Docoh
Loading...

SBT Sterling Bancorp

Filed: 14 May 21, 12:39pm

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 March 31, 2021

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

SBT

The NASDAQ Stock Market LLC (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-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 May 11, 2021, 50,189,609 shares of the registrant’s Common Stock were outstanding.

Sterling Bancorp, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

(dollars in thousands)

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

March 31, 

December 31, 

    

2021

    

2020

Assets

 

  

 

  

Cash and due from banks

$

873,223

$

998,497

Interest-bearing time deposits with other banks

5,528

7,021

Investment securities

 

259,686

 

304,958

Mortgage loans held for sale

 

19,848

 

22,284

Loans, net of allowance for loan losses of $71,871 and $72,387

 

2,389,599

 

2,434,356

Accrued interest receivable

 

10,439

 

10,990

Mortgage servicing rights, net

4,626

5,688

Leasehold improvements and equipment, net

 

9,085

 

8,512

Operating lease right-of-use assets

18,791

19,232

Federal Home Loan Bank stock, at cost

22,950

22,950

Cash surrender value of bank-owned life insurance

 

32,631

 

32,495

Deferred tax asset, net

 

24,104

 

24,326

Other assets

 

23,517

 

22,736

Total assets

$

3,694,027

$

3,914,045

Liabilities and Shareholders' Equity

 

  

 

  

Liabilities:

 

  

 

  

Noninterest-bearing deposits

$

61,329

$

58,458

Interest-bearing deposits

 

2,749,868

 

3,040,508

Deposits held for sale

78,035

Total deposits

 

2,889,232

 

3,098,966

Federal Home Loan Bank borrowings

 

318,000

 

318,000

Subordinated notes, net

 

65,384

 

65,341

Operating lease liabilities

20,056

20,497

Accrued expenses and other liabilities

 

79,439

 

91,650

Total liabilities

 

3,372,111

 

3,594,454

Shareholders’ equity:

 

  

 

  

Preferred stock, authorized 10,000,000 shares; 0 shares issued and outstanding

 

 

Common stock, 0 par value, authorized 500,000,000 shares; issued and outstanding 50,009,407 shares at March 31, 2021 and 49,981,861 shares at December 31, 2020, respectively

 

80,807

 

80,807

Additional paid-in capital

 

13,603

 

13,544

Retained earnings

 

227,178

 

224,853

Accumulated other comprehensive income

 

328

 

387

Total shareholders’ equity

 

321,916

 

319,591

Total liabilities and shareholders’ equity

$

3,694,027

$

3,914,045

See accompanying notes to condensed consolidated financial statements.

2

Sterling Bancorp, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

(dollars in thousands, except per share amounts)

Three Months Ended

March 31, 

    

2021

    

2020

Interest income

Interest and fees on loans

$

31,294

$

39,525

Interest and dividends on investment securities and restricted stock

390

1,034

Other interest

263

434

Total interest income

31,947

40,993

Interest expense

Interest on deposits

6,702

10,364

Interest on Federal Home Loan Bank borrowings

838

810

Interest on subordinated notes

1,180

1,177

Total interest expense

8,720

12,351

Net interest income

23,227

28,642

Provision (recovery) for loan losses

(737)

20,853

Net interest income after provision (recovery) for loan losses

23,964

7,789

Non-interest income

Service charges and fees

159

117

Investment management and advisory fees

— 

313

Gain on sale of investment securities

— 

233

Gain on sale of mortgage loans held for sale

398

269

Unrealized gains (losses) on equity securities

(90)

80

Net servicing loss

(430)

(911)

Income on cash surrender value of bank-owned life insurance

313

328

Other

103

100

Total non-interest income

453

529

Non-interest expense

Salaries and employee benefits

7,848

6,753

Occupancy and equipment

2,196

2,118

Professional fees

8,755

3,312

Advertising and marketing

40

273

FDIC assessments

719

19

Data processing

346

335

Net recovery of mortgage repurchase liability

(153)

— 

Other

1,583

1,425

Total non-interest expense

21,334

14,235

Income (loss) before income taxes

3,083

(5,917)

Income tax expense (benefit)

758

(1,887)

Net income (loss)

$

2,325

$

(4,030)

Income (loss) per share, basic and diluted

$

0.05

$

(0.08)

Weighted average common shares outstanding:

Basic

49,851,202

49,837,662

Diluted

49,912,860

49,837,662

See accompanying notes to condensed consolidated financial statements.

3

Sterling Bancorp, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(dollars in thousands)

Three Months Ended

March 31, 

    

2021

    

2020

Net income (loss)

$

2,325

$

(4,030)

Other comprehensive income (loss), net of tax:

Unrealized gains (losses) on investment securities, arising during the period, net of tax effect of $(23) and $284, respectively

(59)

731

Reclassification adjustment for gains included in net income of $- and $233, respectively, included in gain on sale of investment securities, net of tax effect of $- and $65, respectively

— 

(168)

Total other comprehensive income (loss)

(59)

563

Comprehensive income (loss)

$

2,266

$

(3,467)

See accompanying notes to condensed consolidated financial statements.

4

Sterling Bancorp, Inc.

Condensed Consolidated Statements of Changes in Shareholders’ Equity

(dollars in thousands, except share amounts)

Accumulated

Additional

Other

Total

Common Stock

Paid-in

Retained

Comprehensive

Shareholders’

    

Shares

    

Amount

    

Capital

    

Earnings

    

Income (Loss)

    

Equity

Balance at January 1, 2020

49,944,473

$

80,889

$

13,210

$

238,319

$

196

$

332,614

Net loss

(4,030)

(4,030)

Repurchases of shares of common stock

(10,912)

(82)

(82)

Stock-based compensation

134,177

109

109

Other comprehensive income

 

 

 

 

563

 

563

Dividends distributed ($0.01 per share)

 

 

 

(499)

 

 

(499)

Balance at March 31, 2020

50,067,738

$

80,807

$

13,319

$

233,790

$

759

$

328,675

Balance at January 1, 2021

49,981,861

$

80,807

$

13,544

$

224,853

$

387

$

319,591

Net income

2,325

2,325

Restricted stock surrendered due to 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

See accompanying notes to condensed consolidated financial statements.

5

Sterling Bancorp, Inc.

Condensed Consolidated Statements of Cash Flows

(dollars in thousands)

Three Months Ended

March 31, 

    

2021

    

2020

Cash Flows From Operating Activities

 

  

 

  

Net income (loss)

$

2,325

$

(4,030)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

Provision (recovery) for loan losses

 

(737)

 

20,853

Deferred income taxes

 

245

 

(6,237)

Gain on sale of investment securities

 

 

(233)

Unrealized (gains) losses on equity securities

 

90

 

(80)

Amortization (accretion), net, on investment securities

 

576

 

(128)

Depreciation and amortization on leasehold improvements and equipment

408

398

Origination, net of principal payments, mortgage loans held for sale

 

(7,980)

 

(16,855)

Proceeds from sale of mortgage loans held for sale

 

10,740

 

14,578

Gain on sale of mortgage loans held for sale

 

(398)

 

(269)

Net recovery of mortgage repurchase liability

(153)

Increase in cash surrender value of bank-owned life insurance, net of premiums

 

(136)

 

(153)

Valuation allowance adjustments and amortization of mortgage servicing rights

 

1,136

 

1,896

Stock-based compensation

105

109

Other

 

43

 

39

Change in operating assets and liabilities:

 

 

Accrued interest receivable

 

551

 

497

Other assets

190

662

Accrued expenses and other liabilities

 

(10,111)

 

(13,504)

Net cash used in operating activities

 

(3,106)

 

(2,457)

Cash Flows From Investing Activities

 

  

 

  

Maturities of interest-bearing time deposits with other banks

1,493

Maturities and principal receipts of investment securities

44,524

47,272

Sales of investment securities

23,044

Purchases of investment securities

 

(75,717)

Net decrease in loans

 

133,438

 

71,032

Purchases of portfolio loans

(90,862)

Purchase of leasehold improvements and equipment

 

(981)

 

(281)

Net cash provided by investing activities

 

87,612

 

65,350

Cash Flows From Financing Activities

 

  

 

  

Net increase (decrease) in deposits

 

(209,734)

 

149,853

Proceeds from advances from Federal Home Loan Bank

 

 

100,000

Cash paid for surrender of vested shares due to employee tax liability

(46)

Repurchase of shares of common stock

(82)

Dividends paid to shareholders

 

 

(499)

Net cash provided by (used in) financing activities

 

(209,780)

 

249,272

Net change in cash and due from banks

 

(125,274)

 

312,165

Cash and due from banks at beginning of period

 

998,497

 

77,819

Cash and due from banks at end of period

$

873,223

$

389,984

Supplemental cash flows information

 

  

 

  

Cash paid:

 

  

 

  

Interest

$

11,582

$

9,993

Income taxes

102

Noncash investing and financing activities:

Right-of-use assets obtained in exchange for new operating lease liabilities

530

42

See accompanying notes to condensed consolidated financial statements.

6

Table of Contents

Sterling Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except 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, with its subsidiaries, the “Company”) is a unitary thrift holding company that was incorporated in 1989 and the parent company to 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 other consumer loans and provides deposit products, consisting primarily of checking, savings and term certificate accounts. The Bank operates through a network of 30 branches of which 26 branches are located in San Francisco and Los Angeles, California with the remaining branches located in New York, New York, Southfield, Michigan and the greater Seattle market.

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 1 reportable segment, community banking.

On March 19, 2021, the Bank entered into an agreement with First Federal Savings & Loan Association of Port Angeles, a Washington state chartered bank, to sell the Bank’s Bellevue, Washington branch office, subject to receipt of applicable regulatory approvals and other customary closing conditions. The sale includes the transfer of all deposit accounts located at the branch, with a total balance of $78,035 at March 31, 2021, as well as the transfer of all branch premises and equipment. The agreement provides that the Bank will receive a premium of 2.1% on the principal balance of the deposits at closing. The agreement also provides that the buyer intends to offer employment to all associated staff. This transaction is expected to close in the second quarter of 2021.

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.

Basis of Presentation

The condensed consolidated balance sheet as of March 31, 2021, and the condensed consolidated statements of income, comprehensive income (loss), changes in shareholders’ equity and cash flows for the three months ended March 31, 2021 and 2020 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 months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ended December 31, 2021 or for any future annual or interim period. The consolidated balance sheet at December 31, 2020 included herein was derived from the audited financial statements as of that date. The accompanying unaudited 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, 2020, as filed with the SEC on March 26, 2021 (the “2020 Form 10-K”).

Note 2—New Accounting Standards

Recently Issued Accounting Guidance Not Yet Adopted

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, 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

7

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except per share amounts)

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 U.S. Securities and Exchange Commission (the “SEC”)). The Company, as a smaller reporting company as of the relevant measuring period, qualified for this extension.

At this time, the Company has formed a cross-functional implementation team consisting of individuals from credit, finance and information systems. The implementation team has been working with a software vendor to assist in implementing required changes to credit loss estimation models and processes. The historical data set for model development has been finalized, and the credit loss estimation models are in the process of being developed and tested. The Company expects to recognize a cumulative effect adjustment to the opening balance of retained earnings as of 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 adjustment or of the overall impact of ASU No. 2016-13 on its consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The relief provided by this guidance is elective and applies to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. The guidance provides that changes in contract terms that are made to effect the reference rate reform transition are considered related to the replacement of a reference rate if they are not the result of a business decision that is separate from or in addition to changes to the terms of a contract to effect that transition. If certain criteria are met, entities can elect to not apply certain modification accounting requirements to contracts affected by reference rate reform. The Company’s primary contracts that reference LIBOR are its loan contracts, purchase and sale agreements for investment securities transactions, customer deposit agreements and borrowing agreements with the FHLB. The Company has not yet determined an alternative rate to LIBOR at this time. The optional amendments in ASU No. 2020-04 are effective for all entities for contract modifications made for LIBOR transition between March 12, 2020 through December 31, 2022. The Company may take advantage of the LIBOR transition relief allowed under this ASU in the future.

