EDGAR 10-K Filing

Company CIK: 1680379
Filing Year: 2025
Filename: 1680379_10-K_2025_0001410578-25-000346.json

---

ITEM 1. BUSINESS
ITEM 1. BUSINESS
OVERVIEW
General
We are a unitary thrift holding company incorporated in 1989 and headquartered in Southfield, Michigan and our primary business is the operation of our wholly-owned subsidiary, Sterling Bank. Through Sterling Bank, we currently originate commercial real estate loans and commercial and industrial loans, and provide deposit products, consisting primarily of checking, savings and term certificate accounts. Historically, the Company’s largest asset class has been residential mortgage loans; however, the Bank suspended all residential loan originations in early 2023. The Bank also engages in mortgage banking activities and, as such, acquires, sells and services residential mortgage loans. The Bank operates through a network of 27 branches of which 25 branches are located in the San Francisco and Los Angeles, California metropolitan areas with the remaining branches located in New York, New York and Southfield, Michigan. In February 2024, the Company closed one of its branches in San Francisco and consolidated the operations into a nearby branch office. In October 2024, the Company published notice of the planned closing of the branch office located at the Company’s headquarters in Southfield, Michigan in connection with the closing of the sale of the Bank (as described below).
Our results of operations are dependent primarily on our net interest income, which is the difference between the interest earned on our assets, primarily our loan and securities portfolios, and the interest paid on our deposits and borrowings. Our net income is also affected by our provision for credit losses, non-interest income, non-interest expense (general and administrative expense) and income tax expense. Non-interest income includes service charges and fees; net gain on sales of loans and securities; mortgage servicing fee income, net; income from company-owned life insurance; and other non-interest income. General and administrative expense consists of salaries and employee benefits expense; occupancy and equipment expense; federal deposit insurance assessments; data processing expense; professional fees; and other non-interest expenses. Our net income is also significantly affected by general economic and competitive conditions, particularly changes in market interest rates and U.S. Treasury yield curves, government policies and actions of regulatory authorities.
Sale of the Bank and Dissolution of the Company
On September 15, 2024, the Company and the Bank entered into a definitive stock purchase agreement (the “Stock Purchase Agreement”) with EverBank Financial Corp, a Delaware corporation (“EverBank”), which provides for the Company to sell all of the issued and outstanding shares of capital stock of the Bank to EverBank for a fixed purchase price of $261 million to be paid in cash to the Company (the “Transaction”). Following the completion of the Transaction, EverBank will cause the Bank to merge with and into EverBank, National Association, the bank subsidiary of EverBank, with EverBank, National Association as the surviving bank. Following the bank merger, the separate corporate existence of the Bank will cease.
Also on September 15, 2024, the Company’s board of directors unanimously approved a plan of dissolution (the“Plan of Dissolution”), which provides for the dissolution of the Company under Michigan law following the closing of the Transaction. The Company intends to file a certificate of dissolution with the Michigan Department of Licensing and Regulatory Affairs, and subject to first completing the wind down of the Company and paying or providing for the Company’s creditors and existing and reasonably foreseeable debts, liabilities, and obligations of and claims against the Company (including all transaction expenses incurred in connection with the negotiation and consummation of the Stock Purchase Agreement and any claims or demands received by the Company on behalf of any of its shareholders) in accordance with Michigan law and the Plan of Dissolution, distribute the remaining cash to its shareholders according to their respective rights and interests, in one or more distributions.
The Company’s shareholders approved the Stock Purchase Agreement, the Transaction and the Plan of Dissolution at a Special Meeting of Shareholders held on December 18, 2024. The Transaction is expected to close early in the second quarter of 2025. The Transaction is subject to customary closing conditions, including the receipt of required regulatory approvals. On March 13, 2025, the Company received approval for the Transaction from the Office of the Comptroller of the Currency. The Transaction remains subject to the receipt of approval from the Board of Governors of the Federal Reserve System. In addition, EverBank’s obligation to complete the Transaction is also subject to the following conditions: (i) the sale by the Bank of its portfolio of residential tenant-in-common loans (“TIC loans”) (with an aggregate principal balance of approximately $349 million at December 31, 2024) and receipt by the Bank of the purchase price specified in such agreement and (ii) the average daily closing balance of the Bank’s deposits for the
monthly period ending on the last day of the month before closing is not less than 85% of the average daily closing balance of such deposits for the monthly period ending on July 31, 2024.
