UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of | (I.R.S. Employer |
(
(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 |
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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.
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).
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 ☐ |
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| 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
As of May 1, 2023,
STERLING BANCORP, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
1
Sterling Bancorp, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
(dollars in thousands)
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
March 31, | December 31, | |||||
| 2023 |
| 2022 | |||
Assets |
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Cash and due from banks | $ | | $ | | ||
Interest-bearing time deposits with other banks | | | ||||
Debt securities available for sale, at fair value (amortized cost $ |
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Equity securities |
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Loans held for sale |
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Loans, net of allowance for credit losses of $ |
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Accrued interest receivable |
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Mortgage servicing rights, net | | | ||||
Leasehold improvements and equipment, net |
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Operating lease right-of-use assets | | | ||||
Federal Home Loan Bank stock, at cost | | | ||||
Company-owned life insurance |
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Deferred tax asset, net |
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Other assets |
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Total assets | $ | | $ | | ||
Liabilities and Shareholders’ Equity | ||||||
Liabilities |
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Noninterest-bearing deposits | $ | | $ | | ||
Interest-bearing deposits |
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Total deposits |
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Federal Home Loan Bank borrowings |
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Subordinated notes, net |
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Operating lease liabilities | | | ||||
Accrued expenses and other liabilities |
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Total liabilities |
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Shareholders’ equity |
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Preferred stock, authorized |
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Common stock, |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
| ( |
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Total shareholders’ equity |
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Total liabilities and shareholders’ equity | $ | | $ | | ||
See accompanying notes to condensed consolidated financial statements.
2
Sterling Bancorp, Inc.
Condensed Consolidated Statements of Operation (Unaudited)
(dollars in thousands, except per share amounts)
Three Months Ended | ||||||
March 31, | ||||||
| 2023 |
| 2022 | |||
Interest income | ||||||
Interest and fees on loans | $ | | $ | | ||
Interest and dividends on investment securities and restricted stock | | | ||||
Other interest | | | ||||
Total interest income | | | ||||
Interest expense | ||||||
Interest on deposits | | | ||||
Interest on Federal Home Loan Bank borrowings | | | ||||
Interest on subordinated notes | | | ||||
Total interest expense | | | ||||
Net interest income | | | ||||
Provision for (recovery of) credit losses | | ( | ||||
Net interest income after provision for (recovery of) credit losses | | | ||||
Non-interest income | ||||||
Service charges and fees | | | ||||
Loss on the sale of investment securities | ( | — | ||||
Gain (loss) on sale of mortgage loans held for sale | ( | | ||||
Unrealized gain (loss) on equity securities | | ( | ||||
Net servicing income | | | ||||
Income earned on company-owned life insurance | | | ||||
Other | | | ||||
Total non-interest income | | | ||||
Non-interest expense | ||||||
Salaries and employee benefits | | | ||||
Occupancy and equipment | | | ||||
Professional fees | | | ||||
FDIC assessments | | | ||||
Data processing | | | ||||
Net provision for (recovery of) mortgage repurchase liability | | ( | ||||
Other | | | ||||
Total non-interest expense | | | ||||
Income (loss) before income taxes | ( | | ||||
Income tax expense (benefit) | ( | | ||||
Net income (loss) | $ | ( | $ | | ||
Income (loss) per share, basic and diluted | $ | ( | $ | | ||
Weighted average common shares outstanding: | ||||||
Basic | | | ||||
Diluted | | | ||||
See accompanying notes to condensed consolidated financial statements.
3
Sterling Bancorp, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(dollars in thousands)
Three Months Ended | ||||||
March 31, | ||||||
| 2023 |
| 2022 | |||
Net income (loss) | $ | ( | $ | | ||
Other comprehensive income (loss), net of tax: | ||||||
Unrealized gain (loss) on investment securities, arising during the period, net of tax effect of $ | | ( | ||||
Reclassification adjustment for loss included in net income of $ | | — | ||||
Total other comprehensive income (loss) | | ( | ||||
Comprehensive income (loss) | $ | | $ | ( | ||
See accompanying notes to condensed consolidated financial statements.
