses on a collateral-dependent loan, where the borrower is experiencing financial difficulty, at the fair value of the collateral less estimated costs to sell. The portfolio segments are reviewed at least annually or when major changes occur in the loan portfolio to ensure that the segmentation is still appropriate.

The amount of the allowance for credit losses represents management’s best estimate of current expected credit losses on loans considering available information from internal and external sources, which is relevant to assessing collectability of the loans over the loans’ contractual terms, adjusted for expected prepayments. The contractual term excludes expected extensions, renewals and modifications unless: (i) management has a reasonable expectation at the reporting date that an individual borrower is experiencing financial difficulty and a modification of the loan will be executed, or (ii) the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.

The Company estimates the allowance for credit losses using relevant available information related to past events, current conditions, and reasonable and supportable forecasts. In determining the total allowance for credit losses, the Company calculates the quantitative portion of the allowance for credit losses using a methodology, the Advanced Probability of Default model, a logistic regression model, and adds qualitative adjustments to the model results and the results from any individual loan assessments.

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share amounts)

The Advanced Probability of Default model estimates the expected lifetime net charge off balance utilizing the following: (i) probability that the loan will stop performing or default; (ii) probability that a loan will pay-off entirely prior to maturity; and (iii) macroeconomic variables, including but not limited to unemployment rates, gross domestic product, and the Treasury Yield Curve. This information is specific to each portfolio segment, though not necessarily solely reliant on internally sourced data. Internal data is supplemented by, but not replaced by, peer data when required, primarily to determine the probability of default. The Company then applies a recovery rate to reflect the recoveries over an approximate 10-year period.

The probability of default is estimated by analyzing the relationship between the historical performance of each loan pool and historical economic trends over a complete economic cycle. The probability of default for each pool is adjusted using a statistical model to reflect the current impact of certain macroeconomic variables and their expected changes over a reasonable and supportable forecast period of eight quarters. The Company determined that it was reasonably able to forecast the macroeconomic variables used in the forecast modeling processes with an acceptable degree of confidence for a total of eight quarters. This forecast period is followed by a reversion process whereby the macroeconomic variables are relaxed to revert to the average historical loss rates for periods after the forecasted eight-quarter period.

Management qualitatively adjusts the allowance for credit loss model results for risk factors not considered within the quantitative modeling processes but are nonetheless relevant in assessing the expected credit losses within the portfolio segments. These qualitative risk factor adjustments may increase or decrease management’s estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of risk. Qualitative risk factors considered include adjustments for model limitations, management’s adjustments to economic market forecasts and other current or forecasted events not captured in the Company’s historical loss experience.

For loans that do not share risk characteristics that are evaluated on an individual basis, specific allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things. In such cases, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. The Company reevaluates the fair value of collateral supporting collateral dependent loans on an annual basis.

As disclosed above, the Company has identified the following portfolio segments used in measuring its expected credit losses in the loan portfolio and their respective risk characteristics:

The Residential Real Estate Mortgages portfolio includes residential first mortgages and residential second mortgages. The degree of risk in residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower’s ability to repay in an orderly fashion. Economic trends determined by unemployment rates and other key economic indicators, particularly at the regional and local levels, are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers’ capacity to repay their obligations may be deteriorating.

The Home Equity Lines of Credit portfolio includes residential second mortgages in the form of a revolving line of credit that requires interest only payments for a period followed by an amortizing period. These loans have higher risk of default compared to first liens making it harder to rely on loan-to-value ratios and loan balances can fluctuate. These loans are secured by the residential real estate by serving as a second lien behind the first mortgage lien.

The Commercial Real Estate portfolio includes commercial loans made to many types of businesses involving retail, multifamily, offices, hotels/single-room occupancy hotels, industrial and other commercial properties. Adverse economic developments or an overbuilt market may impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for the properties to produce sufficient cash flow to service debt obligations.

The Construction Loans portfolio is comprised of loans to builders and developers primarily for residential, commercial and mixed-use development. In addition to general commercial real estate risks, construction loans have additional risk of cost overruns, market deterioration during construction, lack of permanent financing and no operating history.

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share amounts)

The Commercial and Industrial portfolio is comprised of loans to many types of businesses for their operating needs of the business. The risk characteristics of these loans vary based on the borrowers’ business and industry as repayment is typically dependent on cash flows generated from the underlying business. These loans may be secured by real estate or other assets or may be unsecured.

Liability for Unfunded Commitments (Effective January 1, 2023)

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for these off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.

The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk through a contractual obligation to extend credit unless that obligation is unconditionally cancellable by the Company. The estimate of expected credit losses generally follows the same methodology as the funded loans by utilizing the loss rates generated for each portfolio segment with an adjustment for the probability of funding to occur. The liability for unfunded commitments, which is recorded in Accrued expenses and other liabilities in the condensed consolidated balance sheets, is adjusted through the provision for (recovery of) credit losses.

Note 4—Investment Securities

Debt Securities

The following tables summarize the amortized cost and fair value of debt securities available for sale at March 31, 2023 and December 31, 2022 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss:


	March 31, 2023
	Amortized		Gross Unrealized				Fair
	Cost		Gain		Loss		Value
Available for sale:
U.S. Treasury and Agency securities	$	176,318	$	21	$	(6,068)	$	170,271
Mortgage-backed securities		40,204		—		(4,236)		35,968
Collateralized mortgage obligations		148,945		6		(12,800)		136,151
Collateralized debt obligations		155		—		(11)		144
Total	$	365,622	$	27	$	(23,115)	$	342,534


	December 31, 2022
	Amortized		Gross Unrealized				Fair
	Cost		Gain		Loss		Value
Available for sale:
U.S. Treasury and Agency securities	$	175,878	$	17	$	(7,458)	$	168,437
Mortgage-backed securities		41,388		—		(4,655)		36,733
Collateralized mortgage obligations		153,066		4		(14,829)		138,241
Collateralized debt obligations		157		—		(10)		147
Total	$	370,489	$	21	$	(26,952)	$	343,558

Securities with a fair value of$107,817 were pledged as collateral on the FHLB borrowings at March 31, 2023.

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share amounts)

Accrued interest receivable on available for sale debt securities totaled $712 and $808 at March 31, 2023 and December 31, 2022, respectively.

The mortgage-backed securities, and a majority of the collateralized mortgage obligations are issued and/or guaranteed by a U.S. government agency (Government National Mortgage Association) or a U.S. government-sponsored enterprise (Federal Home Loan Mortgage Corporation (“Freddie Mac”) or Federal National Mortgage Association (“Fannie Mae”)). The fair value of the private-label collateralized mortgage obligations was $333 and $353 at March 31, 2023 and December 31, 2022, respectively.

No securities of any single issuer, other than debt securities issued by the U.S. government, government agency and government-sponsored enterprises, were in excess of 10% of total shareholders’ equity as of March 31, 2023 and December 31, 2022.

Information pertaining to sales of available for sale debt securities for the three months ended March 31, 2023 and 2022 is as follows:


	Three Months Ended
	March 31,
	2023		2022
Proceeds from the sale of debt securities	$	2,977	$	—

Gross realized gains	$	1	$	—
Gross realized losses		(3)		—
Total net realized losses	$	(2)	$	—

The income tax expense related to the net realized losses was $1 for the three months ended March 31, 2023.

The amortized cost and fair value of U.S. Treasury and Agency securities at March 31, 2023 are shown by contractual maturity in the table below. Mortgage-backed securities, collateralized mortgage obligations and collateralized debt obligations are disclosed separately as the expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.


	Amortized		Fair
	Cost		Value
U.S. Treasury and Agency securities:
Due less than one year	$	97,032	$	95,595
Due after one year through five years		79,286		74,676
Mortgage-backed securities		40,204		35,968
Collateralized mortgage obligations		148,945		136,151
Collateralized debt obligations		155		144
Total	$	365,622	$	342,534

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share amounts)

~~Note 3—Investment Securities~~

~~Debt Securities~~

The following ~~tables summarize the amortized cost and fair value of debt securities~~table summarizes available for sale debt securities, at ~~September 30, 2022~~fair value, in an unrealized loss position for which an allowance for credit losses has not been recorded at March 31, 2023 and December 31, ~~2021~~2022, aggregated by major security type and length of time the ~~corresponding amounts of gross~~individual debt securities have been in a continuous unrealized ~~gains and losses:~~loss position:


	September 30, 2022								March 31, 2023
	Amortized		Gross Unrealized				Fair		Less than 12 Months				12 Months or More				Total
	Cost		Gain		Loss		Value		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Available for sale:
									Value		Losses		Value		Losses		Value		Losses
U.S. Treasury and Agency securities	$	175,433	$	27	$	(7,998)	$	167,462	$	53,801	$	(885)	$	93,449	$	(5,183)	$	147,250	$	(6,068)
Mortgage-backed securities		43,183		—		(5,557)		37,626		5,821		(41)		30,147		(4,195)		35,968		(4,236)
Collateralized mortgage obligations		158,414		60		(15,128)		143,346		40,693		(1,539)		91,149		(11,261)		131,842		(12,800)
Collateralized debt obligations		158		—		(5)		153		—		—		144		(11)		144		(11)
Total	$	377,188	$	87	$	(28,688)	$	348,587	$	100,315	$	(2,465)	$	214,889	$	(20,650)	$	315,204	$	(23,115)


	December 31, 2021								December 31, 2022
	Amortized		Gross Unrealized				Fair		Less than 12 Months				12 Months or More				Total
	Cost		Gain		Loss		Value		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Available for sale:
									Value		Losses		Value		Losses		Value		Losses
U.S. Treasury and Agency securities	$	122,291	$	106	$	(229)	$	122,168	$	100,815	$	(2,839)	$	44,605	$	(4,619)	$	145,420	$	(7,458)
Mortgage-backed securities		49,739		84		(386)		49,437		5,792		(139)		30,941		(4,516)		36,733		(4,655)
Collateralized mortgage obligations		137,662		530		(1,343)		136,849		69,088		(3,169)		64,715		(11,660)		133,803		(14,829)
Collateralized debt obligations		211		—		(8)		203		—		—		147		(10)		147		(10)
Total	$	309,903	$	720	$	(1,966)	$	308,657	$	175,695	$	(6,147)	$	140,408	$	(20,805)	$	316,103	$	(26,952)

~~Securities~~As of March 31, 2023, the debt securities portfolio consisted of 32 debt securities, with ~~a fair value of$106,049 were pledged as collateral~~29 debt securities in an unrealized loss position. For debt securities in an unrealized loss position, the Company has both the intent and ability to hold these investments and, based on ~~FHLB borrowings at September 30, 2022.~~

~~All~~current conditions, the Company does not believe it is likely that it will be required to sell these debt securities prior to recovery of the amortized cost. As the Company had the intent and the ability to hold the debt securities in an unrealized loss position at March 31, 2023, each security with an unrealized loss position was further assessed to determine if a credit loss exists.

The Company’s debt, mortgage-backed securities and athe majority of the collateralized mortgage obligations are issued and/or guaranteed by a U.S. government agency (Government National Mortgage Association) or a U.S. government-sponsored enterprise (Federal Home Loan Mortgage Corporation (“Freddie Mac”) or Federal National Mortgage Association (“Fannie Mae”)). The fair value of the private-label collateralized mortgage obligations was $438 and $529 at September 30, 2022 and December 31, 2021, respectively.

~~No securities of any single issuer, other than debt securities issued~~ by the U.S. government, its agencies and government-sponsored enterprises. Management has concluded that the long history with no credit losses from issuers of U.S. government, ~~agency~~its agencies and government-sponsored enterprises ~~were in excess~~indicates an expectation that nonpayment of ~~10% of total shareholders’ equity~~the amortized cost basis is zero. The Company’s available for sale debt securities are explicitly or implicitly fully guaranteed by the U.S. government. As a result, the Company has not recorded an allowance for credit losses for its available for sale debt securities at March 31, 2023. Similarly, for the same reasons noted above, as of ~~September 30, 2022 and~~ December 31, ~~2021.~~

~~The amortized cost~~2022, the Company determined that the unrealized losses in these securities were due to non-credit-related factors, including changes in interest rates and fair value of U.S. Treasury and Agency securities at September 30, 2022 are shown by contractual maturity in the table below. Mortgage-backed securities, collateralized mortgage obligations and collateralized debt obligations are disclosed separately, as the expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

Amortized

Fair


Cost

Value
U.S. Treasury and Agency securities




Due less than one year

$
24,277

$
24,125
Due after one year through five years

151,156

143,337
Mortgage-backed securities

43,183

37,626
Collateralized mortgage obligations

158,414

143,346
Collateralized debt obligations

158

153
Total

$
377,188

$
348,587

other market conditions.

1016

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements ~~(Unaudited)~~

(dollars in thousands, except share and per share amounts)

Equity Securities

Equity securities with readily determinable fair values are stated at fair value with realized and unrealized gains and losses reported in non-interest income in the condensed consolidated statements of operations. At March 31, 2023 and December 31, 2022, equity securities with readily determinable fair values were $4,466 and $4,396, respectively. The following is a summary of unrealized and realized gains and losses recognized in the condensed consolidated statements of operations:


	Three Months Ended
	March 31,
	2023		2022
Net gain (loss) recorded during the period on equity securities	$	71	$	(236)
Less: net gain (loss) recorded during the period on equity securities sold during the period		—		—
Unrealized gain (loss) recorded during the period on equity securities held at the reporting date	$	71	$	(236)

The Company has elected to account for its investment in a thinly traded, restricted stock using the measurement alternative for equity securities without readily determinable fair values, resulting in the investment carried at cost based on no evidence of impairment or observable trading activity during the three months ended March 31, 2023 and 2022. The investment was reported at $246 at March 31, 2023 and December 31, 2022.

Note 5—Loans

Loans Held for Sale

The major categories of loans held for sale were as follows:


	March 31,		December 31,
	2023		2022
Residential real estate	$	36,445	$	6,181
Commercial real estate		1,534		1,544
Total loans held for sale	$	37,979	$	7,725

At March 31, 2023, loans held for sale include nonaccrual residential real estate loans of $26,270, of which $24,406 were transferred from loans held for investment during the three months ended March 31, 2023. Additionally, residential real estate loans with an amortized cost of $3,906 were transferred to loans held for investment. At December 31, 2022, loans held for sale includes nonaccrual residential real estate loans of $1,942.

In February 2022, the Company sold substantially all of its commercial real estate loans held for sale, which loans had a carrying value of $49,455 on the date of sale, to a third party for cash proceeds of $49,610.

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share amounts)

Loans Held for Investment and Allowance for Credit Losses

The major categories of loans held for investment and the allowance for credit losses were as follows:


	March 31,		December 31,
	2023		2022
Residential real estate	$	1,289,554	$	1,391,276
Commercial real estate		224,792		221,669
Construction		36,255		44,503
Commercial and industrial		1,368		1,396
Other consumer		77		5
Total loans		1,552,046		1,658,849
Less: allowance for credit losses		(38,565)		(45,464)
Loans, net	$	1,513,481	$	1,613,385

Accrued interest receivable related to total gross loans, including loans held for sale, was $6,397 and $6,894 as of March 31, 2023 and December 31, 2022, respectively.

During the three months ended March 31, 2023, loans with an amortized cost of $41,059 were transferred from loans held for investment to loans held for sale due to management’s change in intent and decision to sell the loans. On the transfer, the Company recorded a $6,478 charge off applied against the allowance for credit losses to reflect these loans at their estimated fair value. As noted above, residential real estate loans with an amortized cost of $3,906 were transferred from loans held for sale.

Loans totaling $470,397 and $389,830 were pledged as collateral on the FHLB borrowings at March 31, 2023 and December 31, 2022, respectively.

The allowance for credit losses at March 31, 2023 was estimated using the current expected credit loss model. The Company’s estimate of the allowance for credit losses reflects losses expected over the remaining contractual life of the loans. The contractual term does not consider extensions, renewals or modifications unless the Company has identified a loan where the individual borrower is experiencing financial difficulty. The following table presents the activity in the allowance for credit losses related to loans held for investment by portfolio segment for the three months ended March 31, 2023:


	Residential		Commercial				Commercial		Other
Three Months Ended March 31, 2023	Real Estate		Real Estate		Construction		and Industrial		Consumer		Total
Allowance for credit losses:
Balance at the beginning of the period	$	27,951	$	11,694	$	5,781	$	38	$	—	$	45,464
Adoption of ASU 2016-13		865		1,151		(3,633)		(34)		—		(1,651)
Adoption of ASU 2022-02		(11)		—		391		—		—		380
Provision for (recovery of) credit losses		(1,889)		3,217		(546)		2		—		784
Charge offs		(6,478)		—		—		—		—		(6,478)
Recoveries		60		5		1		—		—		66
Total ending balance	$	20,498	$	16,067	$	1,994	$	6	$	—	$	38,565

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share amounts)

The following table ~~summarizes debt securities available~~presents the activity in the allowance for ~~sale, at fair value,~~credit losses for the three months ended March 31, 2022, as determined in accordance with ~~unrealized losses at September 30, 2022 and December 31, 2021 aggregated by major security type and length~~ASC 310, Receivables(“ASC 310”), prior to the adoption of ~~time the individual securities have been in a continuous unrealized loss position:~~ASU 2016-13:

September 30, 2022

Less than 12 Months

12 Months or More

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized


Value

Losses

Value

Losses

Value

Losses
U.S Treasury and Agency securities

$
122,428

$
(5,191)

$
22,008

$
(2,807)

$
144,436

$
(7,998)
Mortgage-backed securities

34,553

(4,722)

3,073

(835)

37,626

(5,557)
Collateralized mortgage obligations

107,001

(14,440)

15,398

(688)

122,399

(15,128)
Collateralized debt obligations

—

—

153

(5)

153

(5)
Total

$
263,982

$
(24,353)

$
40,632

$
(4,335)

$
304,614

$
(28,688)


	December 31, 2021																		Commercial
	Less than 12 Months				12 Months or More				Total				Residential		Commercial				Lines of		Other
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
U.S Treasury and Agency securities	$	49,865	$	(229)	$	—	$	—	$	49,865	$	(229)
Mortgage-backed securities		7,878		(36)		8,729		(350)		16,607		(386)
Collateralized mortgage obligations		86,354		(1,342)		2,413		(1)		88,767		(1,343)
Collateralized debt obligations		—		—		203		(8)		203		(8)
Total	$	144,097	$	(1,607)	$	11,345	$	(359)	$	155,442	$	(1,966)
Three Months Ended March 31, 2022													Real Estate		Real Estate		Construction		Credit		Consumer		Total
Allowance for loan losses:
Beginning balance													$	32,202	$	12,608	$	11,730	$	8	$	—	$	56,548
Provision for (recovery of) loan losses														(2,481)		1,096		(2,902)		(2)		—		(4,289)
Recoveries														190		5		1		—		—		196
Total ending balance													$	29,911	$	13,709	$	8,829	$	6	$	—	$	52,455

AsPrior to the adoption of ~~September 30, 2022,~~ASU 2016-13, the ~~debt securities portfolio consisted~~Company individually evaluated commercial real estate loans, construction loans and commercial lines of ~~35 debt securities, with 28 debt securities in an unrealized~~credit for impairment and large homogeneous loans, such as residential real estate loans and other consumer loans were collectively evaluated for impairment. The following table presents loans individually and collectively evaluated for impairment and their respective allowance for credit loss position. For debt securities in an unrealized loss position, management has both the intent and ability to hold these investments until the recovery of the decline. The fair value is expected to increase as these securities approach their maturity date or repricing date or if market yields for such investments decline. Accordingly,allocation as of September 30, 2022, the unrealized losses in these securities are due to non-credit-related factors, including changes in interest rates and other market conditions; thus, the impairment was determined to be temporary. All interest and dividends are considered taxable.

~~Equity Securities~~

Equity securities consist of an investment in a qualified community reinvestment act investment fund, which is a publicly-traded mutual fund and an investment in the common equity of Pacific Coast Banker’s Bank, a thinly traded restricted stock. At September 30, 2022 and December 31, ~~2021, equity securities totaled $4,632 and $5,222, respectively, and are included~~2022, as determined in ~~investment securities in~~accordance with ASC 310, prior to the ~~condensed consolidated balance sheets.~~

~~Equity securities with readily determinable fair values are stated at fair value with realized and unrealized gains and losses reported in non-interest income in the condensed consolidated statements~~adoption of income. At September 30, 2022 and December 31, 2021, equity securities with readily determinable fair values were $4,386 and $4,976, respectively. The following is a summary of unrealized and realized gains and losses recognized in the condensed consolidated statements of income:ASU 2016-13:


	Three Months Ended				Nine Months Ended										Commercial
	September 30,				September 30,				Residential		Commercial				Lines of		Other
	2022		2021		2022		2021
Net losses recorded during the period on equity securities	$	(184)	$	(24)	$	(590)	$	(99)
Less: net gains (losses) recorded during the period on equity securities sold during the period		—		—		—		—
Unrealized losses recorded during the period on equity securities held at the reporting date	$	(184)	$	(24)	$	(590)	$	(99)
December 31, 2022									Real Estate		Real Estate		Construction		Credit		Consumer		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment									$	11	$	—	$	—	$	—	$	—	$	11
Collectively evaluated for impairment										27,940		11,694		5,781		38		—		45,453
Total ending allowance balance									$	27,951	$	11,694	$	5,781	$	38	$	—	$	45,464
Loans:
Loans individually evaluated for impairment									$	45	$	—	$	2,485	$	107	$	—	$	2,637
Loans collectively evaluated for impairment										1,391,231		221,669		42,018		1,289		5		1,656,212
Total ending loans balance									$	1,391,276	$	221,669	$	44,503	$	1,396	$	5	$	1,658,849

1119

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements ~~(Unaudited)~~

(dollars in thousands, except share and per share amounts)

The Company has elected to account for its investment in a thinly traded restricted stock using the measurement alternative for equity securities without readily determinable fair values, resulting in the investment carried at cost based on no evidence of impairment or observable trading activity during the nine months ended September 30, 2022 and 2021. The investment was reported at $246 at September 30, 2022 and December 31, 2021.

~~Note 4—Loans~~

~~Loans Held for Sale~~

The ~~major categories~~following table presents information related to impaired loans by class of loans ~~held for sale were~~ as ~~follows:~~of December 31, 2022, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13:


	September 30,		December 31,		At December 31, 2022
	2022		2021		Unpaid				Allowance
Residential real estate	$	7,279	$	11,359
Commercial real estate		1,554		53,628
Total loans held for sale	$	8,833	$	64,987
					Principal		Recorded		for Loan
					Balance		Investment		Losses
With no related allowance for loan losses recorded:
Commercial real estate:
Retail					$	227	$	—	$	—
Construction						2,485		2,485		—
Commercial lines of credit:
Private banking						107		107		—
Subtotal						2,819		2,592		—
With an allowance for loan losses recorded:
Residential real estate, first mortgage						79		45		11
Total					$	2,898	$	2,637	$	11

~~At September 30, 2022,~~The following table presents average impaired loans, ~~held~~as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13, and interest recognized on such loans, for ~~sale includes nonaccrual residential real estate loans of $3,657. Also, a commercial real estate loan with a recorded investment of $1,554 included as held for sale has been classified in~~ the ~~Special Mention category. At December~~three months ended March 31, 2021, loans held for sale includes nonaccrual loans of $18,026, consisting of residential real estate loans of $8,671 and commercial real estate loans of $9,355, of which one commercial real estate loan of $2,059 was considered a troubled debt restructuring.2022:


	At March 31, 2022
	Average		Interest		Cash Basis
	Recorded		Income		Interest
	Investment		Recognized		Recognized
With no related allowance for loan losses recorded:
Residential real estate, first mortgage	$	63	$	—	$	—
Construction		8,395		39		25
Commercial lines of credit:
Private banking		115		2		1
Subtotal		8,573		41		26
With an allowance for loan losses recorded:
Residential real estate, first mortgage		285		1		—
Total	$	8,858	$	42	$	26

~~Loans Held for Investment and Allowance for Loan Losses~~

~~The major categories of loans held for investment and the allowance for loan losses were as follows:~~

September 30,

December 31,

2022

2021
Residential real estate

$
1,430,472

$
1,704,231
Commercial real estate

199,446

201,240
Construction

50,320

106,759
Commercial lines of credit

1,389

363
Other consumer

1

221
Total loans

1,681,628

2,012,814
Less: allowance for loan losses

(45,362)

(56,548)
Loans, net

$
1,636,266

$
1,956,266

~~Loans totaling $446,153 and $557,410 were pledged as collateral on FHLB borrowings at September 30, 2022 and December 31, 2021, respectively.~~

1220

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements ~~(Unaudited)~~

(dollars in thousands, except share and per share amounts)

NonaccrualLoans and Past Due Loans

Past due loans held for investment are loans contractually past due 30 days or more as to principal or interest payments. A loan held for investment is classified as nonaccrual, and the accrual of interest on such loan is discontinued, when the contractual payment of principal or interest becomes 90 days past due. In addition, a loan may be placed on nonaccrual at any other time management has serious doubts about further collectability of principal or interest according to the contractual terms, even though the loan is currently performing. A loan held for investment may remain in accrual status if it is in the process of collection and well secured. When a loan held for investment is placed in nonaccrual status, interest accrued but not received is reversed against interest income. Interest received on such loans is applied to the principal balance of the loan until qualifying for return of accrual status. Loans are returned to accrual status after all principal and interest amounts contractually due are made to return the loan to current status and future payments are reasonably assured.

The following ~~tables present~~table presents the ~~activity~~amortized cost basis of loans on nonaccrual status, amortized cost basis of loans on nonaccrual status with no related allowance for credit losses and loans past due 90 days or more and still accruing as of March 31, 2023 and December 31, 2022:


	March 31, 2023						December 31, 2022
			Nonaccrual						Nonaccrual
			With No		Past Due				With No		Past Due
			Allowance		90 Days or				Allowance		90 Days or
	Nonaccrual		for Credit		More and		Nonaccrual		for Credit		More and
	Loans		Losses		Still Accruing		Loans		Losses		Still Accruing
Residential real estate:
Residential real mortgage	$	—	$	—	$	34	$	33,501	$	—	$	35
Residential second mortgage		—		—		—		189		—		—
Total	$	—	$	—	$	34	$	33,690	$	—	$	35

At March 31, 2023, the Company has no nonaccrual loans in its held for investment loan portfolio. The decrease from December 31, 2022 is primarily due to nonaccrual loans of $24,406 that were transferred to held for sale and nonaccrual loans of $4,231 that were charged off to the allowance for ~~loan losses by portfolio segment~~credit losses. The remainder of the decrease in nonaccrual loans is primarily due to $3,096 of loans that were paid in full and $5,538 of loans that were returned to accrual status. Partially offsetting these decreases, loans totaling $4,296 were added to nonaccrual status and were part of the loans transferred to held for sale.

During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022, the total interest income that would have been recorded if the nonaccrual loans had been current in accordance with their original terms was $538 and ~~2021:~~$624, respectively. The Company does not record interest income on nonaccrual loans.

Aging Analysis of Past Due Loans

Commercial


Residential

Commercial



Lines of

Other


Three Months Ended September 30, 2022

Real Estate

Real Estate

Construction

Credit

Consumer

Total
Allowance for loan losses:












Beginning balance

$
29,982

$
15,035

$
6,708

$
36

$
5

$
51,766
Provision (recovery) for loan losses

(1,841)

(209)

(2,304)

2

(5)

(4,357)
Charge offs

—

(4,064)

—

—

—

(4,064)
Recoveries

46

5

1,966

—

—

2,017
Total ending balance

$
28,187

$
10,767

$
6,370

$
38

$
—

$
45,362

The following table presents an aging of the amortized cost basis of contractually past due loans as of March 31, 2023:

Commercial

Residential

Commercial

Lines of

Other

Nine Months Ended September 30, 2022

Real Estate

Real Estate

Construction

Credit

Consumer

Total
Allowance for loan losses:












Beginning balance

$
32,202

$
12,608

$
11,730

$
8

$
—

$
56,548
Provision (recovery) for loan losses

(4,594)

2,138

(7,329)

30

—

(9,755)
Charge offs

(197)

(4,064)

—

—

—

(4,261)
Recoveries

776

85

1,969

—

—

2,830
Total ending balance

$
28,187

$
10,767

$
6,370

$
38

$
—

$
45,362

Commercial

Residential

Commercial

Lines of

Other

Three Months Ended September 30, 2021

Real Estate

Real Estate

Construction

Credit

Consumer

Total
Allowance for loan losses:












Beginning balance

$
33,064

$
22,491

$
15,056

$
58

$
—

$
70,669
Provision (recovery) for loan losses

109

1,486

(1,194)

(4)

—

397
Charge offs

—

—

(1,965)

—

—

(1,965)
Recoveries

530

605

2

—

—

1,137
Total ending balance

$
33,703

$
24,582

$
11,899

$
54

$
—

$
70,238

Commercial

Residential

Commercial

Lines of

Other

Nine Months Ended September 30, 2021

Real Estate

Real Estate

Construction

Credit

Consumer

Total
Allowance for loan losses:












Beginning balance

$
32,366

$
21,942

$
17,988

$
91

$
—

$
72,387
Provision (recovery) for loan losses

16

2,004

(4,129)

(37)

—

(2,146)
Charge offs

—

—

(1,965)

—

—

(1,965)
Recoveries

1,321

636

5

—

—

1,962
Total ending balance

$
33,703

$
24,582

$
11,899

$
54

$
—

$
70,238


					Greater
	30 - 59		60 - 89		than
	Days		Days		89 Days		Total		Current
March 31, 2023	Past Due		Past Due		Past Due		Past Due		Loans		Total
Residential real estate	$	6,017	$	—	$	34	$	6,051	$	1,283,503	$	1,289,554
Commercial real estate		—		—		—		—		224,792		224,792
Construction		—		—		—		—		36,255		36,255
Commercial and industrial		—		—		—		—		1,368		1,368
Other consumer		—		—		—		—		77		77
Total	$	6,017	$	—	$	34	$	6,051	$	1,545,995	$	1,552,046

1321

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements ~~(Unaudited)~~

(dollars in thousands, except share and per share amounts)

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment by impairment methodology as of September 30, 2022 and December 31, 2021:

Commercial

Residential

Commercial

Lines of

Other

September 30, 2022

Real Estate

Real Estate

Construction

Credit

Consumer

Total
Allowance for loan losses:

Ending allowance balance attributable to loans:











Individually evaluated for impairment

$
12

$
—

$
—

$
—

$
—

$
12
Collectively evaluated for impairment

28,175

10,767

6,370

38

—

45,350
Total ending allowance balance

$
28,187

$
10,767

$
6,370

$
38

$
—

$
45,362
Loans:

Loans individually evaluated for impairment

$
48

$
—

$
2,485

$
110

$
—

$
2,643
Loans collectively evaluated for impairment

1,430,424

199,446

47,835

1,279

1

1,678,985
Total ending loans balance

$
1,430,472

$
199,446

$
50,320

$
1,389

$
1

$
1,681,628

Commercial

Residential

Commercial

Lines of

Other

December 31, 2021

Real Estate

Real Estate

Construction

Credit

Consumer

Total
Allowance for loan losses:












Ending allowance balance attributable to loans:

Individually evaluated for impairment

$
159

$
—

$
—

$
—

$
—

$
159
Collectively evaluated for impairment

32,043

12,608

11,730

8

—

56,389
Total ending allowance balance

$
32,202

$
12,608

$
11,730

$
8

$
—

$
56,548
Loans:

Loans individually evaluated for impairment

$
350

$
4,441

$
14,984

$
116

$
—

$
19,891
Loans collectively evaluated for impairment

1,703,881

196,799

91,775

247

221

1,992,923
Total ending loans balance

$
1,704,231

$
201,240

$
106,759

$
363

$
221

$
2,012,814

~~Table of Contents~~

~~STERLING BANCORP, INC.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~(dollars in thousands, except share and per share amounts)~~

~~The following tables present information related to impaired loans by class of loans as of and for the periods indicated:~~

At September 30, 2022

At December 31, 2021

Unpaid

Allowance

Unpaid

Allowance

Principal

Recorded

for Loan

Principal

Recorded

for Loan


Balance

Investment

Losses

Balance

Investment

Losses
With no related allowance for loan losses recorded:












Residential real estate:

First mortgage

$
—

$
—

$
—

$
91

$
65

$
—
Commercial real estate:

Retail

229

—

—

—

—

—
Hotels/Single-room occupancy hotels

—

—

—

4,459

4,441

—
Construction

2,485

2,485

—

15,004

14,984

—
Commercial lines of credit:

Private banking

110

110

—

116

116

—
Subtotal

2,824

2,595

—

19,670

19,606

—
With an allowance for loan losses recorded:


Residential real estate:

First mortgage

82

48

12

273

285

159
Total

$
2,906

$
2,643

$
12

$
19,943

$
19,891

$
159

Three Months Ended at September 30,

2022

2021

Average

Interest

Cash Basis

Average

Interest

Cash Basis

Recorded

Income

Interest

Recorded

Income

Interest


Investment

Recognized

Recognized

Investment

Recognized

Recognized
With no related allowance for loan losses recorded:






Residential real estate:

First mortgage

$
—

$
—

$
—

$
82

$
—

$
—
Commercial real estate:

Retail

—

—

—

7

—

—
Hotels/Single-room occupancy hotels

—

—

—

10,862

—

—
Office

—

—

—

2,769

—

—
Construction

5,375

40

27

18,820

40

27
Commercial lines of credit:

Private banking

111

2

1

119

2

1
Subtotal

5,486

42

28

32,659

42

28
With an allowance for loan losses recorded:






Residential real estate:

First mortgage

48

2

2

279

1

1
Construction

—

—

—

10,387

56

38
Subtotal

48

2

2

10,666

57

39
Total

$
5,534

$
44

$
30

$
43,325

$
99

$
67

~~Table of Contents~~

~~STERLING BANCORP, INC.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~(dollars in thousands, except share and per share amounts)~~

Nine Months Ended at September 30,

2022

2021

Average

Interest

Cash Basis

Average

Interest

Cash Basis

Recorded

Income

Interest

Recorded

Income

Interest


Investment

Recognized

Recognized

Investment

Recognized

Recognized
With no related allowance for loan losses recorded:






Residential real estate:

First mortgage

$
—

$
—

$
—

$
88

$
—

$
—
Commercial real estate:

Retail

—

—

—

765

—

—
Hotels/Single-room occupancy hotels

—

—

—

17,948

—

—
Office

—

—

—

2,768

—

—
Other

—

—

—

91

—

—
Construction

6,885

118

105

27,387

192

179
Commercial lines of credit:

Private banking

113

5

4

1,264

7

7
Subtotal

6,998

123

109

50,311

199

186
With an allowance for loan losses recorded:






Residential real estate:

First mortgage

198

3

3

280

3

3
Construction

—

—

—

9,751

181

163
Subtotal

198

3

3

10,031

184

166
Total

$
7,196

$
126

$
112

$
60,342

$
383

$
352

~~In the tables above, the unpaid principal balance is not reduced for partial charge offs. Also, the recorded investment excludes accrued interest receivable on loans, which was not significant.~~

Also presented in the table above is the average recorded investment of the impaired loans and the related amount of interest recognized during the time within the period that the impaired loans were impaired. When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual status, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the total principal of an impaired loan is not in doubt and the loan is on nonaccrual status, contractual interest is credited to interest income when received under the cash basis method. The average balances are calculated based on the month-end balances of the loans for the period reported.