Simultaneously with the execution of the Stock Purchase Agreement, the Bank entered into the mortgage loan purchase agreement (the “Mortgage Loan Purchase Agreement”) with Bayview Acquisitions LLC, a Delaware limited liability company (“Bayview”). The Mortgage Loan Purchase Agreement provides that Bayview will purchase the Bank’s residential tenant-in-common loans for an aggregate purchase price equal to 87% of the aggregate unpaid principal balance of the loans on the agreed upon purchase date plus all accrued and unpaid interest. The Bank’s obligation to consummate the sale contemplated by the Mortgage Loan Purchase Agreement is subject to certain conditions, including the receipt by the Bank of evidence of the shareholder and regulatory approvals required for the Transaction. As of December 31, 2024, the residential tenant-in-common loans were not held for sale as the Bank’s intent to liquidate its tenant-in-common loan portfolio is based upon its ability to close the Transaction and receipt of the required approvals for the Transaction. The closing of the loan sale is to occur after receipt of all regulatory approvals for the Transaction and shortly prior to the closing of the Transaction.
Subsidiaries
The Company’s only subsidiary is the Bank.
OUR BUSINESS
Lending Activities
One- to-Four Family Residential Loans. We previously originated residential loans. In May 2022, the Company outsourced the residential loan origination function to a third-party residential lending service provider. As a result, the Company reduced its workforce in its in-house mortgage origination area. In November 2022, the service provider notified the Company of its intention to cease conducting business. The Company explored possible other service providers but decided to suspend the origination of residential lending in early 2023. We may continue to purchase loan pools and loan participations.
The origination of mortgage loans to enable borrowers to purchase or refinance existing homes was historically our most significant loan origination activity, and such loans continue to comprise the largest portion of our loan portfolio. We offered fixed-rate and adjustable-rate mortgage loans with terms of up to 30 years.
Historically, our most significant product was our Advantage Loan Program, and this former loan product-one-, three-, five- or seven-year adjustable-rate mortgages that required down payments of at least 35%-continues to be the largest portion of our gross loans, comprising 52% of our residential loans at December 31, 2024. An internal review of this program indicated that certain employees engaged in misconduct in connection with the origination of a significant number of such loans, including with respect to the verification of income, the amount of income reported for borrowers, reliance on third parties, and related documentation, which led to the termination of the program. We discontinued originating loans under the Advantage Loan Program at the end of 2019.
To avoid the uncertainty of audits and inquiries by third-party investors in Advantage Loan Program loans sold to the secondary market, beginning at the end of the second quarter of 2020, we commenced making offers to each of those investors to repurchase 100% of our previously sold Advantage Loan Program loans. As of December 31, 2024, we had repurchased such loans with an aggregate principal balance of $309.1 million and had outstanding commitments to repurchase an additional $11.1 million through July 2025. At December 31, 2024, the unpaid principal balance of residential mortgage loans sold under the Advantage Loan Program that were subject to potential repurchase obligations for breach of representations and warranties, including loans subject to binding repurchase commitments, totaled $20.8 million.
Another significant residential loan product we previously offered was our TIC loans, which are similar to traditional co-op loans. Our primary market areas of San Francisco and Los Angeles contain a substantial number of two- to six-unit residential buildings and a large amount of condominium conversions. Through our TIC loan program, we offered loans to owners of individual units within the building based on their relative ownership share. At December 31, 2024, we had total outstanding TIC loans of $349.0 million. Our TIC loans generally consisted of three-, five- and seven-year adjustable-rate mortgages. We also offered conventional conforming fixed-rate loans with terms of either 15, 20, or 30 years for mortgages at the Federal Housing Finance Agency limits for those markets where we originated loans. The bulk of our conforming mortgage loans were originated with the intent to sell, after which we typically retained the servicing rights to these loans. In addition, we had a jumbo loan program for residential real estate loans of up to $2.5 million, for which we offered both fixed and adjustable rates. Across our portfolio, our adjustable-rate mortgage loans are based on a 30-year amortization schedule and generally interest rates and payments adjust annually after a one-, three-, five- or seven-year initial fixed period. Interest rates on our adjustable-rate loans adjust to a rate typically equal to 350 to 450 basis points above the one-year secured overnight financing rate (“SOFR”) or adjust to a rate based on the U.S. Treasury one- and five- year constant maturity Treasury rate.