4
Sterling Bancorp, Inc.
Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
(dollars in thousands)
Accumulated | |||||||||||||||||
Additional | Other | Total | |||||||||||||||
Common Stock | Paid-in | Retained | Comprehensive | Shareholders’ | |||||||||||||
| Shares |
| Amount |
| Capital |
| Earnings |
| Income (Loss) |
| Equity | ||||||
Balance at January 1, 2022 | | $ | | $ | | $ | | $ | ( | $ | | ||||||
Net income | — | — | — | | — | | |||||||||||
Repurchase of restricted shares to pay employee tax liability | ( | — | ( | — | — | ( | |||||||||||
Stock-based compensation | | — | | — | — | | |||||||||||
Other comprehensive loss | — |
| — |
| — |
| — |
| ( |
| ( | ||||||
Balance at March 31, 2022 | | $ | | $ | | $ | | $ | ( | $ | | ||||||
Balance at January 1, 2023 | | $ | | $ | | $ | | $ | ( | $ | | ||||||
Cumulative-effect adjustment of a change in accounting principle, net of tax, on adoption of ASU 2016-13 (Note 2) | — | — | — | | — | | |||||||||||
Cumulative-effect adjustment of a change in accounting principle, net of tax, on adoption of ASU 2022-02 (Note 2) | — | — | — | ( | — | ( | |||||||||||
Net loss | — | — | — | ( | — | ( | |||||||||||
Repurchase of restricted shares to pay employee tax liability | ( | — | ( | — | — | ( | |||||||||||
Stock-based compensation | | — | | — | — | | |||||||||||
Other comprehensive income | — | — | — | — | | | |||||||||||
Balance at March 31, 2023 | | $ | | $ | | $ | | $ | ( | $ | | ||||||
See accompanying notes to condensed consolidated financial statements.
5
Sterling Bancorp, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
Three Months Ended | ||||||
March 31, | ||||||
| 2023 |
| 2022 | |||
Cash Flows From Operating Activities |
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Net income (loss) | $ | ( | $ | | ||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
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Provision for (recovery of) credit losses |
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Deferred income taxes |
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Loss on sale of investment securities |
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Unrealized (gain) loss on equity securities |
| ( |
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Net amortization (accretion) on investment securities |
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Depreciation and amortization on leasehold improvements and equipment | | | ||||
Originations, net of principal payments, of loans held for sale |
| ( |
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Proceeds from sale of mortgage loans held for sale |
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(Gain) loss on sale of loans originated for investment and loans held for sale |
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Net provision for (recovery of) mortgage repurchase liability | | ( | ||||
Increase in cash surrender value of company-owned life insurance, net of premiums |
| ( |
| ( | ||
Valuation allowance adjustments and amortization of mortgage servicing rights |
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Stock-based compensation | | | ||||
Other |
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Change in operating assets and liabilities: |
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Accrued interest receivable |
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Other assets | ( | ( | ||||
Accrued expenses and other liabilities |
| ( |
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Net cash provided by (used in) operating activities |
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Cash Flows From Investing Activities |
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Maturities and principal receipts of investment securities | | | ||||
Sales of investment securities | | — | ||||
Purchases of investment securities |
| ( | ( | |||
Proceeds received from redemption of Federal Home Loan Bank stock | — | | ||||
Net decrease in loans |
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Principal payments received on commercial real estate loans held for sale | | | ||||
Proceeds from the sale of commercial real estate loans originated for investment | — | | ||||
Purchases of leasehold improvements and equipment |
| ( |
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Net cash provided by investing activities |
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Cash Flows From Financing Activities |
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Net decrease in deposits |
| ( |
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Cash paid for surrender of vested shares to satisfy employee tax liability | ( | ( | ||||
Net cash used in financing activities |
| ( |
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Net change in cash and due from banks |
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Cash and due from banks at beginning of period |
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Cash and due from banks at end of period | $ | | $ | | ||
Supplemental cash flows information |
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Cash paid for: |
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Interest | $ | | $ | | ||
Income taxes | | | ||||
Noncash investing and financing activities: | ||||||
Transfer of residential real estate loans to loans held for sale | | — | ||||
Transfer of residential real estate loans from loans held for sale | | — | ||||
See accompanying notes to condensed consolidated financial statements.