The following table presents ~~the recorded investment in nonaccrual and loans past due over 90 days still on accrual, excluding nonaccrual loans held for sale, by class of loans as of September 30, 2022 and December 31, 2021:~~

September 30, 2022

December 31, 2021

Loans Past

Loans Past

Due Over

Due Over

90 Days Still

90 Days Still


Nonaccrual

Accruing

Nonaccrual

Accruing
Residential real estate:






Residential first mortgage

$
35,654

$
36

$
45,439

$
39
Residential second mortgage

189

—

236

—
Commercial real estate:

Hotels/Single-room occupancy hotels

—

—

4,441

—
Construction

—

—

12,499

—
Total

$
35,843

$
36

$
62,615

$
39

~~Table of Contents~~

~~STERLING BANCORP, INC.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~(dollars in thousands, except share and per share amounts)~~

~~The following tables present~~ the aging of the recorded investment in past due loans, presented in accordance with ASC 310, as of ~~September 30, 2022 and~~ December 31, ~~2021~~2022, by class of loans:

Greater

30 - 59

60 - 89

than

Days

Days

89 Days

Total

Loans Not

September 30, 2022

Past Due

Past Due

Past Due

Past Due

Past Due

Total
Residential real estate:








Residential first mortgage

$
20,839

$
3,284

$
35,690

$
59,813

$
1,360,315

$
1,420,128
Residential second mortgage

—

—

189

189

10,155

10,344
Commercial real estate:

Retail

—

—

—

—

26,026

26,026
Multifamily

—

—

—

—

81,723

81,723
Office

—

—

—

—

18,216

18,216
Hotels/ Single-room occupancy hotels

—

—

—

—

5,240

5,240
Industrial

—

—

—

—

30,372

30,372
Other

—

—

—

—

37,869

37,869
Construction

—

—

—

—

50,320

50,320
Commercial lines of credit:

Private banking

—

—

—

—

110

110
C&I lending

—

—

—

—

1,279

1,279
Other consumer

—

—

—

—

1

1
Total

$
20,839

$
3,284

$
35,879

$
60,002

$
1,621,626

$
1,681,628


					Greater												Greater
	30 - 59		60 - 89		than								30 - 59		60 - 89		than
	Days		Days		89 Days		Total		Loans Not				Days		Days		89 Days		Total		Current
December 31, 2021	Past Due		Past Due		Past Due		Past Due		Past Due		Total
December 31, 2022													Past Due		Past Due		Past Due		Past Due		Loans		Total
Residential real estate:
Residential first mortgage	$	24,044	$	3,425	$	45,478	$	72,947	$	1,617,509	$	1,690,456	$	17,881	$	5,337	$	33,536	$	56,754	$	1,324,545	$	1,381,299
Residential second mortgage		107		—		236		343		13,432		13,775		99		—		189		288		9,689		9,977
Commercial real estate:
Retail		—		—		—		—		19,574		19,574		—		—		—		—		28,971		28,971
Multifamily		—		—		—		—		96,960		96,960		—		—		—		—		81,444		81,444
Office		—		—		—		—		12,382		12,382		—		—		—		—		39,610		39,610
Hotels/Single-room occupancy hotels		—		—		4,441		4,441		9,780		14,221		—		—		—		—		5,208		5,208
Industrial		—		—		—		—		7,320		7,320		—		—		—		—		30,242		30,242
Other		—		—		—		—		50,783		50,783		—		—		—		—		36,194		36,194
Construction		10,500		—		12,499		22,999		83,760		106,759		—		—		—		—		44,503		44,503
Commercial lines of credit:
Private banking		—		—		—		—		116		116		—		—		—		—		107		107
C&I lending		—		—		—		—		247		247		—		—		—		—		1,289		1,289
Other consumer		—		—		—		—		221		221		—		—		—		—		5		5
Total	$	34,651	$	3,425	$	62,654	$	100,730	$	1,912,084	$	2,012,814	$	17,980	$	5,337	$	33,725	$	57,042	$	1,601,807	$	1,658,849

~~The Company considers~~Collateral-Dependent Loans

A loan is considered collateral-dependent when the ~~performance~~borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the ~~loan portfolio and its impact on the allowance for loan losses.~~collateral. For ~~residential real estate and other consumer loans,~~all classes of financial assets deemed collateral-dependent, the Company ~~also evaluates~~estimates the expected credit ~~quality~~losses based on the ~~aging status~~collateral’s fair value less cost to sell. At March 31, 2023, the Company did not have any collateral-dependent loans held for investment where the borrower is experiencing financial difficulty.

~~Table of Contents~~

~~STERLING BANCORP, INC.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~(dollars in thousands, except share and per share amounts)~~

~~Troubled Debt Restructurings~~

~~As of September 30, 2022 and December 31, 2021,~~collateral. Historically, the Company has ~~a recorded investment in troubled debt restructurings (“TDR”) of $2,643~~provided loan forbearances to residential borrowers when mandated and ~~$18,416, respectively.~~modified construction loans by providing term extensions. The Company ~~has allocated a specific allowance~~did not have any loans held for ~~loan losses for these loans of $12 as of September 30, 2022 and has allocated $39 of specific allowance for loan loss for these loans as of December 31, 2021. There are no commitments~~investment made to ~~lend additional amounts.~~

~~There~~borrowers experiencing financial difficulty that were ~~no loans modified as TDRs during the three or nine months ended September 30, 2022 or 2021.~~

There were no TDRs for which there was a payment default within twelve months following the modification during the three or nine months ended September 30, 2022 or 2021. At September 30, 2022, there were no loans in default. At December 31, 2021, five loans totaling $15,752 were in default.

~~The terms of certain other loans have been~~ modified during the three ~~and nine~~ months ended ~~September 30, 2022 that~~March 31, 2023. The Company did not ~~meet the definition of a TDR. These other~~have any loans held for investment made to borrowers experiencing financial difficulty that were previously modified ~~were not considered significant.~~that subsequently defaulted during the three months ended March 31, 2023.

Foreclosure Proceedings

At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the recorded investment of residential mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled ~~$7,266~~$6,130 and ~~$2,780,~~$5,711, respectively. Of the loans in formal foreclosure proceedings, ~~$2,755~~$6,130 and ~~$2,770~~$603 were included in loans held for sale in the condensed consolidated balance sheets at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively, and were carried at the lower of amortized cost or fair value. The balance of the loans isat December 31, 2022 were classified as held for investment and ~~receives~~received an allocation of the allowance for ~~loan~~credit losses consistent with a substandard loan loss allocation rate as ~~these~~the loans were classified as ~~substandard at September 30, 2022~~substandard.

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share and ~~December 31, 2021, respectively.~~per share amounts)

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes homogeneous loans, such as residential real estate and other consumer loans, and non-homogeneous loans, such as commercial ~~lines of credit,~~and industrial, construction and commercial real estate loans. This analysis is performed at least quarterly. The Company uses the following definitions for risk ratings:

~~Pass: Loans are of satisfactory quality.~~

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the loan. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing facts, conditions and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered pass-rated loans.

For residential and consumer loan classes, the Company evaluates credit quality based on the accrual status of the loan. The following table presents the amortized cost in residential and consumer loans based on accrual status:


	Term Loans Amortized Cost Basis by Origination Year
													Revolving		Revolving
													Loans		Loans
													Amortized		Converted
As of March 31, 2023	2023		2022		2021		2020		2019		Prior		Costs Basis		to Term		Total
Residential lending
Residential mortgage loans:
Payment performance:
Accrual	$	772	$	74,845	$	137,888	$	109,290	$	264,936	$	692,578	$	8,944	$	301	$	1,289,554
Nonaccrual		—		—		—		—		—		—		—		—		—
Total residential mortgage loans	$	772	$	74,845	$	137,888	$	109,290	$	264,936	$	692,578	$	8,944	$	301	$	1,289,554
Residential mortgage loans:
Current period gross write offs	$	—	$	—	$	—	$	—	$	1,858	$	4,601	$	19	$	—	$	6,478

1823

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements ~~(Unaudited)~~

(dollars in thousands, except share and per share amounts)

~~At September 30, 2022~~The amortized cost basis by year of origination and ~~December 31, 2021,~~credit quality indicator of the Company’s commercial loans based on the most recent analysis performed was as follows:


	Term Loans Amortized Cost Basis by Origination Year
													Revolving		Revolving
													Loans		Loans
													Amortized		Converted
As of March 31, 2023	2023		2022		2021		2020		2019		Prior		Costs Basis		to Term		Total
Commercial lending
Real estate - construction:
Risk rating
Pass	$	—	$	—	$	—	$	9,581	$	10,782	$	6,329	$	—	$	—	$	26,692
Special mention		—		—		—		—		3,412		—		—		—		3,412
Substandard or lower		—		—		—		—		6,151		—		—		—		6,151
Total real estate – construction	$	—	$	—	$	—	$	9,581	$	20,345	$	6,329	$	—	$	—	$	36,255
Real estate – construction:
Current period gross charge offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial and industrial:
Risk rating
Pass	$	—	$	—	$	—	$	—	$	—	$	—	$	1,368	$	—	$	1,368
Total commercial and industrial	$	—	$	—	$	—	$	—	$	—	$	—	$	1,368	$	—	$	1,368
Commercial and industrial:
Current period gross charge offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Real estate – commercial real estate:
Risk rating
Pass	$	5,433	$	80,748	$	37,159	$	36,778	$	11,296	$	19,098	$	—	$	—	$	190,512
Special mention		—		3,645		12,215		2,941		7,364		8,115		—		—		34,280
Total real estate – commercial real estate	$	5,433	$	84,393	$	49,374	$	39,719	$	18,660	$	27,213	$	—	$	—	$	224,792
Real estate – commercial mortgage:
Current period gross charge offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

The credit risk ~~rating of~~profiles by internally assigned grade for loans by class of loans ~~was~~as of December 31, 2022, as determined in accordance with ASC 310, prior to the adoption of ASU 2016-13, were as follows:


			Special
December 31, 2022	Pass		Mention		Substandard		Doubtful		Total
Residential real estate:
Residential first mortgage	$	1,347,763	$	—	$	33,536	$	—	$	1,381,299
Residential second mortgage		9,788		—		189		—		9,977
Commercial real estate:
Retail		28,971		—		—		—		28,971
Multifamily		67,361		14,083		—		—		81,444
Office		39,610		—		—		—		39,610
Hotels/ Single-room occupancy hotels		—		3,669		1,539		—		5,208
Industrial		30,242		—		—		—		30,242
Other		21,036		15,158		—		—		36,194
Construction		31,369		4,650		8,484		—		44,503
Commercial lines of credit:
Private banking		107		—		—		—		107
C&I lending		1,289		—		—		—		1,289
Other consumer		5		—		—		—		5
Total	$	1,577,541	$	37,560	$	43,748	$	—	$	1,658,849

Special

September 30, 2022

Pass

Mention

Substandard

Doubtful

Total
Residential real estate:








Residential first mortgage

$
1,384,438

$
—

$
35,690

$
—

$
1,420,128
Residential second mortgage

10,155

—

189

—

10,344
Commercial real estate:

Retail

26,026

—

—

—

26,026
Multifamily

69,369

12,354

—

—

81,723
Office

18,216

—

—

—

18,216
Hotels/ Single-room occupancy hotels

—

3,692

1,548

—

5,240
Industrial

30,372

—

—

—

30,372
Other

22,703

15,166

—

—

37,869
Construction

37,617

4,648

8,055

—

50,320
Commercial lines of credit:

Private banking

110

—

—

—

110
C&I lending

1,279

—

—

—

1,279
Other consumer

1

—

—

—

1
Total

$
1,600,286

$
35,860

$
45,482

$
—

$
1,681,628

Special

December 31, 2021

Pass

Mention

Substandard

Doubtful

Total
Residential real estate:

Residential first mortgage

$
1,644,974

$
—

$
45,249

$
233

$
1,690,456
Residential second mortgage

13,539

—

236

—

13,775
Commercial real estate:

Retail

18,846

728

—

—

19,574
Multifamily

75,543

8,104

13,313

—

96,960
Office

10,413

—

1,969

—

12,382
Hotels/ Single-room occupancy hotels

8,205

—

6,016

—

14,221
Industrial

7,320

—

—

—

7,320
Other

48,996

1,692

95

—

50,783
Construction

67,254

17,226

16,348

5,931

106,759
Commercial lines of credit:

Private banking

116

—

—

—

116
C&I lending

236

11

—

—

247
Other consumer

221

—

—

—

221
Total

$
1,895,663

$
27,761

$
83,226

$
6,164

$
2,012,814

During the three and nine months ended September 30, 2022, the Company repurchased a pool of Advantage Loan Program loans with a total outstanding principal balance of $35,241 and $65,621. During the three and nine months ended September 30, 2021, the Company repurchased pools of Advantage Loan Program loans with a total outstanding principal balance of $6,067 and $173,829, respectively. The Advantage Loan Program loans that have been repurchased and included in the loan portfolio have an outstanding principal balance of $190,467 and $171,185 at September 30, 2022 and December 31, 2021, respectively. For more information on the repurchases of Advantage Loan Program loans, refer to Note 16—Commitments and Contingencies.

During the three months ended September 30, 2022, the Company charged off $4,064 of its recorded investment in certain higher risk commercial real estate loans held in its portfolio. These commercial real estate loans were then sold to a third-party investor for net cash proceeds of $17,794. No gain or loss was recorded on the sale of the commercial real estate loans.

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements ~~(Unaudited)~~

(dollars in thousands, except share and per share amounts)

Note 5—6—Mortgage Servicing Rights, net

The Company records servicing assets from the sale of residential real estate mortgage loans to the secondary market for which servicing has been retained. Residential real estate mortgage loans serviced for others are not included in the condensed consolidated balance sheets. The principal balance of these loans at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 are as follows:


	September 30,		December 31,		March 31,		December 31,
	2022		2021		2023		2022
Residential real estate mortgage loan portfolios serviced for:
FNMA	$	115,446	$	124,764	$	111,126	$	113,704
FHLB		35,357		40,209		33,506		34,282
Private investors		44,955		142,810		40,230		43,274
Total	$	195,758	$	307,783	$	184,862	$	191,260

Custodial escrow balances maintained with these serviced loans were ~~$1,528~~$842 and ~~$5,501~~$380 at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. These balances are included in noninterest-bearing deposits in the condensed consolidated balance sheets.

Activity for mortgage servicing rights and the related valuation allowance are as follows:


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2022		2021		2022		2021		2023		2022
Mortgage servicing rights:
Beginning of period	$	2,542	$	4,200	$	3,332	$	7,853	$	1,840	$	3,332
Additions		—		25		11		124		—		9
Amortization		(657)		(550)		(1,458)		(4,302)		(74)		(253)
End of period		1,885		3,675		1,885		3,675		1,766		3,088

Valuation allowance at beginning of period		89		968		610		2,165
Valuation allowance:
Beginning of period										46		610
Additions (recoveries)		(46)		(166)		(567)		(1,363)		17		(410)
Valuation allowance at end of period		43		802		43		802

End of period										63		200
Mortgage servicing rights, net	$	1,842	$	2,873	$	1,842	$	2,873	$	1,703	$	2,888

Servicing ~~fee loss,~~income, net of amortization of servicing rights and changes in the valuation allowance, was ~~$(384)~~$59 and ~~$(31)~~$443 for the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, respectively, and $(118) and $(1,369) for the nine months ended September 30, 2022 and 2021,~~ respectively.

The fair value of mortgage servicing rights was ~~$2,265~~$2,039 and ~~$2,916~~$2,154 at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. The fair value of mortgage servicing rights is highly sensitive to changes in underlying assumptions. Changes in prepayment speed assumptions have the most significant impact on the estimate of the fair value of mortgage servicing rights. The fair value at ~~September 30,~~March 31, 2023 and December 31, 2022 was determined using discount rates ranging from ~~9.5%~~10.0% to ~~12.0%~~12.5%, prepayment speeds with a weighted average of 10.2% (depending on the stratification of the specific right), a weighted average life of the mortgage servicing right of 77 months and a weighted average default rate of 0.2%. The fair value at December 31, 2021 was determined using discount rates ranging from 9.5% to 12.0%, prepayment speeds with a weighted average of 17.6% (depending on the stratification of the specific right), a weighted average life of the mortgage servicing right of 52 months and a weighted average default rate of 0.2%.

Impairment is determined by stratifying the mortgage servicing rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the carrying amount of certain individual groupings exceeded their fair ~~values,~~value, resulting in write-downs to fair value. Refer to Note 14—13—Fair Values of Financial Instruments.

Note 7—Deposits

Time deposits, included in interest-bearing deposits, were $917,161 and $861,733 at March 31, 2023 and December 31, 2022, respectively.

2025

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements ~~(Unaudited)~~

(dollars in thousands, except share and per share amounts)

~~Note 6—Deposits~~

Time deposits, included in interest-bearing deposits, were $757,576 and $891,820 at September 30, 2022 and December 31, 2021, respectively. Time deposits included brokered deposits of $20,109 at December 31, 2021. There were no brokered deposits at September 30, 2022.

Time deposits that meet or exceed the FDIC insurance limit of $250 were ~~$222,630~~$263,648 and ~~$244,868~~$243,861 at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

Note 7—8—FHLB Borrowings

FHLB Advances

~~FHLB borrowings at September 30, 2022~~At March 31, 2023 and December 31, ~~2021 consist of the following:~~

September 30,

December 31,


2022

Interest Rates

2021

Interest Rates

Long-term fixed rate-advances

$
50,000

1.96
%
$
150,000

0.43% - 1.96
%

~~At September 30,~~ 2022, the Company has a long-term fixed-rate advance of $50,000 with a maturity date of May 2029. The advance requires monthly interest-only payments at 1.96% per annum with the principal amount due on the maturity date and may contain a prepayment penalty if paid before maturity. The advance is callable by the FHLB in May 2024.

The Company utilized its excess liquidity to repay $100,000 in long-term fixed rate advances that were called by the FHLB in May 2022. Additionally, in September 2022, the Company entered into a short-term variable-rate advance for $35,000 with a maturity date of ~~March 2023~~ ~~which was then repaid during the month. At September 30, 2022, the Company had additional borrowing capacity of $354,479 from the FHLB.~~

FHLB Overdraft Line of Credit and Letters of Credit

The Company has established a short-term overdraft line of credit agreement with the FHLB, which provides for maximum borrowings of ~~$20,000.~~$20,000 through October 2023. The overdraft line of credit was not used during ~~the nine~~three months ended ~~September 30,~~March 31, 2023 and 2022. ~~At September 30, 2022 and December 31, 2021, there were no outstanding borrowings under this agreement.~~ Borrowings accrue interest ~~based on~~at a ~~variable rate~~variable-rate based on the FHLB’s overnight cost of funds rate, which was ~~3.45%~~5.24% and ~~0.43%~~4.74% at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. At March 31, 2023 and December 31, 2022, there were no outstanding borrowings under this agreement. The overdraft line of credit ~~has~~is issued for a one-year term and ~~was~~ automatically ~~renewed~~extends for an additional one-year term unless terminated in ~~October 2022 on substantially~~advance of the ~~same terms through October 2023.~~renewal by the Company.

~~The~~In 2021, the Company ~~has~~ entered into irrevocable standby letters of credit arrangements with the FHLB totaling $11,500 to provide credit support for certain of its obligations related to its commitment to repurchase certain pools of Advantage Loan Program loans. An irrevocable standby letter of credit of $7,500 had a 16-month term and expired in July 2022. An irrevocable standby letter of credit ~~originally~~ of $4,000 has a 36-month term and expires in July 2024. This letter of credit was reduced to $2,000 during the second quarter of 2022; thereby, the Company has total available letters of credit of $2,000 ~~and $11,500~~ at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. There were no borrowings outstanding on these standby letters of credit during the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022.

The long-term fixed-rate ~~advances~~advance and the overdraft line of credit are collateralized by certain investment securities and loans. Based on this collateral and holdings of FHLB stock, the Company had additional borrowing capacity with the FHLB of $398,361 at March 31, 2023. Refer to Note 3—4—Investment Securities for further information on securities pledged ~~as collateral~~ and Note 4—5—Loans for further information on loans ~~pledged as collateral.~~pledged.

Other Borrowings

The Company ~~had~~has available unsecured credit lines with other banks totaling $80,000 at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022. There were no borrowings under these unsecured credit lines during the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022.

~~Table of Contents~~

~~STERLING BANCORP, INC.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~(dollars in thousands, except share and per share amounts)~~

Note 8—9—Subordinated Notes, net

The subordinated notes (the “Notes”) were as follows:


	September 30,		December 31,		March 31,		December 31,
	2022		2021		2023		2022
Subordinated notes	$	65,000	$	65,000	$	65,000	$	65,000
Unamortized note premium		290		343		253		271
Total	$	65,290	$	65,343	$	65,253	$	65,271

The Notes ~~bore~~accrue interest at ~~7.0% per annum, payable semi-annually on April 15 and October 15 in arrears, through April 2021 after which the Notes have~~ a variable interest rate ofbased on the three-month ~~LIBOR~~London Interbank Offered Rate (“LIBOR”) rate plus a margin of 5.82%., payable quarterly in arrears. The interest rate was ~~8.33%~~10.65% and ~~5.94%~~9.90% at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. Note premium costs are amortized over the contractual term of the Notes into interest expense using the effective interest method. Interest expense on these Notes was ~~$1,329~~$1,693 and ~~$972~~$964 for the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, respectively, and $3,383 and $3,157 for the nine months ended September 30, 2022 and 2021,~~ respectively. The Notes mature in April 2026.

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share amounts)

The Company may redeem the Notes, in whole or in part, at an amount equal to 100% of the outstanding principal amount being redeemed plus accrued ~~interest, in a principal amount with integral multiples of $1.~~interest. There have been no redemptions of the Notes. The Notes are not subject to redemption by the noteholders.

The Notes are unsecured obligations and are subordinated in right of payment to all existing and future indebtedness, deposits and other liabilities of the Company’s current and future subsidiaries, including the ~~Company’s~~Bank’s deposits as well as the Company’s subsidiaries’ liabilities to general creditors and liabilities arising during the ordinary course of business. ~~The~~Prior to January 1, 2023, the Notes ~~may be~~were included in Tier 2 capital for the Company ~~under current~~as permitted by applicable regulatory guidelines and interpretations. On January 1, 2023, the Company and the Bank elected to use the Community Bank Leverage Ratio (“CBLR”) framework for compliance with capital adcquacy requirements and such framework does not require a computation involving Tier 2 capital. Refer to Note 11—Regulatory Capital Requirements. As long as the Notes are outstanding, the Company is permitted to pay dividends if prior to such dividends, the Bank is considered well capitalized, as defined by regulatory guidelines.

The Company currently may not issue new debt without the prior approval of the FRB.

~~Note 9 – Shareholders’ Equity~~

In April 2022, the Company issued and contributed 160,978 shares of common stock to fund the matching contribution made under the Company’s defined contribution retirement plan. The contribution amount of $1,138 was valued using the closing market price of the stock on the date contributed or $7.07 per share.

In May 2021, the Company issued and sold 300,000 unregistered shares of common stock to its chief executive officer pursuant to the terms of a stock purchase agreement entered into at the time of the chief executive officer’s employment for cash consideration of $1,350 or $4.50 per share, the fair market value on date of sale.

Note 10—Stock-based Compensation

The board of directors established the 2020 Omnibus Equity Incentive Plan (the “2020 Plan”), which was approved by the shareholders in December 2020. The 2020 Plan provides for the grant of up to 3,979,661 shares of common stock for stock options, stock appreciation rights, restricted stock, restricted stock units, performance units and performance shares for issuance to employees, consultants and the board of directors of the ~~Company.~~Company, of which 3,435,696 shares were available for future grants. The stock-based awards are issued at no less than the market price on the date the awards are granted.

Previously, the board of directors had established a 2017 Omnibus Equity Incentive Plan (the “2017 Plan”) which was approved by the shareholders. The 2017 Plan initially provided for the grant of up to 4,237,100 shares of common stock for stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards for issuance to employees, consultants and the board of directors of the Company. The stock-based awards were issued at no less than the market price on the date the awards were granted. Due to the adoption of the 2020 Plan, no further grants will be issued under the 2017 Plan.

~~Table of Contents~~

~~STERLING BANCORP, INC.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~(dollars in thousands, except share and per share amounts)~~

Stock Options

Stock option awards are granted with an exercise price equal to the market price of the Company’s common stock on the date of grant. Beginning ~~with grants~~ in 2020, stock option awards vest ratably over three years (one-third per year) after the date of grant, while stock option awards granted prior to 2020 generally vest in installments of 50% in each of the third and fourth year after the date of grant. All stock option awards have a maximum term of ten years. No stock option awards were granted during the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022.

A summary of the Company’s stock option activity as of and for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 is as follows:


				Weighted						Weighted
		Weighted		Average				Weighted		Average
		Average		Remaining	Aggregate			Average		Remaining	Aggregate
	Number	Exercise		Contractual	Intrinsic		Number	Exercise		Contractual	Intrinsic
	of Shares	Price		Term	Value		of Shares	Price		Term	Value
				(Years)						(Years)
Outstanding at January 1, 2022	367,767	$	5.41	8.13	$	525
Outstanding at January 1, 2023							349,545	$	5.19	7.17	$	627
Granted	—						—
Exercised	—						—
Forfeited/expired	(18,222)		9.67				—
Outstanding at September 30, 2022	349,545	$	5.19	7.43	$	609
Exercisable at September 30, 2022	344,506	$	5.14	7.43	$	609
Outstanding at March 31, 2023							349,545	$	5.19	6.93	$	498
Exercisable at March 31, 2023							349,545	$	5.19	6.93	$	498

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share amounts)

The Company recorded stock-based compensation expense associated with stock options of $3$1 and ~~$34~~$(13) for the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, respectively, and $(8) and $137 for the nine months ended September 30, 2022 and 2021,~~ respectively. At ~~September 30, 2022,~~March 31, 2023, there was ~~$3 of total~~no unrecognized compensation cost related to ~~nonvested~~ stock ~~options which is expected to be recognized over a weighted-average period of less than one year.~~options.

Restricted Stock Awards

Restricted stock awards are issued to independent directors and certain key employees. The restricted stock awards generally vest ratably over three years (one-third per year) after the date of grant. The value of a restricted stock award is based on the market value of the Company’s common stock at the date of grant reduced by the present value of dividends per share expected to be paid during the period the shares are not vested. Upon a change in control, as defined in the 2017 Plan and ~~the~~ 2020 Plan, the outstanding restricted stock awards will immediately vest.

During the ~~nine~~three months ended ~~September 30,~~March 31, 2023, the board of directors approved the issuance of 60,000 shares of restricted stock to independent directors with a weighted average grant-date fair value of $6.09. During the three months ended March 31, 2022, the board of directors approved the issuance of ~~231,842~~53,681 shares of restricted stock, of which 45,000 shares were awarded to independent directors with a weighted average grant-date fair value of $5.75 and ~~186,842~~8,681 shares were awarded to key ~~employees. During the nine months ended September 30, 2021, the board~~employees with a weighted average grant-date fair value of ~~directors approved the issuance of 234,996 shares of restricted stock, of which 45,000 shares were awarded to independent directors and 189,996 shares were awarded to key employees.~~$5.76.

During the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ the Company withheld ~~31,027~~12,166 shares and ~~8,536~~13,383 shares ~~respectively,~~ of common stock representing a portion of the restricted stock awards that vested during the period in order to satisfy certain related employee tax withholding liabilities of ~~$204~~$75 and ~~$46,~~$84, respectively, associated with vesting. These withheld shares are treated the same as repurchased shares for accounting purposes.

~~Table of Contents~~

~~STERLING BANCORP, INC.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~(dollars in thousands, except share and per share amounts)~~

A summary of the restricted stock awards activity for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 is as follows:


		Weighted Average			Weighted Average
	Number	Grant Date		Number	Grant Date
	of Shares	Fair Value		of Shares	Fair Value
Nonvested at January 1, 2022	293,637	$	5.81
Nonvested at January 1, 2023				390,125	$	6.17
Granted	231,842		6.57	60,000		6.09
Vested	(104,739)		6.21	(65,024)		6.62
Forfeited	(22,713)		5.70	(35,589)		6.23
Nonvested at September 30, 2022	398,027	$	6.16
Nonvested at March 31, 2023				349,512	$	6.07

The fair value of the award is recorded as compensation expense on a straight-line basis over the vesting period. The Company recorded stock-based compensation expense associated with restricted stock awards of ~~$252~~$172 and ~~$162~~$159 for the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, respectively, and $648 and $357 for the nine months ended September 30, 2022 and 2021,~~ respectively. At ~~September 30, 2022,~~March 31, 2023, there was ~~$2,017~~$1,540 of total unrecognized compensation cost related to the nonvested stock granted which is expected to be recognized over a weighted-average period of ~~2.17~~2 years. The total fair value of shares vested during the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, was $399 and ~~2021 was $644 and $173,~~$332, respectively.

Note 11—Regulatory Capital Requirements

The Bank is subject to the capital adequacy requirements of the OCC. The Company, as a thrift holding company, generally is subject to the capital adequacy requirements of the Federal Reserve. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Prompt corrective action regulations provide five classifications for depository institutions like the Bank, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors, and the regulators, in their discretion, can require the Company to lower classifications in certain cases. Failure to meet minimum capital requirements can initiate regulatory action that could have a direct material effect on the Company’s business, financial condition and results of operations.