Across our residential portfolio, our loan-to-value ratio (defined as current loan amount compared to appraised value at the time of loan origination) was 49% as of December 31, 2024. For discussion regarding risks particular to our residential real estate loans, see “Item 1A. Risk Factors-Risks Related to Credit.”
Commercial Loans. We offer a variety of commercial loan products, consisting primarily of commercial real estate loans, construction loans and commercial and industrial loans. The majority of our commercial loans are secured by real estate or other business assets. Our underwriting practice for commercial loans requires the identification and documentation of the sources of repayment, risks to repayment, mitigating factors and the aggregate exposure of the lending relationship for each commercial loan. We have several levels of lending authority. Lending limits are based on total exposure to the borrower including all extensions of credit, both used and unused, guarantees, co-signatures or endorsements. Our commercial loans are almost exclusively recourse loans, as we endeavor to secure personal guarantees on each loan we underwrite.
Commercial Real Estate Loans. Our commercial real estate loan portfolio includes loans secured by hotels, office, industrial, retail, multifamily and mixed-use properties. We focus on properties within or contiguous to our branch footprint, focusing on borrowers with income-producing properties, strong cash flow characteristics and strong collateral profiles. Our loan-to-value policy limit is 75% for commercial real estate loans. Income producing commercial real estate loans are subject to a minimum debt service coverage ratio at origination which varies by property type. At December 31, 2024, commercial real estate loans totaled $296.5 million, 37% of which are secured by multifamily properties. At December 31, 2024, approximately 57% of our commercial real estate loan portfolio consisted of adjustable-rate loans with an average reset of 31 months. For discussion regarding the risks particular to our commercial real estate loans, see “Item 1A. Risk Factors-Risks Related to Credit.”
Construction Loans. We previously originated construction loans in greater frequency, but we currently originate such loans on a limited basis, generally in connection with the Bank’s CRA considerations. We have $2.5 million of construction loans on our balance sheet at December 31, 2024, which are comprised primarily of residential construction, commercial construction and mixed-use development loans. Interest reserves are generally established on construction loans. The interest reserve allows the borrower to draw loan funds to pay interest charges on the outstanding balance of the loan when financial condition precedents are met. These construction loans are typically based on the prime rate of interest and have maturities of up to 36 months. Our most recent loan-to-value policy limits are 70% for commercial construction loans and 40% for land loans.
Commercial and Industrial Loans. We also offer commercial and industrial loans consisting of certain term loans and commercial lines of credit to businesses and individuals for business purposes. The commercial and industrial portfolio totaled $7.4 million at December 31, 2024. These term loans are secured by inventory, equipment, accounts receivable, other assets and in some instances by commercial real estate properties. These loans are typically extended to finance companies or other non-bank lenders with terms of less than 5 years. Also, our commercial lines of credit are typically secured by real estate, inventory, equipment, accounts receivable and other assets.
Investment Portfolio
As of December 31, 2024, the fair value of our investment portfolio totaled $342.8 million, with an average effective yield of 3.51%, and the estimated duration on the fixed income portion of our investment portfolio (fair value of $338.1 million) is 1.98 years. The primary objectives of the investment portfolio are to provide liquidity, generate economic value, be responsive to cash needs and assist in managing interest rate risk. As of December 31, 2024, 45% of our investment portfolio consists of U.S. Treasury and Agency securities, with the balance in mortgage-backed securities, collateralized mortgage and debt obligations and equity securities. We regularly evaluate the composition of our investment portfolio as the interest rate yield curve changes and may sell investment securities from time to time to adjust our exposure to interest rates or to provide liquidity.
Our investment policy is reviewed at least annually by our board of directors. Overall investment goals are established by our board of directors, chief executive officer, chief financial officer and members of our Asset and Liability Committee. Our board of directors has delegated the responsibility of monitoring our investment activities to our management and Asset and Liability Committee. Day-to-day activities pertaining to the securities portfolio are conducted under the supervision of our chief financial officer.