In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848), Scope. The amendments in this guidance refine the scope of Topic 848 and clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting also apply to derivative instruments that use an interest rate for margining, discounting or contract price alignment that is modified as a result of reference rate reform (commonly referred to as the discounting transition). ASU No. 2021-01 expands the scope of Topic 848 to also include certain derivative instruments that do not reference LIBOR or a reference rate that is expected to be discontinued, but that are being modified as a result of the discounting transition. Currently, the Company does not use derivative instruments and does not anticipate taking advantage of the LIBOR transition relief allowed under this ASU.

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”). The condensed consolidated financial statements include the results of the Company and its wholly-owned subsidiary.

On December 21, 2020, QCM, LLC, doing business as Quantum Capital Management, a wholly-owned subsidiary of Quantum Fund, LLC and an indirect wholly-owned subsidiary of the Bank, completed the sale of substantially all of its assets, which consisted

8

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except per share amounts)

primarily of client advisory agreements for aggregate consideration of $250. The operations of Quantum Capital Management were not significant.

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

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 period. 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 March 31, 2021 and December 31, 2020, residential real estate loans accounted for 82% and 81%, respectively, of the loan portfolio. 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 March 31, 2021 and December 31, 2020, approximately 86% and 87%, respectively, of the loan portfolio was originated to customers in California.

Starting December 9, 2019, the Bank suspended its Advantage Loan Program and announced on March 6, 2020 that it permanently discontinued this program. Loans originated under this Program comprised a significant component of the Bank’s total loan originations. Advantage Loan Program loans (including nonaccrual residential real estate loans held for sale of $18,572 at March 31, 2021) totaled $1,488,343 and $1,515,248, or 73% and 74%, of the residential loan portfolio at March 31, 2021 and December 31, 2020, respectively.

Risks and Uncertainties – COVID-19

The coronavirus disease 2019 (“COVID-19”) pandemic, and related efforts to contain it, have caused significant disruptions in the functioning of the financial markets, resulted in an unprecedented slowdown in economic activity and a related increase in unemployment, and have increased economic and market uncertainty and volatility. The Company’s primary market areas of California, the greater Seattle market, and New York City have been hit particularly hard by the COVID-19 pandemic. Federal and state governments have taken, and continue to take, unprecedented actions to contain the spread of the disease, including vaccine distribution, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief for businesses and individuals impacted by the pandemic.

During the first quarter of 2021, the COVID-19 pandemic continues to create and exacerbate significant risks and uncertainties for the market that the Bank serves. As the Bank’s residential and commercial customers are facing various levels of financial stress, the Bank continues to experience an elevated level of delinquent and nonaccrual loans, primarily in residential real estate, office, lodging, retail and construction loans.

The duration and severity of the effect of the COVID-19 pandemic on economic, market and business conditions remain uncertain. The Company continues to be subject to heightened business, operational, market, credit and other risks related to the COVID-19 pandemic, which may have an adverse effect on its business, financial condition, liquidity, results of operations, risk-weighted assets and regulatory capital.

9

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except per share amounts)

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, 2021 and December 31, 2020 and the corresponding amounts of gross unrealized gains and losses:

March 31, 2021

Amortized

Gross Unrealized

Fair

    

Cost

    

Gain

    

Loss

    

Value

Available for sale:

 

  

 

  

 

  

 

  

U.S. Treasury & Agency securities

$

118,624

$

162

$

$

118,786

Mortgage-backed securities

31,462

70

(418)

31,114

Collateralized mortgage obligations

 

103,658

 

729

 

(68)

 

104,319

Collateralized debt obligations

 

213

 

 

(20)

 

193

Total

$

253,957

$

961

$

(506)

$

254,412

December 31, 2020

Amortized

Gross Unrealized

Fair

    

Cost

    

Gain

    

Loss

    

Value

Available for sale:

 

  

 

  

 

  

 

  

U.S. Treasury & Agency securities

$

138,742

$

255

$

$

138,997

Mortgage-backed securities

33,743

72

(1)

33,814

Collateralized mortgage obligations

 

126,359

 

628

 

(391)

 

126,596

Collateralized debt obligations

 

214

 

 

(27)

 

187

Total

$

299,058

$

955

$

(419)

$

299,594

Securities with a fair value of $73,725 were pledged as collateral on FHLB borrowings at March 31, 2021.

All of the Company’s mortgage-backed securities, and a majority of the Company’s 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 $720 and $816 at March 31, 2021 and December 31, 2020, respectively.

NaN 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, 2021 and December 31, 2020.

For the three months ended March 31, 2020, the proceeds from sales of debt securities available for sale were $23,044. The Company recorded gross realized gains of $235 and gross realized losses of $(2). There were no sales of debt securities available for sale for the three months ended March 31, 2021.

10

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except per share amounts)

The amortized cost and fair value of debt securities available for sale issued by U.S. Treasury and Agency securities at March 31, 2021 are shown by contractual maturity. Mortgage-backed securities, collateralized mortgage obligations and collateralized debt obligations are disclosed separately in the table below, 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 & Agency securities

 

  

 

  

Due less than one year

$

44,970

$

45,061

Due after one year through five years

73,654

73,725

Mortgage-backed securities

31,462

31,114

Collateralized mortgage obligations

 

103,658

 

104,319

Collateralized debt obligations

 

213

 

193

Total

$

253,957

$

254,412

The following table summarizes debt securities available for sale, at fair value, with unrealized losses at March 31, 2021 and December 31, 2020 aggregated by major security type and length of time the individual securities have been in a continuous unrealized loss position:

March 31, 2021

Less than 12 Months

12 Months or More

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

    

Value

    

Losses

    

Value

    

Losses

    

Value

    

Losses

Mortgage-backed securities

$

20,970

$

(418)

$

$

20,970

$

(418)

Collateralized mortgage obligations

32,360

(68)

32,360

(68)

Collateralized debt obligations

 

193

(20)

193

(20)

Total

$

53,330

$

(486)

$

193

$

(20)

$

53,523

$

(506)

December 31, 2020

Less than 12 Months

12 Months or More

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

    

Value

    

Losses

    

Value

    

Losses

    

Value

    

Losses

Mortgage-backed securities

$

5,694

$

(1)

$

$

$

5,694

$

(1)

Collateralized mortgage obligations

75,740

(391)

75,740

(391)

Collateralized debt obligations

 

 

 

187

 

(27)

 

187

 

(27)

Total

$

81,434

$

(392)

$

187

$

(27)

$

81,621

$

(419)

As of March 31, 2021, the debt securities portfolio consisted of 22 debt securities, with 8 debt securities in an unrealized 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, as of March 31, 2021, 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.

A collateralized debt obligation with a carrying value of $193 and $187 at March 31, 2021 and December 31, 2020, respectively, was rated high quality at inception, but it was subsequently rated by Moody’s as Ba1, which is defined as speculative. The issuers of the underlying investments (the collateral) of the collateralized debt obligation are banks. Management uses in-house and third-party other-than-temporary impairment evaluation models to compare the present value of expected cash flows to the previous estimate to ensure there are no adverse changes in cash flows during the period. The other-than-temporary impairment model considers the structure and term of the collateralized debt obligations and the financial condition of the underlying issuers. Assumptions used in the model include expected future default rates and prepayments. The collateralized debt obligation remained classified as available for sale and represented $20 and $27 of the unrealized losses reported at March 31, 2021 and December 31, 2020, respectively.

11

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except per share amounts)

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 March 31, 2021 and December 31, 2020, equity securities totaled $5,274 and $5,364, respectively, and are included in investment securities in 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 income.

At March 31, 2021 and December 31, 2020, equity securities with readily determinable fair values were $5,028 and $5,118, respectively. The following is a summary of unrealized and realized gains and losses recognized in the condensed consolidated statements of income during the three months ended March 31, 2021 and 2020:

Three Months Ended

March 31, 

    

2021

    

2020

Net gains (losses) recorded during the period on equity securities

$

(90)

$

80

Less: net gains (losses) recorded during the period on equity securities sold during the period

 

Unrealized gains (losses) recorded during the period on equity securities held at the reporting date

$

(90)

$

80

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, 2021 and 2020. The investment was reported at $246 at both March 31, 2021 and December 31, 2020.

Note 5—Loans

Major categories of loans were as follows:

March 31, 

December 31, 

    

2021

    

2020

Residential real estate

$

2,008,439

$

2,033,526

Commercial real estate

 

263,508

 

259,958

Construction

 

184,490

 

206,581

Commercial lines of credit

 

5,029

 

6,671

Other consumer

 

4

 

7

Total loans

 

2,461,470

 

2,506,743

Less: allowance for loan losses

 

(71,871)

 

(72,387)

Loans, net

$

2,389,599

$

2,434,356

Loans totaling $570,920 and $630,197 were pledged as collateral on FHLB borrowings at March 31, 2021 and December 31, 2020, respectively.

12

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except per share amounts)

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2021 and 2020:

Commercial

    

Residential

    

Commercial

    

    

Lines of

    

Other

    

    

Three Months Ended March 31, 2021

Real Estate

Real Estate

Construction

Credit

Consumer

Unallocated

Total

Allowance for loan losses:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Beginning balance

$

32,366

$

21,942

$

17,988

$

91

$

$

$

72,387

Provision (recovery) for loan losses

 

486

 

805

 

(2,023)

 

(5)

 

 

 

(737)

Charge offs

 

 

 

 

 

 

 

Recoveries

 

204

 

16

 

1

 

 

 

 

221

Total ending balance

$

33,056

$

22,763

$

15,966

$

86

$

$

$

71,871

Commercial

Residential

Commercial

Lines of

Other

Three Months Ended March 31, 2020

    

Real Estate

    

Real Estate

    

Construction

    

Credit

    

Consumer

    

Unallocated

    

Total

Allowance for loan losses:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Beginning balance

$

12,336

$

5,243

$

3,822

$

328

$

1

$

$

21,730

Provision (recovery) for loan losses

 

6,808

 

5,999

 

7,616

 

40

 

 

390

 

20,853

Charge offs

 

 

 

 

 

 

 

Recoveries

 

10

 

19

 

1

 

 

 

 

30

Total ending balance

$

19,154

$

11,261

$

11,439

$

368

$

1

$

390

$

42,613

The following tables present the balance in the allowance for loan losses and the recorded investment by portfolio segment and based on impairment evaluation method as of March 31, 2021 and December 31, 2020:

Commercial

Residential

Commercial

Lines of

Other

March 31, 2021

    

Real Estate

    

Real Estate

    

Construction

    

Credit

    

Consumer

    

Unallocated

    

Total

Allowance for loan losses:

Ending allowance balance attributable to loans:

 

  

 

  

 

  

 

  

 

  

 

  

 

Individually evaluated for impairment

$

43

$

$

1,965

$

4

$

$

$

2,012

Collectively evaluated for impairment

33,013

22,763

14,001

82

69,859

Total ending allowance balance

$

33,056

$

22,763

$

15,966

$

86

$

$

$

71,871

Loans:

 

 

 

 

 

 

 

Loans individually evaluated for impairment

$

208

$

19,032

$

41,988

$

2,408

$

$

$

63,636

Loans collectively evaluated for impairment

 

2,008,231

 

244,476

 

142,502

 

2,621

 

4

 

 

2,397,834

Total ending loans balance

$

2,008,439

$

263,508

$

184,490

$

5,029

$

4

$

$

2,461,470

13

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except per share amounts)

Commercial

Residential

Commercial

Lines of

Other

December 31, 2020

    

Real Estate

    

Real Estate

    

Construction

    

Credit

    

Consumer

    

Unallocated

    

Total

Allowance for loan losses:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Ending allowance balance attributable to loans:

Individually evaluated for impairment

$

41

$

287

$

1,905

$

4

$

$

$

2,237

Collectively evaluated for impairment

32,325

21,655

16,083

87

70,150

Total ending allowance balance

$

32,366

$

21,942

$

17,988

$

91

$

$

$

72,387

Loans:

 

 

 

 

 

 

 

Loans individually evaluated for impairment

$

208

$

20,974

$

48,871

$

3,981

$

$

$

74,034

Loans collectively evaluated for impairment

 