6
STERLING BANCORP, INC.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
Note 1—Nature of Operations and Basis of Presentation
Nature of Operations
Sterling Bancorp, Inc. (unless stated otherwise or the context otherwise requires, together with its subsidiaries, the “Company”) is a unitary thrift holding company that was incorporated in 1989 and the parent company of its wholly owned subsidiary, Sterling Bank and Trust, F.S.B. (the “Bank”). The Company’s business is conducted through the Bank, which was formed in 1984. The Bank originates residential and commercial real estate loans, construction loans, commercial and industrial loans and other consumer loans and provides deposit products, consisting primarily of checking, savings and term certificate accounts. It also engages in mortgage banking activities and, as such, acquires, sells and services residential mortgage loans. The Bank operates through a network of
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
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, 2023, and the condensed consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity and cash flows for the three months ended March 31, 2023 and 2022 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, 2023 are not necessarily indicative of the results that may be expected for the year ended December 31, 2023 or for any future annual or interim period. The condensed consolidated balance sheet at December 31, 2022 included herein was derived from the audited financial statements as of that date. The accompanying unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 16, 2023 (the “2022 Form 10-K”).
7
STERLING BANCORP, INC.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
Note 2—Adoption of New Accounting Standards
In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2022-02, Financial Instruments – Credit Losses ( Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”), which eliminates the accounting guidance for troubled debt restructurings by creditors and enhances disclosure requirements for certain loan refinancings and restructurings made to borrowers experiencing financial difficulty. Under the new guidance, creditors should evaluate all loan modifications to determine if they result in a new loan or a continuation of the existing loan under the general loan modification guidance. Public business entities are required to disclose current-period gross write-offs by year of origination for loan financing receivables and net investment in leases. The Company adopted the provisions of ASU 2022-02 on January 1, 2023, along with its adoption of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) as discussed in Note 3—Summary of Significant Accounting Policies. On the date of adoption, the Company recorded a cumulative effect adjustment of $
In June 2016, the FASB issued ASU 2016-13 (and subsequent amendments), which significantly changes estimates for credit losses related to financial assets measured at amortized cost, including loan receivables and other contracts, such as off-balance sheet credit exposure, specifically, loan commitments and standby letters of credit, financial guarantees, and other similar instruments. The guidance replaced the current incurred loss accounting model with an expected loss model, which is referred to as the current expected credit loss (“CECL”) model. The CECL model requires the measurement of the lifetime expected credit losses on financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Additionally, ASU 2016-13 requires credit losses on available for sale debt securities to be presented as an allowance rather than as a write-down. The guidance requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio.
The Company adopted ASU 2016-13 on January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while amounts for prior periods continue to be reported in accordance with previously applicable accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Company recorded a cumulative effect adjustment of $
The details of the changes and quantitative impact on the financial statement line items in the condensed consolidated balance sheet as of January 1, 2023 for the adoption of ASU 2016-13, along with the adoption of ASU 2022-02, were as follows:
| Prior to |
| Adjustments for |
| Adjustments for |
| After | |||||
Adoption | ASU 2016-13 | ASU 2022-02 |
| Adoption | ||||||||
Assets: |
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Allowance for credit losses – loans | $ | | $ | ( | $ | | $ | | ||||
Liabilities: |
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Liability for unfunded commitments |
| — |
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| — | | |||||
Pretax cumulative effect adjustment of a change in accounting principle |
| — |
| ( |
| | — | |||||
Less: income taxes |
| — |
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| ( | — | |||||
Cumulative effect adjustment of a change in accounting principle, net of tax |
| — | $ | ( | $ | | — | |||||
8
STERLING BANCORP, INC.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
The loan portfolio is pooled into segments with similar characteristics and risk profiles for which the probability of default/loss given default methodology is then applied. The Company utilizes a 24-month economic forecast. For all classes of financial assets deemed collateral dependent, the Company elected the practical expedient to estimate the expected credit losses based on the respective collateral’s fair value less cost to sell.