The Bank, after consultation with the OCC, determined that a risk-weighting of 100% should be applied to its Advantage Loan Program loans under the risk weighting requirements for first-lien residential mortgage exposures set forth under the Basel III capital rules. Previously, the Company and the Bank generally applied a 50% risk weight to the Advantage Loan Program loans. The table below presents the Company’s and the Bank’s regulatory capital amounts and ratios applying the 100% risk weight as of September 30, 2022 and December 31, 2021 for the Company’s and Bank’s total adjusted capital to risk-weighted assets, Tier 1 (core) capital to risk-weighted assets and CET1 to risk weighted assets.

Under the Basel III capital rules, both the Company and the Bank must hold a capital conservation buffer (“CCB”) consisting of at least 2.5% above the minimum risk-based capital ratios, or 7.0% for common equity Tier 1 (“CET1”) capital ratio, 8.5% for Tier 1 capital ratio and 10.5% for total capital ratio, in order to avoid limitations on capital distributions and discretionary bonus payments to executive officers and similar employees.

2428

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements ~~(Unaudited)~~

(dollars in thousands, except share and per share amounts)

~~At September 30, 2022~~The federal banking agencies’ regulations provide for an optional simplified measure of capital adequacy for qualifying community banking organizations (that is, the “CBLR” framework), as implemented pursuant to the Economic Growth, Regulatory Relief and ~~December~~Consumer Protection Act of 2018. The CBLR framework is designed to reduce the burden of the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. In order to qualify for the CBLR framework, a community banking organization must have (i) a Tier 1 leverage ratio of greater than 9.0%, (ii) less than $10 billion in total consolidated assets, and (iii) limited amounts of off-balance-sheet exposure and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the capital ratio requirements for the “well capitalized” capital category under applicable prompt corrective action regulations and will not be required to report or calculate risk-based capital under generally applicable capital adequacy requirements. Failure to meet the qualifying criteria within the grace period of two reporting periods, or to maintain a leverage ratio of 8.0% or greater, would require the institution to comply with the generally applicable capital adequacy requirements. An eligible banking organization can opt out of the CBLR framework and revert to compliance with general capital adequacy requirements and capital measurements under prompt corrective action regulations without restriction.

The Company and the Bank have determined the organization is a qualifying community banking organization and has elected to measure capital adequacy under the CBLR framework, effective as of January 1, 2023. Management believes as of March 31, ~~2021,~~2023, the Company and the Bank ~~had met~~meet all ~~regulatory~~ capital adequacy requirements to which they are ~~subject and held capital in excess of the CCB, and the Bank’s regulatory capital ratios exceeded the requirements to be considered well capitalized for all regulatory purposes.~~subject. The following tables present the consolidated Company’s ~~consolidated~~ and the Bank’s actual and minimum required capital amounts and ratios at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021, applying the 100% risk weight to Advantage Loan Program loans:~~2022:


					For Capital					To be Well							To be Well
	Actual				Adequacy Purposes					Capitalized								Capitalized Under Prompt Corrective
	Amount		Ratio		Amount		Ratio			Amount	Ratio		Actual					Action Regulations (CBLR Framework)
September 30, 2022
Total adjusted capital to risk-weighted assets
													Amount		Ratio		Amount		Ratio
March 31, 2023
Tier 1 (core) capital to average total assets (leverage ratio)
Consolidated	$	409,170	26.21	%	$	124,357	8.00	%		N/A	N/A			332,165	13.49	%		221,576	9.00	%
Bank		413,262	26.60			124,275	8.00		$	155,344	10.00	%		406,705	16.52	%		221,520	9.00	%
Tier 1 (core) capital to risk-weighted assets
Consolidated		350,162	22.43			93,268	6.00			N/A	N/A
Bank		393,524	25.33			93,206	6.00			124,275	8.00
Common Equity Tier 1 (CET1)
Consolidated		350,162	22.43			69,951	4.50			N/A	N/A
Bank		393,524	25.33			69,905	4.50			100,974	6.50
Tier 1 (core) capital to adjusted tangible assets (leverage ratio)
Consolidated		350,162	14.09			99,151	4.00			N/A	N/A
Bank		393,524	15.88			99,103	4.00			123,879	5.00


					For Capital					To be Well							For Capital					To be Well
	Actual				Adequacy Purposes					Capitalized			Actual				Adequacy Purposes					Capitalized
	Amount		Ratio		Amount		Ratio			Amount	Ratio		Amount		Ratio		Amount		Ratio			Amount	Ratio
December 31, 2021
December 31, 2022
Total adjusted capital to risk-weighted assets
Consolidated	$	421,732	21.24	%	$	158,851	8.00	%		N/A	N/A		$	390,591	25.64	%	$	121,888	8.00	%		N/A	N/A
Bank		407,699	20.55			158,707	8.00		$	198,384	10.00	%		425,159	27.93			121,795	8.00		$	152,244	10.00	%
Tier 1 (core) capital to risk-weighted assets
Consolidated		344,247	17.34			119,138	6.00			N/A	N/A			332,068	21.79			91,416	6.00			N/A	N/A
Bank		382,509	19.28			119,030	6.00			158,707	8.00			405,803	26.65			91,346	6.00			121,795	8.00
Common Equity Tier 1 (CET1)
Consolidated		344,247	17.34			89,354	4.50			N/A	N/A			332,068	21.79			68,562	4.50			N/A	N/A
Bank		382,509	19.28			89,273	4.50			128,950	6.50			405,803	26.65			68,510	4.50			98,959	6.50
Tier 1 (core) capital to adjusted tangible assets (leverage ratio)
Tier 1 (core) capital to average total assets (leverage ratio)
Consolidated		344,247	11.47			120,039	4.00			N/A	N/A			332,068	13.54			98,073	4.00			N/A	N/A
Bank		382,509	12.77			119,859	4.00			149,824	5.00			405,803	16.56			98,032	4.00			122,540	5.00

2529

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements ~~(Unaudited)~~

(dollars in thousands, except share and per share amounts)

Bank at December 31,

2021

2020

2019

2018

2017

Total adjusted capital to risk-weighted assets

20.55
%
15.74
%
12.08
%
11.43
%
10.06
%
Tier 1 (core) capital to risk-weighted assets

19.28
%
14.47
%
11.32
%
10.66
%
9.12
%
Common Equity Tier 1 (CET1)

19.28
%
14.47
%
11.32
%
10.66
%
9.12
%
Tier 1 (core) capital to adjusted tangible assets (leverage ratio)

12.77
%
9.20
%
9.90
%
9.44
%
8.68
%

In comparison to the above tables, the tables below present the Bank’s and the Company’s regulatory capital ratios applying the 50% risk weight to Advantage Loan Program loans at December 31 for each of the past five years, as previously reported.

Bank at December 31,

2021

2020

2019

2018

2017

Total adjusted capital to risk-weighted assets

28.07
%
21.56
%
17.82
%
16.94
%
14.76
%
Tier 1 (core) capital to risk-weighted assets

26.79
%
20.27
%
16.70
%
15.80
%
13.71
%
Common Equity Tier 1 (CET1)

26.79
%
20.27
%
16.70
%
15.80
%
13.71
%
Tier 1 (core) capital to adjusted tangible assets (leverage ratio)

12.77
%
9.20
%
9.90
%
9.44
%
8.68
%

Dividend Restrictions

As noted above, federal banking regulations require the Bank to maintain certain capital levels and may limit the dividends paid by the ~~bank~~Bank to the holding company or by the holding company to its shareholders. The ~~Company’s~~holding company’s principal source of funds for dividend payments is dividends received from the ~~Bank, and banking regulations limit the dividends that may be paid. Approval by regulatory authorities~~Bank. Regulatory approval is required if (i) the total capital distributions for the applicable calendar year exceed the sum of the Bank’s net income for that year to date plus the Bank’s retained net income for the preceding two years or (ii) the Bank would not be at least ~~adequately capitalized~~“adequately capitalized” following the distribution. In addition, the Company currently is required to obtain the prior approval of the FRB in order to pay dividends to the Company’s shareholders.

Refer to Note 15—Commitments and Contingencies. Also, pursuant to the terms of the subordinated note agreements, the Company may pay dividends if it is well capitalized as defined by regulatory guidelines.

The Qualified Thrift Lender (“QTL”) test requires that a minimum of 65% of assets be maintained in qualified thrift investments, including mortgage loans, housing- and real estate-related finance and other specified areas. If the QTL test is not met, limits are placed on growth, branching, new investments, FHLB advances and dividends, or the Bank must convert to a commercial bank charter. Management believes that the QTL test has been met. ~~Also, pursuant to the terms of the subordinated note agreements, the Company may pay dividends if it is well capitalized as defined by regulatory guidelines.~~

~~Table of Contents~~

~~STERLING BANCORP, INC.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~(dollars in thousands, except share and per share amounts)~~

~~Refer to Note 16—Commitments and Contingencies. In addition, the Company currently is required to obtain the prior approval of the FRB in order to pay dividends to the Company’s shareholders.~~

Note 12—Income (Loss) Per Share

Basic income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted income per common share further includes any common shares available to be issued upon the exercise of outstanding stock options and restricted stock awards if such inclusions would be dilutive. The Company determines the potentially dilutive common shares using the treasury stock method. In periods of a net loss, basic and diluted per share information are the same.

The following table presents the computation of income (loss) per share, basic and diluted:


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2022		2021		2022		2021		2023		2022
Numerator:
Net income	$	1,176	$	9,557	$	4,239	$	15,334
Net income (loss)									$	(503)	$	5,260

Denominator:
Weighted average common shares outstanding, basic		50,400,412		50,167,295		50,326,951		50,010,341		50,444,463		50,191,288
Weighted average effect of potentially dilutive common shares:
Stock options		97,884		55,131		107,671		48,659		—		108,203
Restricted stock		74,635		40,260		88,454		20,931		—		106,632
Weighted average common shares outstanding, diluted		50,572,931		50,262,686		50,523,076		50,079,931		50,444,463		50,406,123

Income per share, basic and diluted	$	0.02	$	0.19	$	0.08	$	0.31
Income (loss) per share:
Basic									$	(0.01)	$	0.10
Diluted									$	(0.01)	$	0.10

The weighted average effect of certain stock options and nonvested restricted stock that were excluded from the computation of weighted average diluted shares outstanding, as inclusion would be anti-dilutive, are summarized as follows:


	Three Months Ended		Nine Months Ended		Three Months Ended
	September 30,		September 30,		March 31,
	2022	2021	2022	2021	2023	2022
Stock options	49,545	67,767	49,897	70,139	349,545	49,545
Restricted stock	176,707	7,294	99,784	104,558	349,512	—
Total	226,252	75,061	149,681	174,697	699,057	49,545

~~Note 13—Employee Benefit Plans~~

In May 2022, the Company surrendered a large split-dollar life program and a few smaller bank-owned life insurance (“BOLI”) policies related to former executives and a controlling shareholder with a cash surrender value of $24,877. The $13,142 increase in value over the duration of the ownership of the policies has moved from non-taxable income to taxable income, resulting in a $3,614 million increase in income tax expense for the nine months ended September 30, 2022. Additional taxes of $1,314 relating to this surrender are included in other expense within non-interest expense during the nine months ended September 30, 2022.

In connection with the surrender, the Company also cancelled certain deferred compensation and the split dollar life insurance agreement with its controlling shareholder which resulted in the reversal of the related liabilities of $4,514 which are included as a reduction in salaries and employee benefits expense in the condensed consolidated statement of income for the nine months ended September 30, 2022.

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements ~~(Unaudited)~~

(dollars in thousands, except share and per share amounts)

Note ~~14—~~13—Fair Values of Financial Instruments

Financial instruments include assets carried at fair value, as well as certain assets and liabilities carried at cost or amortized cost but disclosed at fair value in these condensed consolidated financial statements. Fair value is defined as the exit price, the price that would be received for an asset or paid to transfer a liability in the most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date under current market conditions. The inputs to valuation techniques used to measure fair value are prioritized into a three-level hierarchy. The hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The following methods and significant assumptions are used to estimate fair value:

Investment Securities

The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar investment securities (Level 2). For investment securities where quoted prices or market prices of similar investment securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). ~~Discounted~~The fair value of the collateralized debt obligations, which are categorized as Level 3, is obtained from third-party pricing information. It is determined by calculating discounted cash flows ~~are calculated using spread~~that include spreads that adjust for credit risk and illiquidity. The Company also performs an internal analysis that considers the structure and term of the collateralized debt obligations and the financial condition of the underlying issuers to ~~LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are~~corroborate the information used ~~(if available) to validate~~from the ~~analysis. Rating agency and industry research reports as well as defaults and deferrals on individual investment securities are reviewed and incorporated into the calculations.~~independent third party.

Loans Held for Sale

Loans held for sale are carried at the lower of amortized cost or fair value. ~~Fair~~Loans held for sale may be carried at fair value on a nonrecurring basis when fair value is ~~determined~~less than cost. The fair value is based on outstanding commitments from investors or quoted prices for loans with similar characteristics (Level 2).

~~Impaired Loans~~

The fair value of collateral-dependent impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach, such as comparable sales or the income approach, or a combination of both. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Appraisals for collateral-dependent impaired loans are performed by certified general appraisers whose qualifications and licenses have been reviewed and verified by management. Once received, an appraisal compliance review is completed in accordance with regulatory guidelines.

~~Table of Contents~~

~~STERLING BANCORP, INC.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~(dollars in thousands, except share and per share amounts)~~

Mortgage Servicing Rights

Fair value of mortgage servicing rights is initially determined at the individual grouping level based on an internal valuation model that calculates the present value of estimated future net servicing income. On a quarterly basis, mortgage servicing rights are evaluated for impairment based upon third-party valuations obtained. As disclosed in Note 5—6—Mortgage Servicing Rights, net, the valuation model utilizes interest rate, prepayment speed and default rate assumptions that ~~are specific to loans serviced by the Company and that~~ market participants would use in estimating future net servicing income (Level 3).

~~Assets Measured at Fair Value on a Recurring Basis~~

~~The table below presents the assets measured at fair value on a recurring basis categorized by the level of inputs used in the valuation of each asset at September 30, 2022 and December 31, 2021:~~

Fair Value Measurements at

September 30, 2022

Quoted Prices

in Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

Assets

Inputs

Inputs


Total

(Level 1)

(Level 2)

(Level 3)
Financial Assets








Available for sale debt securities:








U.S. Treasury and Agency securities

$
167,462

$
115,484

$
51,978

$
—
Mortgage-backed securities

37,626

—

37,626

—
Collateralized mortgage obligations

143,346

—

143,346

—
Collateralized debt obligations

153

—

—

153
Equity securities

4,386

4,386

—

—

Fair Value Measurements at

December 31, 2021

Quoted Prices

in Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

Assets

Inputs

Inputs


Total

(Level 1)

(Level 2)

(Level 3)
Financial Assets








Available for sale debt securities:








U.S. Treasury and Agency securities

$
122,168

$
48,827

$
73,341

$
—
Mortgage-backed securities

49,437

—

49,437

—
Collateralized mortgage obligations

136,849

—

136,849

—
Collateralized debt obligations

203

—

—

203
Equity securities

4,976

4,976

—

—

2931

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements ~~(Unaudited)~~

(dollars in thousands, except share and per share amounts)

Assets Measured at Fair Value on a Recurring Basis

The table below presents the assets measured at fair value on a recurring basis categorized by the level of inputs used in the valuation of each asset at March 31, 2023 and December 31, 2022:


			Fair Value Measurements at
			March 31, 2023
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Financial Assets
Available for sale debt securities:
U.S. Treasury and Agency securities	$	170,271	$	118,020	$	52,251	$	—
Mortgage-backed securities		35,968		—		35,968		—
Collateralized mortgage obligations		136,151		—		136,151		—
Collateralized debt obligations		144		—		—		144
Equity securities		4,466		4,466		—		—


			Fair Value Measurements at
			December 31, 2022
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Financial Assets
Available for sale debt securities:
U.S. Treasury and Agency securities	$	168,437	$	116,355	$	52,082	$	—
Mortgage-backed securities		36,733		—		36,733		—
Collateralized mortgage obligations		138,241		—		138,241		—
Collateralized debt obligations		147		—		—		147
Equity securities		4,396		4,396		—		—

The table below presents a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 and ~~2021:~~2022:


	Fair Value Measurements Using Significant				Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)				Unobservable Inputs (Level 3)
	Collateralized Debt Obligations				Collateralized Debt Obligations
	Nine Months Ended September 30,				Three Months Ended March 31,
	2022		2021		2023		2022
Balance of recurring Level 3 assets at beginning of period	$	203	$	187	$	147	$	203
Total gains or losses (realized/unrealized):
Included in income-realized		—		—
Included in other comprehensive loss		3		7
Included in other comprehensive income (loss)						(2)		2
Principal maturities/settlements		(53)		(3)		(1)		(1)
Sales		—		—
Transfers in and/or out of Level 3		—		—
Balance of recurring Level 3 assets at end of period	$	153	$	191	$	144	$	204

~~Unrealized losses on Level 3 investments for collateralized debt obligations was $5~~32

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share and $8 at September 30, 2022 and December 31, 2021, respectively. In addition to the amounts included in income as presented in the table above, interest income recorded on collateralized debt obligations was $5 and $4 for the nine months ended September 30, 2022 and 2021, respectively.per share amounts)

The fair value of the collateralized debt obligations is obtained from third-party pricing information. It is determined by calculating discounted cash flows using LIBOR curves plus spreads that adjust for credit risk and illiquidity. The Company also performs an internal analysis that considers the structure and term of the collateralized debt obligations and the financial condition of the underlying issuers to corroborate the information used from the independent third party.

Assets Measured at Fair Value on a ~~Non-recurring~~Nonrecurring Basis

From time to time, the Company may be required to measure certain other assets at fair value on a nonrecurring basis in accordance with U.S. GAAP. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis that were recorded in the condensed consolidated balance sheets at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the following table provides the level of valuation assumptions used to determine each adjustment and the related carrying value:


	Fair Value Measurements at September 30, 2022								Fair Value Measurements at March 31, 2023
			Quoted Prices in		Significant						Quoted Prices in		Significant
			Active Markets		Other		Significant				Active Markets		Other		Significant
			for Identical		Observable		Unobservable				Identical		Observable		Unobservable
			Assets		Inputs		Inputs				Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)		Fair Value		(Level 1)		(Level 2)		(Level 3)
Commercial real estate loans held for sale	$	1,554	$	—	$	1,554	$	—
Loans held for sale									$	34,581	$	—	$	34,581	$	—
Mortgage servicing rights		311		—		—		311		542		—		—		542


	Fair Value Measurements at December 31, 2021								Fair Value Measurements at December 31, 2022
			Quoted Prices in		Significant						Quoted Prices in		Significant
			Active Markets		Other		Significant				Active Markets		Other		Significant
			for Identical		Observable		Unobservable				for Identical		Observable		Unobservable
			Assets		Inputs		Inputs				Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)		Fair Value		(Level 1)		(Level 2)		(Level 3)
Impaired loans:
Residential real estate	$	86	$	—	$	—	$	86
Commercial real estate loans held for sale		53,628		—		53,628		—
Mortgage servicing rights		2,052		—		—		2,052	$	391	$	—	$	—	$	391

~~Table of Contents~~

~~STERLING BANCORP, INC.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~(dollars in thousands, except share and per share amounts)~~

As discussed above, the fair values of collateral-dependent impaired loans carried at fair value are determined by third-party appraisals. Management adjusts these appraised values based on the age of the appraisal and the type of the property. The following tables present quantitative information about Level 3 fair value measurements for assets measured at ~~September 30, 2022~~fair value on a nonrecurring basis at March 31, 2023 and December 31, ~~2021:~~2022:

Quantitative Information about Level 3 Fair Value Measurements at September 30, 2022

Range


Fair Value

Valuation Technique

Unobservable Inputs

(Weighted Average)⁽¹⁾
Mortgage servicing rights

$
311

Discounted cash flow

Discount rate

9.5% - 12.0%
(11.8%)



Prepayment speed

7.5% - 22.5%
(19.5%)

Default rate

0.1% - 0.2%
(0.2%)

~~(1)~~

~~The range and weighted average for an asset category consisting of a single investment represents the significant unobservable input used in the fair value of the investment.~~


	Quantitative Information about Level 3 Fair Value Measurements at March 31, 2023
					Range
	Fair Value		Valuation Technique	Unobservable Inputs	(Weighted Average) ⁽¹⁾
Mortgage servicing rights	$	542	Discounted cash flow	Discount rate	10.0% - 12.5% (12.3%)
				Prepayment speed	7.6% - 22.6% (18.9%)
				Default rate	0.0%-0.2% (0.2%)

Quantitative Information about Level 3 Fair Value Measurements at December 31, 2021

Quantitative Information about Level 3 Fair Value Measurements at December 31, 2022

Range

Fair Value

Valuation Technique

Unobservable Inputs

(Weighted Average)⁽¹⁾

Fair Value

Valuation Technique

Unobservable Inputs

(Weighted Average) ⁽¹⁾

Impaired loans:

Residential real estate

Sales comparison approach

Adjustments for differences between the comparable sales

N/A
(15%)

Mortgage servicing rights

2,052

Discounted cash flow

Discount rate

9.5% - 12.0%
(11.0%)

391

Discounted cash flow

Discount rate

10.0% - 12.5%
(12.2%)

Prepayment speed

10.5% - 37.1%
(19.7%)

Prepayment speed

7.5% - 22.4%
(19.0%)

Default rate

0.1% - 0.2%
(0.2%)

Default rate

0.1% - 0.2%
(0.2%)

(1)	The range and weighted average for an asset category consisting of a single investment represents the significant unobservable input used in the fair value of the investment.

3133

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements ~~(Unaudited)~~

(dollars in thousands, except share and per share amounts)

Fair Value of Financial Instruments

The carrying amounts and estimated fair values of financial instruments not carried at fair value at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, are as follows:


	Fair Value Measurements at September 30, 2022										Fair Value Measurements at March 31, 2023
	Carrying		Fair								Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3		Amount		Value		Level 1		Level 2		Level 3
Financial Assets
Cash and due from banks	$	352,404	$	352,404	$	352,404	$	—	$	—	$	419,219	$	419,219	$	419,219	$	—	$	—
Interest-bearing time deposits with other banks		1,183		1,183		1,183		—		—		934		934		934		—		—
Loans held for sale ⁽¹⁾		7,279		7,719		—		7,719		—		3,398		3,440		—		3,440		—
Loans, net		1,636,266		1,676,322		—		—		1,676,322		1,513,481		1,436,596		—		—		1,436,596

Financial Liabilities
Time deposits		757,576		752,286		—		752,286		—		917,161		912,351		—		912,351		—
Federal Home Loan Bank borrowings		50,000		48,260		—		48,260		—		50,000		48,760		—		48,760		—
Subordinated notes, net		65,290		65,056		—		65,056		—		65,253		65,533		—		65,533		—


	Fair Value Measurements at December 31, 2021										Fair Value Measurements at December 31, 2022
	Carrying		Fair								Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3		Amount		Value		Level 1		Level 2		Level 3
Financial Assets
Cash and due from banks	$	411,676	$	411,676	$	411,676	$	—	$	—	$	379,798	$	379,798	$	379,798	$	—	$	—
Interest-bearing time deposits with other banks		1,183		1,183		1,183		—		—		934		934		934		—		—
Loans held for sale		11,359		11,809		—		11,809		—		7,725		7,833		—		7,833		—
Loans, net⁽¹⁾		1,956,180		2,025,409		—		—		2,025,409		1,613,385		1,516,771		—		—		1,516,771

Financial Liabilities
Time deposits		891,820		894,049		—		894,049		—		861,733		855,566		—		855,566		—
Federal Home Loan Bank borrowings		150,000		152,560		—		152,560		—		50,000		48,360		—		48,360		—
Subordinated notes, net		65,343		65,073		—		65,073		—		65,271		65,355		—		65,355		—

(1)Excludes ~~impaired~~ loans ~~measured~~that have been reflected in loans held for sale at fair value on a nonrecurring basis ~~at September 30, 2022 and December 31, 2021.~~.

Note ~~15—~~14—Related Party Transactions

~~In May 2021, the Company issued and sold unregistered shares of common stock to its Chief Executive Officer in exchange for cash consideration. Refer to Note 9 – Shareholders’ Equity.~~

The Company subleased certain office space to entities owned by the Company’s controlling shareholders. Amounts received under such subleases totaled ~~$97~~$112 for the three months ended ~~September 30, 2021, and $112 and $289 during the nine months ended September 30, 2022 and 2021, respectively.~~March 31, 2022. The sublease agreements ended on March 31, 2022.

Note ~~16—~~15—Commitments and Contingencies

Financial Instruments with Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit, such as loan commitments and unused credit lines, and standby letters of credit, which are not reflected in the condensed consolidated financial statements.

The Company adopted ASU 2016-13, effective January 1, 2023, which requires the Company to estimate expected credit losses for off-balance sheet credit exposures which are unconditionally cancellable. The liability for unfunded commitments is reduced in the period in which the off-balance sheet financial instruments expire, loan funding occurs or is otherwise settled. The Company maintains an estimated liability for unfunded commitments, primarily related to commitments to extend credit, on the condensed consolidated balance sheet.

3234

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements ~~(Unaudited)~~

(dollars in thousands, except share and per share amounts)

The following presents the activity in the liability for unfunded commitments for the three months ended March 31, 2023:



	Residential		Commercial				Commercial		Other
Three Months Ended March 31, 2023	Real Estate		Real Estate		Construction		and Industrial		Consumer		Total
Liability for unfunded commitments:
Balance at the beginning of the period	$	—	$	—	$	—	$	—	$	—	$	—
Adoption of ASU 2016-13		53		125		398		3		—		579
Increase (decrease) in provision for (recovery of) credit losses		49		30		(190)		1		—		(110)
Total ending balance	$	102	$	155	$	208	$	4	$	—	$	469

Unfunded Commitments to Extend Credit

A commitment to extend credit, such as a loan commitment, credit line and overdraft protection, is a legally binding agreement to lend funds to a customer, usually at a stated interest rate and for a specific purpose. Such commitments have fixed expiration dates and generally require a fee. The extension of a commitment gives rise to credit risk. The actual liquidity requirements or credit risk that the Company ~~will~~may experience is expected to be lower than the contractual amount of commitments to extend credit because a significant portion of those commitments are expected to expire without being ~~drawn upon.~~used. Certain commitments are subject to loan agreements containing covenants regarding the financial performance of the customer that must be met before the Company is required to fund the commitment. The Company uses the same credit policies in making commitments to extend credit as it does in making loans.

The commitments outstanding to make loans include primarily residential real estate loans that are made for a period of 90 days or less. At ~~September 30, 2022,~~March 31, 2023, there were no outstanding commitments to make loans consisted of variable-rate loans of $2,560 at varying interest rates ranging from 4.50% to 5.125% at September 30, 2022 with maturities of 30 years and fixed-rate loans of $113 at an interest rate of 4.875% with maturities of 15 years.loans.

Unused Lines of Credit

The Company also issues ~~unused~~credit lines ~~of credit~~ to meet customer financing needs. At ~~September 30, 2022,~~March 31, 2023, the unused lines of credit include residential second mortgages of ~~$10,874 and~~$10,773, construction loans of ~~$9,736~~$5,974 and commercial and industrial loans of $972, totaling ~~$20,610.~~$17,719. These variable-rate unused lines of credit ~~are associated with variable-rate~~ commitments athave interest rates ranging from ~~5.50%~~4.72% to ~~8.50%~~10.13% at ~~September 30, 2022~~March 31, 2023 with maturities ranging from ~~one month~~3 months to 23 years.

Standby Letters of Credit

Standby letters of credit are issued on behalf of customers in connection with construction contracts between the customers and third parties. Under standby letters of credit, the Company assures that the third parties will receive specified funds if customers fail to meet their contractual obligations. The credit risk to the Company arises from its obligation to make payment in the event of a customer’s contractual default. The maximum amount of potential future payments guaranteed by the Company is limited to the contractual amount of these letters. Collateral may be obtained at exercise of the commitment. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.

The following is a summary of the total amount of unfunded commitments to extend credit and standby letters of credit outstanding at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


	September 30,		December 31,		March 31,		December 31,
	2022		2021		2023		2022
Commitments to make loans	$	2,673	$	23,610	$	—	$	—
Unused lines of credit		20,610		45,805		17,719		20,865
Standby letters of credit		24		24		24		24

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share amounts)

Legal Proceedings

The Company and its subsidiaries may be subject to legal actions and claims arising from contracts or other matters from time to time in the ordinary course of business. Management is not aware of any pending or threatened legal proceedings, except as described below, that are considered other than routine legal proceedings. The Company believes that the ultimate disposition or resolution of its routine legal proceedings, in the aggregate, are immaterial to its financial position, results of operations or liquidity.

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~~STERLING BANCORP, INC.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~(dollars in thousands, except share and per share amounts)~~

On September 27, 2022, the Company entered into a Consent Order with the OCC, resolving the formal investigation by the OCC relating to the Bank’s former residential loan product, marketed as the Advantage Loan Program, and related matters (the “OCC Investigation”). Pursuant to the Consent Order, the Bank has paid a civil money penalty of $6,000. The civil money penalty has been applied against the previously accrued liability for contingent losses reflected on the Company’s condensed consolidated balance sheet. The Consent Order represents a full and final settlement of the OCC Investigation with respect to the Bank. Concurrent with the Consent Order, the OCC notified the Bank that the formal agreement between the Bank and the OCC entered on June 18, 2019 (the “OCC Agreement “) was terminated, which primarily related to certain aspects of the Bank’s Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) compliance program and the Bank’s credit administration.

The Bank has received grand jury subpoenas from the U.S. Department of Justice (the “DOJ”) beginning in 2020 requesting the production of documents and information in connection with an investigation ~~that appears to be~~ focused on the Bank’s Advantage Loan Program and related issues, including residential lending practices and public disclosures about that program contained in the Company’s filings with the SEC. ~~The Bank is fully cooperating~~On March 15, 2023, the Company entered into a Plea Agreement (the “Plea Agreement”) with ~~this~~the DOJ, resolving the DOJ’s investigation. ~~Adverse findings~~Under the Plea Agreement, the Company has agreed to plead guilty to one count of securities fraud primarily relating to disclosures with respect to the Advantage Loan Program contained in the Company’s 2017 IPO Registration Statement and its immediately following Annual Reports on Form 10-K filed in March 2018 and March 2019; pay $27,239 in restitution for the benefit of non-insider victim shareholders; further enhance its compliance program and internal controls with respect to securities law compliance; and provide periodic reports to the DOJ ~~investigation could result in material losses due~~with respect to ~~damages, restitution, penalties, costs, and/or expenses imposed on~~compliance matters. No criminal fine was imposed. The Company’s obligations under the Plea Agreement are generally effective for three years. This resolution releases the Company, ~~which could have~~as well as the Bank, from further prosecution for securities fraud and underlying mortgage fraud in the Advantage Loan Program. At a ~~material adverse effect~~hearing held on April 19, 2023, the ~~Company’s future operations, financial condition, growth, or other aspects~~District Court for the Eastern District of Michigan preliminarily accepted the ~~business.~~Plea Agreement, subject to the final court hearing. The Plea Agreement remains subject to final court approval.

~~The~~In addition, the Company ~~is currently~~remains under a formal investigation by the SEC. This investigation appears to be focused on accounting, financial reporting and disclosure matters, as well as the Company’s internal controls, related to the Advantage Loan Program. The Company has received document and information requests from the SEC and has fully cooperated with this investigation. Adverse findings in the SEC investigation could result in material losses due to penalties, disgorgement, costs and/or expenses imposed on the Company, which could have a material adverse effect on the Company’s future operations, financial condition, growth or other aspects of its business.

At March 31, 2023 and December 31, 2022, the Company has a liability for contingent losses of $27,239 for the outcome of the pending investigations. There can be no assurance (i) that the accrual for contingent losses will be sufficient to cover the cost of any payments required by the DOJ resolution, or (ii) that such costs will not materially exceed such accrual and have a further material impact on the Company’s business, financial condition or results of operations.

The Bank has incurred and expects to continue to incur significant costs in its efforts to respond to the ~~government~~governmental investigations, including to reimburse third parties for the legal costs pursuant to requests for indemnification and advancement of expenses, which are reflected in the Company’s ~~results~~condensed consolidated statements of operations for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and 2021. Adverse findings in any of the aforementioned government investigations could also have collateral consequences for the Company and the Bank, such as creating breaches of representation in certain third-party agreements and loss of eligibility to participate in certain government programs and programs of government sponsored entities.