Deposits
We offer traditional depository products, including checking, savings, money market, individual retirement accounts and certificates of deposits, to individuals and businesses throughout our market areas. Our deposits are insured by the FDIC up to statutory limits. We offer customers traditional retail deposit products through our branch network and the ability to access their accounts through online and mobile banking platforms. We seek to grow our deposits through the use of competitive rates, a focused marketing campaign, and multi-product clubs in which we offer varying benefits depending on the overall relationship with the customer. Our bankers are incentivized to acquire and maintain quality, core deposits as we depend on deposits to fund the majority of our loans. Brokered deposits are obtained when needed to build liquidity at favorable rates.
Market Area
The primary markets in which we operate are the San Francisco and Los Angeles metropolitan areas, and our 25-branch network in these areas is our core distribution channel. In addition, we have one branch in New York City and our headquarters branch in Southfield, Michigan. In October 2024, the Company published notice of the planned closing of the branch office located at the Company’s headquarters in Southfield, Michigan in connection with the closing of the Transaction. We strive to take advantage of our core footprint and deep-rooted relationships to target local customers with a diversified product offering. Our local branch network enables us to gather deposits, promote the Sterling brand and customer loyalty, originate loans and other products and maintain relationships with our customers through regular community involvement.
Competition
The financial services industry is highly competitive as we compete for loans, deposits and customer relationships in our market. Competition involves efforts to retain current clients, make new loans and obtain new deposits, increase the scope and sophistication of services offered and offer competitive interest rates paid on deposits and charged on loans. Within our branch footprint, we primarily face competition from national, regional and other local financial institutions that have established branch networks throughout the San Francisco and Los Angeles metropolitan areas as well as the New York City market, giving them visible retail presence to customers.
In mortgage banking, we face competition from a wide range of national financial institutions, regional and local community banks, as well as credit unions and national mortgage underwriters. In commercial banking, we face competition to underwrite loans to sound, stable businesses and real estate projects at competitive price levels that make sense for our business and risk profile. Our major commercial bank competitors include larger national, regional and local financial institutions that may have the ability to make loans on larger projects than we can or provide a larger mix of product offerings. We also compete with smaller local financial institutions that may have aggressive pricing and unique terms on various types of loans and, increasingly, financial technology platforms that offer their products exclusively through web-based portals.
In retail banking, we primarily compete with national and local banks that have a visible retail presence and personnel in our market areas. The primary factors driving competition in consumer banking are customer service, interest rates, fees charged, branch location and hours of operation and the range of products offered. We compete for deposits by advertising, offering competitive interest rates and seeking to provide a higher level of personal service. We also face competition from non-traditional alternatives to banks such as credit unions, internet-based banks, money centers, money market mutual funds and cash management accounts.
For further discussion regarding the competitive factors and uncertainties impacting our business, see “Item 1A. Risk Factors-Risks Related to Competition.”
HUMAN CAPITAL RESOURCES
Overview
Our culture remains focused on integrity, inclusion, continuous learning and synergy as the Company continues to build on the employee experience. The Company’s approach to human capital issues at this time is informed by the Transaction and the need to retain certain employees in order to accomplish the goals of the Company and the Bank given the proposed Transaction and the wind down of the Company following the Transaction.
In 2024, we continued to focus on initiatives that promote employee engagement through the introduction of technology to improve communication and transparency with our employment practices. In 2024, we established a management-level Human Resources committee that performs annual reviews of related policies and ongoing survey activities. The Company continues to be invested in building a culture of engagement that promotes giving back to our shareholders, employees and the communities we serve. Collaboration and teamwork remain at the core of our focus.
As of December 31, 2024, we had a total of 216 full time and seven part time employees, located predominately in California, Michigan and New York, a net reduction of 32 employees from December 31, 2023. This represents a reduction in the employee base due to certain planned reductions during 2024 to obtain further operating efficiencies, some expected employee attrition following the announcement of the Transaction and voluntary resignations because of the highly competitive job market in our California locations. Our employees are not represented by a collective bargaining unit or are parties to a collective bargaining agreement. We believe that our relationship with our employees is built on trust, transparency, and inclusivity and because of that, we continue to have a dedicated and engaged workforce.