The Company also made an accounting policy election to not measure an allowance for credit losses on accrued interest receivable and to present accrued interest receivable separately from the related financial asset on the condensed consolidated balance sheet.
The Company’s available for sale debt securities are comprised of debt, mortgage-backed securities and collateralized mortgage obligations. The debt, mortgage-backed securities and the majority of the collateralized mortgage obligations are issued by the U.S. government, its agencies and government-sponsored enterprises. Management has concluded that the long history with no credit losses from these issuers indicates an expectation that nonpayment of the amortized cost is zero. Thus, the Company has not recorded an allowance for credit losses for its available for sale debt securities at the date of adoption.
As stated, the comparative prior period information presented before January 1, 2023 has not been adjusted and continues to be reported under the Company’s historical allowance for loan losses policies as described in Note 2 to the consolidated financial statements in the 2022 Form 10-K.
Note 3— Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying condensed consolidated financial statements have been prepared in conformity with U.S. GAAP. The condensed consolidated financial statements include the results of Sterling Bancorp, Inc. and its wholly-owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Due to the inherent uncertainty involved in making estimates, actual results reported in the future periods may be based upon amounts that could differ from those estimates.
Concentration of Credit Risk
The loan portfolio consists primarily of residential real estate loans, which are collateralized by real estate. At March 31, 2023 and December 31, 2022, residential real estate loans accounted for
9
STERLING BANCORP, INC.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
In December 2019, the Company terminated a loan product consisting of one-, three-, five- or seven-year adjustable-rate mortgages that required a down payment of at least 35% (also referred to herein as “Advantage Loan Program loans”) which continues to be the largest portion of gross residential loans. An internal review of the Advantage Loan Program indicated that certain employees engaged in misconduct in connection with the origination of a significant number of such loans, including with respect to verification of income, the amount of income reported for borrowers, reliance on third parties and related documentation. Refer to Note 15—Commitments and Contingencies.
Advantage Loan Program loans (including residential real estate loans held for sale of $
Investment Securities
Debt Securities (Effective January 1, 2023)
Debt securities are classified as either available for sale or held to maturity. Management determines the classification of the debt securities when they are purchased.
All debt securities were categorized as available for sale as of March 31, 2023 and December 31, 2022. Debt securities available for sale are stated at fair value, with unrealized gains and losses reported in accumulated other comprehensive loss, net of income taxes. The amortized cost of debt securities is adjusted for amortization of premiums (noncallable) and accretion of discounts. The Company amortizes premiums and accretes discounts using the effective interest method over the contractual life of the individual securities or, in the case of asset-backed securities, using the effective yield method over the estimated life of the individual securities.
Interest income includes amortization or accretion of purchase premium or discount. Gains and losses realized on the sales of available for sale debt securities are recorded on the settlement date and determined using the specific identification method.
For available for sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For available for sale debt securities that do not meet the aforementioned criteria, the Company evaluates at the individual security level whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of income taxes.
Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit losses. Losses are charged against the allowance for credit losses when management believes the uncollectibility of an available for sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
Accrued interest receivable on available for sale debt securities is recorded separately from the amortized cost basis of the debt securities in the condensed consolidated balance sheets and is excluded from the estimate of credit losses.
10
STERLING BANCORP, INC.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
Equity Securities
Equity securities with readily determinable fair values are stated at fair value with unrealized and realized gains and losses reported in income. Those equity securities without readily determinable fair values are recorded at cost less any impairments, adjusted for subsequent observable price changes in orderly transactions for an identical or similar investment of the same issuer. Any changes in the carrying value of the equity investments are recognized in income.
Management performs a qualitative assessment each reporting period to identify impairment of equity securities without readily determinable fair values. When a qualitative assessment indicates that an impairment exists, management determines the fair value of the investment and if the fair value is less than the investment’s carrying value, an impairment charge is recorded in income equal to the difference between the fair value and the carrying amount of the investment.