In 2019, the Company commenced an internal review of the Advantage Loan Program and related matters (the “Internal Review”). The primary focus of the Internal Review, which has been led by outside legal counsel at the direction of a special committee of independent directors (the “Special Committee”), has involved the origination of residential real estate loans under the Advantage Loan Program and related matters. Results from the Special Committee’s Internal Review have indicated that certain employees engaged in misconduct in connection with the origination of a significant number of such loans, including with respect to verification of income, the amount of income reported for borrowers, reliance on third parties, and related documentation. As a result, the Company permanently discontinued the Advantage Loan Program. While the Internal Review is substantially complete, the Company expects the Internal Review to remain open during the pendency of the government investigations discussed herein, and it is possible additional work will be required in connection with the Internal Review.

At September 30, 2022 and December 31, 2021, the Company has a liability for contingent losses of $9,000 and $15,000, respectively, for the outcome of the pending investigations. There can be no assurance (i) that the Company will not incur material losses due to damages, penalties, costs and/or expenses as a result of such investigations, (ii) that the accrual for contingent losses will be sufficient to cover such losses, or (iii) that such losses will not materially exceed such accrual and have a material impact on the Company’s business, financial condition or results of operations.

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~~STERLING BANCORP, INC.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~(dollars in thousands, except share and per share amounts)~~

In addition, on July 28, 2020, the Company received a demand letter from two law firms representing a purported shareholder of the Company (the “Shareholder Demand”) which was later reflected in a shareholder derivative complaint that was filed against us and certain of our current and former directors, styled ~~Cahnman v. Allen~~, ~~et al.~~, No. 2:22-cv-10124 (E.D. Mich.), alleging that members of the Company’s board of directors breached their fiduciary duties of oversight and disclosure based on allegations concerning the Bank’s residential lending practices and disclosures concerning those practices that were made in the Company’s registration statement and prospectus for its initial public offering, in subsequent press releases, in periodic and other filings with the SEC and during earnings calls. On January 21, 2022, the Company and the purported shareholder entered into an agreement in the form of a definitive stipulation of settlement (the “Settlement”), of which the court granted final approval on September 29, 2022. Pursuant to the Settlement, the Company agreed to adopt and implement substantial corporate governance reforms (the “Corporate Governance Enhancements”), many of which were already in progress and have now been completed, and pay attorneys’ fees and expenses in the amount of $650 in exchange for the release of all defendants from all alleged claims therein. The Settlement provides customary releases of certain individuals and entities, including the current board of directors and certain former board members, and reserves for the Company’s board of directors the exclusive right to continue to evaluate and pursue claims against non-released individuals based on their conduct concerning, related to, or arising from the matters raised in the Shareholder Demand. Reimbursement of the $650 due under the Settlement was paid by the Company’s insurance carriers under applicable insurance policies during the fourth quarter of 2022.

Mortgage Repurchase Liability

~~During the period 2015 through 2019, the~~The Company has previously sold portfolio loans originated under the Advantage Loan Program to private investors in the secondary market. The Company also sells conventional residential real estate loans (which excludes Advantage Loan Program loans) in the secondary market primarily to Fannie Mae on an ongoing basis. In connection with these loans sold, the Company makes customary representations and warranties about various characteristics of each loan. The Company may be required pursuant to the terms of the applicable mortgage loan purchase and sale agreements to repurchase any previously sold loan or indemnify (make whole) the investor for which the representation or warranty of the Company proves to be inaccurate, incomplete or misleading. In the event of a repurchase, the Company is typically required to pay the unpaid principal balance, the proportionate premium received when selling the loan and certain expenses. As a result, the Company may incur a loss with respect to each repurchased loan.

In 2019, in connection with the above mentioned investigations stemming from the Advantage Loan Program, the Company recorded a mortgage repurchase liability of $7,823, primarily related to probable losses on the previously sold Advantage Loan Program portfolio. The Company determined that these losses became probable in the latter part of the fourth quarter of 2019, taking into account the results of the Internal Review.

To avoid the uncertainty of audits and inquiries by third-party investors in the Advantage Loan Program, beginning at the end of the second quarter of 2020, the Company commenced making offers to each of those investors to repurchase 100% of the previously sold Advantage Loan Program loans. ~~Since this time, certain~~These loans were previously sold to third-party investors ~~have accepted this offer. In May 2022,~~with servicing of the ~~Company repurchased a pool~~loan retained. Losses expected to be incurred upon the repurchase of ~~Advantage Loan Program~~such loans with a total outstanding unpaid principal balance of $30,380, which was not subject to an existing written agreement to repurchase. In connection with this repurchase, the Company recognized a loss of $695 related to a fair value discountwere reflected in ~~other non-interest expense and a disposition of $376 of mortgage servicing rights, and charged a loss of $622 against~~ the mortgage repurchase liability. ~~In September 2022, the Company repurchased pools~~

Table of ~~Advantage Loan Program loans with a total outstanding unpaid principal balance of $35,241. In connection with this repurchase, the Company recognized a loss of $1,608 related~~Contents

STERLING BANCORP, INC.

Notes to ~~a fair value discount~~Condensed Consolidated Financial Statements

(dollars in ~~other non-interest expense~~thousands, except share and ~~a disposition of $487 of mortgage servicing rights, and charged a loss of $884 against the mortgage repurchase liability.~~ per share amounts)

Pursuant to the existing agreements with such investors, the Company also agreed to repurchase additional pools of Advantage Loan Program loans at the predetermined repurchase prices as stated in the agreements. ~~The Company has entered into~~At March 31, 2023, there was an outstanding agreement to repurchase an additional pool of Advantage Loan Program loans with an ~~outstanding~~unpaid principal balance of ~~$21,392 at September 30, 2022,~~$20,471 that extends to July 2025, with the final decision to effect any such repurchase, ~~and the specific date of repurchase,~~ as determined by the applicable investor. The last date on which the investor has the right to cause the repurchase of this pool of loans is July 22, 2023. Losses expected to be incurred upon the repurchase of such loans are reflected in the mortgage repurchase liability.

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~~STERLING BANCORP, INC.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~(dollars in thousands, except share and per share amounts)~~

~~As of September 30, 2022~~At March 31, 2023 and December 31, ~~2021,~~2022, the mortgage repurchase liability was ~~$778~~$929 and ~~$2,954,~~$809, respectively, which is included in accrued expenses and other liabilities in the condensed consolidated balance sheets. The unpaid principal balance of residential real estate loans sold that were subject to potential repurchase obligations in the event of breach of representations and warranties totaled ~~$160,401~~$103,034 and ~~$237,049~~$112,542 at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively, including Advantage Loan Program loans totaling ~~$44,955~~$40,230 and ~~$142,810~~$43,274 at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

The mortgage repurchase liability reflects management’s estimate of losses based on a combination of factors. The Company’s estimation process requires management to make subjective and complex judgements about matters that are inherently uncertain, such as future repurchase demand expectations, economic factors and findings from the Internal Review. The actual repurchase losses could vary significantly from the recorded mortgage repurchase liability, depending on the outcome of various factors, including those previously discussed.

Activity in the mortgage repurchase liability was as follows:


	Nine Months Ended				Three Months Ended
	September 30,				March 31,
	2022		2021		2023		2022
Balance, beginning of period	$	2,954	$	9,699	$	809	$	2,954
Net recovery		(670)		(963)
Loss on loan repurchases		(1,506)		(5,511)
Net provision (recovery)						120		(213)
Balance, end of the period	$	778	$	3,225	$	929	$	2,741

~~Note 17—Subsequent Events~~

During the second quarter of 2022, the Company outsourced its residential loan origination function to Promontory MortgagePath, which provides community banks with an outsourced residential lending service for mortgage loan production. In November 2022, Promontory MortgagePath advised the Company of its intent to cease conducting business. Promontory MortgagePath and the Company will continue to accept loan applications through November 30, 2022, and will use commercially reasonable efforts to evaluate and originate pending loan applications by February 28, 2023. At that time, the Company will suspend the origination of residential loans pending further evaluation of its alternatives, which may include discontinuing the origination of residential loans. However, the Company may purchase residential loans from the secondary market in the future.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management’s discussion and analysis of financial condition and results of operations ~~(“MD&A”)~~ should be read in conjunction with the unaudited condensed consolidated financial statements, related notes, and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and related notes included in our ~~2021~~2022 Form 10-K.

Unless we state otherwise or the context otherwise requires, references in this Quarterly Report on Form 10-Q to “Sterling,” “we,” “our,” “us” or “the Company” refer to Sterling Bancorp, Inc., a Michigan corporation, and its subsidiaries, including Sterling Bank & Trust, F.S.B., which we sometimes refer to as “Sterling Bank,” “the Bank” or “our Bank.”

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain statements that are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), regarding the Company’s plans, expectations, thoughts, beliefs, estimates, goals, and outlook for the future that are intended to be covered by the protections provided under the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “attribute,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “goal,” “target,” “outlook,” “aim,” “would” and “annualized” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and they are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. Accordingly, you should not place undue reliance on any such forward-looking statements.

The risks, uncertainties and other factors identified in our filings with the SEC, and others, may cause actual future results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. A summary of these factors is below, under the heading “Risk Factors Summary.” For additional information on factors that could materially affect the forward-looking statements included in this Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2022,~~March 31, 2023, see the risk factors set forth under “Item 1A. Risk Factors” in our ~~2021~~2022 Form 10-K. You should carefully consider ~~the~~these risk factors ~~discussed below, and in our Risk Factors and other disclosures,~~ in evaluating these forward-looking statements.

Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise except as required by law. New risks and uncertainties arise from time to time, and it is not possible for us to predict those events or how they may affect us. In addition, we cannot assess the impact of any particular risk, uncertainty or other factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Risk Factors Summary

The following is a summary of the material risks we are exposed to in the course of our business activities. The below summary does not contain all of the information that may be important to you, and you should read the below summary together with the more detailed discussion of risks set forth under “Part II, Item 1A. Risk Factors” and in our ~~2021~~2022 Form 10-K, as well as under this “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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Risks Related to the Advantage Loan Program

●

~~The results~~Compliance with the Plea Agreement and the effect of the ~~Internal Review of~~Plea Agreement on our ~~Advantage Loan Program~~reputation and ~~related matters~~ability to raise capital

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●

The results of ~~investigations of us by the DOJ, the SEC or other~~ governmental ~~agencies~~investigations

●

The costs of legal proceedings, including settlements and judgments

●

The effects of the ~~permanent discontinuation~~termination of our Advantage Loan Program

●

~~Compliance with BSA/AML laws~~Potential claims for advancement and ~~regulations generally~~

●

~~Potential future losses in connection with representations~~indemnification from certain directors and ~~warranties we have made with respect~~officers related to ~~residential real estate loans that we have sold into~~ the ~~secondary market~~

~~Risks Related to the COVID-19 Pandemic~~

●

~~The economic impact,~~governmental investigations and ~~governmental and regulatory actions to mitigate the impact, of the disruptions created~~potential litigation against us or counterclaims by ~~the COVID-19 pandemic~~

●

~~The effects of the economic disruptions resulting from the COVID-19 pandemic on~~ our ~~loan portfolio~~controlling shareholder

Risks Related to the Economy and Financial Markets

●

The effects of fiscal and monetary policies and regulations of the federal government and the ~~Federal Reserve~~FRB

●

The disruptions to the economy and the U.S. banking system caused by recent bank failures

●

Changes in the state of the general economy and the financial markets and their effects on the demand for our loan services

●

The effects of fiscal challenges facing the U.S. government

●

The economic impact, and governmental and regulatory actions to mitigate the impact, of the disruptions created by the coronavirus disease 2019 (“COVID-19”) pandemic

●

Macroeconomic and geopolitical challenges and uncertainties affecting the stability of regions and countries around the globe and the effect of changes in the economic and political relations between the U.S. and other nations

Risks Related to Credit

●

The credit risks of lending activities, including changes in the levels of delinquencies and nonperforming assets and changes in the financial performance and/or economic condition of our borrowers, including the effects of continued inflation and the possibility of a recession

●

Our concentration in residential real estate loans

●

The geographic concentration of our loans and operations in California

●

The potential insufficiency of our allowance for loan losses to cover losses in our loan portfolio

Risks Related to Our Highly Regulated Industry

●

The extensive laws and regulations affecting the financial services industry, including the ~~QTL~~qualified thrift lender test, the continued effects of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and related rulemaking, changes in banking ~~securities~~ and ~~tax~~securities laws and regulations and their application by our regulators and the Community Reinvestment Act and fair lending laws, including as a result of the recent bank failures

●

Failure to comply with banking laws and regulations

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●

Enforcement priorities of the federal bank regulatory agencies

Risks Related to Competition

●

Strong competition within our market areas or with respect to our products and pricing

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●

Our reputation as a community bank and the effects of continued negative publicity

●

Our ability to keep pace with technological change and introduce new products and services

●

Consumers deciding not to use banks to complete their financial transactions

Risks Related to Interest Rates

●

Negative impacts of future changes in interest rates

●

Uncertainty relating to the determination and discontinuation of the ~~London Interbank Offered Rate (“LIBOR”)~~LIBOR

Risks Related to Liquidity

●

Our ability to ensure we have adequate liquidity

●

Our ability to obtain external financing on favorable terms, or at all, in the future

●

The quality of our real estate loans and our ability to sell our loans to the secondary market

●

Our deposit account balances that exceed FDIC insurance limits may expose the Bank to enhanced liquidity risk

Other Risks Related to Our Business

●

Our ability to attract and retain key employees and other qualified personnel

●

Our operational, technological and organizational infrastructure, including the effectiveness of our enterprise risk management framework at mitigating risk and loss to us

●

Operational risks from a high volume of financial transactions and increased reliance on technology, including risk of loss related to cybersecurity or privacy breaches and the increased frequency and sophistication of cyberattacks

●

The operational risk associated with third-party vendors and other financial institutions

●

The ability of customers and counterparties to provide accurate and complete information and the soundness of third parties on which we rely

●

Our employees’ adherence to our internal policies and procedures

●

The effects of natural disasters on us and our California borrowers and the adequacy of our business continuity and disaster recovery plans

●

Environmental, social and governance matters and their effects on our reputation and the market price of our securities

●

Climate change and related legislative and regulatory initiatives

●

Adverse conditions internationally and their effects on our customers

●

Fluctuations in securities markets, including changes to the valuation of our securities portfolio

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●

~~The value of our mortgage servicing rights~~

●

The reliance of our critical accounting policies and estimates, including for the allowance for ~~loan~~credit losses, on analytical and forecasting techniques and models

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●

Other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services and the other risks described elsewhere herein or in the documents incorporated by reference herein and our other filings with the SEC

●

We may experience increases in FDIC insurance assessments

Risks Related to Governance Matters

●

The Seligman family’s ability to influence our operations and control the outcome of matters submitted for shareholder approval

●

Our ability to pay dividends

The foregoing risk factors should not be construed as an exhaustive list and should be read in conjunction with the cautionary statements that are included under “Cautionary Note Regarding Forward-Looking Statements” above, under “Item 1A. Risk Factors” in our ~~2021~~2022 Form 10-K and elsewhere in this Quarterly Report on Form 10-Q, as well as the items set forth under “Part II, Item 1A. Risk Factors.”

~~Executive Summary~~

~~The following overview should be read in conjunction with our MD&A in its entirety.~~

Company Overview

We are a unitary thrift holding company headquartered in Southfield, Michigan and our primary business is the operation of our wholly owned subsidiary, Sterling Bank. Through Sterling Bank, we offer a range of loan products to the residential and commercial markets, as well as retail and business banking services. The Bank originates residential and commercial real estate loans, construction loans, commercial and industrial and other consumer loans and provides deposit products, consisting primarily of checking, savings and term certificate accounts. It also engages in mortgage banking activities and, as such, acquires, sells and services residential mortgage loans. The Bank operates through a network of 28 branches of which 26 branches are located in San Francisco and Los Angeles, California with the remaining branches located in New York, New York and Southfield, Michigan.

~~Internal Review, Investigations and Regulatory Matters Related~~Recent Developments

On March 15, 2023, the Company entered into a Plea Agreement with the DOJ, resolving the DOJ’s investigation. Under the Plea Agreement, the Company has agreed to plead guilty to one count of securities fraud primarily relating to disclosures with respect to the Advantage Loan Program

~~The primary focus~~ contained in the Company’s 2017 IPO Registration Statement and its immediately following Annual Reports on Form 10-K filed in March 2018 and March 2019; pay $27.2 million in restitution for the benefit of the Internal Review, which has been led by outside legal counsel under the direction of the Special Committee, has involved the origination of residential real estate loans under the Advantage Loan Programnon-insider victim shareholders; further enhance its compliance program and ~~related matters. The Internal Review has indicated that certain employees engaged in misconduct in connection with the origination of a significant number of such loans, including~~internal controls with respect to ~~verification of income~~securities law compliance; and ~~employment,~~provide periodic reports to the ~~amount of income reported~~DOJ with respect to compliance matters. No criminal fine was imposed. The Company’s obligations under the Plea Agreement are generally effective for ~~borrowers, reliance on third parties, and related documentation. As a result,~~three years. This resolution releases the Company, ~~permanently discontinued~~as well as the ~~Advantage Loan Program,~~Bank, from further prosecution for securities fraud and ~~a significant number of officers and employees have been terminated or resigned, including the top loan producers within~~underlying mortgage fraud in the Advantage Loan Program. ~~While~~At a hearing held on April 19, 2023, the ~~Internal Review is substantially complete,~~District Court for the ~~Company expects it to remain open during~~Eastern District of Michigan preliminarily accepted the ~~pendency of the government investigations discussed below, and it is possible additional work will be required in connection with the Internal Review.~~

~~On September 27, 2022, the Company entered into a Consent Order with the OCC, resolving the OCC Investigation, which had been ongoing for almost three years. Pursuant~~Plea Agreement, subject to the ~~Consent Order, the Bank has paid a civil money penalty of $6 million, which has been applied against the Company’s previously accrued liability for contingent losses.~~final court hearing. The ~~Consent Order represents a full and~~Plea Agreement remains subject to final settlement of the OCC Investigation with respect to the Bank. Concurrent with the Consent Order, the OCC notified the Bank that the OCC Agreement entered into on June 18, 2019 was terminated, which primarily related to certain aspects of the Bank’s BSA/AML compliance program and the Bank’s credit administration.court approval.

The Bank is currently responding to grand jury subpoenas from the DOJ and remains under a formal investigation by the SEC, both of which are related to the Advantage Loan Program and the related disclosures of that program in the Company’s federal securities law filings.For additional information regarding these matters, see “Part II, Item 1. Legal Proceedings.”

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Overview of Quarterly Performance

The ~~Company incurred significant legal, consulting and other third-party expenses during the third~~first quarter of ~~2022, as it has over~~2023 continues to reflect our remediation and repositioning. The resolutions of the past two years, in connection with the Internal Review, the government investigations, compliance with the OCC Agreement, defending litigation related to the Advantage Loan Program and reimbursing current and former officers and directors for their out-of-pocket legal costs in connection with the government investigations.

~~On October 7, 2022, we commenced an action against Scott Seligman, the Bank’s founder and controlling shareholder, and other nominal defendants, styled~~ ~~Sterling Bank and Trust, F.S.B. and Sterling Bancorp, Inc. vs. Scott Seligman, et al.,~~ No. 2:22-cv-12398-SFC-DRG (E.D. Mich.), seeking compensatory and other damages, disgorgement of certain monies and injunctive relief. There is no assurance that we will be successful in any final adjudication of this case, that any remedy would be adequate in the event we are successful in the adjudication or that we would achieve an acceptable settlement. See “Part II, Item 1. Legal Proceedings” for additional detail regarding this matter.

~~On November 3, 2022, Mr. Seligman commenced an action against the Company in the Oakland County Business Court styled~~ ~~Scott J. Seligman v. Sterling Bancorp, Inc.~~, No. 2:22-cv-12660-MAG-DRG (E.D. Mich.). The complaint alleges that Mr. Seligman is entitled to the advancement and reimbursement of all attorneys’ fees and other expenses incurred in connection with the complaint filed against him by the Company and the Bank as well as certain government investigations involving the Company and the Bank, including investigationsinvestigation by the DOJ ~~and OCC related to~~during the ~~Advantage Loan Program. The Company intends to vigorously defend this and any related actions. See “Part II, Item 1. Legal Proceedings” for additional detail regarding this matter.~~

~~Overview of Quarterly Performance~~

Net income was $1.2 million for the quarter ended September 30, 2022 compared to $9.6 million for the quarter ended September 30, 2021. Our net interest margin continued to improve, though our loan portfolio continued to decline which reduced our net interest income compared to the thirdfirst quarter of ~~2021. Also contributing to~~2023 and of the ~~decrease in net income for~~OCC investigation during the ~~third quarter~~second half of 2022 as compared to the third quarter of 2021, the 2021 period includes a refundable tax credit against certain employment taxes, also known as the ERC tax credit under the CARES Act. The Company recognized $6.5 million of ERC, resulting in a net reduction of salaries and employee benefits expense for the third quarter of 2021. Also, the 2021 period includes a gain of $1.4 million on the saleremove much of the ~~Bellevue, Washington branch~~uncertainty that has existed since 2020. Furthermore, despite the uncertainty in ~~July 2021. We experienced a recovery for loan losses for~~ the ~~third quarter of 2022 compared~~banking industry resulting from several recent bank failures, we continue to ~~the provision for loan losses for the third quarter of 2021 as our asset~~maintain strong capital levels, liquidity and credit quality improved during the third quarter of 2022; as our nonperforming assets declined to $42.2 million at September 30, 2022. In addition, the recovery for loan losses also reflects the continued decline of our loan portfolio.

We also completed a sale of higher risk commercial real estate loans with unpaid principal balances of $21.9 million. Prior to the sale, we charged off $4.1 million of its recorded investment. We received net cash proceeds of $17.8 million on the sale of the commercial real estate loans. This sale further improved our credit metrics.

We ~~continued to experience significant repayments in excess~~had a net loss of our loan originations contributing to our excess liquidity. This resulted in the continued overall decline of our consolidated balance sheet, with total assets declining from $2.9 billion at December 31, 2021 to $2.4 billion at September 30, 2022.

~~During~~$(0.5) million for the three months ended ~~September 30,~~March 31, 2023, compared to net income of $5.3 million for the three months ended March 31, 2022. This decrease was primarily due to an increase in interest expense on our average balance of interest-bearing deposits, as the average interest rate paid increased 166 basis points, while the average yield on interest-earning assets increased 133 basis points. The changes in our average interest rate paid and average yield are primarily driven by the Federal Open Market Committee’s increase of the federal funds rate range from 0.00% - 0.25% in March 2022 to 4.75% - 5.00% by March 31, 2023. Non-interest expenses remained high during the first quarter of 2023, reflecting the continued high level of professional fees related to the DOJ investigation and resolution, as well as the costs of our ongoing cooperation as both the OCC and DOJ continue to investigate certain individuals.

In addition, we ~~repurchased pools~~continued to improve our credit metrics. During the first quarter of ~~Advantage Loan Program~~2023, we reclassified $41.1 million of nonaccrual and delinquent residential loans ~~with total outstanding unpaid principal balances of $35.2 million. In connection with this repurchase,~~as held for sale and recorded a $6.5 million charge off against the ~~Company recognized a loss of $1.6 million~~allowance for credit losses to ~~record the~~reflect their estimated fair value ~~discount~~of $34.6 million. This reclassification reduces our nonperforming loans held for investment to a negligible amount and our total nonperforming assets to $26.3 million, which is comprised almost entirely of nonaccrual residential loans held for sale.

In March 2023, two banks experienced significant deposit losses and ultimately failed. This caused investor and customer confidence in ~~other non-interest expense~~the banking sector to wane. However, our total deposits remained relatively stable in the three months ended March 31, 2023 and, ~~a disposition~~in particular, during the month of ~~$0.5~~March, only decreasing $32.2 million, ~~of mortgage servicing rights,~~or 2%, from December 31, 2022 to $1.9 billion at March 31, 2023. Our current strategy remains to offer competitive interest rates on our deposit products to maintain our existing customer deposit base and ~~charged a loss of $0.9 million against the mortgage repurchase liability.~~help manage our liquidity.

Our regulatory capital ratios remained well above the levels required to be considered well capitalized for regulatory purposes.

On September 29, 2022, the court granted final approval of the Settlement in connection with the shareholder derivative action that was filed against us and certain of our current and former directors, styled ~~Cahnman v. Allen~~, et al., No. 2:22-cv-10124 (E.D. Mich.). The Company entered into the Settlement on January 21, 2022, pursuant to which the Company agreed to adopt and implement the Corporate Governance Enhancements, many of which were already in progress and have now been completed, and pay attorneys’ fees and expenses in the amount of $650 thousand in exchange for the release of all defendants from alleged claims therein. Reimbursement of the $650 thousand due under the Settlement was paid in October 2022 by the Company’s insurance carriers under applicable insurance policies.

~~Table of Contents~~

During the second quarter of 2022, we outsourced our residential loan origination function to Promontory MortgagePath, which provides community banks with an outsourced residential lending service for mortgage loan production. In November 2022, Promontory MortgagePath advised the Company of its intent to cease conducting business. Promontory MortgagePath and the Company will continue to accept loan applications through November 30, 2022, and will use commercially reasonable efforts to evaluate and originate pending loan applications by February 28, 2023. At that time, we will suspend the origination of residential loans pending further evaluation of our alternatives, which may include discontinuing the origination of residential loans. However, we may purchase residential loans from the secondary market in the future.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP and with general practices within the financial services industry. Application of these principles requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under current circumstances. These assumptions form the basis for our judgments about the carrying values of assets and liabilities that are not readily available from independent, objective sources. We evaluate our estimates on an ongoing basis. Use of alternative assumptions may have resulted in significantly different estimates. Actual results may differ from these estimates.

During the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, there were no significant changes to our accounting policies that we believe are critical to an understanding of our financial condition and results of operations, which critical accounting policies are disclosed in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s ~~2021~~2022 Form ~~10-K.~~

~~Financial Condition~~

The Company’s total assets were $2.4 billion at September 30, 2022 compared to $2.9 billion at December 31, 2021. The investment securities portfolio increased $39.3 million, or 13%, to $353.2 million at September 30, 2022 from $313.9 million at December 31, 2021, which is attributable to purchases10-K, except we have updated our discussion of ~~additional investments totaling $147.5 million, partially offset by maturing investments, totaling $80.6 million and unrealized losses of $19.8 million. Total loans, net of~~our accounting policy that we consider as critical for the allowance for ~~loan~~credit losses ~~decreased to $1.6 billion at September 30, 2022 compared to $2.0 billion at December 31, 2021. The Company originated loans held for investment consisting~~below as a result of ~~residential real estate loans~~our adoption of ~~$55.0 million, commercial real estate loans~~ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of $51.7 million and commercial and industrial loans of $1.1 million, and originated residential real estate loans held for sale of $1.8 million. The Company repurchased Advantage Loan Program loans with an aggregate principal balance of $65.6 million and sold higher risk commercial real estate loans with a carrying value of $67.4 million. We received loan payoffs of $442.9 million during the nine months ended September 30, 2022. The significant loan repayments experienced during the nine months ended September 30, 2022 continued the trend over the past several years in our Advantage Loan Program portfolio and, along with the decision to cease origination of construction loans, were the primary driver of the continued reduction of the consolidated balance sheet. Our loan production also continued to be adversely impacted by the termination of the Advantage Loan Program and the inability over the last several years to create and introduce new loan products. Most of the excess liquidity from the loan repayments was used to fund maturing time deposits that generally carried higher interest rates. Total deposits decreased $310.7 million, or 14%, to $2.0 billion at September 30, 2022. In June 2022, with increasing interest rates, our offeringsCredit Losses on time deposits returned to more competitive rates, partially offsetting the decline experienced in the first half of 2022. FHLB borrowings decreased from $150.0 million at December 31, 2021 to $50.0 million at September 30, 2022, which is attributable to the repayment of $100.0 million in FHLB advances during the second quarter of 2022.Financial Instruments,” on January 1, 2023.

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Allowance for Credit Losses

The allowance for credit losses is based on the accuracy of credit risk ratings on individual borrowers, the use of estimates and significant judgment as to the amount and timing of expected future cash flows on nonaccrual loans, significant reliance on estimated loss rates on portfolios and consideration of our evaluation of macro-economic factors and trends. While our methodology in establishing the allowance for credit losses attributes portions of the allowance for credit losses to the residential and commercial real estate, and other consumer portfolio segments, the entire allowance for credit losses is available to absorb credit losses in the total loan portfolio.

The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of held for investment loans to present the net amount expected to be collected from the loans. The allowance for credit losses is adjusted through a charge (recovery) to provision for (recovery of) credit losses. Changes in the allowance for credit losses and, therefore, in the related provision can materially affect net income. In applying the judgment and review required to determine the allowance for credit losses, management considers changes in economic conditions, customer behavior, and collateral value, among other factors. From time to time, economic factors or business decisions may affect the composition and mix of the loan portfolio, causing management to increase or decrease the allowance for credit losses. When the Company determines that all or a portion of a loan is uncollectible, the appropriate amount is written off, and the allowance for credit losses is reduced by the same amount. The Company applies judgment to determine when a loan is deemed uncollectible; however, generally a loan will be considered uncollectible no later than when all efforts at collection have been exhausted. Subsequent recoveries, if any, are credited to the allowance for credit losses when received.

The Company estimates the allowance for credit losses in accordance with the CECL methodology for loans measured at amortized cost. The allowance for credit losses is established based upon the Company's current estimate of expected lifetime credit losses. Arriving at an appropriate amount of allowance for credit losses involves a high degree of judgment. The Company estimates credit losses on a collective basis for loans sharing similar risk characteristics using a quantitative model combined with an assessment of certain qualitative factors designed to address forecast risk and model risk inherent in the quantitative model output. Management's judgment is required for the selection and application of these factors which are derived from historical loss experience as well as assumptions surrounding expected future losses and economic forecasts. Loans that no longer share similar risk characteristics with any portfolio segment are subject to individual assessment and are removed from the collectively assessed segments. Management performs periodic sensitivity and stress testing using available economic forecasts in order to evaluate the adequacy of the allowance for credit losses under varying scenarios.

The Company’s methodologies for estimating the allowance for credit losses considers available relevant information about the collectability of cash flows, including past events, current conditions, and reasonable and supportable forecasts. For additional discussion of the Company’s methodology in determining the allowance for credit losses, see Note 3 – Summary of Significant Accounting Policies, Allowance for Credit Losses - Loans to our condensed consolidated financial statements included in Item 1. Financial Statements.

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Balance Sheet and Capital Analysis

Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.


	At September 30, 2022				At December 31, 2021				At March 31, 2023				At December 31, 2022
	Amount		%		Amount		%		Amount		%		Amount		%

	(Dollars in thousands)								(Dollars in thousands)
Real estate:
Residential real estate	$	1,430,472	85	%	$	1,704,231	85	%	$	1,289,554	83	%	$	1,391,276	84	%
Commercial real estate		199,446	12	%		201,240	10	%		224,792	15	%		221,669	13	%
Construction		50,320	3	%		106,759	5	%		36,255	2	%		44,503	3	%
Total real estate		1,680,238	100	%		2,012,230	100	%		1,550,601	100	%		1,657,448	100	%
Commercial lines of credit		1,389	—	%		363	—	%
Commercial and industrial										1,368	—	%		1,396	—	%
Other consumer		1	—	%		221	—	%		77	—	%		5	—	%
Total loans		1,681,628	100	%		2,012,814	100	%		1,552,046	100	%		1,658,849	100	%
Less: allowance for loan losses		(45,362)				(56,548)
Less: allowance for credit losses										(38,565)				(45,464)
Loans, net	$	1,636,266			$	1,956,266			$	1,513,481			$	1,613,385

Our loan portfolio consists primarily of residential real estate loans, which are collateralized by real estate. At March 31, 2023 and December 31, 2022, residential real estate loans accounted for 83% and 84%, respectively, of total gross loans held for investment. Most of these residential loans and other commercial loans have been made to individuals and businesses in the state of California, specifically in the San Francisco and Los Angeles areas. As of March 31, 2023, approximately 81% of our loan portfolio was based in California with 54% and 27% in the San Francisco and Los Angeles areas, respectively.