2,033,318

 

238,984

 

157,710

 

2,690

 

7

 

 

2,432,709

Total ending loans balance

$

2,033,526

$

259,958

$

206,581

$

6,671

$

7

$

$

2,506,743

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

At March 31, 2021

At December 31, 2020

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

$

113

$

91

$

$

116

$

94

$

Commercial real estate:

Retail

1,240

1,016

1,247

1,029

Hotels/Single-room occupancy hotels

17,923

18,016

11,428

11,419

Construction

35,150

34,560

42,669

41,951

Commercial lines of credit, C&I lending

2,285

2,285

3,857

3,857

Subtotal

 

56,711

 

55,968

 

 

59,317

 

58,350

 

With an allowance for loan losses recorded:

 

 

 

 

 

 

  

Residential real estate, first mortgage

 

113

 

117

 

43

 

114

 

114

 

41

Commercial real estate, hotels/single-room occupancy hotels

8,645

8,526

287

Construction

 

7,463

 

7,428

 

1,965

 

6,920

 

6,920

 

1,905

Commercial lines of credit, private banking

123

123

4

124

124

4

Subtotal

 

7,699

 

7,668

 

2,012

 

15,803

 

15,684

 

2,237

Total

$

64,410

$

63,636

$

2,012

$

75,120

$

74,034

$

2,237

14

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except per share amounts)

Three Months Ended March 31,

2021

2020

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

$

93

$

$

$

96

$

$

Commercial real estate:

Retail

 

1,023

1,089

15

10

Hotels/Single-room occupancy hotels

18,005

Construction

34,274

123

80

26,653

466

269

Commercial lines of credit, private banking

2,285

1,243

21

14

Subtotal

55,680

123

80

 

29,081

 

502

 

293

With an allowance for loan losses recorded:

 

  

 

  

 

  

Residential real estate, first mortgage

115

 

117

 

1

 

1

Construction

7,174

Commercial lines of credit, private banking

124

2

1

131

2

1

Subtotal

7,413

2

1

 

248

 

3

 

2

Total

$

63,093

$

125

$

81

$

29,329

$

505

$

295

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 by class of loans as of March 31, 2021 and December 31, 2020:

March 31, 2021

December 31, 2020

Loans Past

Loans Past 

Due Over

Due Over

90 Days Still

90 Days Still

    

Nonaccrual

    

Accruing

    

Nonaccrual

    

Accruing

Residential real estate:

 

  

 

  

 

  

 

  

Residential first mortgage

$

26,921

$

45

$

20,043

$

46

Residential second mortgage

714

686

Commercial real estate:

 

Retail

 

1,016

 

 

20

 

Hotels/Single-room occupancy hotels

18,016

19,945

Construction

34,581

41,873

Commercial lines of credit:

Private banking

2,285

2,285

C&I lending

1,572

Total

$

83,533

$

45

$

86,424

$

46

15

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except per share amounts)

The following tables present the aging of the recorded investment in past due loans as of March 31, 2021 and December 31, 2020 by class of loans:

Greater

30 - 59 

60 - 89 

than

Days

Days

89 Days

Total

Loans Not

March 31, 2021

    

Past Due

    

Past Due

    

Past Due

    

Past Due

    

Past Due

    

Total

Residential real estate:

 

  

 

  

 

  

 

  

 

  

 

  

Residential first mortgage

$

28,749

$

12,780

$

26,966

$

68,495

$

1,922,807

$

1,991,302

Residential second mortgage

 

 

 

714

 

714

 

16,423

 

17,137

Commercial real estate:

 

 

 

 

 

 

Retail

 

1,232

 

 

1,016

 

2,248

 

13,845

 

16,093

Multifamily

 

 

 

 

 

87,502

 

87,502

Offices

 

 

 

 

 

24,551

 

24,551

Hotels/Single-room occupancy hotels

 

5,457

 

 

18,016

 

23,473

 

52,011

 

75,484

Industrial

 

 

 

 

 

13,158

 

13,158

Other

 

 

384

 

 

384

 

46,336

 

46,720

Construction

11,771

34,581

46,352

138,138

184,490

Commercial lines of credit:

 

 

 

 

 

 

Private banking

 

 

 

2,285

 

2,285

 

123

 

2,408

C&I lending

 

715

 

 

 

715

 

1,906

 

2,621

Other consumer

 

 

 

 

 

4

 

4

Total

$

47,924

$

13,164

$

83,578

$

144,666

$

2,316,804

$

2,461,470

Greater

30 - 59 

60 - 89 

than

Days

Days

89 Days

Total

Loans Not

December 31, 2020

    

Past Due

    

Past Due

    

Past Due

    

Past Due

    

Past Due

    

Total

Residential real estate:

 

 

 

 

  

 

 

Residential first mortgage

$

37,819

$

14,524

$

20,089

$

72,432

$

1,943,602

$

2,016,034

Residential second mortgage

 

362

 

134

 

686

 

1,182

 

16,310

 

17,492

Commercial real estate:

 

 

 

 

 

 

Retail

 

1,010

 

 

20

 

1,030

 

15,170

 

16,200

Multifamily

 

3,835

 

 

 

3,835

 

75,374

 

79,209

Offices

 

 

 

 

 

27,061

 

27,061

Hotels/ Single-room occupancy hotels

 

 

 

19,945

 

19,945

 

47,690

 

67,635

Industrial

 

 

 

 

 

13,186

 

13,186

Other

 

 

 

 

 

56,667

 

56,667

Construction

 

8,593

 

2,514

 

41,873

 

52,980

 

153,601

 

206,581

Commercial lines of credit:

 

 

 

 

 

 

Private banking

 

 

 

2,285

 

2,285

 

124

 

2,409

C&I lending

 

 

 

1,572

 

1,572

 

2,690

 

4,262

Other consumer

 

 

 

 

 

7

 

7

Total

$

51,619

$

17,172

$

86,470

$

155,261

$

2,351,482

$

2,506,743

The aging of the loans in the table above as of March 31, 2021 has not been adjusted for customers granted a payment deferral in response to COVID-19. These loans remain in the aging category that was applicable at the time of payment deferral. Interest continues to accrue on these loans. Refer to the discussion of forbearance loans below.

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential real estate and other consumer loans, the Company also evaluates credit quality based on the aging status of the loan, which is presented above, and by payment activity. The Company reviews the status of nonperforming loans, which include loans 90 days past due and still accruing and nonaccrual loans.

16

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except per share amounts)

Troubled Debt Restructurings

At March 31, 2021 and December 31, 2020, the balance of outstanding loans identified as troubled debt restructurings, along with the allocated portion of the allowance for loan losses with respect to these loans, was as follows:

March 31, 2021

December 31, 2020

Recorded

Allowance for

Recorded

Allowance for

Investment

Loan Losses

Investment

Loan Losses

Residential real estate, first mortgage

    

$

208

    

$

43

$

209

$

41

Commercial real estate, retail

 

1,016

 

 

1,029

 

Construction

 

28,102

 

1,965

 

26,985

 

1,906

Commercial lines of credit, private banking

 

123

 

4

 

124

 

4

Total

$

29,449

$

2,012

$

28,347

$

1,951

During the three months ended March 31, 2021, the Bank modified the terms of 2 construction loans and 1 private banking loan with an extension of the maturity dates at the contract’s existing rate of interest, which is lower than the current market rate for a new loan with similar risk. The total outstanding recorded investments were $10,863 both before and after modification. During the three months ended March 31, 2021 and 2020, there were no loans modified as troubled debt restructurings that defaulted for which the payment default occurred within one year of modification. NaN loans totaling $21,697 modified as troubled debt restructurings are in default under their modified terms as of March 31, 2021.

The terms of certain other loans have been modified during the three months ended March 31, 2021 and 2020 that did not meet the definition of a troubled debt restructuring. These other loans that were modified were not considered significant.

Forbearance Loans

As a response to the COVID-19 pandemic, the Company has offered forbearance under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) to customers facing COVID-19-related financial difficulties. The CARES Act created a forbearance program for impacted borrowers and imposed a temporary 60-day moratorium on foreclosures and foreclosure-related evictions related to federally backed mortgage loans, which include loans secured by a first or subordinate lien on residential one-to-four family real property that have been purchased by Fannie Mae or Freddie Mac, are insured by HUD or are insured or guaranteed by other listed agencies. Borrowers of such federally backed mortgage loans experiencing a financial hardship as a result of COVID-19 may request forbearance, regardless of delinquency status, for up to 360 days. Subsequently, the federal agencies as well as the state of California announced extensions of their moratoria on single-family foreclosures and evictions and Federal Housing Administration insured loans, with the latest extensions through June 30, 2021.

Certain provisions of the CARES Act, as amended in December 2020 by the Consolidated Appropriations Act of 2021, encourage financial institutions to practice prudent efforts to work with borrowers impacted by the COVID-19 pandemic. Under these provisions, a modification deemed to be COVID-19-related would not be considered a troubled debt restructuring if the loan were not more than 30 days past due as of December 31, 2019 and the deferral was executed between March 1, 2020 and the earlier of 60 days after the date of termination of the COVID-19 national emergency or January 1, 2022. The banking regulators issued similar guidance, which also clarified that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not troubled debt restructurings.

In this context, the Company implemented a COVID-19 forbearance program that generally provided for principal and interest forbearance for 120 days to residential borrowers with extensions available to qualified borrowers available for up to a maximum deferral period of twelve months, and these loans were not considered troubled debt restructurings. Under the forbearance program, interest continues to accrue at the note rate. At the end of the forbearance period, the borrower’s accrued but unpaid interest will be added to their outstanding principal balance while keeping the principal and interest payment at the amount determined in accordance with the terms of the note, thus extending the loan’s maturity date. The terms of commercial loan forbearances are reviewed and determined on a case-by-case basis, and these loans were not considered troubled debt restructurings. Loans modified under the CARES program during the three months ended March 31, 2021 totaled $36,130, among which $8,136 loans were granted an

17

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except per share amounts)

extension of forbearance after the initial forbearance period expired by December 31, 2020. The amount of loans that remain in payment deferral totaled $41,855 and $15,785 at March 31, 2021 and December 31, 2020, respectively. Total accrued interest receivables on these loans were $552 and $146 at March 31, 2021 and December 31, 2020, respectively.

Foreclosure Proceedings

At March 31, 2021 and December 31, 2020, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $8,163 and $5,320, respectively. Of the loans in formal foreclosure proceedings $8,153 and $3,209 were included in mortgage loans held for sale in the condensed consolidated balance sheets at March 31, 2021 and December 31, 2020, respectively, and were carried at the lower of amortized cost or fair value. The balance of loans are classified as held for investment and receive an allowance for loan losses reserve allocation consistent with a substandard loan loss allocation rate as these loans are classified as substandard at both March 31, 2021 and December 31, 2020, respectively.

Credit Quality

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, 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.