Loans Held for Sale
The Company originates certain loans intended for sale in the secondary market. Loans held for sale are carried at the lower of amortized cost or fair value on an individual loan basis. The fair value of loans held for sale are primarily determined based on quoted prices for similar loans in active markets or outstanding commitments from third-party investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to non-interest income in the condensed consolidated statements of operations.
Performing residential real estate loans that are held for sale are generally sold with servicing rights retained. The carrying value of mortgage loans sold is reduced by the amount allocated to the servicing right. On the sale of an originated loan, the servicing right is recorded at its estimated fair value. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold and are recorded as a component of non-interest income.
Loans that are originated and classified as held for investment are periodically sold in order to manage liquidity, asset credit quality, interest rate risk or concentration risk. Loans that are reclassified into loans held for sale from loans held for investment, due to a change in intent, are recorded at the lower of cost or fair value.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at amortized cost, net of the allowance for credit losses. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts, and deferred loan fees and costs. Accrued interest receivable related to loans is recorded separately from the amortized cost basis of loans on the condensed consolidated balance sheets and is excluded from the estimate of credit losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct loan origination costs, are deferred and amortized over the contractual lives of the respective loans as a yield adjustment using the effective interest method. Other credit-related fees are recognized as fee income, as a component of non-interest income.
Interest income on loans is accrued as earned using the interest method over the term of the loan. The accrual of interest income is discontinued at the time the loan is 90 days past due or earlier if conditions warrant and placed on nonaccrual status. In all cases, loans are placed on nonaccrual status at an earlier date if collection of principal or interest is considered doubtful. All interest accrued and not received for loans placed on nonaccrual status is reversed against interest income. Any payments received on nonaccrual loans are applied to interest income on a cash basis if the loan is considered well secured. Otherwise, all payments received are applied first to outstanding loan principal amounts and then to the recovery of the charged off loan amounts. Any excess is treated as a recovery of interest and fees. Loans are returned to accrual status after all principal and interest amounts contractually due are made and future payments are reasonably assured.
11
STERLING BANCORP, INC.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
Allowance for Credit Losses - Loans (Effective January 1, 2023)
The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of held for investment loans to present the net amount expected to be collected on the loans. The allowance for credit losses is adjusted through a charge (recovery) to provision for (recovery of) credit losses in the condensed consolidated statements of operations. When the Company determines that all or a portion of a loan is uncollectible, the appropriate amount is written off, and the allowance for credit losses is reduced by the same amount. The Company applies judgment to determine when a loan is deemed uncollectible; however, generally a loan will be considered uncollectible no later than when all efforts at collection have been exhausted. Subsequent recoveries, if any, are credited to the allowance for credit losses when received. Portions of the allowance for credit losses may be allocated for specific credits; however, the entire allowance for credit losses is available for any credit that, in management’s judgment, should be charged off.
The Company estimates the allowance for credit losses on loans based on the underlying loans’ amortized cost. If the collection of principal becomes uncertain, the Company stops accruing interest and reverses the accrued but unpaid interest against interest income. The Company has made a policy election to exclude accrued interest receivable from the measurement of the allowance for credit losses. The allowance for credit losses process involves procedures to appropriately consider the unique characteristics of the Company’s portfolio segments. The allowance for credit losses is measured on a collective (pool) basis for portfolios of loans with similar risk characteristics and risk profiles. The Company’s portfolio segments include the following: (i) commercial real estate, (ii) commercial construction, (iii) commercial and industrial, (iv) residential real estate and (v) home equity lines of credit. These portfolio segments were identified based on their common characteristics: loan type/purpose of loan, underlying collateral type, historical/expected credit loss patterns, availability of credit quality indicators (i.e., FICO, risk rating, delinquency) and completeness of the historical information. Loans which do not share risk characteristics — generally, nonaccrual commercial and construction loans, and collateral-dependent loans where the borrower is experiencing financial difficulty — are individually assessed for credit loss. The Company has elected, as a practical expedient, to measure the allowance for credit losses on a collateral-dependent loan, where the borrower is experiencing financial difficulty, at the fair value of the collateral less estimated costs to sell. The portfolio segments are reviewed at least annually or when major changes occur in the loan portfolio to ensure that the segmentation is still appropriate.