Total gross loans held for investment of $1.6 billion at March 31, 2023 declined $106.8 million, or 6%, from $1.7 billion at December 31, 2022. The decline in our loan portfolio from December 31, 2022 was primarily attributable to repayments on loans, which continued to outpace our loan production. Also, contributing to the decline in loans held for investment, during the three months ended March 31, 2023, loans with an amortized cost of $41.1 million were transferred from loans held for investment to loans held for sale due to management’s change in intent and decision to sell the loans. On the transfer, the Company recorded a $6.5 million charge off applied against the allowance for credit losses to reflect these loans at their estimated fair value. Also, during the same period, residential real estate loans with an amortized cost of $3.9 million were transferred from loans held for sale to loans held for investment.

Our overall decline in loan production reflects a number of factors, including our decision to stop originating construction loans and the prevailing rising interest rate and inflationary environment of 2022, which practically limited the opportunities we had for meaningful loan production. Also, in May 2022, we outsourced our residential loan origination function to a third-party vendor. In November 2022, we were notified of our residential loan originator plans to exit the business. We used commercially reasonable efforts to evaluate and originate pending loan applications through February 28, 2023. The Company is in the process of finding a new mortgage fulfillment provider. Until such time as we enter into an agreement with a replacement provider, we have suspended the origination of residential loans and pending further evaluation of our alternatives, we may discontinue the origination of residential mortgage loans. In the meantime, we may look to purchase residential loans from the secondary market or pursue other similar alternatives. Finally, our loan production was impacted by our decision to delay introducing new loan products until we had resolved the governmental investigations.

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Maturities and Sensitivities of Loans to Changes in Interest Rates. The Company’s loan portfolio includes adjustable-rate loans, primarily tied to Prime, LIBOR, U.S. Treasuries and Secured Overnight Financing Rate (“SOFR”), and fixed-rate loans, for which the interest rate does not change through the life of the loan. The following table sets forth ~~our fixed and adjustable-rate loans~~the recorded investment by interest rate type in our loan portfolio at ~~September 30, 2022:~~March 31, 2023:


	Fixed		Adjustable		Total		Adjustable Rate
March 31, 2023							Prime			LIBOR			Treasury			SOFR			Total			Fixed Rate			Total

	(In thousands)						(In thousands)
Real estate:
Residential real estate	$	19,314	$	1,411,158	$	1,430,472	$	9,245		$	898,532		$	332,091		$	29,995		$	1,269,863		$	19,691		$	1,289,554
Commercial real estate		81,333		118,113		199,446		—			—			121,808			21,488			143,296			81,496			224,792
Construction		—		50,320		50,320		36,255			—			—			—			36,255			—			36,255
Commercial lines of credit		1,213		176		1,389
Commercial and industrial								135			—			36			—			171			1,197			1,368
Other consumer		1		—		1		—			—			—			—			—			77			77
Total	$	101,861	$	1,579,767	$	1,681,628	$	45,635		$	898,532		$	453,935		$	51,483		$	1,449,585		$	102,461		$	1,552,046

% by rate type at March 31, 2023								3	%		58	%		29	%		3	%		93	%		7	%		100	%

~~The table set forth below contains the repricing dates of adjustable-rate loans included within~~Across our loan portfolio, asour adjustable-rate loans are typically based on a 30-year amortization schedule and generally interest rates and payments adjust annually after a one-, three-, five- or seven-year initial fixed period. Our prime-based loans, which typically are construction loans and home equity loans, adjust to a rate equal to 25 to 238 basis points above Prime and have maturities of ~~September 30, 2022:~~

Residential

Commercial



Commercial

Other



Real Estate

Real Estate

Construction

Lines of Credit

Consumer

Total

(In thousands)
Amounts to adjust in:












6 months or less

$
430,218

$
1,601

$
50,320

$
176

$
—

$
482,315
After 6 months through 12 months

469,771

5,359

—

—

—

475,130
After 12 months through 24 months

131,858

2,088

—

—

—

133,946
After 24 months through 36 months

121,124

54,242

—

—

—

175,366
After 36 months through 60 months

187,019

54,823

—

—

—

241,842
After 60 months

71,168

—

—

—

—

71,168
Fixed to maturity

19,314

81,333

—

1,213

1

101,861
Total

$
1,430,472

$
199,446

$
50,320

$
1,389

$
1

$
1,681,628

up to 36 months. Interest rates on our adjustable-rate LIBOR-based loans originated prior to March 8, 2021 adjust to a rate typically equal to 350 to 450 basis points above the one-year LIBOR, and those that were originated after March 8, 2021 adjust to a rate based on the U.S. Treasury one-year constant maturity Treasury rate. At ~~September 30, 2022,~~March 31, 2023, we have adjustable-rate loans totaling ~~$1.1 billion,~~$898.5 million, or ~~63%~~58%, inof our loan portfolio that are LIBOR-indexed currently and will reprice to an interest rate based on LIBOR, until LIBOR is no longer available as a reference rate. Upon the cessation of the publication of LIBOR rate, currently expected on June 30, 2023, we have determined that our LIBOR-based loans will convert to rates based on SOFR.

At ~~September 30,~~March 31, 2023, our SOFR-based loans consist of residential mortgage loans that were purchased in October 2022 ~~$123.8~~and an origination of a large commercial real estate loan.

The table set forth below contains the repricing dates of adjustable-rate loans included within our loan portfolio as of March 31, 2023:


	Residential		Commercial				Commercial		Other
March 31, 2023	Real Estate		Real Estate		Construction		and Industrial		Consumer		Total

	(In thousands)
Amounts to adjust in:
6 months or less	$	406,972	$	26,790	$	36,255	$	171	$	—	$	470,188
After 6 months through 12 months		399,905		994		—		—		—		400,899
After 12 months through 24 months		113,802		50,320		—		—		—		164,122
After 24 months through 36 months		110,242		4,450		—		—		—		114,692
After 36 months through 60 months		149,940		57,503		—		—		—		207,443
After 60 months		89,002		3,239		—		—		—		92,241
Fixed to maturity		19,691		81,496		—		1,197		77		102,461
Total	$	1,289,554	$	224,792	$	36,255	$	1,368	$	77	$	1,552,046

At March 31, 2023, $122.1 million, or 8%, of our adjustable interest rate loans were at their interest rate floor. See ~~Part I,~~ Item 3. Quantitative and Qualitative Disclosures about Market Risk relating to the discontinuance of LIBOR and ~~the expected conversion of~~ our LIBOR based loans convert to ~~Secured Overnight Financing Rate (“SOFR”)-based~~SOFR-based rates.

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Asset Quality

Nonperforming Assets.Nonperforming assets include nonaccrual loans, loans that are past due 90 days or more ~~days past due~~ and still accruing interest ~~troubled debt restructurings~~ and nonaccrual loans held for sale.

We generally place a loan on nonaccrual status when management believes that collection of principal or interest has become doubtful or when a loan becomes 90 days past due as to principal or interest. For nonaccrual loans, interest previously accrued but not collected is reversed and charged against income at the time a loan is placed on nonaccrual ~~status (i.e., when a loan is 90 days past due or earlier if conditions warrant).~~status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Troubled debt restructurings are modified loans in which a borrower demonstrated financial difficulties and for which a concession has been granted. At September 30, 2022 and December 31, 2021, we had troubled debt restructurings totaling $2.6 million and $18.4 million, respectively, a decrease which primarily reflects loans that were paid in full of $15.6 million. There were no troubled debt restructurings on nonaccrual status at September 30, 2022. We had troubled debt restructurings on nonaccrual status of $15.8 million at December 31, 2021 included in the nonaccrual loan categories in the following table. See Note 4—Loans—Troubled Debt Restructurings to our condensed consolidated financial statements for additional information about our troubled debt restructurings.

The following table sets forth information regarding our nonperforming assets at the dates indicated.


	At September 30,			At December 31,			At March 31,			At December 31,
	2022			2021			2023			2022

	(Dollars in thousands)						(Dollars in thousands)
Nonaccrual loans⁽¹⁾:
Residential real estate	$	35,843		$	45,675		$	—		$	33,690
Commercial real estate		—			4,441
Construction		—			12,499
Total nonaccrual loans⁽²⁾		35,843			62,615			—			33,690
Loans past due 90 days or more and still accruing interest		36			39			34			35
Nonperforming Loans		35,879			62,654
Other troubled debt restructurings⁽³⁾		2,643			2,664			—			2,637
Nonaccrual loans held for sale		3,657			18,026			26,270			1,942
Total nonperforming assets	$	42,179		$	83,344		$	26,304		$	38,304
Total loans	$	1,681,628		$	2,012,814
Total loans⁽¹⁾							$	1,552,046		$	1,658,849
Total assets	$	2,447,904		$	2,876,830		$	2,411,548		$	2,444,735
Total nonaccrual loans to total loans⁽²⁾		2.13	%		3.11	%		—			2.03	%
Total nonperforming assets to total assets		1.72	%		2.90	%		1.09	%		1.57	%

(1)	Loans are classified as held for investment and are presented before the allowance for ~~loan~~credit losses.

(2)

Total nonaccrual loans exclude nonaccrual loans held for ~~sale but include troubled debt restructurings on nonaccrual status.~~sale. If nonaccrual loans held for sale ~~were~~are included, the ratio of total nonaccrual loans to total gross loans would ~~have been 2.34%~~be 1.65% and ~~3.88%~~2.14% at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

(3)

Other troubled debt restructurings at December 31, 2022 exclude those loans presented above as nonaccrual or past due 90 days or more and still accruing interest. Effective January 1, 2023, loan modifications involving borrowers experiencing financial difficulty are evaluated under the new credit loss model. There were no such loan modifications during the three months ended March 31, 2023.

As of ~~September 30, 2022,~~March 31, 2023, nonperforming assets totaled ~~$42.2~~$26.3 million, a decrease of ~~$41.2~~$12.0 million from $38.3 million at December 31, ~~2021.~~2022. This decrease is primarily attributable to the ~~decline in nonaccrual loans. Our ratio~~reclassification of $24.4 million of nonaccrual residential loans ~~to total loans decreased~~ from ~~3.11% at December 31, 2021~~held for investment to ~~2.13% at September 30, 2022. This decrease reflects both nonaccrual loans being paid in full and loans returning to accrual status and the sale of the commercial real estate loan portfolio~~ held for sale, ~~during~~ the ~~first quarter~~repayment in full of ~~2022.~~$3.1 million of nonaccrual residential loans and the return of $5.5 million of nonaccrual residential loans to accrual status. Additionally, on the reclassification, nonaccrual residential real estate loans totaling $4.2 million were charged off. Partially offsetting these decreases, loans totaling $4.3 million were added to nonaccrual status and were included in the loans classified as held for sale. When including nonaccrual loans held for sale, the ratio of nonaccrual loans to total gross loans decreased from ~~3.88%~~2.14% at December 31, ~~2021~~2022 to ~~2.34%~~1.65% at ~~September 30, 2022.~~March 31, 2023.

~~Nonaccrual loans totaled $35.8 million at September 30,~~During the three months ended March 31, 2023 and 2022, ~~a decrease of $26.8 million from $62.6 million at December 31, 2021. The decrease in~~the total interest income that would have been recorded if the nonaccrual loans is primarily due to loan payoffs of $4.4 million of commercial real estate and $12.5 million of construction loans. Nonaccrual residential real estate loans totaled $35.8 million at September 30, 2022, a decrease of $9.8 million from $45.7 million at December 31, 2021. The remaining declinehad been current in ~~nonaccrual loans is due to nonaccrual residential real estate loans totaling $8.7 million that were paid in full and loans totaling $10.4 million that returned to accrual status, which~~accordance with their original terms was ~~partially offset by loans totaling $12.4 million that were added to nonaccrual status.~~

~~Table of Contents~~

Nonaccrual loans held for sale totaled $3.7 million at September 30, 2022, a decrease of $14.4 million from December 31, 2021. The decrease in nonaccrual loans held for sale primarily is due to the sale of commercial real estate loans totaling $9.4$0.5 million and ~~residential real estate loans totaling $3.9~~$0.6 million, ~~that were paid in full.~~respectively. The commercial real estate loans were sold as part of the larger sale of commercial real estate loans to a third-party purchaser in February 2022 for cash proceeds of $49.6 million. These loans were secured primarily by single-room occupancy (SRO) properties.Company does not record interest income on nonaccrual loans.

Delinquent ~~Loans.~~Loans. The following tables set forth our loan delinquencies, including nonaccrual loans, by type and amount at the dates ~~indicated.~~indicated.


	September 30, 2022						December 31, 2021						March 31, 2023						December 31, 2022
	30 - 59		60 - 89		90 Days		30 - 59		60 - 89		90 Days		30 - 59		60 - 89		90 Days		30 - 59		60 - 89		90 Days
	Days		Days		or More		Days		Days		or More		Days		Days		or More		Days		Days		or More
	Past Due		Past Due		Past Due		Past Due		Past Due		Past Due		Past Due		Past Due		Past Due		Past Due		Past Due		Past Due

	(In thousands)												(In thousands)
Residential real estate	$	20,839	$	3,284	$	35,879	$	24,151	$	3,425	$	45,714	$	6,017	$	—	$	34	$	17,980	$	5,337	$	33,725
Commercial real estate		—		—		—		—		—		4,441
Construction		—		—		—		10,500		—		12,499
Total delinquent loans	$	20,839	$	3,284	$	35,879	$	34,651	$	3,425	$	62,654

Table of Contents

Total loans 90 days or more past due ~~including nonaccrual loans,~~ decreased ~~$26.8 million, or 43%,~~ from ~~$62.7~~$33.7 million at December 31, ~~2021~~2022 to ~~$35.9 million~~$34 thousand at ~~September 30, 2022.~~March 31, 2023. This decrease was primarily attributable to the change in nonaccrual loans ~~that were paid~~discussed in full totaling $25.6 million and loans reclassified from delinquent to current status totaling $10.4 million, which was partially offset by the addition of delinquent loans totaling $12.4 million during nine months ended September 30, 2022.“—Nonperforming Assets” above.

Classified Loans. We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The four risk categories utilized are Pass, Special Mention, Substandard and Doubtful. Loans in the Pass category are considered to be of satisfactory quality, while the remaining three categories indicate varying levels of credit risk. See Note 4—5—Loans—Credit Quality to our condensed consolidated financial statements for additional information about our risk categories.

~~Table of Contents~~

Loans classified as Special Mention, Substandard and Doubtful were as follows at the dates indicated:


	September 30, 2022									December 31, 2021									March 31, 2023									December 31, 2022
	Loans Held for			Loans Held for						Loans Held for			Loans Held for						Loans Held for			Loans Held						Loans Held for			Loans Held
	Investment			Sale			Total			Investment			Sale			Total			Investment			for Sale			Total			Investment			for Sale			Total

	(In thousands)																		(Dollars in thousands)
Special Mention:
Commercial real estate	$	31,212		$	1,554		$	32,766		$	10,524		$	16,125		$	26,649		$	34,280		$	1,534		$	35,814		$	32,910		$	1,544		$	34,454
Construction		4,648			—			4,648			17,226			—			17,226			3,412			—			3,412			4,650			—			4,650
Commercial lines of credit		—			—			—			11			—			11
Total Special Mention		35,860			1,554			37,414			27,761			16,125			43,886			37,692			1,534			39,226			37,560			1,544			39,104
Substandard:
Residential real estate		35,879			3,657			39,536			45,485			8,671			54,156			34			26,270			26,304			33,725			1,942			35,667
Commercial real estate		1,548			—			1,548			21,393			33,230			54,623			—			—			—			1,539			—			1,539
Construction		8,055			—			8,055			16,348			—			16,348			6,151			—			6,151			8,484			—			8,484
Total Substandard		45,482			3,657			49,139			83,226			41,901			125,127			6,185			26,270			32,455			43,748			1,942			45,690
Doubtful:
Residential real estate		—			—			—			233			—			233
Construction		—			—			—			5,931			—			5,931
Total Doubtful		—			—			—			6,164			—			6,164
Total	$	81,342		$	5,211		$	86,553		$	117,151		$	58,026		$	175,177		$	43,877		$	27,804		$	71,681		$	81,308		$	3,486		$	84,794

Total Loans	$	1,681,628		$	8,833		$	1,690,461		$	2,012,814		$	64,987		$	2,077,801		$	1,552,046		$	37,979		$	1,590,025		$	1,658,849		$	7,725		$	1,666,574
Classified assets to total loans		5	%		59	%		5	%		6	%		89	%		8	%		3	%		73	%		5	%		5	%		45	%		5	%

~~Total Special Mention, Substandard~~Allowance for Credit Losses

We adopted ASU 2016-13 on January 1, 2023 on a modified retrospective basis. This guidance changes the accounting for credit losses from an incurred loss model, which estimates a loss allowance based on current known and ~~Doubtful loans were $86.6 million, or 5% of total gross loans, at September 30, 2022, compared~~inherent losses within the loan portfolio to ~~$175.2 million, or 8% of total gross loans, at December 31, 2021. All~~an expected loss model, which estimates a credit loss based on losses expected to be recorded over the lifetime of the ~~three~~ loan ~~classifications, noted above, decreased from December 31, 2021.~~

portfolio. We recorded a pre-tax cumulative effect adjustment to decrease the allowance for credit losses by $1.7 million and we established a liability for unfunded commitments of $0.6 million. The ~~increase of $8.1 million~~decrease in ~~Special Mention loans held~~the allowance for ~~investment~~credit losses was primarily ~~attributable~~due to ~~loans that were downgraded totaling $30.6 million, loans that were upgraded from Substandard totaling $10.3 million,~~our construction portfolio which has short contractual maturities and was partially offset by an increase in the ~~upgrade of loans totaling $12.6 million, loans that were paid~~allowance for credit losses in ~~full totaling $11.8 million,~~both our residential real estate and commercial real estate ~~loans that were sold totaling $8.2 million. The decrease~~portfolios which have longer contractual maturities.

Based on our evaluation of $37.6 million in Substandard loans held for investment was primarily attributable to loans that were paid in full totaling $19.8 million, loans that were upgraded totaling $18.9 million, and commercial real estate loans that were sold totaling $10.1 million, which was partially offset by loans downgraded totaling $12.4 million. The decrease of $6.2 million in Doubtful loans was related to loans that were paid in full.

~~The large decrease in classified loans held~~our available for sale is primarily due to the sale of substantially all of our commercial real estate portfolio held for sale during the first quarter of 2022. The sale of this pool of loans contributed to the overall improvement of our credit metrics.

~~Impaired Loans.~~ ~~A loan is considered impaired when, based on current information and events, it is probable that~~debt securities, we ~~will be unable to collect all amounts due according to the contractual terms of the loan agreement. If a loan is impaired, a portion of the~~did not record an allowance for ~~loan~~credit losses is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral or operations of collateral.on these securities, upon adoption. See Note ~~4—Loans~~4 to our condensed consolidated financial statements included in Item 1. Financial Statements.

See “Critical Accounting Policies and Estimates – Allowance for ~~tables presenting~~Credit Losses” for additional ~~data regarding the~~discussion of our allowance for ~~loan~~credit losses ~~and impaired loans.~~accounting policy.

At September 30, 2022 and December 31, 2021, we had impaired loans with a total recorded investment of $2.6 million and $19.9 million, respectively. Total impaired loans decreased $17.2 million, or 87%, from December 31, 2021 to September 30, 2022, primarily attributable to construction loans that were paid in full totaling $12.4 million and a commercial real estate loan that was paid in full totaling $4.4 million.

4647

Table of Contents

~~Allowance for Loan Losses~~

~~The~~Prior to the adoption of CECL, the allowance for loan losses iswas maintained at levels considered adequate by management to provide for probable loan losses inherent in the loan portfolio as of the condensed consolidated balance sheet reporting dates. The allowance for loan losses iswas based on management’s assessment of various quantitative and qualitative factors affecting the loan portfolio, including portfolio composition, net ~~charge offs,~~charge-offs, delinquent and nonaccrual loans, foreclosures, Bank-specific factors (e.g., staff experience, underwriting guidelines etc.), national and local business conditions, historical loss experience, an overall evaluation of the quality of the underlying collateral and other external factors. Certain qualitative components within our allowance for loan losses methodology took on increased significance in prior periods, and to a lesser extent in the most recent period, as a result of the economic impact of the COVID-19 pandemic. These qualitative components ~~include~~included unemployment, commercial property vacancy rates, uncertainty in property values and deterioration in the overall macro-economic environment.

~~Table of Contents~~

The following table ~~sets forth~~presents the activity in ~~our~~the allowance for ~~loan~~credit losses by portfolio segment for the three months ended March 31, 2023:


	Residential		Commercial				Commercial		Other
Three Months Ended March 31, 2023	Real Estate		Real Estate		Construction		and Industrial		Consumer		Total

	(Dollars in thousands)
Allowance for credit losses:
Balance at the beginning of the period	$	27,951	$	11,694	$	5,781	$	38	$	—	$	45,464
Adoption of ASU 2016-13		865		1,151		(3,633)		(34)		—		(1,651)
Adoption of ASU 2022-02		(11)		—		391		—		—		380
Provision for (recovery of) for credit losses		(1,889)		3,217		(546)		2		—		784
Charge offs		(6,478)		—		—		—		—		(6,478)
Recoveries		60		5		1		—		—		66
Total ending balance	$	20,498	$	16,067	$	1,994	$	6	$	—	$	38,565

The following table presents the activity in the allowance for credit losses for the ~~periods indicated (dollars in thousands):~~three months ended March 31, 2022, as determined accordance with ASC 310, Receivables, prior to the adoption of ASU 2016-13:

Commercial

Residential

Commercial

Lines of

Other

Three Months Ended September 30, 2022

Real Estate

Real Estate

Construction

Credit

Consumer

Total

Allowance for loan losses:











Beginning balance

$
29,982

$
15,035

$
6,708

$
36

$
5

$
51,766

Provision (recovery) for loan losses

(1,841)

(209)

(2,304)

2

(5)

(4,357)

Charge offs

—

(4,064)

—

—

—

(4,064)

Recoveries

46

5

1,966

—

—

2,017

Total ending balance

$
28,187

$
10,767

$
6,370

$
38

$
—

$
45,362

Average gross loans during period

$
1,449,854

$
212,803

$
52,843

$
1,404

$
23

$
1,716,927

Net charge offs (recoveries) to average gross loans during period

—
%

1.91
%

(3.72)
%

—
%

—
%

0.12
%

Commercial




Residential

Commercial

Lines of

Other

Nine Months Ended September 30, 2022

Real Estate

Real Estate

Construction

Credit

Consumer

Total

Allowance for loan losses:













Beginning balance

$
32,202

$
12,608

$
11,730

$
8

$
—

$
56,548

Provision (recovery) for loan losses

(4,594)

2,138

(7,329)

30

—

(9,755)

Charge offs

(197)

(4,064)

—

—

—

(4,261)

Recoveries

776

85

1,969

—

—

2,830

Total ending balance

$
28,187

$
10,767

$
6,370

$
38

$
—

$
45,362

Average gross loans during period

$
1,547,432

$
214,827

$
70,027

$
707

$
40

$
1,833,033

Net charge offs (recoveries) to average gross loans during period

(0.04)
%

1.85
%

(2.81)
%

—
%

—
%

0.08
%

Commercial

Residential

Commercial

Lines of

Other

Three Months Ended September 30, 2021

Real Estate

Real Estate

Construction

Credit

Consumer

Total

Allowance for loan losses:











Beginning balance

$
33,064

$
22,491

$
15,056

$
58

$
—

$
70,669

Provision (recovery) for loan losses

109

1,486

(1,194)

(4)

—

397

Charge offs

—

—

(1,965)

—

—

(1,965)

Recoveries

530

605

2

—

—

1,137

Total ending balance

$
33,703

$
24,582

$
11,899

$
54

$
—

$
70,238

Average gross loans during period

$
1,885,269

$
285,050

$
135,292

$
1,947

$
33

$
2,307,591

Net charge offs (recoveries) to average gross loans during period

(0.03)
%

(0.21)
%

1.45
%

—
%

—
%

0.04
%


										Commercial															Commercial
	Residential			Commercial						Lines of			Other						Residential		Commercial				Lines of		Other
Nine Months Ended September 30, 2021	Real Estate			Real Estate			Construction			Credit			Consumer			Total
Three Months Ended March 31, 2022																			Real Estate		Real Estate		Construction		Credit		Consumer		Total

																			(Dollars in thousands)
Allowance for loan losses:
Beginning balance	$	32,366		$	21,942		$	17,988		$	91		$	—		$	72,387		$	32,202	$	12,608	$	11,730	$	8	$	—	$	56,548
Provision (recovery) for loan losses		16			2,004			(4,129)			(37)			—			(2,146)
Charge offs		—			—			(1,965)			—			—			(1,965)
Provision for (recovery of) for loan losses																				(2,481)		1,096		(2,902)		(2)		—		(4,289)
Recoveries		1,321			636			5			—			—			1,962			190		5		1		—		—		196
Total ending balance	$	33,703		$	24,582		$	11,899		$	54		$	—		$	70,238		$	29,911	$	13,709	$	8,829	$	6	$	—	$	52,455
Average gross loans during period	$	1,937,210		$	266,754		$	168,382		$	3,295		$	14		$	2,375,655
Net charge offs (recoveries) to average gross loans during period		(0.07)	%		(0.24)	%		1.16	%		—	%		—	%		—	%

Table of Contents

Our ~~total~~ allowance for ~~loan~~credit losses at March 31, 2023 was $38.6 million, or 2.48% of total loans held for investment, compared to $44.2 million, or 2.66% (after the adoption of ASU 2016-13), of total loans held for investment, at January 1, 2023. The allowance for credit losses decreased ~~by $11.2~~from $44.2 million ~~or 20%, from $56.5 million at December 31, 2021,~~ primarily due to the transfer of nonaccrual and delinquent residential real estate loans to held for sale, which resulted in a charge off of $6.5 million and removed all nonaccrual loans from our held for investment portfolio, and an overall reduction in our loan ~~portfolio that has resulted from~~portfolio. These decreases were partially offset by an increase in the ~~decline~~required allowance on our commercial real estate loans because of changes in our ~~loan production as a result of~~economic forecasts to reflect the ~~discontinuation of the Advantage Loan Program and the absence of new loan products, as well as improvement~~weakening in the ~~credit quality of our loan portfolio during the nine months ended September 30, 2022.~~ commercial real estate market.

Net charge offs during the first quarter of 2023 were $6.4 million compared to net recoveries of $(0.2) million for the three months ended September 30, 2022 were $2.0 million compared to $0.8 million during the comparable period of 2021. Net charge offs during the nine months ended September 30, 2022 were $1.4 million compared to $3 thousand during the comparable period in 2021.March 31, 2022. Net charge offs in the ~~three and nine months ended September 30, 2022 included $4.1~~first quarter of 2023 primarily reflects the $6.5 million in ~~write-downs~~charge offs of our recorded investment ~~in higher risk commercial real estate~~on those residential loans transferred to held infor sale during the ~~loan portfolio with an unpaid principal balance~~three months ended March 31, 2023.

See “Results of ~~$21.9 million, which we subsequently sold~~Operations—Provision for ~~net cash proceeds of $17.8 million during September 2022.~~(Recovery of) for Credit Losses” for additional information about our provision for (recovery of) for credit losses.

The following table sets forth the allowance for ~~loan~~credit losses allocated by loan category at the dates indicated. The allowance for ~~loan~~credit losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance for ~~loan~~credit losses to absorb losses in other categories.


	At September 30, 2022					At December 31, 2021					At March 31, 2023					At December 31, 2022
				Percent of					Percent of					Percent of					Percent of
				Loans in					Loans in					Loans in					Loans in
				Each					Each					Each					Each
	Allowance			Category to		Allowance			Category to		Allowance			Category to		Allowance			Category to
	for Loan			Total		for Loan			Total		for Credit			Total		for Credit			Total
	Losses			Loans		Losses			Loans		Losses			Loans		Losses			Loans

	(Dollars in thousands)										(Dollars in thousands)
Residential real estate	$	28,187		85	%	$	32,202		85	%	$	20,498		83	%	$	27,951		84	%
Commercial real estate		10,767		12	%		12,608		10	%		16,067		15	%		11,694		13	%
Construction		6,370		3	%		11,730		5	%		1,994		2	%		5,781		3	%
Commercial lines of credit		38		—	%		8		—	%
Commercial and industrial												6		—	%		38		—	%
Other consumer		—		—	%		—		—	%		—		—	%		—		—	%
Total	$	45,362		100	%	$	56,548		100	%	$	38,565		100	%	$	45,464		100	%
Nonaccrual loans⁽¹⁾	$	35,843				$	62,615				$	—		—		$	33,690		—
Nonperforming loans and troubled debt restructurings⁽²⁾	$	38,522				$	65,318				$	34		—		$	36,362		—
Total loans	$	1,681,628				$	2,012,814				$	1,552,046		—		$	1,658,849		—
Allowance for loan losses to nonaccrual loans⁽¹⁾		127	%				90	%
Allowance for loan losses to total loans		2.70	%				2.81	%
Allowance for credit losses to nonaccrual loans⁽¹⁾												—	%	—			135	%	—
Allowance for credit losses to total loans												2.48	%	—			2.74	%	—

(1)	Nonaccrual loans exclude nonaccrual loans held for ~~sale but include troubled debt restructurings on nonaccrual status.~~sale.

(2)	Nonperforming loans and troubled debt restructurings exclude nonaccrual loans and troubled debt restructurings in loans held for sale.

~~Our allowance for~~Collateral-Dependent Loans

A loan ~~losses as a percentage~~is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of ~~our loan portfolio was 2.70% and 2.81% as of September 30, 2022 and December~~the collateral. At March 31, ~~2021, respectively. In addition, our allowance for loan losses as a percentage of nonaccrual~~2023, the Company did not have any collateral-dependent loans ~~was 127% and 90% as of September 30, 2022 and December 31, 2021, respectively. This increase~~where the borrower is primarily attributable to our significant decline in nonaccrual loans. See “Results of Operations—Provision (Recovery) for Loan Losses” for additional information about our provision (recovery) for loan losses.

Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and our results of operations could be adversely affected if circumstances differ substantially from the assumptions used in determining the allowance for loan losses. Furthermore, while we believe we have established our allowance for loan losses in conformity with U.S. GAAP, there can be no assurance that regulators, in reviewing our loan portfolio, will not require us to increase our allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate. Any material increase in the allowance for loan losses may adversely affect ourexperiencing financial ~~condition and results of operations.~~difficulty.

Table of Contents

Modifications to Borrowers Experiencing Financial Difficulty

In January 2023, the Company adopted ASU 2022-02, Financial Instruments – Credit Losses (ASC 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) which eliminated the accounting guidance for troubled debt restructurings while enhancing disclosures requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. The Company adopted the provisions of ASU 2022-02 on January 1, 2023, along with its adoption of ASU 2016-13, Financial Instruments—Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments (“2016-13”) and was applied using the modified retrospective method. On the date of adoption, the Company increased its allowance for credit losses by $0.4 million, recorded a deferred income tax impact of $0.1 million and recorded a cumulative effect adjustment of $0.3 million, net of the income tax impact of $0.1 million, to decrease the opening balance of retained earnings as of January 1, 2023, for the initial application of ASU 2022-02. The cumulative effect adjustment represents the difference between the allowance previously determined under the troubled debt restructuring model and the allowance determined under the new credit loss accounting model for existing troubled debt restructuring loans on the adoption date.

Modifications to borrowers experiencing financial difficulty may include interest rate reductions, principal or interest forgiveness, forbearances, term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Historically, the Company has provided loan forbearances to residential borrowers when mandated and modified construction loans by providing term extensions. The Company did not have any loans held for investment made to borrowers experiencing financial difficulty that were modified during the three months ended March 31, 2023. The Company did not have any loans held for investment made to borrowers experiencing financial difficulty that were previously modified that subsequently defaulted during the three months ended March 31, 2023.

Investment Securities Portfolio

The following table sets forth the amortized cost and estimated fair value of our available for sale debt securities portfolio at the dates ~~indicated:~~indicated.