Culture and Engagement
We strive to amplify the employee voice through communication using multiple channels, one being the employee engagement survey. We conducted our annual employee engagement survey in August 2024 and overall participation was 74%. In addition to the survey, we have published an internal news bulletin on a quarterly basis to inform employees of what is happening at the Company and recognize employees and teams for their contributions at work, in our communities and with our customers. Overall, our culture is one that promotes our core competencies, and we will continue to build on integrity, continuous learning and synergy.
Management values our employees and continues to work with the human resources team on improving on the employee experience from recruitment through departure. We believe the implementation of the Human Resources Information System has added to the employee application, recruitment and on-boarding practices that contribute toward building a culture of engagement. Human resources technology is being implemented across the organization to help with communication and provide employees with the information they need through the Human Resources Information System discussed above. We continue to strive to build a culture in which employees feel valued, heard and are provided with the knowledge, tools and resources to be successful.
As of December 31, 2024, 55% of employees were female, and 62% identified within an ethnically diverse group. Within the employees at the level of assistant vice president or higher, 54% were female and 54% identified within an ethnically diverse group. We are committed to providing a workplace that is free of harassment and discrimination by taking proactive measures and providing all employees with non-discrimination and sexual harassment prevention training on an annual basis. We continue to support and provide diversity training to all employees to increase cultural competency and collaboration.
We believe in having a workforce in which employees feel valued, empowered and that they are making a positive difference within our communities, workplace and within the lives of the customers we serve.
Talent Acquisition, Retention and Development
The Company continues to provide an adaptable work arrangement model to provide employees the opportunity to work remotely, on a hybrid schedule or in the office based on their position, responsibilities and location. It is our goal to attract, retain and develop employees and provide opportunities for growth. We believe the pool of available talent from which we can recruit critical talent has expanded due to our flexible work environment provided by the adaptable work arrangement model.
We understand that our ability to retain employees leads to the retention of customers and allows us to build strong relationships based on trust, so we continue to invest in the professional development of our employees. Our customers depend on the capabilities and knowledge of our employees, which is why we have been investing in the growth of our team. For further discussion regarding retention of our employees, see “Item 1A. Risk Factors-Other Risks Related to Our Business.”
We strive to offer competitive pay, benefits and services to meet the needs of our employees. In 2024, we continued to offer competitive benefits to all employees. Our benefits include health care, a 401(k) plan with an employer matching contribution, financial education and counseling, partial tuition reimbursement, wellness initiatives (including programs designed to help our employees meet their health goals) and paid time off. We continue to offer over 600 technical and professional development courses and educational reimbursement for approved external training opportunities. Our goal is to promote a culture of continuous learning in which employees are developing both interpersonally and professionally to meet their career goals.
SUPERVISION AND REGULATION
General
Sterling Bank is a federally chartered stock savings bank that has elected to operate as a covered savings association, effective August 9, 2023. As a covered savings association, the Bank generally functions as a commercial bank without the constraints applicable to a thrift institution. For instance, for so long as the Bank continues to operate as a covered savings association, the Bank is not required to satisfy the QTL test that applies generally as a matter of federal law to thrift institutions. The Bank is subject to primary examination and regulation by the OCC and, as an insured depository institution, the FDIC. The federal system of regulation and supervision establishes a comprehensive framework of activities in which Sterling Bank may engage and is intended primarily for the protection of depositors and the FDIC’s Deposit Insurance Fund (the “DIF”) rather than our shareholders. In connection with its election to operate as a covered savings association, Sterling Bank was required to become a member of the Federal Reserve System and subscribe to the capital stock of the Federal Reserve Bank of Chicago.
Sterling Bank also is a member of, and owns stock in, the Federal Home Loan Bank (the “FHLB”) of Indianapolis, which is one of the 11 regional banks in the FHLB system.
As a unitary thrift holding company, Sterling Bancorp is required to comply with the rules and regulations of the FRB. As a company that controls a depository institution that has elected to operate as a covered savings association, Sterling Bancorp is treated for most regulatory purposes as a bank holding company. We are required to file certain reports with the FRB and are subject to examination by and the enforcement authority of the FRB. Sterling Bancorp is also subject to the rules and regulations of the SEC under the federal securities laws. However, upon completion of the Transaction, Sterling Bancorp will no longer be a registered thrift holding company and therefore will not be required to comply with applicable federal banking laws and the rules and regulations of the FRB thereunder.