The amount of the allowance for credit losses represents management’s best estimate of current expected credit losses on loans considering available information from internal and external sources, which is relevant to assessing collectability of the loans over the loans’ contractual terms, adjusted for expected prepayments. The contractual term excludes expected extensions, renewals and modifications unless: (i) management has a reasonable expectation at the reporting date that an individual borrower is experiencing financial difficulty and a modification of the loan will be executed, or (ii) the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.
The Company estimates the allowance for credit losses using relevant available information related to past events, current conditions, and reasonable and supportable forecasts. In determining the total allowance for credit losses, the Company calculates the quantitative portion of the allowance for credit losses using a methodology, the Advanced Probability of Default model, a logistic regression model, and adds qualitative adjustments to the model results and the results from any individual loan assessments.
12
STERLING BANCORP, INC.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
The Advanced Probability of Default model estimates the expected lifetime net charge off balance utilizing the following: (i) probability that the loan will stop performing or default; (ii) probability that a loan will pay-off entirely prior to maturity; and (iii) macroeconomic variables, including but not limited to unemployment rates, gross domestic product, and the Treasury Yield Curve. This information is specific to each portfolio segment, though not necessarily solely reliant on internally sourced data. Internal data is supplemented by, but not replaced by, peer data when required, primarily to determine the probability of default. The Company then applies a recovery rate to reflect the recoveries over an approximate 10-year period.
The probability of default is estimated by analyzing the relationship between the historical performance of each loan pool and historical economic trends over a complete economic cycle. The probability of default for each pool is adjusted using a statistical model to reflect the current impact of certain macroeconomic variables and their expected changes over a reasonable and supportable forecast period of eight quarters. The Company determined that it was reasonably able to forecast the macroeconomic variables used in the forecast modeling processes with an acceptable degree of confidence for a total of eight quarters. This forecast period is followed by a reversion process whereby the macroeconomic variables are relaxed to revert to the average historical loss rates for periods after the forecasted eight-quarter period.
Management qualitatively adjusts the allowance for credit loss model results for risk factors not considered within the quantitative modeling processes but are nonetheless relevant in assessing the expected credit losses within the portfolio segments. These qualitative risk factor adjustments may increase or decrease management’s estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of risk. Qualitative risk factors considered include adjustments for model limitations, management’s adjustments to economic market forecasts and other current or forecasted events not captured in the Company’s historical loss experience.
For loans that do not share risk characteristics that are evaluated on an individual basis, specific allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things. In such cases, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. The Company reevaluates the fair value of collateral supporting collateral dependent loans on an annual basis.
As disclosed above, the Company has identified the following portfolio segments used in measuring its expected credit losses in the loan portfolio and their respective risk characteristics:
The Residential Real Estate Mortgages portfolio includes residential first mortgages and residential second mortgages. The degree of risk in residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower’s ability to repay in an orderly fashion. Economic trends determined by unemployment rates and other key economic indicators, particularly at the regional and local levels, are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers’ capacity to repay their obligations may be deteriorating.
The Home Equity Lines of Credit portfolio includes residential second mortgages in the form of a revolving line of credit that requires interest only payments for a period followed by an amortizing period. These loans have higher risk of default compared to first liens making it harder to rely on loan-to-value ratios and loan balances can fluctuate. These loans are secured by the residential real estate by serving as a second lien behind the first mortgage lien.
The Commercial Real Estate portfolio includes commercial loans made to many types of businesses involving retail, multifamily, offices, hotels/single-room occupancy hotels, industrial and other commercial properties. Adverse economic developments or an overbuilt market may impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for the properties to produce sufficient cash flow to service debt obligations.
The Construction Loans portfolio is comprised of loans to builders and developers primarily for residential, commercial and mixed-use development. In addition to general commercial real estate risks, construction loans have additional risk of cost overruns, market deterioration during construction, lack of permanent financing and no operating history.