	At September 30,				At December 31,				At March 31,				At December 31,
	2022				2021				2023				2022
	Amortized		Fair		Amortized		Fair		Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value		Cost		Value		Cost		Value

	(In thousands)								(In thousands)
U.S. Treasury and Agency securities	$	175,433	$	167,462	$	122,291	$	122,168	$	176,318	$	170,271	$	175,878	$	168,437
Mortgage-backed securities		43,183		37,626		49,739		49,437		40,204		35,968		41,388		36,733
Collateralized mortgage obligations		158,414		143,346		137,662		136,849		148,945		136,151		153,066		138,241
Collateralized debt obligations		158		153		211		203		155		144		157		147
Total	$	377,188	$	348,587	$	309,903	$	308,657	$	365,622	$	342,534	$	370,489	$	343,558

We ~~increased~~decreased the size of our available for sale debt securities portfolio (on an amortized-cost basis) by ~~$67.3~~$4.9 million, or ~~22%~~1.3%, from December 31, ~~2021~~2022 to ~~$377.2~~$365.6 million at ~~September 30, 2022, which is attributable~~March 31, 2023. The decline in our debt securities (on an amortized cost basis) during the first quarter of 2023 was primarily due to ~~purchases~~principal receipts from our collateralized mortgage obligations and mortgage-backed securities of ~~additional~~$5.4 million. We continually evaluate our investment securities portfolio in response to established asset/liability management objectives and changing market conditions that could affect profitability and the level of ~~$147.5 million, primarily treasury securities, partially offset by maturing investments. The purchase~~interest rate risk to which we are exposed. These evaluations may cause us to change the level of funds we deploy into investment securities ~~is consistent with~~and change the ~~utilization~~composition of our ~~excess liquidity.~~investment securities portfolio.

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For available for sale debt securities in an unrealized loss position, we first assess whether we intend to sell, or it is more likely than not that we will be required to sell the security before recovery of its amortized cost. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For available for sale debt securities that do not meet the aforementioned criteria, we evaluate at the individual security level whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of income taxes.

We review the debt securities portfolio on a quarterly basis to determine the cause, magnitude and duration of declines in the fair value of each security. In estimating other-than-temporary impairment, we consider many factors including: (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions and (4) whether we have the intent to sell the security or more likely than not will be required to sell the security before its anticipated recovery. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recorded through income as an impairment. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: (1) other-than-temporary impairment related to credit loss, which must be recognized in the condensed consolidated statements of income and (2) other-than-temporary impairment related to other factors, which is recognized in other comprehensive loss. The credit loss is measured as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. The assessment of whether any other-than-temporary decline exists may involve a high degree of subjectivity and judgment and is based on the information available to management at a point in time. We evaluate debt securities for other-than-temporary impairment at least on a quarterly basis and more frequently when economic or market conditions warrant such an evaluation.

At ~~September 30, 2022,~~March 31, 2023, gross unrealized losses on debt securities totaled ~~$28.7~~$23.1 million. ~~We do not consider~~Our debt, mortgage-backed securities and the majority of the collateralized mortgage obligations are issued by the U.S. government, its agencies and government-sponsored enterprises. Management has concluded that the long history with no credit losses from issuers of U.S. government, its agencies and government-sponsored enterprises indicates an expectation that nonpayment of the amortized cost basis is zero. Our available for sale debt securities ~~to be other-than-temporarily impaired at September 30, 2022, since (i)~~are explicitly or implicitly fully guaranteed by the ~~decline in fair value of the~~U.S. government. As a result, we have not recorded an allowance for credit losses for our available for sale debt securities is attributable to changes in market value due to the current rising interest rate environment, not credit quality, (ii) we do not have the intent to sell the debt securities and (iii) it is likely that we will not be required to sell the debt securities before their anticipated recovery.at March 31, 2023.

Our equity securities consist of an investment in a qualified community reinvestment act investment fund, which is a publicly-traded mutual fund, and an investment in the common equity of Pacific Coast Banker’s Bank, a thinly traded restricted stock. At ~~September 30,~~March 31, 2023 and December 31, 2022, equity securities totaled $4.7 million and $4.6 million, respectively.

We are required to hold non-marketable equity securities, comprised of FHLB stock, as a condition of our membership in the FHLB system. Our FHLB stock is accounted for at cost, which equals par or its redemption value. At March 31, 2022 and December 31, ~~2021, equity securities totaled $4.6~~2022, we held $20.3 million ~~and $5.2 million, respectively.~~in FHLB stock.

Deposits

Deposits are the primary source of funding for the Company. We regularly review the need to adjust our deposit offering rates on various deposit products in order to maintain a stable liquidity profile and a competitive cost of funds.

~~Table~~ We obtain funds from depositors by offering a range of ~~Contents~~deposit types, including demand, savings money market and time. The following table sets forth the composition of our deposits by account type at the dates indicated.


	At March 31,		At December 31,
	2023		2022

	(In thousands)
Noninterest-bearing deposits	$	46,496	$	53,041
Money market, savings and NOW		958,165		1,039,263
Time deposits		917,161		861,733
Total deposits	$	1,921,822	$	1,954,037

Total deposits were ~~$2.0~~$1.9 billion as of ~~September 30, 2022,~~March 31, 2023, a decrease of ~~$310.7~~$32.2 million, or ~~14%~~2%, compared to ~~$2.3~~$2.0 billion at December 31, 2021. Our time deposits decreased by $134.2 million, or 15%, due to our strategy to reduce time deposits by offering time deposits at less competitive rates. In June 2022, with increasing interest rates, our offerings on time deposits returned to more competitive rates, partially offsetting the decline experienced in the first half of 2022. Our money market, savings and NOW ~~accounts~~deposits decreased by ~~$182.8~~$81.1 million, or ~~14%~~8%, and our noninterest-bearing demand deposits ~~increased $6.3~~decreased $6.5 million, or ~~10%~~12%, from December 31, ~~2021. Time~~2022. Our time deposits ~~included brokered~~increased by $55.4 million, or 6%, due to our strategy to continue to offer time deposits at competitive interest rates to maintain our existing customer deposit base and help manage our liquidity. We also experienced our existing customers shifting their deposits from money market, savings and NOW accounts to time deposits to take advantage of ~~$20.1 million at December 31, 2021.~~the higher interest rates. We had no brokered deposits at ~~September 30,~~March 31, 2023 or December 31, 2022.

We continue to focus on core deposits, which we define as all deposits except for time deposits greater than ~~$0.25 million~~$250,000 and brokered deposits. Core deposits totaled $1.7 billion, or ~~89%~~86% of total deposits, at ~~September 30, 2022~~March 31, 2023 compared to ~~$2.0~~$1.7 billion, or 88% of total deposits, at December 31, ~~2021.~~2022.

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As of March 31, 2023, we had estimated $389.1 million in uninsured deposits. Total estimated uninsured deposits were approximately 20% of total deposits at March 31, 2023. The insured deposit data does not reflect an evaluation of all of the account styling distinctions that would determine the availability of deposit insurance to individual accounts based on FDIC regulations. The portion of U.S. time deposits, by account, that exceed the FDIC insurance limit of $250,000 was $93.6 million at March 31, 2023.

Borrowings

In addition to deposits, we ~~generally~~ use short-term borrowings, such as FHLB advances and drawdowns on an ~~FHLB~~ overdraft credit line with the FHLB, as sources of funds to meet the daily liquidity needs of our customers. ~~Any~~Our short-term ~~FHLB~~ advances ~~would~~with the FHLB consist primarily of advances of funds for one- or two-week periods.

At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, outstanding FHLB borrowings totaled $50.0 ~~million and $150.0 million, respectively, and there were no amounts outstanding on lines~~million. Our FHLB borrowings consisted of ~~credit~~a long-term fixed rate advance with ~~other banks. In~~a fixed interest rate of 1.96% with a maturity date of May ~~2022, we repaid $100 million in borrowings with~~2029, although the advance is callable by the FHLB asin May 2024.

We have outstanding subordinated notes in a ~~result of a call provision that allowed the Federal Home Loan Bank to require payment. In addition, $65.0 million in~~ principal amount of ~~our Subordinated~~$65.0 million (the “Notes”) at March 31, 2023, which have a variable interest rate equal to the three-month LIBOR rate plus a margin of 5.82%. The interest rate was 10.65% at March 31, 2023. The Notes ~~due~~mature on April 15, ~~2026, remained~~2026. The Company may redeem the Notes, in whole or part, at an amount equal to 100% of the outstanding asprincipal amount being redeemed plus accrued interest. There have been no redemptions of ~~September 30, 2022 and December 31, 2021.~~the Notes.

At ~~September 30, 2022,~~March 31, 2023, we had the ability to borrow an additional ~~$374.5~~$398.4 million from the FHLB, which included an available line of credit of $20.0 million. In addition, we have standby letters of credit, totaling $2.0 million, which provide credit support for certain of our obligations related to our commitments to repurchase certain pools of Advantage Loan Program loans. We also had available credit lines with other banks totaling $80.0 million. There were no borrowings outstanding on the lines of credit with other banks.

Shareholders’ Equity

Total shareholders’ equity was ~~$329.6~~$315.5 million at ~~September 30, 2022,~~March 31, 2023, compared to ~~$343.6~~$312.6 million at December 31, ~~2021.~~2022. The ~~decline~~increase in shareholders’ equity is primarily ~~due~~attributable to ~~an increase in accumulated other comprehensive loss of $19.8 million due to increased~~ unrealized losses on our investment securities ~~portfolio. These unrealized losses on our investment~~ portfolio ~~are primarily attributable to~~in accumulated other comprehensive loss that have recovered by $2.8 million since December 31, 2022 which resulted from changes in market value ~~due~~related to the ~~current rising~~shift in the interest rate environment but will not necessarily impact our eventual realized returns since we have both the intent and ability to hold these investment securities until maturity or the price recovers. This decrease is partially offset by net incomeyield curve.

Analysis of $4.2 million. Shareholders’ equity also reflects the issuance of 160,978 common shares for $1.1 million to fund our matching contribution to the defined contribution retirement plan in the first quarter of 2022.

Results of Operations ~~for the~~

Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2023 compared to Three Months Ended March 31, 2022 ~~and 2021~~

General. The Company had a net ~~income~~loss of ~~$1.2~~$(0.5) million for the three months ended ~~September 30, 2022, a decrease of $8.4 million~~March 31, 2023 compared to net income of ~~$9.6~~$5.3 million for the three months ended ~~September 30, 2021. Net income was $4.2 million for the nine months ended September 30, 2022, a decrease~~March 31, 2022.

Table of ~~$11.1 million compared to net income of $15.3 million for the nine months ended September 30, 2021.~~Contents

Average Balance Sheet and Related Yields and Rates. The following table presents average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022. The average balances are daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of discount accretion and net deferred loan origination costs accounted for as yield adjustments.

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	As of and for the												As of and for the
	Three Months Ended September 30,												Nine Months Ended September 30,												Three Months Ended
	2022						2021						2022						2021						March 31, 2023						March 31, 2022
					Average						Average						Average						Average						Average						Average
	Average				Yield/		Average				Yield/		Average				Yield/		Average				Yield/		Average				Yield/		Average				Yield/
	Balance		Interest		Rate		Balance		Interest		Rate		Balance		Interest		Rate		Balance		Interest		Rate		Balance		Interest		Rate		Balance		Interest		Rate

	(Dollars in thousands)												(Dollars in thousands)												(Dollars in thousands)
Interest-earning assets
Loans⁽¹⁾
Residential real estate and other consumer	$	1,457,171	$	17,310	4.75	%	$	1,900,611	$	22,002	4.63	%	$	1,556,569	$	52,898	4.53	%	$	1,955,375	$	70,392	4.80	%	$	1,366,872	$	18,514	5.42	%	$	1,660,692	$	18,278	4.40	%
Commercial real estate		214,453		2,458	4.58	%		285,055		3,422	4.80	%		227,524		8,441	4.95	%		266,763		10,049	5.02	%		223,929		2,596	4.64	%		247,044		3,436	5.56	%
Construction		52,843		1,190	9.01	%		135,292		1,896	5.61	%		70,027		4,222	8.04	%		168,382		8,096	6.41	%		41,436		1,034	9.98	%		95,123		2,149	9.04	%
Commercial lines of credit		1,404		17	4.84	%		1,947		28	5.75	%		707		28	5.28	%		3,295		179	7.24	%
Commercial and industrial																										1,382		16	4.63	%		350		5	5.71	%
Total loans		1,725,871		20,975	4.86	%		2,322,905		27,348	4.71	%		1,854,827		65,589	4.71	%		2,393,815		88,716	4.94	%		1,633,619		22,160	5.43	%		2,003,209		23,868	4.77	%
Securities, includes restricted stock⁽²⁾		394,503		1,945	1.97	%		213,945		375	0.70	%		380,485		4,133	1.45	%		265,545		1,150	0.58	%		366,346		2,456	2.68	%		350,150		835	0.95	%
Other interest-earning assets		328,177		1,925	2.35	%		664,747		253	0.15	%		395,400		2,931	0.99	%		838,223		743	0.12	%		411,766		4,807	4.67	%		452,651		215	0.19	%
Total interest-earning assets		2,448,551		24,845	4.06	%		3,201,597		27,976	3.50	%		2,630,712		72,653	3.68	%		3,497,583		90,609	3.45	%		2,411,731		29,423	4.88	%		2,806,010		24,918	3.55	%
Noninterest-earning assets
Cash and due from banks		4,083						7,376						3,848						7,472						4,475						4,016
Other assets		20,238						41,360						35,269						42,458						28,398						43,322
Total assets	$	2,472,872					$	3,250,333					$	2,669,829					$	3,547,513					$	2,444,604					$	2,853,348
Interest-bearing liabilities
Money Market, Savings and NOW	$	1,184,601	$	2,053	0.69	%	$	1,329,832	$	771	0.23	%	$	1,260,953	$	3,516	0.37	%	$	1,352,198	$	2,513	0.25	%
Money market, savings and NOW																									$	1,001,505	$	4,614	1.87	%	$	1,310,848	$	707	0.22	%
Time deposits⁽³⁾		711,184		1,671	0.93	%		1,075,598		2,770	1.02	%		777,110		4,554	0.78	%		1,350,172		12,966	1.28	%		900,890		5,195	2.34	%		861,785		1,623	0.76	%
Total interest-bearing deposits		1,895,785		3,724	0.78	%		2,405,430		3,541	0.58	%		2,038,063		8,070	0.53	%		2,702,370		15,479	0.77	%		1,902,395		9,809	2.09	%		2,172,633		2,330	0.43	%
FHLB borrowings		50,380		253	1.97	%		307,733		826	1.06	%		103,242		919	1.19	%		314,544		2,511	1.05	%		50,000		245	1.96	%		150,000		352	0.94	%
Subordinated notes, net		65,301		1,329	7.96	%		65,372		972	5.95	%		65,319		3,383	6.83	%		65,372		3,157	6.44	%		65,264		1,693	10.38	%		65,337		964	5.90	%
Total borrowings		115,681		1,582	5.35	%		373,105		1,798	1.91	%		168,561		4,302	3.37	%		379,916		5,668	1.96	%		115,264		1,938	6.73	%		215,337		1,316	2.44	%
Total interest-bearing liabilities		2,011,466		5,306	1.05	%		2,778,535		5,339	0.76	%		2,206,624		12,372	0.75	%		3,082,286		21,147	0.92	%		2,017,659		11,747	2.36	%		2,387,970		3,646	0.62	%
Noninterest-bearing liabilities
Demand deposits		74,550						66,566						70,427						62,131						50,284						64,119
Other liabilities⁽³⁾		50,476						72,694						51,314						75,162						63,308						55,479
Shareholders’ equity		336,380						332,538						341,464						327,934						313,353						345,780
Total liabilities and shareholders’ equity	$	2,472,872					$	3,250,333					$	2,669,829					$	3,547,513					$	2,444,604					$	2,853,348
Net interest income and spread(2)			$	19,539	3.01	%			$	22,637	2.74	%			$	60,281	2.93	%			$	69,462	2.53	%			$	17,676	2.52	%			$	21,272	2.93	%
Net interest margin(2)					3.19	%					2.83	%					3.06	%					2.65	%					2.93	%					3.03	%

(1)	Nonaccrual loans are included in the respective average loan balances. Income, if any, on such loans is recognized on a cash basis.

(2)	Interest income does not include taxable equivalence adjustments.

~~(3)~~Certain prior period amounts have been reclassified to conform with the current period presentation. The Company has reclassified accrued interest on outstanding time deposits from accrued expenses and other liabilities to interest-bearing deposits in the consolidated balance sheet at September 30, 2021.

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The following table presents the dollar amount of changes in interest income and interest expense for major components of ~~interest earning~~interest-earning assets and interest-bearing liabilities for the periods indicated. The table distinguishes between: (1) changes attributable to volume (changes in volume multiplied by the prior period’s rate), (2) changes attributable to rate (change in rate multiplied by the prior period’s volume) and (3) total increase (decrease) (the sum of the previous columns). Changes attributable to both volume and rate are allocated ratably between the volume and rate categories.


	Three Months Ended						Nine Months Ended
	September 30, 2022 vs. 2021						September 30, 2022 vs. 2021						Three Months Ended
					Net						Net		March 31, 2023 vs. 2022
	Increase (Decrease)				Increase		Increase (Decrease)				Increase		Increase (Decrease)				Net
	due to				(Decrease)		due to				(Decrease)		due to				Increase
	Volume		Rate				Volume		Rate				Volume		Rate		(Decrease)

	(In thousands)												(Dollars in thousands)
Change in interest income:
Loans
Residential real estate and other consumer	$	(5,249)	$	557	$	(4,692)	$	(13,712)	$	(3,782)	$	(17,494)	$	(3,564)	$	3,800	$	236
Commercial real estate		(813)		(151)		(964)		(1,469)		(139)		(1,608)		(303)		(537)		(840)
Construction		(1,507)		801		(706)		(5,567)		1,693		(3,874)		(1,319)		204		(1,115)
Commercial lines of credit		(7)		(4)		(11)		(113)		(38)		(151)
Commercial and industrial														12		(1)		11
Total loans		(7,576)		1,203		(6,373)		(20,861)		(2,266)		(23,127)		(5,174)		3,466		(1,708)
Securities, includes restricted stock		499		1,071		1,570		668		2,315		2,983		40		1,581		1,621
Other interest-earning assets		(188)		1,860		1,672		(595)		2,783		2,188		(21)		4,613		4,592
Total change in interest income		(7,265)		4,134		(3,131)		(20,788)		2,832		(17,956)		(5,155)		9,660		4,505
Change in interest expense:
Money Markets, Savings and NOW		(92)		1,374		1,282		(176)		1,179		1,003
Money market, savings and NOW														(211)		4,118		3,907
Time deposits		(872)		(227)		(1,099)		(4,380)		(4,032)		(8,412)		76		3,496		3,572
Total interest-bearing deposits		(964)		1,147		183		(4,556)		(2,853)		(7,409)		(135)		7,614		7,479
FHLB borrowings		(974)		401		(573)		(1,879)		287		(1,592)		(332)		225		(107)
Subordinated notes, net		(1)		358		357		(2)		228		226		(1)		730		729
Total change in interest expense		(1,939)		1,906		(33)		(6,437)		(2,338)		(8,775)		(468)		8,569		8,101
Change in net interest income	$	(5,326)	$	2,228	$	(3,098)	$	(14,351)	$	5,170	$	(9,181)	$	(4,687)	$	1,091	$	(3,596)

Net Interest Income. Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends primarily upon the volume of interest-earning assets and interest-bearing liabilities and the corresponding interest rates earned or paid. Our net interest income is significantly impacted by changes in interest rates and market yield curves and their related impact on cash flows.

~~Three Months Ended September 30, 2022 Compared to the Three Months Ended September 30, 2021~~

Net interest income was ~~$19.5~~$17.7 million for the three months ended ~~September 30, 2022,~~March 31, 2023, a decrease of ~~$3.1~~$3.6 million, or ~~14%~~17%, from ~~$22.6 million for the same period in 2021.~~

~~Interest income was $24.8~~$21.3 million for the three months ended ~~September 30,~~March 31, 2022. The decrease in net interest income reflects interest expense, primarily on deposits, increasing more than interest income during the rising rate environment of the past twelve months, which was the result of the Federal Open Market Committee increasing the federal funds rate range from 0.00% - 0.25% in March 2022 ~~a decrease~~to 4.75% - 5.00% in March 2023.

Interest income was $29.4 million for the three months ended March 31, 2023, an increase of ~~$3.1~~$4.5 million, or ~~11%~~18%, from the ~~same period in 2021.~~three months ended March 31, 2022. The ~~decrease~~increase in interest income was primarily due to a decline in the average balance of the loan portfolio of $597.0 million, or 26%, from $2.3 billion for the three months ended September 30, 2021 compared to $1.7 billion for the three months ended September 30, 2022. The decrease in our average balance of loans is primarily due to our loan repayments continuing to outpace our loan production in regard to residential real estate loans and our decision to stop actively originating construction loans. Our loan production continues to be adversely impacted by the termination of the Advantage Loan Program and the inability over the last several years to create and introduce new loan products. Interest income related to loans was positively impacted by our average yield on loans which increased 15 basis points to 4.86% for the three months ended September 30, 2022 from 4.71% compared to the three months ended September 30, 2021 due to the increase in market interest rates. The average yield on our residential real estate and other consumer loans increased 12 basis points from the three months ended September 30, 2021.

~~Table of Contents~~

~~The decrease in~~ interest income earned on loans was partially offset by an increase in interest income on investment securities of $1.6 million and other interest-earning assets of $1.7 million during the three months ended September 30, 2022 compared to the same period in 2021. Although the average balance of our investment securities and other interest-earning assets as these portfolios repriced significantly in the rising rate environment. Other interest-earning assets, which ~~generally~~ are ~~lower-yielding~~comprised primarily of cash and ~~more liquid than our loans, was $722.7 million~~due from banks, had an average yield of 4.67% for the three months ended ~~September 30, 2022~~March 31, 2023 compared to ~~$878.7~~0.19% for the three months ended March 31, 2022. These assets benefitted the most from the rising rate environment as correspondent banks and the Federal Reserve increased their deposit rate and overnight funding rates, respectively, by over 400 basis points. The impact of rising interest rates on our other interest-earning assets was slightly offset by a modest decline in the average balance of these assets. Although the average balance of our investment securities increased only 5%, these assets had an average yield of 2.68% for the three months ended March 31, 2023 compared to 0.95% for the three months ended March 31, 2022. The average balance of our investment securities was $366.3 million for the three months ended ~~September 30, 2021, the average yield was 2.14% for the three months ended September 30, 2022, an increase of 185 basis points from the three months ended September 30, 2021.~~

~~Interest expense was $5.3~~March 31, 2023 compared to $350.2 million for the three months ended September 30, 2022 and remained relatively unchanged from the three months ended September 30, 2021. Interest on deposits increased $0.2 million which reflects an increase in the average rate paid on interest-bearing deposits of 20 basis points to 0.78% for the three months ended September 30, 2022 compared to 0.58% for the three months ended September 30, 2021. However, although market interest rates increased, the average balance of interest-bearing deposits decreased $509.6 million, or 21%, to $1.9 billion in the three months ended September 30, 2022 from $2.4 billion in the three months ended September 30, 2021. This decrease is primarily driven by a $364.4 million decrease in the average balance of time deposits, which generally have a higher cost. In June 2022, with increasing interest rates, our offerings on time deposits returned to more competitive rates, partiallyMarch 31, 2022.

Partially offsetting the ~~decline experienced in the first half of 2022.~~

The higher interest rates in 2022 than 2021 resulted in an increase in the average interest rate paid on subordinated notes from 5.95% during the three months ended September 30, 2021 to 7.96% during the three months ended September 30, 2022. Additionally, the average balance of FHLB borrowings decreased $257.4 million from September 30, 2021. This decrease in borrowings is the result of the repayments of $157.0 million in borrowings during the fourth quarter of 2021 and $100.0 million in borrowings during the second quarter of 2022 which had the effect of decreasing interest expense by approximately $0.6 million.

~~Nine Months Ended September~~~~30, 2022 Compared to the Nine Months Ended September~~~~30, 2021~~

~~Net~~increased interest income ~~was $60.3 million for~~earned on the ~~nine months ended September 30, 2022, a decrease of $9.2 million, or 13%, from $69.5 million for the same period in 2021.~~

Interest income was $72.7 million for the nine months ended September 30, 2022, a decrease of $18.0 million, or 20%, from the same period in 2021. The decrease in interest income was primarily due to a decline in the average balance of the loan portfolio of $539.0 million, or 23%, to $2.0 billion for the nine months ended September 30, 2022 from $2.7 billion for the nine months ended September 30, 2021. The decrease in our average balance of loans is primarily due to our loan repayments continuing to outpace our loan production in regard to residential real estate loans and our decision to stop actively originating construction loans and sell our higher risk commercial real estate loans. Our loan production also continues to be adversely impacted by the termination of the Advantage Loan Program and the inability over the last several years to create and introduce new loan products.

The decline in interest income also reflects a decline in the average yield on our loan portfolio in addition to the impact of the declining balance sheet. Our average yield on our loans decreased 23 basis points, to 4.71% for the nine months ended September 30, 2022 from 4.94% for the same period of the prior year. The average yield on our residential real estate and other consumer loans decreased 27 basis points from the nine months ended September 30, 2021. Throughout 2021, market interest rates remained at historically low levels with it starting to rise in the first quarter of 2022 and continuing through the third quarter of 2022. The interest rates on our residential loan portfolio continued to reprice downward as a result, which included new production originating at much lower rates than the loans were paid in full. The decline of the average yield on our commercial real estate and construction loan portfolios during the nine months ended September 30, 2022 was mitigated by the collection of approximately $1.8 million of interest on nonperforming commercial real estate and construction loans during the nine months ended September 30, 2022.

~~The~~ average balance of our investment securities and other ~~interest-earning~~interest-earnings assets ~~which generally are lower-yielding and more liquid than our loans,~~ was $775.9 million for nine months ended September 30, 2022 compared to $1.1 billion for the nine months ended September 30, 2021. These assets had an average yield of 1.21% for the nine months ended September 30, 2022, an increase of 98 basis points from the nine months ended September 30, 2021 resultinga decline in interest income earned on our loan portfolio. Because much of ~~$4.1 million for the nine months ended September 30, 2022 compared to $1.2 million for the nine months ended September 30, 2021.~~our loan portfolio is comprised of

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adjustable-rate mortgages, the increase in interest income arising from rising interest rates was largely offset by the decline in the balance of our loan portfolio. The average balance of our loan portfolio declined $369.6 million, or 18%, from $2.0 billion for the three months ended March 31, 2022. The decrease in our average balance of loans is primarily attributable to repayments on loans, which continued to outpace our loan production as the result of our decisions to delay the development of new residential and commercial loan products and stop originating construction loans. Although the average balance of our residential mortgage loan portfolio has declined, the average yield increased 102 basis points from the three months ended March 31, 2022, due to our adjustable-rate residential real estate mortgage loans repricing at higher interest rates driven by the increasing interest rate environment in the second half of 2022 and into 2023.

Interest expense was ~~$12.4~~$11.7 million for the ~~nine~~three months ended ~~September 30, 2022, a decrease of $8.8~~March 31, 2023 compared to $3.6 million ~~or 42%, from~~for the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022. Similar to our interest-bearing assets, the increase in our interest expense was primarily driven by the change in interest rates, partially offset by the impact of a decline in the balance of our interest-bearing liabilities. The ~~decrease~~increase in interest expense was primarily due ~~in part~~ to ~~a decrease~~an increase in the average ~~balance of~~rate paid on our interest-bearing deposits ~~which decreased $664.3 million, or 25%, in~~of 166 basis points from the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2022. Specifically, the average rate paid on money market, savings and NOW accounts and time deposits increased 165 basis points and 158 basis points, respectively, compared to the ~~nine~~three months ended ~~September 30, 2021. This decrease is primarily driven by a decrease~~March 31, 2022, as we continued to competitively price our deposits as rates continued to rise throughout the past twelve months. Interest expense related to interest on deposits comprised 84% of total interest expense for the three months ended March 31, 2023 compared to 64% of total interest expense for the three months ended March 31, 2022.

In addition, our interest expense on our subordinated notes increased $0.7 million as the average rate paid increased to 10.38% for the three months ended March 31, 2023 compared to 5.90% for the three months ended March 31, 2022, as the interest rate on the notes continued to reprice in the average balance of time deposits of $573.1 million. The reduction of these higher costing deposits contributed to the lower average cost of interest-bearing deposits. Additionally, the average balance of FHLB borrowings decreased $211.3 million from September 30, 2021 and is the result of the repayment of $157.0 million in borrowings during the fourth quarter of 2021 and $100.0 million during the second quarter of 2022.rising interest rate environment.

Net Interest Margin and Interest Rate Spread. Net interest margin was ~~3.19%~~2.93% for the three months ended ~~September 30, 2022, up 36~~March 31, 2023, down 10 basis points from ~~2.83%~~3.03% for the ~~same period in 2021.~~three months ended March 31, 2022. The interest rate spread was ~~3.01%~~2.52% for the three months ended ~~September 30, 2022, up 27~~March 31, 2023, down 41 basis points from ~~2.74%~~2.93% for the ~~same period in 2021.~~three months ended March 31, 2022. Our net interest margin and interest rate spread ~~for~~were negatively impacted during the three months ended ~~September 30, 2022 were positively impacted by increasing market~~March 31, 2023, due to the average rate on our total interest-bearing liabilities primarily on our customer deposits due to the higher interest ~~rates as~~rate environment than the ~~yield on average interest-earning assets increased 56 basis points while the cost of average interest-earning liabilities increased 29 basis points.~~

~~Net interest margin was 3.06% for the nine months ended September 30, 2022, up 41 basis points from 2.65% for the same~~comparable period in 2021. The interest rate spread was 2.93% for the nine months ended September 30, 2022, up 40 basis points from 2.53% for the same period in 2021. Our net interest margin and interest rate spread for the nine months ended September 30, 2022 were positively impacted by a decrease in the cost of average interest-bearing liabilities as higher interest cost of average time deposits decreased and an increase in the yield on average interest-earning assets as the yield on average interest-earning other assets increased while their average balances decreased.2022.

Provision ~~(Recovery)~~ for ~~Loan~~(Recovery of) Credit Losses. Our ~~recovery~~provision for ~~loan~~credit losses was ~~$(4.4)~~$0.7 million for the three months ended September 30, 2022, compared to a provision for loan losses of $0.4 million for the three months ended September 30, 2021. Our recovery for loan losses for the three months ended September 30, 2022 is primarily attributable to improvements in our credit quality as well as a decrease in our total loan portfolio of $96.5 million during the quarter.

~~Our recovery for loan losses was $(9.8) million for the nine months ended September 30, 2022,~~March 31, 2023 compared to a recovery for loan losses of ~~$(2.1)~~$(4.3) million for the ~~nine~~three months ended ~~September 30, 2021. Our recovery~~March 31, 2022. The following table presents the components of our provision for ~~loan losses for the nine months ended September 30, 2022 is primarily attributable to an improvement~~(recovery of) credit losses:

Three Months Ended

March 31,

2023

2022

(In thousands)
Provision for (recovery of) credit losses:






Loans

$
0.8

$
(4.3)
Off-balance sheet credit exposures

(0.1)

—
Total

$
0.7

$
(4.3)

The increase in the provision for credit ~~quality~~losses on loans was primarily due to net charge offs of ~~our loan portfolio during~~$6.4 million on the ~~nine-month period, which includes the effects~~transfer of ~~a $35.8 million decrease of Special Mention, Substandard and Doubtful~~ loans held for sale and the ~~sale of higher risk~~increase in the allowance for credit losses on our commercial real estate ~~in the third quarter of 2022, as well as~~loans, which was offset by a decrease in ~~our total loan portfolio of $331.2 million from December 31, 2021, including construction loans of $56.4 million which carried a higher allocated~~the allowance for credit losses on our residential portfolio as a result of the transfer of loans to held for sale and loan ~~loss. See “—Asset Quality” and~~payoffs. For additional information on changes to the allowance for credit losses, see “—Allowance for ~~Loan Losses” for further discussion regarding our classified loans and the credit quality of our loan portfolio.~~
~~Our total allowance for loan losses decreased to $45.4 million, or 2.70% of total loans, at September 30, 2022 compared to $56.5 million, or 2.81% of total loans, at December 31, 2021.~~Credit Losses.”