18

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except per share amounts)

At March 31, 2021 and December 31, 2020, the risk rating of loans by class of loans was as follows:

Special

March 31, 2021

    

Pass

    

Mention

    

Substandard

    

Doubtful

    

Total

Residential real estate:

 

  

 

  

 

 

  

 

  

Residential first mortgage

$

1,964,336

$

$

26,875

$

91

$

1,991,302

Residential second mortgage

 

16,423

 

 

714

 

 

17,137

Commercial real estate:

 

 

 

 

 

Retail

 

13,513

 

1,564

 

1,016

 

 

16,093

Multifamily

 

58,812

 

13,598

 

15,092

 

 

87,502

Offices

 

9,669

 

1,612

 

13,270

 

 

24,551

Hotels/ Single-room occupancy hotels

 

17,402

 

17,915

 

40,167

 

 

75,484

Industrial

 

5,859

 

 

7,299

 

 

13,158

Other

 

33,320

 

7,736

 

5,664

 

 

46,720

Construction

 

127,488

 

13,374

 

36,200

 

7,428

 

184,490

Commercial lines of credit:

 

 

 

 

 

Private banking

 

123

 

2,285

 

 

 

2,408

C&I lending

 

2,587

 

34

 

 

 

2,621

Other consumer

 

4

 

 

 

 

4

Total

$

2,249,536

$

58,118

$

146,297

$

7,519

$

2,461,470

Special

December 31, 2020

    

Pass

    

Mention

    

Substandard

    

Doubtful

    

Total

Residential real estate:

 

 

 

 

 

Residential first mortgage

$

1,995,945

$

$

19,995

$

94

$

2,016,034

Residential second mortgage

 

16,806

 

 

686

 

 

17,492

Commercial real estate:

 

 

 

 

 

Retail

 

13,599

 

1,572

 

1,029

 

 

16,200

Multifamily

 

55,772

 

14,238

 

9,199

 

 

79,209

Offices

 

12,014

 

1,623

 

13,424

 

 

27,061

Hotels/Single-room occupancy hotels

 

9,115

 

17,984

 

40,536

 

 

67,635

Industrial

 

5,867

 

 

7,319

 

 

13,186

Other

 

43,193

 

7,732

 

5,742

 

 

56,667

Construction

 

152,577

 

14,234

 

32,850

 

6,920

 

206,581

Commercial lines of credit:

 

 

 

 

 

Private banking

 

124

 

2,285

 

 

 

2,409

C&I lending

 

3,573

 

 

689

 

 

4,262

Other consumer

 

7

 

 

 

 

7

Total

$

2,308,592

$

59,668

$

131,469

$

7,014

$

2,506,743

During the three months ended March 31, 2021, the Bank repurchased a pool of Advantage Loan Program loans with a total outstanding principal balance of $87,944. For more information on the repurchases of mortgage loans, refer to Note 16—Commitments and Contingencies.

19

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except per share amounts)

Note 6—Mortgage Servicing Rights, net

The Bank 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 March 31, 2021 and December 31, 2020 are as follows:

March 31, 

December 31, 

    

2021

    

2020

Residential real estate mortgage loan portfolios serviced for: 

 

  

 

  

FNMA

$

157,605

$

171,553

FHLB

 

53,424

 

64,661

Private investors

 

302,982

 

429,816

Total

$

514,011

$

666,030

Custodial escrow balances maintained with these serviced loans were $3,991 and $6,051 at March 31, 2021 and December 31, 2020, respectively.

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

Three Months Ended

March 31, 

    

2021

    

2020

Mortgage servicing rights:

Beginning of period

$

7,853

$

10,845

Additions

74

107

Amortization

(2,072)

(650)

End of period

5,855

10,302

Valuation allowance at beginning of period   

2,165

1,080

Additions (recoveries)

(936)

1,246

Valuation allowance at end of period

1,229

2,326

Mortgage servicing rights, net

$

4,626

$

7,976

Servicing fee loss, net of amortization of servicing rights and changes in the valuation allowance, was $(430) and $(911) for the three months ended March 31, 2021 and 2020, respectively.

The fair value of mortgage servicing rights was $4,855 and $5,841 at March 31, 2021 and December 31, 2020, 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 March 31, 2021 was determined using discount rates ranging from 9.5% to 12.0%, prepayment speeds with a weighted average of 20.0% (depending on the stratification of the specific right), a weighted average life of the mortgage servicing right of 49 months and a weighted average default rate of 0.2%.The fair value at December 31, 2020 was determined using discount rates ranging from 9.5% to 12.0%, prepayment speeds with a weighted average of 22.5% (depending on the stratification of the specific right), a weighted average life of the mortgage servicing right of 43 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 March 31, 2021 and December 31, 2020, the carrying amount of certain individual groupings exceeded their fair values, resulting in write-downs to fair value. Refer to Note 13—Fair Values of Financial Instruments.

20

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except per share amounts)

Note 7—Deposits

Time deposits, included in interest-bearing deposits, were $1,482,122 and $1,646,523 at March 31, 2021 and December 31, 2020, respectively. Time deposits included brokered deposits of $35,000 and $42,751 at March 31, 2021 and December 31, 2020, respectively.

Time deposits that meet or exceed the FDIC insurance limit of $250 were $431,131 and $487,340 at March 31, 2021 and December 31, 2020, respectively.

Note 8—FHLB Borrowings

FHLB borrowings at March 31, 2021 and December 31, 2020 consist of the following:

March 31,

December 31,

    

2021

    

 Interest Rates

    

2020

    

 Interest Rates

Long-term fixed rate advances

$

318,000

 

0.43%-1.96%

$

318,000

 

0.43%-1.96%

FHLB Advances

The long-term fixed rate advances have maturity dates ranging from July 2021 to February 2030. Interest on these advances is payable monthly, and each advance is payable at its maturity date and may contain a prepayment penalty if paid before maturity. At March 31, 2021, advances totaling $307,000 were callable by the FHLB as follows: $100,000 in May 2021; $67,000 in September 2021; $90,000 in October 2021; and $50,000 in May 2024. At March 31, 2021, the Bank had additional borrowing capacity of $86,222 from the FHLB.

FHLB Overdraft Line of Credit and Letter of Credit

The Bank has established an overdraft line of credit agreement with the FHLB providing maximum borrowings of $50,000. The average amount outstanding during the three months ended March 31, 2021 and 2020 was $13 and $5, respectively. At March 31, 2021 and December 31, 2020, there were 0 outstanding borrowings under this agreement. Borrowings accrue interest based on a variable rate based on the FHLB’s overnight cost of funds rate, which was 0.41% and 0.46% at March 31, 2021 and December 31, 2020, respectively. The agreement has a one-year term and terminates in October 2021. The Bank also had a $7,500 letter of credit with the FHLB at March 31, 2021, which was not in use. This letter has a 16-month term and expires in July 2022.

The FHLB advances, the overdraft line of credit and letter of credit are collateralized by pledged securities and loans. Refer to Note 4—Investment Securities for further information on securities pledged and Note 5—Loans for further information on loans pledged.

Other Borrowings

The Bank had available unsecured credit lines with other banks totaling $80,000 and $100,000 at March 31, 2021 and December 31, 2020, respectively. There were 0 borrowings under these unsecured credit lines during the three months ended March 31, 2021 or 2020.

21

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except per share amounts)

Note 9—Subordinated Notes, net

The subordinated notes (the "Notes") were as follows:

March 31, 

December 31, 

    

2021

    

2020

7.0% fixed to floating rate subordinated notes     

$

65,000

$

65,000

Unamortized note premium

 

394

 

411

Unamortized debt issuance costs

 

(10)

 

(70)

Total

$

65,384

$

65,341

The Notes bear interest at 7% per annum, payable semi-annually on April 15 and October 15 in arrears, through April 2021 after which the Notes will have a variable interest rate of the three-month LIBOR rate plus a margin of 5.82%. Premiums and debt issuance costs are amortized over the contractual term of the Notes into interest expense using the effective interest method. Interest expense on these Notes was $1,180 and $1,177 for the three months ended March 31, 2021 and 2020, respectively. The Notes mature in April 2026.

On or after April 14, 2021, 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. The Notes were not redeemable by the Company prior to April 14, 2021 except in the event that (i) the Notes no longer qualify as Tier 2 Capital, (ii) the interest on the Notes is determined by law to be not deductible for Federal Income Tax reporting or (iii) the Company is considered an investment company pursuant to the Investment Company Act of 1940. 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 Bank’s deposits as well as the Company’s subsidiaries’ liabilities to general creditors and liabilities arising during the ordinary course of business. The Notes may be included in Tier 2 capital for the Company under current regulatory guidelines and interpretations. 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 10—Stock Repurchase Program

In late 2018, the board of directors approved the repurchase of up to $50,000 of the Company’s outstanding shares of common stock. The stock repurchase program permits the Company to purchase shares of its common stock from time to time in the open market or in privately negotiated transactions. The program does not have an expiration date. The Company received regulatory approval of its stock repurchase program and publicly announced the program in January 2019. Under this program, the Company is not obligated to repurchase shares of its common stock. The repurchased shares will be canceled and returned to authorized but unissued status.

During the three months ended March 31, 2020, the Company repurchased and cancelled 10,912 shares of its common stock for $82, including commissions and fees (average repurchase price of $7.57 per share). Such repurchases of common stock were funded through cash generated from operations. As of March 31, 2021, the Company had $19,568 of common stock purchases remaining that may be made under the program.

In March 2020, the Company suspended the stock repurchase program for at least the near term in connection with the issues related to the Advantage Loan Program. Refer to Note 16─Commitments and Contingencies for further information regarding the internal review of the Advantage Loan Program (the "Internal Review"). The Company currently may not repurchase any common stock without the approval of the FRB.

22

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except per share amounts)

Note 11—Stock-based Compensation

The board of directors 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 board of directors of the Company. The stock-based awards are issued at no less than the market price on the date the awards are granted.

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 board of directors of the Company. The stock-based awards are issued at no less than the market price on the date the awards are granted. Due to the adoption of the 2020 Plan, no further grants will be issued under the 2017 Plan.

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. Starting in 2020, stock option awards granted under the 2017 Plan generally 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. NaN stock option awards were granted under the 2020 Plan during the three months ended March 31, 2021.

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted below. Estimating the grant date fair values for employee stock options requires management to make assumptions regarding expected volatility of the value of those underlying shares, the risk-free rate over the expected life of the stock options and the date on which share-based payments will be settled. Expected volatilities are based on a weighted average of the Company’s historic volatility and an implied volatility for a group of industry-relevant bank holding companies as of the measurement date. The expected term of options granted is calculated using the simplified method (the midpoint between the end of the vesting period and the end of the maximum term). The risk-free rate for the expected term of the option is based upon U.S. Treasury yield curve in effect at the time of grant. Expected dividend yield represents what the Company anticipates will be declared during the expected term of the options.

A summary of the Company’s stock option activity as of and for the three months ended March 31, 2021 is as follows:

Weighted

 

Weighted

Average

 

Average

Remaining

Aggregate

Number

Exercise

Contractual

Intrinsic

    

of Shares

    

Price

    

Term

    

Value

(Years)

 

Outstanding at January 1, 2021

377,882

 

$

5.61

9.09

$

Granted

Exercised 

Forfeited/expired

(3,000)

13.73

Outstanding at March 31, 2021

374,882

$

5.54

8.86

$

498

Exercisable at March 31, 2021

128,550

 

$

5.89

8.78

 

$

166

The Company recorded stock-based compensation expense associated with stock options of $57 and $26 for the three months ended March 31, 2021 and 2020, respectively. At March 31, 2021, there was $138 of total unrecognized compensation cost related to nonvested stock options granted under the 2017 Plan. The unrecognized compensation cost related to nonvested stock options is expected to be recognized over a weighted-average period of 1.08 years.

23

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except per share amounts)

Restricted Stock Awards

During the three months ended March 31, 2021, 45,000 shares of restricted stock were awarded to non-employee independent directors under the 2020 Plan. The restricted stock awards generally vest ratably over three years (one-third per year) after the date of grant. Upon a change in control, as defined in the Plan, the outstanding restricted stock awards will immediately vest. 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.

A summary of the Company’s restricted stock awards activity for the three months ended March 31, 2021 is as follows:

    

    

Weighted Average 

Number 

Grant Date Fair

of Shares

Value

Nonvested at January 1, 2021

 

137,936

$

7.90

Granted

 

45,000

 

4.72

Vested

 

(31,906)

 

7.67

Forfeited

 

(8,918)

 

9.30

Nonvested at March 31, 2021

 

142,112

$

6.85

In connection with the vesting of restricted stock awards during the three months ended March 31, 2021 under the 2017 Plan, the Company withheld 8,536 shares of stock in order to satisfy related tax withholding obligations.

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 $48 and $83 for the three months ended March 31, 2021 and 2020, respectively. At March 31, 2021, there was $767 of total unrecognized compensation cost related to the nonvested stock granted under the 2017 Plan and the 2020 Plan collectively. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.14 years. The total fair value of shares vested during the three months ended March 31, 2021 was $173.