Under this system of regulation, the regulatory authorities have extensive discretion in connection with their supervisory, enforcement, rulemaking and examination activities and policies, including rules or policies that: establish minimum capital levels; restrict the timing and amount of dividend payments; govern the classification of assets; determine the adequacy of the allowance for credit losses for regulatory purposes; and establish the timing and amounts of assessments and fees. Moreover, as part of their examination authority, the banking regulators assign numerical ratings to banks and savings institutions relating to capital, asset quality, management, liquidity, earnings and other factors. These ratings are inherently subjective and the receipt of a less than satisfactory rating in one or more categories may result in enforcement action by the banking regulators against a financial institution.
A less than satisfactory rating may also prevent a financial institution, such as Sterling Bank or Sterling Bancorp, from obtaining necessary regulatory approvals to access the capital markets, pay dividends, acquire other financial institutions or establish new branches.
In addition, we must comply with significant anti-money laundering (“AML”) and anti-terrorism laws and regulations, the CRA and regulations implemented thereunder, and fair lending laws and regulations. Government agencies have the authority to impose monetary penalties and other sanctions on institutions that fail to comply with these laws and regulations, which could significantly affect our business activities, including our ability to expand our branch network or acquire other financial institutions.
Finally, we are also subject to the laws and regulations of the State of Michigan, in which our main office is located, and other states in which we do business, including California and New York.
Any change in applicable laws or regulations, whether by the OCC, the FDIC, the FRB, the SEC, state regulators, or Congress, could have a material adverse impact on the operations and financial performance of Sterling Bancorp and Sterling Bank.
Set forth below is a brief description of material regulatory requirements that are or will be applicable to Sterling Bancorp and Sterling Bank. The description is limited to certain material aspects of the statutes and regulations addressed and is not intended to be a complete description of such statutes and regulations and their effects on Sterling Bancorp and Sterling Bank.
Federal Banking Regulation
Business Activities. A federal savings bank derives its lending and investment powers from HOLA and applicable federal regulations. A federal savings bank that elects to operate as a covered savings association, including Sterling Bank, retains its federal savings bank charter and continues to be treated as such for certain enumerated purposes; however, covered savings associations generally are afforded the same rights and privileges as national banks under the National Bank Act and other applicable federal laws and regulations. Under these laws and regulations, Sterling Bank may invest in mortgage loans secured by residential and commercial real estate, commercial business and consumer loans, certain types of debt securities and certain other assets, subject to applicable limits. Sterling Bank may also establish subsidiaries that may engage in certain activities not otherwise permissible for Sterling Bank, including wealth and investment management.
Corporate and Risk Governance. We are required as a supervisory matter to implement an effective corporate and risk governance framework commensurate with our size, complexity and risk profile. Fundamental components of this framework include the authorities and responsibilities of directors and senior managers to govern the operations and structure of the Company and the Bank, as well as the implementation and management of systems and processes designed to identify, measure, monitor and control the risks to the organization, specifically including strategic, reputation, compliance and operational risks.
Further, the federal banking agencies have in recent years increased their focus on banks’ third-party risk management controls and practices. In 2023, the federal banking agencies, including the OCC, adopted interagency guidance on risk management of third-party relationships. The guidance applies broadly to any business agreement between a banking organization and another entity, by contract or otherwise (including affiliated entities), and requires banking organizations to analyze the risks associated with each third-party relationship and establish effective governance and risk management processes for all stages of a third-party relationship, including planning, due diligence and third-party selection, contract negotiation, ongoing monitoring and termination. Additionally, on July 25, 2024, the federal banking agencies issued a joint statement on banks’ arrangements with third parties to deliver bank deposit products and services which identified the agencies’ expectations for risk management controls relating to such arrangements. See “Item 1A. Risk Factors - Other Risks Related to Our Business” for additional discussion of this topic.