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Non-interest Income. ~~Non-interest~~The components of non-interest income ~~information is~~were as follows:


	Three Months Ended								Nine Months Ended								Three Months Ended
	September 30,				Change				September 30,				Change				March 31,				Change
	2022		2021		Amount		Percent		2022		2021		Amount		Percent		2023		2022		Amount		Percent

	(Dollars in thousands)																(Dollars in thousands)
Service charges and fees	$	124	$	120	$	4	3	%	$	351	$	423	$	(72)	(17)	%	$	94	$	122	$	(28)	(23)	%
Gain on sale of mortgage loans held for sale		—		151		(151)	(100)	%		200		619		(419)	(68)	%
Unrealized losses on equity securities		(184)		(24)		(160)	N/M			(590)		(99)		(491)	N/M
Gain on sale of branch office		—		1,417		(1,417)	(100)	%		—		1,417		(1,417)	(100)	%
Net servicing loss		(384)		(31)		(353)	N/M			(118)		(1,369)		1,251	91	%
Income on cash surrender value of bank-owned life insurance		87		325		(238)	(73)	%		670		960		(290)	(30)	%
Loss on sale of investment securities																		(2)		—		(2)	N/M
Gain (loss) on sale of mortgage loans held for sale																		(25)		197		(222)	N/M
Unrealized gain (loss) on equity securities																		71		(236)		307	N/M
Net servicing income																		59		443		(384)	(87)	%
Income earned on company-owned life insurance																		80		328		(248)	(76)	%
Other		—		100		(100)	(100)	%		586		291		295	N/M			1		557		(556)	(100)	%
Total non-interest income	$	(357)	$	2,058	$	(2,415)	N/M		$	1,099	$	2,242	$	(1,143)	(51)	%	$	278	$	1,411	$	(1,133)	(80)	%

N/M - not meaningful

Non-interest income of ~~$(0.4)~~$0.3 million for the three months ended ~~September 30, 2022 reflected a decrease of $2.4 million from the same period in 2021. Non-interest income of $1.1 million for the nine months ended September 30, 2022 reflected~~March 31, 2023, a decrease of $1.1 million from the ~~same period in 2021.~~three months ended March 31, 2022. The decrease in non-interest income ~~for the three and nine months ended September 30, 2022~~ is primarily ~~attributable~~the result of declines in net servicing income of $0.4 million and approximately $0.4 million in recoveries of the loan valuation losses previously taken on certain commercial real estate loans that were sold in the first quarter of 2022. In addition, income earned on company-owned life insurance decreased $0.2 million due to the ~~$1.4 million~~surrender of certain policies in the second quarter of 2022. Further, gain (loss) on the sale of ~~the Bellevue, Washington branch office in the third quarter~~mortage loans held for sale decreased by $0.2 million primarily due to fewer sales of ~~2021. Also,~~mortage loans during the three ~~and nine~~ months ended September 30, 2022, we repurchased a pool of Advantage Loan Program loans with a total outstanding principal balance of $35.2 million and $65.6 million compared to loans with a total outstanding principal balance of $6.1 million and $173.8 million duringMarch 31, 2023 offset by the three and nine months ended September 30, 2021, respectively. These repurchases result in higher net servicing losses in those periods which have higher repurchase volumes due to the disposition of related mortgage servicing rights. Unrealized lossesunrealized gain (loss) on equity securities ~~were also greater in the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021 due to the market interest rate environment.~~increase of $0.3 million.

Non-interest Expense. ~~Non-interest~~The components of non-interest expense ~~information is~~were as follows:


	Three Months Ended								Nine Months Ended								Three Months Ended
	September 30,				Change				September 30,				Change				March 31,				Change
	2022		2021		Amount		Percent		2022		2021		Amount		Percent		2023		2022		Amount		Percent

	(Dollars in thousands)																(Dollars in thousands)
Salaries and employee benefits	$	9,336	$	2,774	$	6,562	N/M		$	24,522	$	19,300	$	5,222	27	%	$	9,410	$	9,617	$	(207)	(2)	%
Occupancy and equipment		2,112		2,395		(283)	(12)	%		6,441		6,840		(399)	(6)	%		2,112		2,142		(30)	(1)	%
Professional fees		5,756		4,024		1,732	43	%		17,979		18,500		(521)	(3)	%		3,221		5,157		(1,936)	(38)	%
FDIC assessments		316		417		(101)	(24)	%		1,031		1,636		(605)	(37)	%		257		369		(112)	(30)	%
Data processing		725		403		322	80	%		2,292		1,189		1,103	93	%		738		805		(67)	(8)	%
Net recovery of mortgage repurchase liability		(145)		(298)		153	51	%		(670)		(963)		293	30	%
Net provision for (recovery of) mortgage repurchase liability																		120		(213)		333	N/M
Other		3,521		1,361		2,160	N/M			8,943		5,852		3,091	53	%		1,979		1,546		433	28	%
Total non-interest expense	$	21,621	$	11,076	$	10,545	95	%	$	60,538	$	52,354	$	8,184	16	%	$	17,837	$	19,423	$	(1,586)	(8)	%

N/M - not meaningful

Non-interest expense ~~was $21.6 million and $11.1~~of $17.8 million for the three months ended ~~September 30, 2022 and 2021, respectively, and $60.5~~March 31, 2023 reflected a decrease of $1.6 million ~~and $52.4 million for the nine months ended September 30, 2022 and 2021, respectively.~~

~~Salaries and employee benefits expense increased for the three and nine months ended September 30, 2022 when~~ compared to the ~~same periods~~three months ended March 31, 2022. This decrease was primarily attributable to reimbursements received from an insurance carrier of $2.2 million for previously incurred direct and third-party legal expenses related to the governmental investigations that were determined to be covered by our insurance. Absent the reimbursement from the insurance carrier, professional fees would have remained elevated. The decrease was partially offset by an increase in the ~~prior year. In the third quarter~~net provision for mortage repurchase liability of ~~2021, the Company~~$0.3 million and a $0.4 million increase in other non-interest expenses.

Income Tax Expense (Benefit). We recorded ~~$6.5 million in the ERC, which were available under the CARES Act and resulted in a net reduction~~an income tax benefit of salaries and employee benefits expense. Absent recognizing the $6.5 million ERC, salaries and benefits expense for the three and nine months ended September 30, 2021 would have been substantially higher, and thus salaries and benefits expense$(54) thousand, or effective tax rate of 9.7%, for the three months ended ~~September 30, 2022 would have shown only modest increases from~~March 31, 2023 compared to an income tax expense of $2.3 million, or effective tax rate of 30.3%, for the three months ended ~~September 30, 2021.~~March 31, 2022. The decrease in our effective tax rate is primarily due to the lower level of pretax earnings in the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.

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Salaries and employee benefits expense for the nine months ended September 30, 2022 benefited from the cancellation of certain deferred compensation and split dollar life insurance agreements with its controlling shareholder which resulted in the reversal of the related liabilities of $4.5 million upon surrender of a large split-dollar life program and certain BOLI policies partially offset by $0.4 million in separation costs related to the reduction in our mortgage origination staff, all of which occurred during the second quarter of 2022. Due to this reduction in mortgage origination staff, the Company experienced reduced salaries and benefits expense of $0.9 million during the third quarter of 2022. During the three and nine months ended September 30, 2022, we continued hiring employees in key positions, provided salary adjustments to employees to maintain compensation at competitive levels, and made enhancements to existing employee benefit plans, all of which had the impact of increasing salaries and benefits expense.

Professional fees for the three months ended September 30, 2022 increased $1.7 million compared to the three months ended September 30, 2021, which included a $1.4 million insurance reimbursement received in the third quarter of 2021. Absent the reimbursement, professional fees for the three months ended September 30, 2022 would have reflected a slight increase from the prior year period. Professional fees for the nine months ended September 30, 2022 declined by $0.5 million compared to the nine months ended September 30, 2021, which decline would have been greater but for the insurance reimbursements received in 2021 of $3.8 million and is attributable to the elevated professional services received in 2021 related to the Internal Review, the government investigations and regulatory initiatives.

Other non-interest expense increased during the three month and nine months ended September 30, 2022 largely due to the $1.6 million and $2.3 million fair value discounts on $35.2 million and $65.6 million of Advantage Loan Program loans repurchased in the three and nine months ended September, 30 2022, respectively. The repurchases made in 2021 had no such fair value discount as the rise in market interest rates drove the losses on loans repurchased in 2022. Additionally, the nine months ended September 30, 2022 included additional tax of $1.3 million incurred during the second quarter of 2022 related to certain BOLI policies surrendered.

~~Income Tax Expense.~~ We recorded an income tax expense of $0.7 million and $6.4 million for the three and nine months ended September 30, 2022, respectively, compared to an income tax expense of $3.7 million and $6.2 million for the three and nine months ended September 30, 2021, respectively. During the second quarter of 2022, we surrendered a large split-dollar life program and a few smaller BOLI policies related to former executives and a controlling shareholder with a cash surrender value of $24.9 million. The $13.1 million increase in value over the duration of the ownership of the policies moved from non-taxable income to taxable income, resulting in a $3.6 million increase in income tax expense for the nine months ended September 30, 2022. Additionally, other than temporary differences originating in the nine months ended September 30, 2022 were the non-taxable cancellation of the split-dollar life insurance agreement and the non-deductible additional tax related to the surrender of the bank-owned life insurance policies, which together resulted in an income tax benefit of approximately $0.8 million.

Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations when they come due. We rely on our ability to generate deposits and effectively manage the repayment and maturity schedules of our loans to ensure we have adequate liquidity to fund our operations.

During the three months ended March 31, 2023, two large banks were closed and placed into receivership with the FDIC. Although we were not directly affected by these bank failures, this news caused depositors to withdraw or attempt to withdraw their funds from these and other financial institutions, including us. Our customer deposit balances have remained relatively stable following these bank failures. Should we be exposed to this type of contagion risk in the future, we may need to exit certain positions in investments at a pace and in a market environment that may result in substantial losses. The risk of significant deposit withdrawals may be magnified based on the amount of uninsured deposits; concentrations of depositors in certain industries, geographies and corporate life cycle stages; and the availability of alternative deposit and investment opportunities for our customers.

Our primary sources of funds consist of ~~deposit inflows,~~cash flows from operations, deposits and principal repayments on loans and sales of our investment securities. Additional liquidity is provided by our ability to borrow from the FHLB, our ability to sell portions of our loan ~~repayments~~portfolio, and ~~FHLB borrowings.~~access to the discount window of the Federal Reserve and brokered deposits. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

Our most liquid assets are cash and due from banks, interest-bearing time deposits with other banks and investment securities in our available for sale portfolio. These funds offer substantial resources to meet either new loan demand or to help offset reductions in our deposit funding base. At March 31, 2023 and December 31, 2022, cash and due from banks totaled $419.2 million and $379.8 million, respectively; interest-bearing time deposits with other banks totaled $0.9 million; and debt securities available for sale, totaled $342.5 million and $343.6 million, respectively. We ~~have substantial cash requirements going forward, as discussed below, which we plan to fund through our total available liquidity, cash flows from operations~~purchased investment securities of $3.0 million and ~~additional liquidity measures, if determined to be necessary.~~

$73.6 million during the three months ended March 31, 2023 and 2022, respectively, and had maturing investments or principal receipts of $5.4 million and $12.4 million during the three months ended March 31, 2023 and 2022, respectively. We regularly review the need to adjust our investments in liquid assets based upon our assessment of: (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest earning deposits and securities and (4) the objectives of our asset/liability management program. The Company’s Asset Liability Management Committee monitors sources and uses of funds and modifies asset and liability positions as liquidity requirements change. Excess liquid assets are generally invested in interest-earning deposits and short-term securities.

Our ~~most liquid assets are cash~~liquidity is further enhanced by our ability to pledge loans and ~~due~~investment securities to access secured borrowings from banks, interest-bearing time deposits with other banks and debt securities classified as available for sale. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period.the FHLB. At ~~September 30, 2022~~March 31, 2023 and December 31, 2021, cash and due from banks totaled $352.4 million and $411.7 million, respectively; interest-bearing time deposits with other banks totaled $1.2 million; debt securities available for sale, which provide additional sources of liquidity, totaled $348.6 million and $308.7 million, respectively.

~~At September 30,~~ 2022, ~~and December 31, 2021,~~ outstanding FHLB ~~borrowings~~advances totaled $50.0 ~~million and $150.0 million, respectively. In May 2022, we utilized our excess liquidity to repay $100.0 million in long-term fixed rate advances which the FHLB had called using the call provision.~~million. There were no amounts outstanding on lines of credit with other ~~banks.~~banks during the three months ended March 31, 2023. Based on our collateral and holdings of FHLB stock, the Company had additional borrowing capacity with the FHLB of $398.4 million. We also had available credit lines with other banks totaling $80.0 million.

In addition, as a result of the recent bank failures of Silicon Valley Bank and Signature Bank, the FRB has made available to banks the Bank Term Funding Program, against which we can borrow with qualifying collateral, including the bulk of the investment securities portfolio, valued at par as permitted by the terms of the program. The term is for one year and the interest rate is fixed at the time the advance is taken and there is no prepayment penalty. Allowable investments for pledge would include all of the Company’s investment securities except the non-Agency collateralized mortgage obligations and those allowable investments already pledged to the FHLB. At March 31, 2023, the Company had no advances outstanding under the Bank Term Funding Program, but would have unused borrowing capacity of $254.1 million thereunder. The program expires on March 11, 2024.

Cash flows from financing activities are primarily impacted by our deposits. Our total deposits were $1.9 billion at March 31, 2023, a decrease of $32.2 million, or 2% from December 31, 2022. We generate deposits from local businesses and individuals through customer referrals and other relationships and through our retail presence. We obtain funds from depositors by offering a range of deposit types, including demand, savings money market and time. We utilize borrowings and brokered deposits to supplement funding needs and manage our liquidity position. As of March 31, 2023, time deposits due within one year were $604.4 million, or 31% of total deposits. As of December 31, 2022, time deposits due within one year were $444.9 million, or 23% of total deposits. In addition, we estimated our total uninsured deposits were $389.1 million, or 20%, of total deposits. as of March 31, 2023.

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~~At September 30,~~The cash outflows from decreases in deposits was more than offset by the cash inflows from net decreases in loans. During the three months ended March 31, 2023 and 2022, we ~~had~~originated $6.2 million and $60.8 million, respectively, of loans. Cash flows provided by loan payoffs totaled $53.2 million and $182.0 million during the ~~ability~~three months ended March 31, 2023 and 2022, respectively. From time to ~~borrow an additional $374.5 million from the FHLB, which included an available line of credit of $20 million. In addition,~~time, we have obtained standby letters of credit totaling $2.0 million, which provides credit support for certain of our obligations related to our commitment to repurchase certain pools of Advantage Loan Program loans. We also ~~had available credit lines with other banks totaling $80 million.~~

Although we reduced our excess liquidity during 2021 through 2022, we believe that our existing liquidity combined with our borrowing capacity with the FHLB and our bank lines of credit, as well as the ability to obtain additional funds through brokered deposits, would allow us to manage any unexpected increase in loan demand or any unforeseen financial demand or commitment.

~~To avoid the uncertainty of audits and inquiries by third-party investors~~sell residential mortgage loans in the ~~Advantage Loan Program~~secondary market primarily to third party investors. Often, the agreements under which we sell residential mortgages loans ~~beginning at the end~~may contain provisions that include various representations and warranties regarding origination and characteristics of the ~~second quarter of 2020, the Company commenced making offers to each of those investors to repurchase 100% of the previously sold Advantage Loan Program~~residential mortgage loans. ~~Through September 30, 2022, the~~The Company has ~~repurchased~~outstanding commitments to repurchase pools of Advantage Loan Program loans ~~previously~~ sold with a total outstanding ~~unpaid~~ principal balance of $309.0 million. During the nine months ended September 30, 2022, the Company repurchased $65.6 million of Advantage Loan Program loans. In addition, pursuant to existing agreements with such investors, the Company also agreed to repurchase an additional pool of Advantage Loan Program loans through July 2023. The aggregate unpaid principal balance of these loans was $21.4$20.5 million at ~~September 30, 2022. At September 30, 2022,~~March 31, 2023. These commitments expire in July 2025. In addition, the unpaid principal balance of the ~~previously~~ sold Advantage Loan Program loans that would be subject to repurchase by us if 100% of our original offers to repurchase such loans were accepted totaled ~~$45.0~~$40.2 million, which includes loans that we have committed to repurchase. Should additional secondary market investors accept our offers to repurchase Advantage Loan Program loans with respect to a substantial portion of such outstanding loans, the cash required to fund these repurchases will reduce our liquidity.

We are a party to financial instruments in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to make loans and standby letters of credit that are not reflected in our condensed consolidated balance sheets, ~~and~~as well as commitments on unused lines of credit that involve elements of credit and interest rate risk in excess of the amount recorded in the condensed consolidated balance sheets. Our exposure to credit loss is represented by the contractual amount of ~~the instruments. We use the same credit policies in making commitments as we do for on-balance sheet~~these instruments. At ~~September 30, 2022,~~March 31, 2023, we had ~~$23.3~~unfunded commitments to extend credit totaling $17.7 million inand standby letters of credit outstanding of $24 thousand. The Company is required to estimate the expected credit losses for off-balance sheet credit exposures, including unfunded loan commitments and ~~unused lines~~letters of credit, ~~outstanding and $24 thousand in standby letters~~which are not unconditionally cancellable. At March 31, 2023, the Company has recorded a liability for unfunded commitments of ~~credit. At December 31, 2021, we had $69.4 million in loan commitments and unused lines of credit outstanding and $24 thousand in standby letters of credit.~~

As of September 30, 2022, time deposits due within one year were $457.4 million, or 23% of total deposits. Total time deposits at September 30, 2022 were $757.6 million, or 39% of total deposits. As of December 31, 2021, time deposits due within one year were $646.6 million, or 29% of total deposits. Total time deposits at December 31, 2021 were $891.8 million, or 39% of total deposits.

Our primary investing activities are the origination of loans and the purchase of investment securities. During the nine months ended September 30, 2022, we originated $109.6 million of loans and purchased $147.5 million of investment securities. During the nine months ended September 30, 2021, we originated $143.5 million of loans and purchased investment securities of $23.2 million. Additionally, we paid $63.5 million to the purchaser of the Bellevue, Washington branch office, the sale of which included the transfer of all deposit accounts located at the branch and all branch premises and equipment. Cash flows provided by loan payoffs totaled $442.9 million and $596.5 million during the nine months ended September 30, 2022 and 2021, respectively.

Financing activities consist primarily of activity in deposit accounts and, to a lesser extent, borrowings. We experienced a net decrease in total deposits of $310.7 million during the nine months ended September 30, 2022, from $2.3 billion at December 31, 2021. We generate deposits from local businesses and individuals through customer referrals and other relationships and through our retail presence. We utilize borrowings and brokered deposits to supplement funding needs and manage our liquidity position. During the nine months ended September 30, 2022, we repaid $135 million of borrowings with the FHLB and engaged in new borrowings with the FHLB of $35$0.5 million.

The Company is a separate and distinct legal entity from the Bank, and, on a parent company-only basis, the Company’s primary source of funding is dividends received from the Bank. ~~Banking~~Federal banking regulations limit the dividends that may be paid by the Bank. ~~Approval by regulatory authorities~~Regulatory approval is required if the Bank’s total capital distributions for the applicable calendar year exceed the sum of the Bank’s net income for that year to date plus the Bank’s retained net income for the preceding two years, or the Bank would not be at least ~~adequately capitalized~~“adequately capitalized” under applicable regulations following the distribution. ~~Banking~~Federal banking regulations also limit the ability of the Bank to pay dividends under other circumstances. Even if an application is not otherwise required, every savings bank that is a subsidiary of a unitary thrift holding company, such as the Bank, must still file a notice with the FRB at least 30 days before its board of directors declares a dividend or approves a capital distribution. The Company has the legal ability to access the debt and equity capital markets for funding, although the Company currently is required to obtain the prior approval of the FRB in order to issue debt.

~~Table of Contents~~

In recent years, the Company’s primary funding needs on a parent company-only basis have consisted of ~~dividends to shareholders,~~ interest expense on subordinated notes and ~~stock repurchases.~~expenses attributable to public company operations. The Company suspended cash dividends to shareholders and its share repurchase program early in 2020. At ~~September 30, 2022,~~March 31, 2023, the Company had $65.0 million in principal amount of subordinated notes outstanding that are due April 15, 2026, but may be redeemed by us, in whole or in ~~part.~~part, at any time. There have been no redemptions on the subordinated notes. ~~Interest expense on the subordinated notes was $3.4 million and $3.2 million for the nine months ended September 30, 2022 and 2021, respectively.~~ The subordinated notes ~~had an~~require interest ~~rate of 7% per annum,~~ payable ~~semi-annually on April 15 and October 15~~quarterly in arrears ~~through April 2021, after which the subordinated notes converted to~~at a ~~variable~~variable-rate of interest ~~rate~~ of the three-month LIBOR rate plus a margin of 5.82% ~~(8.33%~~(10.65% at ~~September 30, 2022)~~March 31, 2023). In 2017, the United Kingdom (“U.K.”) Financial Conduct Authority announced that it would no longer compel banks to submit rates for the calculation of LIBOR after 2021, and the administrator of LIBOR has proposed to extend publication of the most commonly used U.S. dollar LIBOR settings to September 30, 2023. Pursuant to recent federal and New York State legislation, upon the cessation of the publication of the three-month LIBOR rate on June 30, 2023, the subordinated notes will bear interest at a rate based on ~~the~~ SOFR.

The Plea Agreement provides that the Company must make a restitution payment of $27.2 million for the benefit of non-insider victim shareholders. This restitution payment will need to be funded shortly after court approval. The Company intends to fund this payment primarily from a cash dividend from the Bank, subject to compliance with applicable regulations.

The Company’s ability to pay cash dividends is restricted by the terms of the subordinated notes as well as applicable provisions of Michigan law and the rules and regulations of the OCC and the FRB. Under the terms of the subordinated notes, as long as the subordinated notes are outstanding, the Company is permitted to pay dividends if prior to such dividends, the Bank is considered ~~well capitalized~~“well capitalized” under applicable ~~regulatory capital requirements.~~regulations. In addition, under Michigan law, the Company is prohibited from paying cash dividends if, after giving effect to the dividend, (i) it would not be able to pay its debts as they become due in the usual course of business or (ii) its total assets would be less than the sum of its total liabilities plus the preferential rights upon dissolution of shareholders with preferential rights on dissolution that are superior to those receiving the dividend, and we are currently required to obtain the prior approval of the FRB in order to pay any dividends to our shareholders.

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The Company and the Bank are ~~required~~subject to ~~meet several regulatory~~minimum capital adequacy requirements administered by the Federal Reserve and the OCC, respectively. We manage our capital to comply with our internal planning targets and regulatory capital standards administered by the Federal Reserve and the OCC. We review capital levels on a quarterly basis including our needs for additional capital and ability to pay cash dividends.

~~These~~The federal banking agencies’ capital requirements are the result of a final rule implementing recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act. In addition to establishing ~~the~~these minimum regulatory capital requirements, ~~the~~these regulations have established a CCB consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The CCB is designed to absorb losses during periods of economic stress. Banking institutions with a (i) CET1 to risk-weighted assets, (ii) Tier 1 capital to risk-weighted assets or (iii) total capital to risk-weighted assets above the respective minimum but below the minimum plus the CCB will face constraints on dividends, equity repurchases and discretionary bonus payments to executive officers based on the amount of the shortfall.

The Bank, after consultation with the OCC, determined that a risk-weighting of 100% should be applied to its Advantage Loan Program loans under the risk weighting requirements for first-lien residential mortgage exposures set forth under the Basel III capital rules. Previously,At December 31, 2022, the Company and the Bank generally applied a 50% risk weight to the Advantage Loan Program loans. The table below presents the Company’s and the Bank’s regulatory capital amounts and ratios applying the 100% risk weight as of September 30, 2022 and December 31, 2021 for the Company’s and Bank’s total adjusted capital to risk-weighted assets, Tier 1 (core) capital to risk-weighted assets and CET1 to risk weighted assets.

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~~At September 30, 2022 and December 31, 2021, the Company and the Bank had~~ met all regulatory capital requirements to which they ~~are~~were subject and held capital in excess of the CCB, and the Bank’s regulatory capital ratios exceeded the requirements to be considered well capitalized for all regulatory purposes. The following tables present the Company’s consolidated and the Bank’s actual and minimum required capital amounts and ratios at September 30, 2022 and December 31, 2021, applying the 100% risk weight to Advantage Loan Program loans:

For Capital

To be Well

Actual

Adequacy Purposes

Capitalized

Amount

Ratio

Amount

Ratio

Amount

Ratio

September 30, 2022

Total adjusted capital to risk‑weighted assets













Consolidated

$
409,170

26.21
%
$
124,357

8.00
%

N/A

N/A

Bank

413,262

26.60

124,275

8.00

$
155,344

10.00
%
Tier 1 (core) capital to risk‑weighted assets







Consolidated

350,162

22.43

93,268

6.00

N/A

N/A

Bank

393,524

25.33

93,206

6.00

124,275

8.00

Common Equity Tier 1 (CET1)







Consolidated

350,162

22.43

69,951

4.50

N/A

N/A

Bank

393,524

25.33

69,905

4.50

100,974

6.50

Tier 1 (core) capital to adjusted tangible assets (leverage ratio)







Consolidated

350,162

14.09

99,151

4.00

N/A

N/A

Bank

393,524

15.88

99,103

4.00

123,879

5.00




For Capital

To be Well

Actual

Adequacy Purposes

Capitalized

Amount

Ratio

Amount

Ratio

Amount

Ratio

December 31, 2021

Total adjusted capital to risk‑weighted assets













Consolidated

$
421,732

21.24
%
$
158,851

8.00
%

N/A

N/A

Bank

407,699

20.55

158,707

8.00

$
198,384

10.00
%
Tier 1 (core) capital to risk‑weighted assets













Consolidated

344,247

17.34

119,138

6.00

N/A

N/A

Bank

382,509

19.28

119,030

6.00

158,707

8.00

Common Equity Tier 1 (CET1)













Consolidated

344,247

17.34

89,354

4.50

N/A

N/A

Bank

382,509

19.28

89,273

4.50

128,950

6.50

Tier 1 (core) capital to adjusted tangible assets (leverage ratio)













Consolidated

344,247

11.47

120,039

4.00

N/A

N/A

Bank

382,509

12.77

119,859

4.00

149,824

5.00

~~Table~~CCB; however, effective as of ~~Contents~~

In order to provide a comparable trend analysis for the Bank’s and the Company’s risk based capital ratios applying the 100% risk weight to Advantage Loan Program loans, the tables below present the regulatory capital ratios applying the 100% risk weight at December 31 for each of the past five years. At each of the year-end dates reported,January 1, 2023, the Company and the Bank ~~had~~have each elected to use the CBLR framework for compliance with regulatory capital requirements. At March 31, 2023, the Company and Bank satisfied the requirements of the CBLR framework and therefore are considered to have met ~~all~~the minimum capital requirements to be “well capitalized” under applicable prompt corrective action requirement. Had we been subject to the CBLR framework at December 31, 2022, we would have been in compliance with the CBLR requirements and, as a result, we would have been deemed to be “well capitalized” and in compliance with any other generally appliable capital requirements. For further information regarding our regulatory capital requirements, ~~and applicable capital cushions~~see Note 11 to which they are subject and held capital in excess of the CCB, and the Bank would have been considered well capitalized for all regulatory purposes. The CCB requirement was phased in beginning on January 1, 2016 at the 0.625% level and increased by 0.625% on each subsequent January 1, until the buffer was implemented in full at 2.5% on January 1, 2019. Accordingly, the CCB at December 31, 2018 and 2017 was 1.875% and 1.25%, respectively.

Company at December 31,


2021

2020

2019

2018

2017

Total adjusted capital to risk-weighted assets

21.24
%
16.51
%
14.58
%
14.82
%
13.49
%
Tier 1 (core) capital to risk-weighted assets

17.34
%
12.65
%
11.56
%
11.77
%
10.33
%
Common Equity Tier 1 (CET1)

17.34
%
12.65
%
11.56
%
11.77
%
10.33
%
Tier 1 (core) capital to adjusted tangible assets (leverage ratio)

11.47
%
8.08
%
10.11
%
10.42
%
9.83
%


Bank at December 31,

2021

2020

2019

2018

2017

Total adjusted capital to risk-weighted assets

20.55
%
15.74
%
12.08
%
11.43
%
10.06
%
Tier 1 (core) capital to risk-weighted assets

19.28
%
14.47
%
11.32
%
10.66
%
9.12
%
Common Equity Tier 1 (CET1)

19.28
%
14.47
%
11.32
%
10.66
%
9.12
%
Tier 1 (core) capital to adjusted tangible assets (leverage ratio)

12.77
%
9.20
%
9.90
%
9.44
%
8.68
%

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Company at December 31,

2021

2020

2019

2018

2017

Total adjusted capital to risk-weighted assets

29.02
%
22.58
%
21.49
%
21.98
%
20.28
%
Tier 1 (core) capital to risk-weighted assets

24.08
%
17.68
%
17.04
%
17.45
%
15.53
%
Common Equity Tier 1 (CET1)

24.08
%
17.68
%
17.04
%
17.45
%
15.53
%
Tier 1 (core) capital to adjusted tangible assets (leverage ratio)

11.47
%
8.08
%
10.11
%
10.42
%
9.83
%


Bank at December 31,

2021

2020

2019

2018

2017

Total adjusted capital to risk-weighted assets

28.07
%
21.56
%
17.82
%
16.94
%
14.76
%
Tier 1 (core) capital to risk-weighted assets

26.79
%
20.27
%
16.70
%
15.80
%
13.71
%
Common Equity Tier 1 (CET1)

26.79
%
20.27
%
16.70
%
15.80
%
13.71
%
Tier 1 (core) capital to adjusted tangible assets (leverage ratio)

12.77
%
9.20
%
9.90
%
9.44
%
8.68
%

~~Recently Issued Accounting Guidance~~
~~See Note 2–Summary of Significant Accounting Policies to~~ our ~~unaudited~~ condensed consolidated financial statements included in ~~“Part I, Item~~“Item 1. Financial ~~Statements” for~~Statements.
As observed in the wake of the recent bank failures, compliance with regulatory minimum capital requirements is a ~~discussion~~tool used in assessing the Company’s capital adequacy, but is not necessarily determinative of ~~recently issued~~how the Company would fare under extreme stress. Factors that may affect the adequacy of the Company’s capital include the inherent limitations of fair value estimates and the assumptions thereof, the inherent limitations of accounting ~~guidance~~classifications of certain investments and ~~related impact~~the effect on ~~our financial condition~~their measurement, external macroeconomic conditions and ~~results~~their effects on capital and the Company’s ability to raise capital or refinance capital commitments, and extent of ~~operations.~~steps taken by state or federal governmental authorities in periods of extreme stress.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General.The principal objective of our asset and liability management function is to evaluate the interest rate risk within the balance sheet and pursue a controlled assumption of interest rate risk while maximizing net income and preserving adequate levels of liquidity and capital. The Asset Liability Committee of our board of directors (“ALCO”) has oversight of our asset and liability management function, which is implemented and managed by our Management Asset Liability Committee. Our Management Asset Liability Committee meets regularly to review, among other things, the sensitivity of our assets and liabilities to product offering rate changes, local and national market conditions and market interest rates. That group also reviews our liquidity, capital, deposit mix, loan mix and investment positions.

We manage our exposure to interest rates primarily by structuring our balance sheet in the ordinary course of ~~business. Our management of interest rate risk is overseen by our board of directors ALCO, and implemented by our management ALCO~~business based on a risk management infrastructure approved by our board of directors that outlines reporting and measurement requirements. In particular, this infrastructure sets limits, calculated quarterly, for various interest rate-related metrics, our economic value of equity (“EVE”) and net interest income simulations involving parallel shifts in interest rate curves. Steepening and flattening yield curves and various prepayment and deposit duration assumptions are prepared at least annually. Our interest rate management policies also require periodic review and documentation of all key assumptions used, such as identifying appropriate interest rate scenarios, setting loan prepayment rates and deposit durations based on historical analysis.

We do not typically enter into derivative contracts for the purpose of managing interest rate risk, but we may do so in the future. Based upon the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets.

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Net Interest Income Simulation.We use an interest rate risk simulation model to test the interest rate sensitivity of net interest income and the balance sheet. Instantaneous parallel rate shift scenarios are modeled and utilized to evaluate risk and establish exposure limits for acceptable changes in net interest income. These scenarios, known as rate shocks, simulate an instantaneous change in interest rates on a static balance sheet and use various assumptions, including, but not limited to, prepayments on loans and securities, deposit decay rates and pricing decisions on loans and ~~deposits, and reinvestment and replacement of asset and liability cash flows.~~

~~Table of Contents~~deposits.

The following table presents the estimated changes in net interest income of the Bank, calculated on a bank-only basis, which would result from changes in market interest rates over a 12-month period beginning ~~on September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022. The table below demonstrates that we are asset sensitive at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, with the asset sensitivity of our balance sheet ~~slightly~~ decreasing from December 31, ~~2021. Changes to~~2022 primarily from the increasing the beta assumptions on our money market product. Quarter over quarter the base net interest income decreased from a combination of market interest rates, balance sheet mix ~~are the primary driver of the~~ changes, ~~to net interest income.~~and key model assumption updates.