24

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except per share amounts)

Note 12Income (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 (loss) 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

March 31, 

    

2021

    

2020

Numerator:

 

  

 

  

Net income (loss)

$

2,325

$

(4,030)

Denominator:

 

 

Weighted average common shares outstanding, basic

 

49,851,202

 

49,837,662

Weighted average effect of potentially dilutive common shares:

 

 

Stock options

 

49,790

 

Restricted stock

 

11,868

 

Weighted average common shares outstanding, diluted

 

49,912,860

 

49,837,662

 

 

Income (loss) per share:

Basic

$

0.05

$

(0.08)

Diluted

$

0.05

$

(0.08)

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

March 31, 

    

2021

    

2020

Stock options

 

74,882

 

201,165

Restricted stock

 

64,647

 

234,273

Total

 

139,529

 

435,438

Note 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.

25

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except per share amounts)

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 cash flows are calculated using spread 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 used (if available) to validate 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.

Mortgage Loans Held for Sale

Mortgage loans held for sale are carried at lower of amortized cost or fair value. Mortgage loans held for sale may be carried at fair value on a nonrecurring basis when fair value is 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 us. Once received, an appraisal compliance review is completed in accordance with regulatory guidelines.

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 6—Mortgage Servicing Rights, net, the valuation model utilizes interest rate, prepayment speed, and default rate assumptions that market participants would use in estimating future net servicing income (Level 3).

26

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except 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, 2021 and December 31, 2020:

Fair Value Measurements at

March 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 & Agency securities

$

118,786

$

20,053

$

98,733

$

Mortgage-backed securities

31,114

31,114

Collateralized mortgage obligations

 

104,319

 

 

104,319

 

Collateralized debt obligations

 

193

 

 

 

193

Equity securities

 

5,028

 

5,028

 

 

Fair Value Measurements at

December 31, 2020

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 & Agency securities

$

138,997

$

40,192

$

98,805

$

Mortgage-backed securities

33,814

33,814

Collateralized mortgage obligations

 

126,596

 

 

126,596

 

Collateralized debt obligations

 

187

 

 

 

187

Equity securities

5,118

5,118

The table below presents a reconciliation for assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at March 31, 2021 and 2020:

Fair Value Measurements Using Significant

Unobservable Inputs (Level 3)

Collateralized Debt Obligations

    

March 31, 2021

    

March 31, 2020

Balance of recurring Level 3 assets at beginning of period

$

187

$

199

Total gains or losses (realized/unrealized):

 

 

  

Included in income-realized

 

 

Included in other comprehensive income (loss)

 

7

 

(9)

Principal maturities/settlements

(1)

(1)

Sales

 

 

Transfers in and/or out of Level 3

 

 

Balance of recurring Level 3 assets at end of period

$

193

$

189

27

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except per share amounts)

Unrealized losses on Level 3 investments for collateralized debt obligations was $20 and $27 at March 31, 2021 and December 31, 2020, respectively. In addition to the amounts included in income as presented in the table above, interest income recorded on collateralized debt obligations was $1 and $2 for the three months ended March 31, 2021 and 2020, respectively.

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 Basis

From time to time, the Bank 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 sheet at March 31, 2021 and December 31, 2020, the following table provides the level of valuation assumptions used to determine each adjustment and the related carrying value:

Fair Value Measurements at March 31, 2021

    

    

Quoted Prices in

    

Significant 

    

Active Markets

Other 

Significant 

for Identical

Observable 

Unobservable 

Assets

Inputs

Inputs 

Fair Value

(Level 1)

(Level 2)

(Level 3)

Impaired loans:

Construction

$

5,463

$

$

$

5,463

Mortgage servicing rights

3,244

3,244

Fair Value Measurements at December 31, 2020

    

    

Quoted Prices in

    

Significant 

    

Active Markets

Other 

Significant 

for Identical

Observable 

Unobservable 

Assets

Inputs

Inputs 

Fair Value

(Level 1)

(Level 2)

(Level 3)

Impaired loans:

Commercial real estate

$

8,240

$

$

$

8,240

Construction

5,015

5,015

Mortgage loans held for sale

19,375

19,375

Mortgage servicing rights

5,175

5,175

28

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except per share amounts)

As discussed previously, 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 table presents quantitative information about Level 3 fair value measurements at March 31, 2021 and December 31, 2020:

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

Valuation

Range

    

Fair Value

    

 Technique

    

Unobservable Inputs

    

(Weighted Average) (1)

Impaired loans:

Construction

$

5,463

Hybrid of sales comparison and income capitalization approaches

Adjustments for differences between the comparable sales and income data for similar loans and collateral underlying such loans

N/A
(15%)

Mortgage servicing rights

$

3,244

Discounted cash flow

Discount rate

9.5% - 12.0%
(11.5%)

 

 

  

 

Prepayment speed

10.6% - 36.2%
(22.9%)

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 December 31, 2020

Valuation

Range

    

Fair Value

    

 Technique

    

Unobservable Inputs

(Weighted Average) (1)

Impaired loans:

Commercial real estate

$

8,240

Sales comparison approach/Income capitalization approach

Adjustments for differences between the comparable sales and income data for similar loans and collateral underlying such loans

N/A
(36%)

Construction

$

5,015

Hybrid of sales comparison and income capitalization approaches

Adjustments for differences between the comparable sales and income data for similar loans and collateral underlying such loans

N/A
(15%)

Mortgage servicing rights

$

5,175

Discounted cash flow

Discount rate

9.5% - 12.0%
(11.6%)

Prepayment speed

10.5% - 37.0%
(23.7%)

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.

29

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except per share amounts)

Fair Value of Financial Instruments

The carrying amounts and estimated fair values of financial instruments not carried at fair value at March 31, 2021 and December 31, 2020, are as follows:

Fair Value Measurements at March 31, 2021

Carrying

Fair

    

Amount

    

Value

    

Level 1

    

Level 2

    

Level 3

Financial Assets

 

  

  

 

  

 

  

 

  

Cash and due from banks

$

873,233

$

873,233

$

873,233

$

$

Interest-bearing time deposits with other banks

 

5,528

 

5,537

 

 

5,537

 

Mortgage loans held for sale

 

19,848

 

19,872

 

 

19,872

 

Loans, net(1)

 

2,384,136

 

2,484,514

 

 

 

2,484,514

Financial Liabilities

 

Time deposits(2)

 

1,482,122

 

1,489,924

 

 

1,489,924

 

Federal Home Loan Bank borrowings

 

318,000

 

322,115

 

 

322,115

 

Subordinated notes, net

 

65,384

 

65,618

 

 

65,618

 

(1)Excludes impaired loans measured at fair value on a nonrecurring basis at March 31, 2021.
(2)Includes time deposits held for sale with a carrying value of $24,826 and a fair value of $24,956 (Level 2).

Fair Value Measurements at December 31, 2020

Carrying

Fair

    

Amount

    

Value

    

Level 1

    

Level 2

    

Level 3

Financial Assets

 

  

  

 

  

 

  

 

  

Cash and due from banks

$

998,497

$

998,497

$

998,497

$

$

Interest-bearing time deposits with other banks

 

7,021

 

7,021

 

7,021

 

 

Mortgage loans held for sale

 

2,909

 

3,052

 

 

3,052

 

Loans, net

 

2,434,356

 

2,521,874

 

 

 

2,521,874

Financial Liabilities

 

 

 

 

 

Time deposits

 

1,646,523

 

1,658,020

 

 

1,658,020

 

Federal Home Loan Bank borrowings

 

318,000

 

328,150

 

 

328,150

 

Subordinated notes, net

 

65,341

 

65,753

 

 

65,753

 

Note 14—Regulatory Capital Requirements

The Bank is subject to the capital adequacy requirements of the OCC. The Company, as a thrift holding company, 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. 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. Prompt corrective action provisions are not applicable to thrift holding companies. Failure to meet minimum capital requirements can initiate regulatory action that could have a direct material effect on our business, financial condition and results of operations.

Prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition.

30

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except per share amounts)

Under the Basel III capital rules, the Company and the Bank must hold a capital conservation buffer ("CCB") over the adequately capitalized risk-based capital ratios. At present, in order to avoid the imposition of restrictions on capital distributions and discretionary bonus payments, the Company is required to maintain a CCB of at least 2.50%. The net unrealized gain or loss on investment securities is not included in regulatory capital. Banking organizations are required to maintain a minimum total capital ratio of 10.5%, a minimum Tier 1 capital ratio of 8.5% and a minimum common equity Tier 1 capital ratio of 7.0% (in each case accounting for the required CCB). Management believes that at March 31, 2021, the Company and the Bank meet all regulatory capital requirements to which they are subject.

At March 31, 2021 and December 31, 2020, the Bank exceeded all capital requirements to be categorized as well capitalized, and the Company exceeded applicable capital adequacy requirements as presented below. The Company’s consolidated and the Bank’s actual and minimum required capital amounts and ratios, with such regulatory minimums not including the CCB as discussed above, at March 31, 2021 and December 31, 2020 are as follows:

For Capital

To be Well

Actual

Adequacy Purposes

Capitalized

 

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

March 31, 2021

 

  

 

  

 

  

 

  

 

  

 

  

Total adjusted capital to risk-weighted assets

 

  

 

  

 

  

 

  

 

  

 

  

Consolidated

$

409,349

23.52

%  

$

139,209

 

8.00

%  

N/A

 

N/A

Bank

 

391,014

22.66

 

138,030

 

8.00

$

172,538

 

10.00

%  

Tier 1 (core) capital to risk-weighted assets

 

 

  

 

  

Consolidated

 

321,588

18.48

 

104,407

 

6.00

 

N/A

 

N/A

Bank

 

368,762

21.37

 

103,523

 

6.00

 

138,030

 

8.00

Common Equity Tier 1 (CET1)

 

 

  

 

  

Consolidated

 

321,588

18.48

 

78,305

 

4.50

 

N/A

 

N/A

Bank

 

368,762

21.37

 

77,642

 

4.50

 

112,150

 

6.50

Tier 1 (core) capital to adjusted tangible assets

 

 

  

 

  

Consolidated

 

321,588

8.34

 

154,264

 

4.00

 

N/A

 

N/A

Bank

 

368,762

9.60

 

153,689

 

4.00

 

192,111

 

5.00

For Capital

To be Well

Actual

Adequacy Purposes

Capitalized

 

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

December 31, 2020

 

  

 

  

 

  

 

  

 

  

 

  

Total adjusted capital to risk-weighted assets

 

  

 

  

 

  

 

  

 

  

 

  

Consolidated

$

407,733

22.58

%  

$

144,466

8.00

%  

N/A

 

N/A

Bank

 

386,237

21.56

 

143,339

8.00

179,174

 

10.00

%  

Tier 1 (core) capital to risk-weighted assets

 

 

 

 

Consolidated

 

319,204

17.68

 

108,350

6.00

 

N/A

 

N/A

Bank

 

363,224

20.27

 

107,504

6.00

 

143,339

 

8.00

Common Equity Tier 1 (CET1)

 

 

 

 

Consolidated

 

319,204

17.68

 

81,262

4.50

 

N/A

 

N/A

Bank

 

363,224

20.27

 

80,628

4.50

 

116,463

 

6.50

Tier 1 (core) capital to adjusted tangible assets

 

 

 

 

Consolidated

 

319,204

8.08

 

158,067

4.00

 

N/A

 

N/A

Bank

 

363,224

9.20

 

157,954

4.00

 

197,442

 

5.00

Dividend Restrictions

As noted above, banking regulations require the Bank to maintain certain capital levels and may limit the dividends paid by the bank to the holding company or by the holding company to its shareholders. The 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 is required if (i) the total capital distributions for the applicable calendar year exceed the sum of the Bank’s net income for

31

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except per share amounts)

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 following the distribution.

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.

The Bank is currently required to obtain the prior approval of the OCC in order to pay dividends to the Company due to the existence of a formal agreement with the OCC. 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 15—Related Party Transactions

From time to time, the Company had made charitable contributions to a foundation for which certain members of the boards of directors of the Company and Bank, and who are also related to the Company’s controlling shareholders, serve as trustees. The Company paid $225 to the foundation during the three months ended March 31, 2020. The Company ceased to make the charitable contributions in the second quarter of 2020.