Capital Requirements. Prior to January 1, 2023, the Federal regulations required Sterling Bancorp and Sterling Bank to meet several minimum capital standards under the risk-based capital rules implemented by the federal banking agencies pursuant to the Dodd-Frank Act. In general, subject to certain exceptions as discussed further below, minimum capital standards include a common equity Tier 1 capital to risk-weighted assets ratio of 4.5%, a Tier 1 capital to risk-weighted assets ratio of 6.0%, a total adjusted capital to risk-weighted assets ratio of 8.0%, and a Tier 1 capital to average total assets leverage ratio of 4.0%.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (for example, recourse obligations, direct credit substitutes and residual interests) are multiplied by a risk-weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. Common equity Tier 1 capital is generally defined as common shareholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus, and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for credit losses limited to a maximum of 1.25% of risk-weighted assets. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. In assessing an institution’s capital adequacy, the OCC takes into consideration not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary.
The Bank, after consultation with the OCC, determined that a risk-weighting of 100% should be applied to its Advantage Loan Program loans under the risk weighting requirements for first-lien residential mortgage exposure set forth under the Basel III capital rules. Previously, the Company and the Bank generally applied a 50% risk weight to the Advantage Loan Program loans. The new risk weighting was applied as of December 31, 2021.
In addition to establishing the minimum regulatory capital requirements, the capital rules limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a capital conservation buffer consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements.
The capital rules provide for an optional simplified measure of capital adequacy for qualifying community banking organizations (that is, the community bank leverage ratio (the “CBLR”) framework), as provided by the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (the “EGRRCPA”). The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. In order to qualify for the CBLR framework, a community banking organization must have (i) a Tier 1 leverage ratio of greater than 9.0%, (ii) less than $10 billion in total consolidated assets, and (iii) limited amounts of off-balance-sheet exposure and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well capitalized ratio requirements under prompt corrective action regulations and will not be required to report or calculate risk-based capital. Failure to meet the qualifying criteria within the grace period or maintain a leverage ratio of 8% or greater requires the institution to comply with the generally applicable capital requirements. The Bank is a qualifying community bank organization and elected to opt into the CBLR framework, effective as of January 1, 2023.
As discussed above, by opting into the CBLR framework, we are not required to meet minimum standards under the risk-based capital rules implemented by the federal banking agencies pursuant to the Dodd-Frank Act. Instead, maintaining a Tier 1 leverage ratio of greater than 9.0% is considered to have satisfied the risk-based and leverage capital requirements in the regulatory agencies’ generally applicable capital rules and to have met the well capitalized ratio requirements. Tier 1 leverage ratio is defined as Tier 1 capital to average total consolidated assets ratio. At December 31, 2024, the Company and the Bank met the requirement to have a Tier 1 leverage ratio greater than 9.0%.
Loans-to-One Borrower. Generally, a federal savings bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally includes certain financial instruments (but not real estate). As of December 31, 2024, the Bank was in compliance with the loans-to-one borrower limitations.
Capital Distributions. Federal regulations impose limitations on capital distributions by a federal savings bank, which include cash dividends, stock repurchases and other transactions charged to the savings bank’s capital account. A federal savings bank must file an application with the OCC for approval of a capital distribution under various circumstances, including, for example, if the savings bank’s total capital distributions for the applicable calendar year exceed the sum of its net income for that year to date plus its retained net income for the preceding two years; the savings bank would not be at least adequately capitalized or otherwise would not remain an “eligible savings association” under applicable OCC regulations following the distribution; or the distribution would violate any applicable law, regulation or agreement with, or order or notice approved by, the OCC.
Even if an application is not otherwise required, every savings bank that is a subsidiary of a unitary thrift holding company, such as Sterling Bank, must still file a notice with the FRB at least 30 days before its board of directors declares a dividend or approves a capital distribution. FRB approval is also required for any repurchase of capital stock by a financial institution with over $3 billion in assets, unless an exception applies.
A notice or application related to a capital distribution or share repurchase may be disapproved by the OCC if:
● the federal savings bank would be undercapitalized following the distribution;
● the proposed capital distribution raises safety and soundness concerns; or
● the capital distribution would violate a prohibition contained in any statute, regulation or agreement, or any condition imposed upon the savings bank in an application or notice approved by the OCC.
In addition, the Federal Deposit Insurance Act provides that an insured depository institution may not make any capital distribution if, after making such distribution, the institution would fail to meet any applicable regulatory capital requirement.