	At September 30,				At December 31,				At March 31,				At December 31,
	2022				2021				2023				2022
	Estimated				Estimated				Estimated				Estimated
	12-Months				12-Months				12-Months				12-Months
	Net Interest				Net Interest				Net Interest				Net Interest
Change in Interest Rates (Basis Points)	Income		Change		Income		Change		Income		Change		Income		Change

	(Dollars in thousands)								(Dollars in thousands)
400	$	91,099	6	%	$	89,446	6	%
300		90,006	5	%		89,738	7	%
200		88,842	4	%		89,266	6	%	$	74,234	2	%	$	83,587	4	%
100		87,315	2	%		86,909	3	%		73,607	2	%		82,016	2	%
0		85,646				84,214				72,483				80,074
–100		82,337	(4)	%		79,552	(6)	%
−100										70,395	(3)	%		75,959	(5)	%
−200										66,314	(9)	%		70,881	(12)	%

Economic Value of Equity Simulation.We also analyze our sensitivity to changes in interest rates through an EVE model. EVE represents the present value of the expected cash flows from our assets less the present value of the expected cash flows arising from our liabilities. EVE attempts to quantify our economic value using a discounted cash flow methodology. We estimate what our EVE would be as of a specific date. We then calculate what EVE would be as of the same date throughout a series of interest rate scenarios representing immediate and permanent parallel shifts in the yield curve. We currently calculate EVE under the assumptions that interest rates increase 100, 200, 300 and 400 basis points from current market rates, and under the assumption that interest rates decrease 100 basis points from current market rates.

The following table presents, as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively, the impacts of immediate and permanent parallel hypothetical changes in market interest rates on EVE of the Bank, calculated on a bank-only basis. The base EVE decreased from December 31, 2022 partially from interest rate and balance sheet mix changes, and partially from implementation of updated model assumptions of our non-maturity deposit beta and decay. The sensitivity of our balance sheet ~~increased~~worsened from December 31, ~~2021~~2022 in the up-rate scenarios and improved in the down-rate scenarios primarily as a result of ~~yield curve effects on our deposit liabilities’ fair value as well as overall changes in~~ the ~~balance sheet mix to longer-duration assets.~~updated decay assumptions. Since EVE is a long-term measurement of value, the change in EVE is not indicative of the short term (12-months) effects on ~~earnings~~earnings.


	At September 30,				At December 31,				At March 31,				At December 31,
	2022				2021				2023				2022
	Economic				Economic				Economic				Economic
	Value of				Value of				Value				Value
Change in Interest Rates (Basis Points)	Equity		Change		Equity		Change		of Equity		Change		of Equity		Change

��	(Dollars in thousands)
400	$	474,636	(18)	%	$	490,721	0	%
300		507,126	(12)	%		500,308	2	%
									(Dollars in thousands)
200		539,431	(7)	%		506,761	3	%	$	402,308	(13)	%	$	489,907	(10)	%
100		563,908	(2)	%		505,676	3	%		438,533	(5)	%		521,450	(4)	%
0		576,986				490,567				463,137				542,625
–100		566,289	(2)	%		437,362	(11)	%
−100										478,525	3	%		537,092	(1)	%
−200										484,680	5	%		522,085	(4)	%

As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing tables. Many assumptions are used to calculate the impact of interest rate fluctuations. Actual results may be significantly different than our projections due to several factors, including the timing and frequency of rate changes, market conditions and the shape of the yield curve. The computations of interest rate risk shown above do not include actions that our management may undertake to manage the risks in response to anticipated changes in interest rates, and actual results may also differ due to any actions

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taken in response to the changing rates. Accordingly, the data presented in the tables in this section should not be relied upon as indicative of actual results in the event of changes in interest rates and the resulting EVE and net interest income estimates are not intended to represent and should not be construed to represent our estimate of the underlying EVE or forecast of net interest income. Furthermore, the EVE presented in the foregoing table is not intended to present the fair market value of the Company, nor does it represent amounts that would be available for distribution to shareholders in the event of the liquidation of the Company.

~~Table of Contents~~

LIBOR Discontinuation

In 2017, the U.K. Financial Conduct Authority announced that it would no longer compel banks to submit rates for the calculation of LIBOR after 2021. The administrator of LIBOR has proposed to extend publication of the most commonly used U.S. dollar LIBOR settings to ~~September~~June 30, ~~2023~~2023. On April 6, 2021, legislation was adopted in New York State that provides for the use of a statutory replacement for U.S. dollar LIBOR in certain New York law legacy contracts. On March 15, 2022, the Consolidated Appropriations Act of 2022, among other things, provided for the use of interest rates based on SOFR in certain contracts currently based on LIBOR and ~~to cease publishing other LIBOR settings~~a safe harbor from liability for utilizing SOFR-based interest rates as a replacement for LIBOR. Regulations implementing this legislation were enacted by the FRB in a final rule on December ~~31, 2021.~~ 16, 2022.

We have significant exposure to financial instruments with attributes that are ~~either~~ directly or indirectly dependent on LIBOR to establish their interest rate and/or ~~value, the majority of which mature after December 31, 2021. Based~~value. We ceased using LIBOR for new originations on ~~our transition progress to date, we have ceased originating LIBOR-based products since~~ March 8, 2021 and began originating loans based on the U.S. Treasury ~~rate based loans after March 8, 2021. Our~~one-year constant maturity Treasury rates thereafter; however, our adjustable-rate loan products ~~have an index-based~~that are LIBOR-indexed currently continue to reset ~~feature which will continue.~~based on LIBOR. Pursuant to ~~recent~~ federal and New York State legislation, ~~we have determined that~~upon the cessation of the publication of the three-month LIBOR rate, the Company’s subordinated notes and our LIBOR-based loans ~~and outstanding subordinated notes~~ will ~~convert to SOFR-based rates.~~bear interest at a rate based on SOFR.

ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in the Company’s reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the specified time periods in the rules and forms of the SEC, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer ~~(“CEO”)~~ and Chief Financial Officer, ~~(“CFO”),~~ as appropriate, to allow timely decisions regarding required ~~disclosure.~~disclosures.
Our management, with the participation of the ~~CEO~~Chief Executive Officer and the ~~CFO,~~Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) promulgated under the Exchange Act) as of ~~September 30, 2022.~~March 31, 2023. Based on these evaluations, the ~~CEO~~Chief Executive Officer and the ~~CFO~~Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of ~~September 30, 2022.~~March 31, 2023.
Changes in Internal Control Over Financial Reporting
Our management is required to evaluate, with the participation of our ~~CEO~~Chief Executive Officer and our ~~CFO,~~Chief Financial Officer, any changes in internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during each ~~fiscal~~ quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. There were no changes in our internal control over financial reporting during the ~~quarter~~three months ended ~~September 30, 2022~~March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as described below and as described in “Part II, Item 1A. Risk Factors,” we are not aware of any material developments to our pending legal proceedings as disclosed in the Company’s ~~2021~~2022 Form 10-K, ~~and Forms 10-Q for the quarters ended March 31, 2022 and June 30, 2022,~~ nor are we involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. We believe that such routine legal proceedings, in the aggregate, are immaterial to our financial condition and results of operations.
~~OCC Agreement~~Department of Justice Investigation
The Bank has received grand jury subpoenas from the DOJ beginning in 2020 requesting the production of documents and information in connection with an investigation focused on the Bank’s Advantage Loan Program and related issues, including residential lending practices and public disclosures about that program contained in the Company’s filings with the SEC. On ~~September 27, 2022,~~March 15, 2023, the Company, entered into a ~~Consent Order~~Plea Agreement with the ~~OCC,~~DOJ, resolving the ~~OCC Investigation. Pursuant~~DOJ’s investigation. Under the Plea Agreement, the Company has agreed to ~~the Consent Order, the Bank paid a civil money penalty~~plead guilty to one count of ~~$6 million, which has been applied against the Company’s previously accrued liability for contingent losses. The Consent Order represents a full and final settlement of the OCC Investigation~~securities fraud primarily relating to disclosures with respect to the ~~Bank. Concurrent with~~Advantage Loan Program contained in the ~~Consent Order,~~Company’s 2017 IPO Registration Statement and its immediately following Annual Reports on Form 10-K filed in March 2018 and March 2019; pay $27.2 million in restitution for the ~~OCC notified the Bank that the OCC Agreement was terminated, which primarily related to certain aspects~~benefit of ~~the Bank’s BSA/AML~~non-insider victim shareholders; further enhance its compliance program and ~~the Bank’s credit administration.~~
~~Cahnman v. Allen, et al.~~
On July 28, 2020, we received the Shareholder Demand brought by Raymond Cahnman, a purported shareholder, set forth in a demand letter that was later reflected in a shareholder derivative complaint that was filed against usinternal controls with respect to securities law compliance; and ~~certain of our current and former directors, styled~~ ~~Cahnman v. Allen~~, ~~et al.~~~~, No. 2:22-cv-10124 (E.D. Mich.). On January 21, 2022, we entered into the Settlement, of which the court granted final approval on September 29, 2022. Pursuant~~provide periodic reports to the ~~Settlement, we agreed~~DOJ with respect to ~~adopt~~compliance matters. No criminal fine was imposed. The Company’s obligations under the Plea Agreement are generally effective for three years. This resolution releases the Company, as well as the Bank, from further prosecution for securities fraud and ~~implement the Corporate Governance Enhancements, many of which were already in progress and have now been completed, and pay attorneys’ fees and expenses~~underlying mortgage fraud in the ~~amount of $650 thousand in exchange~~Advantage Loan Program. At a hearing held on April 19, 2023, the District Court for the ~~release~~Eastern District of ~~all defendants from all alleged claims therein.~~Michigan preliminarily accepted the Plea Agreement, subject to the final court hearing. The Settlement provides customary releases of certain individuals and entities, including the current board of directors and certain former board members, and reserves for our board of directors the exclusive rightPlea Agreement remains subject to continue to evaluate and pursue claims against non-released individuals based on their conduct concerning, related to, or arising from the matters raised in the Shareholder Demand. Reimbursement of the $650 thousand due under the Settlement was paid by our insurance carriers under applicable insurance policies during the fourth quarter of 2022.final court approval.
Sterling Bank and Trust, F.S.B. and Sterling Bancorp, Inc. vs. Scott Seligman, et al.
On October 7, 2022, the Company and the Bank commenced an action against the Bank’s founder and controlling shareholder, and other nominal defendants, in the United States District Court for the Eastern District of Michigan styled Sterling Bank and Trust, F.S.B. and Sterling Bancorp, Inc. vs. Scott Seligman, et al., No. 2:22-cv-12398-SFC-DRG (E.D. Mich.). The complaint alleges that Mr. Seligman breached his fiduciary duties to the Company and the Bank by, among other actions and inactions, using his controlling position to develop and direct the Bank’s now-discontinued Advantage Loan Program to advance his own interests and unjustly enrich himself at the expense of the Company, the Bank and the Company’s minority shareholders. The complaint seeks to recover compensatory and other damages, disgorgement of certain monies and injunctive relief. On January 30, 2023, Mr. Seligman and the nominal defendants moved to dismiss the case. The Company and the Bank filed their opposition motions on March 13, 2023, and Mr. Seligman and the nominal defendants filed a reply brief on April 13, 2023. The court will hold a hearing to consider the plaintiff’s motion to dismiss, which we currently anticipate to take place in the third quarter of 2023. There is no assurance that we will be successful in any final adjudication of this case, that any remedy would be adequate in the event we are successful in the adjudication or that we would achieve an acceptable settlement.

~~Scott J. Seligman vs. Sterling Bancorp, Inc.~~
~~On November 3, 2022, Mr. Seligman commenced an action against the Company in the Oakland County Business Court styled~~ ~~Scott J. Seligman v. Sterling Bancorp, Inc.~~, No. 2:22-cv-12660-MAG-DRG (E.D. Mich.). The complaint alleges that Mr. Seligman is entitled to the advancement and reimbursement of all attorneys’ fees and other expenses incurred in connection with the complaint filed against him by the Company and the Bank as well as the certain government investigations involving the Company and the Bank, including investigations by the DOJ and OCC related to the Advantage Loan Program. The Company and the Bank have filed a motion with the Oakland County Business Court to have the case removed to the U.S. District Court for the Eastern District of Michigan. The Company intends to vigorously defend this and any related actions.

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ITEM 1A. RISK FACTORS
Except as described herein, there are no material changes from the risk factors as disclosed in the Company’s ~~2021~~2022 Form 10-K.

Our entry into the Plea Agreement may harm our reputation, harm our ability to engage with certain third parties and disqualify us from certain safe harbor exemptions from offering or selling our securities, and the failure to comply with the terms of the Plea Agreement may subject us to further prosecution.
As part of the Plea Agreement, the Company agreed to plead guilty to one count of securities fraud primarily relating to disclosures with respect to the Advantage Loan Program contained in the Company’s 2017 IPO Registration Statement and its immediately following Annual Reports on Form 10-K filed in March 2018 and ~~Form 10-Q~~March 2019. In addition to the reputational risk and the negative publicity we have already received regarding the Advantage Loan Program, our entry into the Plea Agreement may cause further damage to our reputation in the communities we serve. Further, our entry into the Plea Agreement may cause third parties, including certain quasi-governmental agencies or exchanges, to elect to cease doing business with us, where they have the discretion to do such. Any such damage to our reputation and our ability to conduct business with third parties could materially adversely affect our business, results of operation and financial condition.

The “bad actor” disqualification provisions of Regulation D under the Securities Act restrict an issuer from offering or selling securities in a private placement in reliance on Regulation D if, among other things, the issuer has been convicted of any felony or misdemeanor, or other “disqualifying event” under the rule, which has not been waived. The SEC or the court may waive such disqualification upon a showing of good cause that disqualification is not necessary under the circumstances for which the ~~quarters~~safe harbor exemptions are being denied. Absent a waiver, we will be restricted in our ability to raise capital in a private placement in reliance on Regulation D as a direct consequence of pleading guilty to a charge of securities fraud. We have submitted to the SEC and to the court a waiver request from the “bad actor” disqualifications. There is no assurance that the SEC or the court will grant this request. If the SEC and the court were to deny our waiver request, we will be limited in our ability to raise capital through a private placement under Regulation D, which could have an adverse impact on our business, financial condition and results of operations.

Furthermore, if the Company were to breach the Plea Agreement, the Company would be subject to prosecution for any known or newly-discovered criminal violations, including additional charges. In such event, our ability to develop or introduce new loan products would once again be curtailed and become uncertain, which would have an adverse impact on our business and results of operations.

Recent volatility in the banking sector, triggered by the failures of Silicon Valley Bank and Signature Bank, may result in legislative initiatives, agency rulemaking activities, or changes in agency policies and priorities that could subject the Company and the Bank to enhanced government regulation and supervision.
On March 10, 2023, Silicon Valley Bank (“SIVB”) was closed by the California Department of Financial Protection and Innovation (the “CDFPI”). Two days later, on March 12, 2023, Signature Bank (“SBNY”) also failed. In each case, the FDIC was appointed as receiver. The FDIC, together with the FRB and the U.S. Treasury Secretary, then took action under applicable emergency systemic risk authority to fully protect the depositors of each bank as the institutions were wound down. SIVB and SBNY each had substantial business relationships with, and exposure to, entities within the innovation sector, including financial technology and digital asset companies, and had received an influx of deposits over the course of several years which coincided with the rapid growth of that sector. In recent periods, however, SIVB and SBNY each began to experience significant deposit losses. These losses increased rapidly in early March, ultimately causing each institution to fail. Relatedly, First Republic Bank (“FRC”) also experienced significant deposit losses in the aftermath of the failures of SIVB and SBNY, and was closed by the CDFPI, which appointed the FDIC as receiver, on May 1, 2023.
Investor and customer confidence in the banking sector—particular with regard to mid-size and larger regional banking organizations—waned in response to the failures of SIVB and SBNY. Notably, the Company’s share price decreased by approximately 9% during March 2023, consistent with other regional banking organizations. According to data published by the FRB, deposits at domestic commercial banks decreased by approximately $280 billion between the end of February 2023 and the week ended March ~~31, 2022~~29, 2023. The Bank’s total deposits decreased by $32.2 million, or 2%, during the first quarter of 2023.
Congress and ~~June 30, 2022.~~the federal banking agencies have begun to evaluate the events leading to the failures of SIVB and SBNY, and will likely also evaluate such with respect to the failure of FRC, to ascertain possible explanations for these developments. Preliminarily,

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legislators and the leadership of the federal banking agencies have posited varying theories, including, for example, inadequate prudential regulation of regional banking organizations (generally, institutions with less than $250 billion in total assets), insufficient supervision of such organizations, and a failure by the institutions themselves to properly manage risks—specifically including interest rate and liquidity risks in consideration of each institution’s business model, exposure to the innovation sector, and substantial uninsured deposit liabilities.

Further evaluation of recent developments in the banking sector may lead to governmental initiatives intended to prevent future bank failures and stem significant deposit outflows from the banking sector, including (i) legislation aimed at preventing similar future bank runs and failures and stabilizing confidence in the banking sector over the long term; (ii) agency rulemaking to modify and enhance relevant regulatory requirements, specifically with respect to liquidity risk management, deposit concentrations, capital adequacy, stress testing and contingency planning, and safe and sound banking practices; and (iii) enhancement of the agencies’ supervision and examination policies and priorities. More specifically, for instance, the federal banking agencies may modify the risk-based capital regulations to eliminate the ability of certain banks to elect to offset portions of their accumulated other comprehensive income related to unrealized gains and losses on investment securities when calculating regulatory capital requirements. Alternatively, the treatment of accumulated other comprehensive income under U.S. GAAP also could be modified, the effect of which may carry through to banks’ capital management and regulatory compliance practices. The federal banking agencies may also re-evaluate applicable liquidity risk management standards, such as by reconsidering the mix of assets that are deemed to be “high-quality liquid assets” (“HQLA”) and/or how HQLA holdings and cash inflows and outflows are tabulated and weighted for liquidity management purposes.

Although we cannot predict with certainty which initiatives may be pursued by lawmakers and agency leadership, nor can we predict the terms and scope of any such initiatives, including whether community banks such as the Bank would be impacted, any of the potential changes referenced above could, among other things, subject us to additional costs, limit the types of financial services and products we may offer, and limit our future growth, any of which could materially and adversely affect our business, results of operations or financial condition.

We ~~expect~~may experience increases in FDIC insurance assessments.

The losses incurred by the Deposit Insurance Fund in connection with the resolution of SIVB, SBNY and FRC, which are estimated to ~~suspend~~amount to approximately $35.5 billion in the ~~origination of residential loans as our third-party vendor for residential loan origination, Promontory MortgagePath, is ceasing~~aggregate, are required by law to ~~do business.~~

~~During~~be recovered through one or more special assessments on depository institutions and, potentially, their holding companies if the ~~second quarter of 2022, we outsourced our residential loan origination function~~FDIC determines such action to Promontory MortgagePath, which provides community banks with an outsourced residential lending service for mortgage loan production. In November 2022, Promontory MortgagePath advised the Company of its intent to cease conducting business. Promontory MortgagePathbe appropriate and the ~~Company will continue to accept loan applications through November 30, 2022,~~Secretary of the Treasury concurs. The FDIC must consider a variety of factors in determining the terms and ~~will use commercially reasonable efforts to evaluate and originate pending loan applications by February 28, 2023. At~~applicability of any such special assessment, including, among others, the types of entities that time, we will suspend the origination of residential loans pending further evaluation of our alternatives, which may include discontinuing the origination of residential loans. However, we may purchase residential loansbenefit from the ~~secondary market~~action taken by the agencies, economic conditions, and anticipated industry impacts. The FDIC has announced that it intends to publish a notice of proposed rulemaking for a special assessment in May 2023. It is also possible that our regular deposit insurance assessment rates will increase should the ~~future. As~~FDIC alter the assessment rate schedule or calculation methodology for all larger financial institutions (including the Bank) as a result of the ~~suspension~~recent bank failures. Although we cannot predict the specific timing and terms of any special assessment relating to the resolution of SIVB, SBNY and FRC, including whether such special assessment would be imposed on community banks such as the Bank, or any other increase in out deposit insurance assessment rates, any increase in our assessment fees could have a materially adverse effect on our results of operations and financial condition.

The proportion of our deposit account balances that exceed FDIC insurance limits may expose the Bank to enhanced liquidity risk in times of financial distress.

A significant factor in the failures of SIVB, SBNY and FRC appears to have been the proportion of the ~~origination~~deposits held by each institution that exceeded FDIC insurance limits. In response to the failures of ~~residential loans~~SIVB, SBNY and FRC, many large depositors across the industry have withdrawn deposits in excess of applicable deposit insurance limits and deposited these funds in other financial institutions and, in many instances, moved these funds into money market mutual funds or other similar securities accounts in an effort to diversify the risk of further bank failure(s).

Uninsured deposits historically have been viewed by the FDIC as less stable than insured deposits. According to statements made by the FDIC staff and the leadership of the federal banking agencies, customers with larger uninsured deposit account balances often are small- and mid-sized businesses that rely upon deposit funds for payment of operational expenses and, as a result, are more likely to closely monitor the financial condition and performance of their depository institutions. As a result, in the event of financial distress, uninsured depositors historically have been more likely to withdraw their deposits.

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As of March 31, 2023, approximately 20% of our total deposits of $1.9 billion were not insured by the FDIC. If a significant portion of our deposits were to be withdrawn within a short period of time such that additional sources of funding would be required to meet withdrawal demands, we may be unable to obtain funding at favorable terms, which may have an adverse effect on our net interest margin. Obtaining adequate funding to meet our deposit obligations may be more challenging during periods of elevated prevailing interest rates, such as the present, and our ~~decision earlier~~ability to attract depositors during a time of actual or perceived distress or instability in the marketplace may be limited. Further, interest rates paid for borrowings generally exceed the interest rates paid on deposits, and this ~~year to discontinue~~spread may be exacerbated by higher prevailing interest rates.

In addition, because the ~~origination of construction loans, we expect the size~~fair value of our ~~balance sheet~~available for sale investment securities decrease when interest rates increase, after-tax proceeds resulting from the sale of such assets may be diminished during periods when interest rates are elevated. At March 31, 2023, our accumulated other comprehensive loss related to ~~continue~~unrealized net losses on investment securities was $16.7 million, which currently does not impact our regulatory capital ratios. However, should we sell all or a material portion of our investment securities portfolio to ~~decline~~increase liquidity in the face of depositor withdrawals in the current interest rate environment, we may recognize significant losses that would, in turn, reduce our regulatory capital position. Under such circumstances, we may access funding from sources such as ~~loan repayments are received.~~the FRB’s discount window or its recently-established Bank Term Funding Program to manage our liquidity risk and mitigate the risk to our regulatory capital position.

The occurrence of any of these events could materially and adversely affect our business, results of operations or financial condition.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities by the Issuer
Withholding of Vested Restricted Stock Awards
During the three months ended ~~September 30, 2022,~~March 31, 2023, the Company withheld shares of common stock representing a portion of the restricted stock awards that vested during the period under our employee stock benefit plans in order to pay employee tax liabilities associated with such vesting. These withheld shares are treated the same as repurchased shares for accounting purposes.

The following table provides certain information with respect to our purchases of shares of the Company’s common stock, as of the settlement date, during the three months ended ~~September 30, 2022,~~March 31, 2023, all of which represent tax withholding of restricted stock awards:


Issuer Purchases of Equity Securities

Issuer Purchases of Equity Securities

Total Number of

Approximate Dollar

Total Number of

Approximate Dollar

Shares Purchased as

Value of Shares that

Shares Purchased as

Value of Shares that

Total Number

Average

Part of Publicly

May Yet Be Purchased

Total Number

Average

Part of Publicly

May Yet Be Purchased

of Shares

Price Paid

Announced Plans or

Under the

of Shares

Price Paid

Announced Plans or

Under the
Period

Purchased⁽¹⁾

per Share

Programs

Plans or Programs⁽²⁾

Purchased⁽¹⁾

per Share

Programs

Plans or Programs⁽²⁾
July 1 - 31, 2022

268

$
5.89

—

$
19,568,117
August 1 - 31, 2022

—

—

—

19,568,117
September 1 - 30, 2022

1,031

5.95

—

19,568,117
January 1 - 31, 2023

972

$
6.00

—

$
19,568,117
February 1 - 28, 2023

—

—

—

19,568,117
March 1 - 31, 2023

11,194

6.20

—

19,568,117
Total

1,299

$
5.94

—



12,166

$
6.18

—


(1) These shares were acquired from employees to satisfy income tax withholding requirements in connection with vesting share awards during the three months ended ~~September 30, 2022.~~March 31, 2023.
(2) In 2018, the Company announced a stock repurchase program for up to $50 million of its outstanding stock. At ~~September 30, 2022,~~March 31, 2023, $19.6 million remains of the $50 million authorized repurchase amount. In March 2020, the Company suspended the stock repurchase program.

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ITEM 6. EXHIBITS
A list of exhibits to this Form 10-Q is set forth in the Exhibit Index below.

Incorporated by Reference

Incorporated by Reference
Exhibit
Number

Exhibit Description

Filed /Furnished
Herewith

Form

Period
Ending

Exhibit /
Appendix
Number

Filing Date

Exhibit Description

Filed /Furnished
Herewith

Form

Period
Ending

Exhibit /
Appendix
Number

Filing Date

10.1

Consent Order, dated September 27, 2022

8-K

N/A

10.1

9/27/2022

Plea Agreement dated March 15, 2023 by and between Sterling Bancorp, Inc. and the U.S. Department of Justice

8-K

10.1

3/15/2023

31.1

Section 302 Certification — Chief Executive Officer

X

Section 302 Certification — Chief Executive Officer

X

31.2

Section 302 Certification — Chief Financial Officer

X

Section 302 Certification — Chief Financial Officer

X

32.1*

Section 906 Certification — Chief Executive Officer

X

Section 906 Certification — Chief Executive Officer

X

32.2*

Section 906 Certification — Chief Financial Officer

X

Section 906 Certification — Chief Financial Officer

X

101.INS**

Inline XBRL Instance Document

X

Inline XBRL Instance Document

X

101.SCH

Inline XBRL Taxonomy Extension Schema Document

X

Inline XBRL Taxonomy Extension Schema Document

X

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

X

Inline XBRL Taxonomy Extension Calculation Linkbase Document

X

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

X

Inline XBRL Taxonomy Extension Definition Linkbase Document

X

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

X

Inline XBRL Taxonomy Extension Label Linkbase Document

X

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

X

Inline XBRL Taxonomy Extension Presentation Linkbase Document

X

104

Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)

X

Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)

X

* This document is being furnished with this Quarterly Report on Form 10-Q. This certification is deemed not filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act, or the Exchange Act.
** The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: ~~November 14, 2022~~May 10, 2023

STERLING BANCORP, INC.

(Registrant)

By:
/s/ THOMAS M. O’BRIEN

Thomas M. O’Brien
Chairman and Chief Executive Officer
(Principal Executive Officer)

By:
/s/ KAREN KNOTT

Karen Knott
Chief Financial Officer
(Principal Financial and Accounting Officer)

6867


	Three Months Ended at September 30,
	2022						2021
	Average		Interest		Cash Basis		Average		Interest		Cash Basis
	Recorded		Income		Interest		Recorded		Income		Interest
	Investment		Recognized		Recognized		Investment		Recognized		Recognized
With no related allowance for loan losses recorded:
Residential real estate:
First mortgage	$	—	$	—	$	—	$	82	$	—	$	—
Commercial real estate:
Retail		—		—		—		7		—		—
Hotels/Single-room occupancy hotels		—		—		—		10,862		—		—
Office		—		—		—		2,769		—		—
Construction		5,375		40		27		18,820		40		27
Commercial lines of credit:
Private banking		111		2		1		119		2		1
Subtotal		5,486		42		28		32,659		42		28
With an allowance for loan losses recorded:
Residential real estate:
First mortgage		48		2		2		279		1		1
Construction		—		—		—		10,387		56		38
Subtotal		48		2		2		10,666		57		39
Total	$	5,534	$	44	$	30	$	43,325	$	99	$	67


	Nine Months Ended at September 30,
	2022						2021
	Average		Interest		Cash Basis		Average		Interest		Cash Basis
	Recorded		Income		Interest		Recorded		Income		Interest
	Investment		Recognized		Recognized		Investment		Recognized		Recognized
With no related allowance for loan losses recorded:
Residential real estate:
First mortgage	$	—	$	—	$	—	$	88	$	—	$	—
Commercial real estate:
Retail		—		—		—		765		—		—
Hotels/Single-room occupancy hotels		—		—		—		17,948		—		—
Office		—		—		—		2,768		—		—
Other		—		—		—		91		—		—
Construction		6,885		118		105		27,387		192		179
Commercial lines of credit:
Private banking		113		5		4		1,264		7		7
Subtotal		6,998		123		109		50,311		199		186
With an allowance for loan losses recorded:
Residential real estate:
First mortgage		198		3		3		280		3		3
Construction		—		—		—		9,751		181		163
Subtotal		198		3		3		10,031		184		166
Total	$	7,196	$	126	$	112	$	60,342	$	383	$	352


	September 30, 2022				December 31, 2021
			Loans Past				Loans Past
			Due Over				Due Over
			90 Days Still				90 Days Still
	Nonaccrual		Accruing		Nonaccrual		Accruing
Residential real estate:
Residential first mortgage	$	35,654	$	36	$	45,439	$	39
Residential second mortgage		189		—		236		—
Commercial real estate:
Hotels/Single-room occupancy hotels		—		—		4,441		—
Construction		—		—		12,499		—
Total	$	35,843	$	36	$	62,615	$	39


	Company at December 31,
	2021		2020		2019		2018		2017
Total adjusted capital to risk-weighted assets	21.24	%	16.51	%	14.58	%	14.82	%	13.49	%
Tier 1 (core) capital to risk-weighted assets	17.34	%	12.65	%	11.56	%	11.77	%	10.33	%
Common Equity Tier 1 (CET1)	17.34	%	12.65	%	11.56	%	11.77	%	10.33	%
Tier 1 (core) capital to adjusted tangible assets (leverage ratio)	11.47	%	8.08	%	10.11	%	10.42	%	9.83	%


	Bank at December 31,
	2021		2020		2019		2018		2017
Total adjusted capital to risk-weighted assets	20.55	%	15.74	%	12.08	%	11.43	%	10.06	%
Tier 1 (core) capital to risk-weighted assets	19.28	%	14.47	%	11.32	%	10.66	%	9.12	%
Common Equity Tier 1 (CET1)	19.28	%	14.47	%	11.32	%	10.66	%	9.12	%
Tier 1 (core) capital to adjusted tangible assets (leverage ratio)	12.77	%	9.20	%	9.90	%	9.44	%	8.68	%


	Issuer Purchases of Equity Securities						Issuer Purchases of Equity Securities
				Total Number of		Approximate Dollar				Total Number of		Approximate Dollar
				Shares Purchased as		Value of Shares that				Shares Purchased as		Value of Shares that
	Total Number	Average		Part of Publicly		May Yet Be Purchased	Total Number	Average		Part of Publicly		May Yet Be Purchased
	of Shares	Price Paid		Announced Plans or		Under the	of Shares	Price Paid		Announced Plans or		Under the
Period	Purchased⁽¹⁾	per Share		Programs	Plans or Programs⁽²⁾		Purchased⁽¹⁾	per Share		Programs	Plans or Programs⁽²⁾
July 1 - 31, 2022	268	$	5.89	—	$	19,568,117
August 1 - 31, 2022	—		—	—		19,568,117
September 1 - 30, 2022	1,031		5.95	—		19,568,117
January 1 - 31, 2023							972	$	6.00	—	$	19,568,117
February 1 - 28, 2023							—		—	—		19,568,117
March 1 - 31, 2023							11,194		6.20	—		19,568,117
Total	1,299	$	5.94	—			12,166	$	6.18	—


Date: ~~November 14, 2022~~May 10, 2023		STERLING BANCORP, INC.
		(Registrant)

	By:	/s/ THOMAS M. O’BRIEN
		Thomas M. O’Brien Chairman and Chief Executive Officer (Principal Executive Officer)

	By:	/s/ KAREN KNOTT
		Karen Knott Chief Financial Officer (Principal Financial and Accounting Officer)