The Bank had provided monthly data processing and programming services to entities controlled by the Company’s controlling shareholders. Aggregate fees received for such services amounted to $27 during the three months ended March 31, 2020. The Bank terminated such data processing agreement, effective as of November 2020.

The Company historically had leased certain storage and office space from entities owned by the Company’s controlling shareholders. Amounts paid under such leases totaled $60 during the three months ended March 31, 2020. The leases have been terminated as of December 31, 2020.

The Company subleases certain office space to entities owned by the Company’s controlling shareholders. Amounts received under such subleases totaled $95 and $69 during the three months ended March 31, 2021 and 2020, respectively.

Note 16—Commitments and Contingencies

Financial Instruments with Off-Balance Sheet Risk

The Bank 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 and standby letters of credit, which are not reflected in the condensed consolidated financial statements.

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 Bank will 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. Certain commitments are subject to loan agreements containing covenants regarding the financial performance of the customer that must be met before the Bank is required to fund the commitment. The Bank 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 March 31, 2021, outstanding commitments to make loans consisted of fixed rate loans of $2,876 with interest rates ranging

32

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except per share amounts)

from 2.375% to 4.125% and maturities ranging from 10 years to 30 years and variable rate loans of $23,701 with varying interest rates (ranging from 3.125% to 3.75% at March 31, 2021) and maturities of 30 years.

Unused Lines of Credit

The Bank also issues unused lines of credit to meet customer financing needs. At March 31, 2021, the unused lines of credit include residential second mortgages of $16,399, construction loans of $85,355, commercial lines of credit of $11 and consumer loans of $45. These unused lines of credit consisted of fixed rate loans of $45 with interest rates ranging from 5.25% to 18% and maturities ranging from 3 months to 6 years and variable rate loans of $101,765 with varying interest rates (ranging from 3.25% to 9.75%) and maturities ranging from one month to 15 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 Bank assures that the third parties will receive specified funds if customers fail to meet their contractual obligations. The credit risk to the Bank 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 Bank 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 March 31, 2021 and December 31, 2020:

March 31, 

December 31, 

    

2021

    

2020

Commitments to make loans

$

26,577

$

40,331

Unused lines of credit

 

101,810

 

140,665

Standby letters of credit

 

24

 

24

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.

The Bank is currently under formal investigation by the OCC and continues to be subject to a publicly available formal agreement with the OCC, dated June 18, 2019 (the “OCC Agreement”), relating primarily to certain aspects of its Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) compliance program as well as the Bank’s credit administration. The OCC Agreement generally requires that the Bank enhance its policies and procedures to ensure compliance with BSA/AML laws and regulations and ensure effective controls over residential loan underwriting. Specifically, the OCC Agreement requires the Bank to: (i) establish a compliance committee to monitor and oversee the Bank’s compliance with the provisions of OCC Agreement; (ii) develop a revised customer due diligence and enhanced due diligence program; (iii) develop a revised suspicious activity monitoring program; (iv) engage an independent, third-party consultant to review and provide a written report on the Bank’s suspicious activity monitoring; (v) develop revised policies and procedures to ensure effective BSA/AML model risk management for the Bank’s automated suspicious activity monitoring system, which must be validated by a qualified, independent third party; (vi) ensure that the Bank’s BSA Department maintains sufficient personnel; and (vii) develop revised policies and procedures to ensure effective controls over loan underwriting. In addition to these requirements, while the OCC Agreement remains in effect, the Bank is subject to certain restrictions on expansion activities, such as growth through acquisition or branching to supplement organic growth of the Bank. Further, any failure to comply with the requirements of the OCC Agreement could result in further enforcement actions, the imposition of material restrictions on the activities of the Bank, or the assessment of fines or penalties. The Bank established a Compliance Committee to monitor and assure

33

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except per share amounts)

compliance with the OCC Agreement, oversee the completion of an independent review of account and transaction activity to be conducted by a third-party vendor and engage a third party to conduct a model validation for its BSA/AML monitoring software.

The Bank is fully cooperating with the OCC investigation and implementing the items necessary to achieve compliance with the obligations in the OCC Agreement. A finding by the OCC that the Bank failed to comply with the OCC Agreement or adverse findings in the OCC investigation could result in additional regulatory scrutiny, constraints on the Bank’s business, or other formal enforcement action. Any of those events could have a material adverse effect on our future operations, financial condition, growth, or other aspects of our business. The Bank has incurred and expects to continue to incur significant costs in its efforts to comply with the OCC Agreement and respond to the OCC investigation, which are reflected in the Company's results of operations for the three months ended March 31, 2021 and 2020.

The Bank also 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. On April 15, 2021, the DOJ charged by criminal information the former managing director of residential lending of the Bank with conspiracy to commit bank and wire fraud in connection with the Advantage Loan Program, and that individual has entered into an agreement with the DOJ to plead guilty to that charge. The criminal information and plea agreement assert that the individual acted with the knowledge and encouragement of certain former members of senior management. The Bank is fully cooperating with this ongoing investigation. Adverse findings in the DOJ investigation could result in material losses due to damages, penalties, costs, and/or expenses imposed on the Company, which could have a material adverse effect on our future operations, financial condition, growth, or other aspects of our business. The Bank has and expects to continue to incur significant costs in its efforts to comply with the DOJ investigation in 2021.

In the first quarter of 2021, the Company learned of a formal investigation recently initiated 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 requests from the SEC and is fully cooperating 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. The Company expects to incur significant costs in its efforts to comply with the SEC investigation in 2021.

In addition, the Company, certain of its current and former officers and directors and other parties were named as defendants in a shareholder class action captioned Oklahoma Police Pension and Retirement System v. Sterling Bancorp, Inc., et al., Case No. 5:20-cv-10490-JEL-EAS, filed on February 26, 2020 in the U.S. District Court for the Eastern District of Michigan. The plaintiffs filed an amended complaint on July 2, 2020, seeking damages and reimbursement of fees and expenses. This action alleges violations of the federal securities laws, primarily with respect to disclosures concerning the Bank’s residential lending 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 September 22, 2020, the Company filed with the court a motion to dismiss the amended complaint. In February 2021, the Company, each individual defendant and the plaintiff reached an agreement in principle to settle the securities class action lawsuit. On April 19, 2021, the plaintiff, the Company and each of the other defendants entered into the final settlement agreement and submitted it to the court. Preliminary approval was granted by the court on April 28, 2021, and a final approval hearing is scheduled to be held before the court on September 16, 2021. The final agreement provides for a single $12,500 cash payment in exchange for the release of all of the defendants from all alleged claims therein and remains subject to final documentation, court approval and other conditions. This $12,500 liability has been accrued for as of December 31, 2020. The full amount of the settlement will be paid by the Company’s insurance carriers under applicable insurance policies. In the event final court approval is not received, or the settlement is not finalized for any other reason, the Company intends to vigorously defend this action.

The Company maintained a liability of $27,500 for contingent losses at March 31, 2021 and December 31, 2020. The outcome of the pending investigations and litigation is uncertain. 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 and litigation, (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.

34

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except per share amounts)

In addition, on July 28, 2020, the Company received a demand letter from 2 law firms representing a purported shareholder of the Company alleging facts and claims substantially the same as many of the alleged facts and claims in the class action lawsuit. The demand letter requests that the board of directors take action to (1) recover damages the Company has purportedly sustained as a result of alleged breaches of fiduciary duties by certain of its officers and directors; (2) recover for the benefit of the Company the amounts by which certain of its officers and directors purportedly were unjustly enriched; and (3) correct alleged deficiencies in the Company's internal controls. The demand letter states that, if the board of directors has not taken the actions demanded within 90 days after the receipt of the letter, or in the event the board of directors refuses to take the actions demanded, the purported shareholder would commence a shareholder derivative action on behalf of the Company seeking appropriate relief. The board of directors established a demand review committee to evaluate the matters raised in the demand letter and to determine the actions, if any, that should be taken by the Company with respect to those matters. The Company responded to the demand letter advising the purported shareholder of the appointment of the demand review committee. The demand review committee's investigation is ongoing; accordingly, no additional actions with respect to this matter have been taken by the board of directors. Further, legal action has not yet been brought by the purported shareholder. Nevertheless, expenses related to the evaluation by the demand review committee have been significant. There can be no assurance as to whether any litigation will be commenced by or against the Company with respect to the demand letter or that, if any such litigation is commenced, the Company will not incur material losses due to damages, penalties, costs and/or expenses as a result of such litigation or that any such losses will not have a material impact on the Company’s financial condition or results of operations.

Mortgage Repurchase Liability

During the period 2015 through 2019, the Company 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 loans and certain expenses.

As of March 31, 2021 and December 31, 2020, the Bank maintained a mortgage repurchase liability in connection with the above mentioned investigations stemming from the Advantage Loan Program totaling $6,629 and $9,699, 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 for breach of representations and warranties totaled $426,758 and $562,139 at March 31, 2021 and December 31, 2020, respectively, including Advantage Loan Program loans totaling $302,982 and $429,816 at March 31, 2021 and December 31, 2020, 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.

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.

In March 2021, a third-party investor accepted the Company’s offer to repurchase a pool of Advantage Loan Program loans with an outstanding unpaid principal balance of $87,944. These loans were previously sold to such third-party investor with servicing retained and were considered to be performing at the repurchase date. In connection with this repurchase, the Company recognized a disposition of $1,255 mortgage servicing rights and charged a loss of $2,917 against the mortgage repurchase liability.

35

Table of Contents

STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except per share amounts)

The table below presents the activity in the mortgage repurchase liability at March 31, 2021 and 2020:

    

March 31, 2021

    

March 31, 2020

Mortgage repurchase liability:

 

  

 

  

Beginning balance (as of January 1)

$

9,699

$

7,823

Net recovery

 

(153)

 

Charge offs

 

(2,917)

 

Ending balance

$

6,629

$

7,823

Note 17—Subsequent Events

Stock-based Compensation

On April 23, 2021, the Board of Directors approved the issuance of 182,702 restricted stock awards to certain key employees that vest ratably over three years (one-third per year) after the date of grant. The restricted stock awards were issued at fair market value at the date of grant. Upon a change in control, as defined in the 2020 Plan, the outstanding restricted stock awards will immediately vest.

36

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 2020 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 March 31, 2021, see the risk factors set forth under “Item 1A. Risk Factors” in our 2020 Form 10-K. You should carefully consider the 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 2020 Form 10-K, as well as under this “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

37

Risks Related to the Advantage Loan Program

The results of the Internal Review of our Advantage Loan Program and related matters
The results of investigations of us by the OCC, the DOJ, the SEC or other governmental agencies
The costs of legal proceedings, including settlements and judgments
The effects of the permanent discontinuation of our Advantage Loan Program
Compliance with the OCC Agreement and BSA /AML laws and regulations generally
Potential future losses in connection with representations and warranties we have made with respect to residential real estate loans that we have sold into the secondary market

Risks Related to the COVID-19 Pandemic

The economic impact, and governmental and regulatory actions to mitigate the impact, of the disruptions created by the COVID-19 pandemic
The effects of the economic disruptions resulting from the COVID-19 pandemic on our loan portfolio

Risks Related to the Economy and Financial Markets

The effects of fiscal and monetary policies and regulations of the federal government and Federal Reserve
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 increases to the federal corporate tax rate

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
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 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 laws and regulations and their application by our regulators and the Community Reinvestment Act and fair lending laws
Adverse effects that may arise from the material weaknesses in our internal control over financial reporting or a failure to promptly remediate them

Risks Related to Competition

Strong competition within our market areas or with respect to our products and pricing
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
Negative impacts of future changes in interest rates
Uncertainty relating to the determination and discontinuance of LIBOR

38

Risks Related to Interest Rates

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

Other Risks Related to Our Business

The recent significant transition in our senior management and 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
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
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
The value of our mortgage servicing rights
The reliance of our critical accounting policies and estimates, including for the allowance for loan losses, on analytical and forecasting techniques and models
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

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 2020 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 banking services.