13
STERLING BANCORP, INC.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
The Commercial and Industrial portfolio is comprised of loans to many types of businesses for their operating needs of the business. The risk characteristics of these loans vary based on the borrowers’ business and industry as repayment is typically dependent on cash flows generated from the underlying business. These loans may be secured by real estate or other assets or may be unsecured.
Liability for Unfunded Commitments (Effective January 1, 2023)
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for these off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.
The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk through a contractual obligation to extend credit unless that obligation is unconditionally cancellable by the Company. The estimate of expected credit losses generally follows the same methodology as the funded loans by utilizing the loss rates generated for each portfolio segment with an adjustment for the probability of funding to occur. The liability for unfunded commitments, which is recorded in Accrued expenses and other liabilities in the condensed consolidated balance sheets, is adjusted through the provision for (recovery of) credit losses.
Note 4—Investment Securities
Debt Securities
The following tables summarize the amortized cost and fair value of debt securities available for sale at March 31, 2023 and December 31, 2022 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss:
March 31, 2023 | ||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||
| Cost |
| Gain |
| Loss |
| Value | |||||
Available for sale: |
|
|
|
|
|
|
|
| ||||
U.S. Treasury and Agency securities | $ | | $ | | $ | ( | $ | | ||||
Mortgage-backed securities | | — | ( | | ||||||||
Collateralized mortgage obligations |
| |
| |
| ( |
| | ||||
Collateralized debt obligations |
| |
| — |
| ( |
| | ||||
Total | $ | | $ | | $ | ( | $ | | ||||
December 31, 2022 | ||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||
| Cost |
| Gain |
| Loss |
| Value | |||||
Available for sale: |
|
|
|
|
|
|
|
| ||||
U.S. Treasury and Agency securities | $ | | $ | | $ | ( | $ | | ||||
Mortgage-backed securities | | — | ( | | ||||||||
Collateralized mortgage obligations |
| |
| |
| ( |
| | ||||
Collateralized debt obligations |
| |
| — |
| ( |
| | ||||
Total | $ | | $ | | $ | ( | $ | | ||||
Securities with a fair value of $
14
STERLING BANCORP, INC.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
Accrued interest receivable on available for sale debt securities totaled $
The mortgage-backed securities, and a majority of the collateralized mortgage obligations are issued and/or guaranteed by a U.S. government agency (Government National Mortgage Association) or a U.S. government-sponsored enterprise (Federal Home Loan Mortgage Corporation (“Freddie Mac”) or Federal National Mortgage Association (“Fannie Mae”)). The fair value of the private-label collateralized mortgage obligations was $
Information pertaining to sales of available for sale debt securities for the three months ended March 31, 2023 and 2022 is as follows:
Three Months Ended | ||||||
March 31, | ||||||
| 2023 |
| 2022 | |||
Proceeds from the sale of debt securities | $ | | $ | — | ||
Gross realized gains | $ | | $ | — | ||
Gross realized losses |
| ( |
| — | ||
Total net realized losses | $ | ( | $ | — | ||
The income tax expense related to the net realized losses was $
The amortized cost and fair value of U.S. Treasury and Agency securities at March 31, 2023 are shown by contractual maturity in the table below. Mortgage-backed securities, collateralized mortgage obligations and collateralized debt obligations are disclosed separately as the expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized | Fair | |||||
| Cost |
| Value | |||
U.S. Treasury and Agency securities: |
|
|
|
| ||
Due less than one year | $ | | $ | | ||
Due after one year through five years | | | ||||
Mortgage-backed securities | | | ||||
Collateralized mortgage obligations |
| |
| | ||
Collateralized debt obligations |
| |
| | ||
Total | $ | | $ | | ||
15
STERLING BANCORP, INC.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
The following table summarizes available for sale debt securities, at fair value, in an unrealized loss position for which an allowance for credit losses has not been recorded at March 31, 2023 and December 31, 2022, aggregated by major security type and length of time the individual debt securities have been in a continuous unrealized loss position:
March 31, 2023 | ||||||||||||||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses | |||||||
U.S. Treasury and Agency securities | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | ||||||
Mortgage-backed securities | | ( | ||||||||||||||||