39

Internal Review, Investigations and Regulatory Matters Related to the Advantage Loan Program

On December 9, 2019, the Company announced it had voluntarily suspended its Advantage Loan Program in connection with the Internal Review. The primary focus of the Internal Review, which has been led by outside legal counsel under 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. The Internal Review has 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 and employment, 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, and a significant number of officers and employees have been terminated or resigned, including the top loan producers within the Advantage Loan Program. While the Internal Review is substantially complete, the Company expects it to remain open during the pendency of the government investigations discussed below, and it is possible additional work will be required in connection with the Internal Review.

The Bank is currently under formal investigation by the OCC, is responding to grand jury subpoenas from the DOJ and is responding to a formal investigation recently initiated by the SEC, all of which are related to the Advantage Loan Program. The Bank also continues to be subject to the OCC Agreement, which relates primarily to certain aspects of the Bank’s BSA/AML compliance program as well as its credit administration. The OCC Agreement requires the Bank to: (i) establish a compliance committee to monitor and oversee the Bank’s compliance with the provisions of OCC Agreement; (ii) develop a revised customer due diligence and enhanced due diligence program; (iii) develop a revised suspicious activity monitoring program; (iv) engage an independent, third-party consultant to review and provide a written report on the Bank’s suspicious activity monitoring; (v) develop revised policies and procedures to ensure effective BSA/AML model risk management for the Bank’s automated suspicious activity monitoring system, which must be validated by a qualified, independent third party; (vi) ensure that the Bank’s BSA Department maintains sufficient personnel; and (vii) develop revised policies and procedures to ensure effective controls over loan underwriting. In addition to these requirements, while the OCC Agreement remains in effect, the Bank is subject to certain restrictions on expansion activities, such as growth through acquisition or branching to supplement organic growth of the Bank.

The Company has incurred and continued to incur significant legal, consulting and other third-party expenses in the first quarter of 2021 in connection with the Internal Review, the government investigations, compliance with the OCC Agreement and defending litigation and threatened litigation related to the Advantage Loan Program.

For further information regarding these matters, see “Part II, Item 1. Legal Proceedings" and "Part II, Item 1A. Risk Factors."

Update on Impact of COVID-19

The COVID-19 pandemic continues to create extensive disruptions to U.S. and global economic conditions and financial markets and to businesses and the lives of individuals throughout the world. Although in various locations certain activity restrictions have been relaxed with some level of success, in many states and localities the number of individuals diagnosed with COVID-19 has increased significantly, causing a freezing or, in certain cases, a reversal of previously announced relaxation of activity restrictions and prompting the need for additional aid and other forms of relief. Recently, COVID-19 vaccinations have been increasing. It is too early to know how quickly these vaccines can be distributed to the broader population and how effective the vaccination of the broader population will be in mitigating the adverse social and economic effects of the pandemic. Further, variant strains of the COVID-19 virus have appeared, further complicating efforts of the medical community and federal, state and local governments in response to the pandemic. The ultimate impact of the COVID-19 pandemic will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken currently or in the future by governmental authorities in response to the pandemic.

Congress and various state governments and federal agencies have taken actions to require lenders to provide forbearance and other relief to borrowers (for example, waiving late payment and other fees). At March 31, 2021, pandemic-related forbearances totaled $41.9 million, or 1.7% of total loans, down significantly from peak levels in 2020. The remaining forbearances consist of $20.3 million residential real estate loans, $14.1 million commercial real estate loans and $7.4 million construction loans. We continue to work together with our borrowers as circumstances permit.

The economic disruptions related to the COVID-19 pandemic have resulted in a significant increase in delinquencies and loans on nonaccrual status across our commercial real estate loan, construction loan and residential real estate loan portfolios as certain

40

industries have been particularly hard-hit by the COVID-19 pandemic, which has adversely affected the ability of many of our borrowers to repay their loans. For example, as of March 31, 2021, our commercial real estate loan portfolio includes loans secured by SROs, hotels, retail properties and offices, totaling $116.1 million, representing 4.7% of total loans, including $75.5 million of loans secured by SROs and hotels. According to data from Cushman & Wakefield, the office vacancy rate in San Francisco continued to rise during the first quarter of 2021 and was 18.7% as of March 31, 2021. In addition, operating cash flows from tenants have decreased as a result of the COVID-19 pandemic, and decreased travel as a result of the COVID-19 pandemic has affected our SRO borrowers by reducing demand from tourists for travel accommodations in San Francisco. Our construction loan portfolio also includes similar substantial exposures. In addition, the elevated unemployment rate will continue to have a significant adverse impact on the ability of our residential real estate borrowers to repay their loans.

During the first quarter of 2021, we continued to experience higher than normal downgrades and elevated nonaccrual level. Total loans 90 days or more past due, including nonaccrual loans but excluding loan forbearances related to the COVID-19 pandemic, totaled $83.6 million at March 31, 2021, compared to $86.5 million at December 31, 2020.

Overview of Quarterly Performance

Our historical lending strategy has been to offer a range of loan products to the residential and commercial markets. The majority of our loan portfolio consists of residential real estate mortgages, which accounted for 82% of our loan portfolio as of March 31, 2021. The balance of our loan portfolio consists of commercial real estate, construction, and commercial lines of credit.

Our focus for 2021 is to continue to work hard to resolve our outstanding compliance issues and re-establish strong credit metrics for new lending initiatives. Going forward, we plan to focus on the diversification of our overall loan production and develop new residential loan products. However, the implementation of any new loan products takes time and may be subject to the prior review and approval of applicable bank regulatory authorities. In addition, we continued to maintain a high level of liquidity to prepare for potential Advantage Loan Program repurchase requests, which we have solicited from loan investors, and to compensate for the Bank's reduced borrowing capacity from the FHLB as a result of a reduction in collateral pledged, as well as to prepare for additional uncertainties related to our ongoing examinations and investigations. The Bank repurchased $87.9 million of Advantage Loan Program loans in the first quarter of 2021.

On March 19, 2021, the Bank entered into an agreement with First Federal Savings & Loan Association of Port Angeles, a Washington state chartered bank, to sell the Bank’s Bellevue, Washington branch office, subject to receipt of applicable regulatory approvals and other customary closing conditions. The sale includes the transfer of all deposit accounts located at the branch, with a total balance of $78.0 million at March 31, 2021, as well as the transfer of all branch premises and equipment. The agreement provides that the Bank will receive a premium of 2.1% on the principal balance of the deposits at closing. The agreement also provides that the buyer intends to offer employment to all associated staff. This transaction is expected to close in the second quarter of 2021.

As of March 31, 2021, the Company had total consolidated assets of $3.69 billion, total consolidated deposits of $2.89 billion and total consolidated shareholders’ equity of $321.9 million. Liquid assets, comprising cash and due from banks and investment securities, decreased $170.5 million, or 13%, to $1.13 billion from $1.30 billion at December 31, 2020. Total loans held for investment decreased $45.3 million, or 2%, to $2.46 billion from $2.51 billion at December 31, 2020. Net principal payments continued to exceed new loan production for the three months ended March 31, 2021. This decrease was partially offset by the repurchase of $87.9 million of Advantage Loan Program loans.

Our net income (loss) increased $6.4 million from net loss of $(4.0) million for the three months ended March 31, 2020 to net income of $2.3 million for the three months ended March 31, 2021, primarily attributable to a $0.7 million recovery of loan losses in the current period compared to a $20.9 million provision for loan losses for the same period in 2020. This increase was partially offset by a $5.4 million decrease in our net interest income and a $5.4 million increase in professional fees related to our efforts to achieve compliance with the OCC Agreement, our ongoing enhancements to our regulatory compliance framework (including our internal controls over financial reporting), and the ongoing government investigations and litigation. Our net interest margin decreased from 3.57% for the three months ended March 31, 2020 to 2.45% for the current period due primarily to a decline in the average balance of our loan portfolio, as well as a shift in the balance sheet mix and the impact of the current low interest rate environment.

41

Our regulatory capital ratios remained well above the levels required to be considered well capitalized for regulatory purposes with a Common Equity Tier 1 ratio for the Company of 18.48% and a ratio of Tier 1 Capital to adjusted tangible assets of 8.34%. See "Liquidity and Capital Resources."

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 three months ended March 31, 2021, 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 2020 Form 10-K.

Financial Condition

The Company’s total assets were $3.69 billion at March 31, 2021 compared to $3.91 billion at December 31, 2020. Total loans, net of allowance for loan losses, decreased slightly to $2.39 billion compared to $2.43 billion at December 31, 2020. The investment securities portfolio decreased $45.3 million, or 15%, to $259.7 million at March 31, 2021 from $305.0 million at December 31, 2020. Total deposits, including $78.0 million deposits held for sale, decreased $209.7 million, or 7%, to $2.89 billion at March 31, 2021. Borrowings, excluding the Notes, remain unchanged at $318.0 million at March 31, 2021.

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

At March 31, 2021

    

At December 31, 2020

    

Amount

    

%

    

Amount

    

%

 

 

(Dollars in thousands)

Real estate:

Residential real estate

$

2,008,439

 

82

%  

$

2,033,526

 

81

%

Commercial real estate

 

263,508

 

11

%  

 

259,958

 

11

%

Construction

 

184,490

 

7

%  

 

206,581

 

8

%

Total real estate

 

2,456,437

 

100

%  

 

2,500,065

 

100

%

Commercial lines of credit

 

5,029

 

%  

 

6,671

 

%

Other consumer

 

4

 

%  

 

7

 

%

Total loans

 

2,461,470

 

100

%  

 

2,506,743

 

100

%

Allowance for loan losses

 

(71,871)

 

 

(72,387)

 

  

Loans, net

$

2,389,599

$

2,434,356

 

  

42

The following table sets forth our fixed and adjustable-rate loans in our loan portfolio at March 31, 2021:

    

Fixed

    

Adjustable

    

Total

(In thousands)

Real estate:

    

  

    

    

  

Residential real estate

$

26,953

$

1,981,486

$

2,008,439

Commercial real estate

 

83,360

 

180,148

 

263,508

Construction

 

 

184,490

 

184,490

Commercial lines of credit

 

157

 

4,872

 

5,029

Other consumer

 

4

 

 

4

Total

$

110,474

$

2,350,996

$

2,461,470

The table set forth below contains the repricing dates of adjustable rate loans included within our loan portfolio as of March 31, 2021:

Residential

Commercial

    

    

Commercial

    

Other

    

March 31, 2021

    

Real Estate

    

Real Estate

    

Construction

    

Lines of Credit

    

Consumer

    

Total

(In thousands)

Amounts to adjust in:

    

  

    

  

    

  

    

  

    

  

    

  

6 months or less

$

472,129

$

20,459

$

184,490

$

4,872

$

$

681,950

More than 6 months through 12 months

 

482,188

 

11,758

 

 

 

 

493,946

More than 12 months through 24 months

 

418,015

 

47,768

 

 

 

 

465,783

More than 24 months through 36 months

 

207,826

 

25,498

 

 

 

 

233,324

More than 36 months through 60 months

 

337,502

 

74,665

 

 

 

 

412,167

More than 60 months

 

63,826

 

 

 

 

 

63,826

Fixed to Maturity

 

26,953

 

83,360

 

 

157

 

4

 

110,474

Total

$

2,008,439

$

263,508

$

184,490

$

5,029

$

4

$

2,461,470

At March 31, 2021, $356.4 million, or 15.2%, of our adjustable interest rate loans were at their interest rate floor.

Asset Quality

Nonperforming Assets. Nonperforming assets include nonaccrual loans, loans that are 90 or more days past due or more and still accruing interest, troubled debt restructurings, nonaccrual loans held for sale and other loan collateral acquired through foreclosures and repossessions. At March 31, 2021 and December 31, 2020, we had $45 thousand and $46 thousand, respectively, of accruing loans that were past due 90 days or more. 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. 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. However, not all troubled debt restructurings are placed on nonaccrual status. At March 31, 2021 and December 31, 2020, we had troubled debt restructurings totaling $29.4 million and $28.3 million, respectively. Troubled debt restructurings on nonaccrual status at such dates totaled $21.8 million and $20.1 million, respectively, and are included in the nonaccrual loan categories in the following table. See Note 5—Loans—Troubled Debt Restructurings to our condensed consolidated financial statements for additional information about our troubled debt restructurings.

43

The following table sets forth information regarding our nonperforming assets at the dates indicated. In addition to the exclusions and presentation conventions described in the footnotes to the table, the categories of nonperforming assets in the following table do not include COVID-19-related loan forbearances that may be excluded from troubled debt restructurings under the CARES Act.

    

At March 31,

    

At December 31,

 

2021

    

2020

(Dollars in thousands)

 

Nonaccrual loans (1):

    

  

 

  

Residential real estate

$

27,635

    

$

20,729

Commercial real estate

 

19,032

 

19,965

Construction

 

34,581

 

41,873

Commercial lines of credit

 

2,285

 

3,857

Other consumer

 

 

Total nonaccrual loans (2)

 

83,533

 

86,424

Other real estate owned

167

167

Loans past due 90 days or more and still accruing interest

 

45

 

46

Other troubled debt restructurings(3)

7,646

8,246

Nonaccrual loans held for sale(4)

18,572

19,375

Total nonperforming assets

$

109,963

$

114,258

Total loans

$

2,461,470

$

2,506,743

Total assets

$

3,694,027

$

3,914,045

Total nonaccrual loans to total loans(2)

 

3.39

%  

 

3.45

%

Total nonperforming assets to total assets

 

2.98

%  

 

2.92

%

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

(2)  Total nonaccrual loans exclude nonaccrual loans held for sale but include troubled debt restructurings on nonaccrual status.

(3)  Other troubled debt restructurings exclude those loans presented above as nonaccrual or past due 90 days or more and still accruing interest.

(4)  Nonaccrual loans held for sale were residential real estate loans as of March 31, 2021.

As of March 31, 2021, nonperforming assets totaled $110.0 million, reflecting a decrease of $4.3 million from $114.3 million as of December 31, 2020. This decrease is attributable primarily to nonaccrual construction loans, which totaled $34.6 million as of March 31, 2021, reflecting a decrease of $7.3 million from $41.9 million as of December 31, 2020. Residential real estate loans comprised 33% of total nonaccrual loans as of March 31, 2021 compared to 24% as of December 31, 2020. Commercial real estate and construction loans collectively comprised 64% of total nonaccrual loans compared to 72% as of December 31, 2020.

The decrease in nonaccrual construction loans is attributable primarily to three construction loans totaling $7.5 million paid in full and three construction loans totaling $4.6 million returning to accrual status upon conversion to commercial real estate bridge loans to allow time for the borrower to sell the project. The decrease was partially offset by the addition of one construction loan of $4.2 million to nonaccrual status.

The total amount of additional interest income on nonaccrual loans that would have been recognized for the quarter ended March 31, 2021 if interest on all such loans had been recorded based upon original contract terms was approximately $1.2 million. The total amount of interest income received during the quarter ended March 31, 2021 on nonaccrual loans was $0.9 million.

COVID-19-Related Forbearances. Under the CARES Act, COVID-19-related loan forbearances may be excluded from treatment as a troubled debt restructuring if such forbearance meets certain criteria. Further, in response to the COVID-19 pandemic, we have offered forbearance under the CARES Act to customers facing COVID-19-related financial difficulties. While the principal balance of loans modified due to the economic effects of the COVID-19 pandemic and still in forbearance declined from peak levels in 2020, we continue to work together with our borrowers as circumstances may permit. Residential real estate forbearances increased $9.6 million from $10.7 million at December 31, 2020 to $20.3 million at March 31, 2021. This increase was primarily attributable to eleven loans totaling $8.4 million, whose initial forbearance period expired by December 31, 2020, but whose borrowers subsequently requested and were granted an extension of forbearance in the first quarter of 2021, and the repurchase of previously sold loans totaling $1.7 million that were under forbearance. Two commercial real estate loans totaling $13.2 million and one construction loan of $7.4 million entered forbearance during the first quarter of 2021 and one commercial real estate loan of $4.2 million exited

44

forbearance. Total loans in forbearance as of March 31, 2021 were $41.9 million, or 1.70%, of total loans held for investment. The following table sets forth such loans in forbearance at the dates indicated.

    

March 31,  

    

December 31, 

 

Forbearance Composition

2021

2020

Residential real estate

$

20,298

$

10,729

Commercial real estate

 

14,129

 

5,056

Construction

 

7,428

 

Total loans in forbearance

$

41,855

$

15,785

Loans in forbearance to total loans held for investment

 

1.70

%  

 

0.63

%

Delinquent Loans. The following tables set forth our loan delinquencies, including nonaccrual loans but excluding loan forbearances related to the COVID-19 pandemic, by type and amount at the dates indicated.

March 31, 2021

    

December 31, 2020

30 - 59

60 - 89

90 Days

30 - 59

60 - 89

90 Days

 Days

Days

or More

Days

Days

or More

    

Past Due

    

Past Due

    

Past Due

    

Past Due

    

Past Due

    

Past Due

(In thousands)

Residential real estate

    

$

28,749

    

$

12,780

    

$

27,680

    

$

38,181

    

$

14,658

    

$

20,775

Commercial real estate

 

6,689

 

384

 

19,032

 

4,845

 

 

19,965

Construction

 

11,771

 

 

34,581

 

8,593

 

2,514

 

41,873

Commercial lines of credit

 

715

 

 

2,285

 

 

 

3,857

Other consumer

 

 

 

 

 

 

Total delinquent loans

$

47,924

$

13,164

$

83,578

$

51,619

$

17,172

$

86,470

Total loans 90 days or more past due, including nonaccrual loans but excluding loan forbearances related to the COVID-19 pandemic, decreased $2.9 million, or 3%, from $86.5 million at December 31, 2020 to $83.6 million at March 31, 2021. This decrease was primarily attributable to our construction loan portfolio.

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 5—Loans—Credit Quality to our consolidated financial statements for additional information about our risk categories.

Loans classified as Substandard, Doubtful and Special Mention were as follows:

    

March 31,

    

December 31,

2021

2020

(Dollars in thousands)

Special Mention

$

58,118

$

59,668

Substandard

 

146,297

 

131,469

Doubtful

 

7,519

 

7,014

Total

$

211,934

 

$

198,151

Total Special Mention, Substandard and Doubtful loans were $211.9 million, or 8.61% of total loans, at March 31, 2021, compared to $198.2 million, or 7.90% of total loans, at December 31, 2020. The $14.8 million increase in Substandard loans was mainly attributable to the downgrade of 16 residential real estate loans totaling $12.2 million that became over 90 days past due, one commercial real estate loans of $6.0 million and one construction loan of $4.4 million. These downgrades were offset, in part, by the upgrade of ten residential real estate loans totaling $4.9 million that became current on their scheduled payments and $3.5 million of loans paid in full.

Impaired Loans. A loan is considered impaired when, based on current information and events, it is probable that Bank 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

45

allowance for loan 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. See Note 5—Loans to our condensed consolidated financial statements for tables presenting additional data regarding the allowance for loan losses and impaired loans.

At March 31, 2021 and December 31, 2020, we had 23 and 31 impaired loans with recorded investments of $63.6 million and $74.0 million, respectively. Total impaired loans decreased $10.4 million, or 14%, primarily attributable to $11.1 million impaired loans paid in full and $2.7 million impaired loans returning to accrual status. This decrease was partially offset by one construction loan of $4.2 million being added to impaired status.

Allowance for Loan Losses

The allowance for loan losses is 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 is based on management’s assessment of various factors affecting the loan portfolio, including portfolio composition, delinquent and nonaccrual loans, national and local business conditions, loss experience and an overall evaluation of the quality of the underlying collateral. In addition, certain qualitative components within our allowance for loan losses methodology have taken on increased significance as a result of the economic impact of the COVID-19 pandemic. These qualitative components include increased unemployment, commercial property vacancy rates, uncertainty in property values and deterioration in the overall macro-economic environment.

The following table sets forth activity in the allowance for loan losses for the periods indicated.

Three Months Ended 

 

March 31,

    

2021

    

2020

    

(Dollars in thousands)

Allowance for loan losses at beginning of period

    

$

72,387

$

21,730

Charge offs:

 

  

 

  

Residential real estate

 

 

Commercial real estate

 

 

Construction

 

 

Commercial lines of credit

 

 

Other consumer

 

 

Total charge offs

 

 

Recoveries:

 

 

  

Residential real estate

 

204

 

10

Commercial real estate

 

16

 

19

Construction

 

1

 

1

Commercial lines of credit

 

 

Other consumer

 

 

Total recoveries

 

221

 

30

Net recoveries

 

221

 

30

Provision (recovery) for loan losses

 

(737)

 

20,853

Allowance for loan losses at end of period

$

71,871

$

42,613

Nonperforming loans and troubled debt restructurings at end of period

$

91,224

$

40,790

Total loans at end of period

$

2,461,470

$

2,842,258

Average loans during period

$

2,467,037

$

2,870,715

Allowance for loan losses to nonperforming loans and troubled debt restructurings at end of period

 

79

%  

 

105

%

Allowance for loan losses to total loans at end of period

 

2.92

%  

 

1.50

%

Net recoveries to average loans outstanding during the period

 

(0.01)

%  

 

%

46

The following tables set forth the allowance for loan losses allocated by loan category at the dates indicated. The allowance for loan 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 losses to absorb losses in other categories.

At March 31, 2021

    

    At December 31, 2020

 

Percent of

Percent of

 

Loans in

Loans in

 

Allowance

Each

Allowance

Each

 

for Loan

Category to

for Loan

Category to

 

Losses

 

Total Loans

    

Losses

 

Total Loans

 

(Dollars in thousands)

Residential real estate

    

$

33,056

    

82

%  

$

32,366

    

81

%

Commercial real estate

 

22,763

 

11

%  

 

21,942

 

10

%

Construction

 

15,966

 

7

%  

 

17,988

 

8

%

Commercial lines of credit

 

86

 

%  

 

91

 

1

%

Other consumer

 

 

%  

 

 

%

Unallocated

 

 

N/A

 

 

N/A

Total

$

71,871

 

100

%  

$

72,387

 

100

%

The allowance for loan losses as a percentage of loans was 2.92% and 2.89% as of March 31, 2021 and December 31, 2020, respectively. Our total allowance for loan losses decreased by $0.5 million, or 0.71%, to $71.9 million during the three months ended March 31, 2021, from $72.4 million at December 31, 2020. The $0.5 million decrease to our allowance for loan losses was primarily attributable to a $1.8 million reduction in required allowance for loan losses due to a decrease in the aggregate balance of Pass rated loans as a result of loan portfolio runoff, despite the repurchase of residential real estate loans and new originations during the quarter. Partially offsetting the decrease in our allowance for loan losses was a $1.3 million increase in required allowance for loan loss reflecting a $13.8 million net increase in Special Mention, Substandard and Doubtful loans during the quarter.

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 our financial condition and results of operations.

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.

At March 31,

    

At December 31,

2021

2020

Amortized 

Fair 

Amortized 

Fair 

Cost

Value

Cost

Value

(In thousands)

U.S. Treasury & Agency securities

    

$

118,624

    

$

118,786

    

$

138,742

    

$

138,997

Mortgage-backed securities

 

31,462

 

31,114

 

33,743

 

33,814

Collateralized mortgage obligations

 

103,658

 

104,319

 

126,359

 

126,596

Collateralized debt obligations

 

213

 

193

 

214

 

187

Total

$

253,957

$

254,412

$

299,058

$

299,594

We decreased the size of our available-for-sale debt securities portfolio (on an amortized-cost basis) $45.1 million, or 15.1%, from December 31, 2020 to $254.0 million at March 31, 2021, reflecting the maturity of a $20.0 million Treasury note and the paydown of the mortgage-backed securities and collateralized mortgage obligations portfolio.

47

At March 31, 2021 and December 31, 2020, we had no investments in a single company or entity, other than the U.S. government and government agency securities, with an aggregate book value in excess of 10% of our total shareholders’ equity.

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 oth