CRA and Fair Lending Laws. Under the CRA, as implemented by federal regulations, all federal savings banks have a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low- and moderate- income borrowers. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OCC, in connection with its examination of a federally chartered savings association, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. A savings bank’s failure to comply with the provisions of the CRA could, at a minimum, result in denial of certain corporate applications such as branch expansion or mergers, or in restrictions on its activities. The CRA requires a written evaluation of an institution’s CRA performance utilizing a four-tiered descriptive rating system. All institutions insured by the FDIC must publicly disclose their rating. Sterling Bank received a satisfactory CRA rating in its most recent federal examination.
In October 2023, the federal banking agencies issued a joint final rule to revise the regulations implementing CRA. Under the final rule, the agencies will evaluate a bank’s CRA performance based upon the varied activities that it conducts and the communities in which it operates. CRA evaluations and data collection requirements will be tailored based on bank size and type. The Bank is considered a “large bank” under the final rule and therefore will be evaluated under new lending, retail services and products, community development financing and community development services tests. The final rule includes CRA assessment areas associated with mobile and online banking and new metrics and benchmarks to assess retail lending performance. In addition, the final rule emphasizes smaller loans and investments that can have a high impact and be more responsive to the needs of low- and moderate-income communities. On March 29, 2024, a federal district court in Texas granted a preliminary injunction barring implementation of the final rule. The injunction extends the effective date of April 1, 2024, and all other implementation dates, on a day-for-day basis until the injunction is lifted. While the federal banking agencies are appealing the district court’s decision, to date the injunction remains in effect and implementation of the final rule is delayed indefinitely. Compliance with the majority of the final rule’s provisions otherwise would not have been required until January 1, 2026, and the data reporting requirements of the final rule would not have taken effect until January 1, 2027.
The CRA, the Equal Credit Opportunity Act (“ECOA”), the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The fair lending laws prohibit discrimination in the provision of banking services on the basis of prohibited factors including, among others, race, color, national origin, gender, and religion. The enforcement of these laws has, in recent years, been a priority for the Consumer Financial Protection Bureau (the “CFPB”), the Department of Housing and Urban Development and other regulators. Under the fair lending laws, a lender may be liable for policies that result in a disparate treatment of or have a disparate impact on a protected class of applicants or borrowers. If a pattern or practice of lending discrimination is alleged by a regulator, then that agency may refer the matter to the DOJ for investigation. Pursuant to a Memorandum of Understanding entered into by the DOJ and CFPB, the agencies have agreed to share information and coordinate investigations and have also generally committed to strengthen their coordination efforts, including in respect of fair lending investigations. A successful challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on mergers and acquisitions activity and restrictions on expansion activity. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation.
ATR/QM Rules. The CFPB’s ability-to-repay (“ATR”) and qualified mortgage (“QM”) rules require, in connection with the origination of residential real estate loans within its scope, that a mortgage lender must make a reasonable and good faith determination at or before consummation that the consumer will have a reasonable ability to repay the loan according to its terms. Among other requirements, a creditor must verify the information on which it bases its repayment ability determination by using reasonably reliable, written third-party records. These rules prohibit creditors, such as Sterling Bank, from extending residential real estate loans without regard for the consumer’s ability to repay and add restrictions and requirements to residential mortgage origination and servicing practices. In addition, these rules restrict the imposition of prepayment penalties and compensation practices relating to residential real estate loan origination. Mortgage lenders are required to determine consumers’ ability to repay in one of two ways. The first alternative requires the mortgage lender to consider eight underwriting factors when making the credit decision. The mortgage lender may also originate QMs, which are entitled to a presumption that the creditor making the loan satisfied the ATR requirements. In general, a QM is a residential real estate loan that does not have certain high-risk features, such as negative amortization, interest-only payments, balloon payments, a term exceeding 30 years or an annual percentage rate that exceeds applicable limits prescribed by rule. Further, the EGRRCPA created a new category of QMs presumed to satisfy ability-to-repay requirements of the ATR/QM rules for loans that meet certain criteria and are held in portfolio by banks with less than $10 billion in assets, including the Bank.
Our residential real estate loans originated under our former programs, such as TIC loan program and Advantage Loan Program, are not QMs, as our underwriting processes for those programs do not follow applicable regulatory guidance required for such qualification; however, our remaining conforming residential real estate loans originated in 2021 and 2022 were QMs. See “Item 1A. Risk Factors - Risks Related to Our Highly Regulated Industry” for additional discussion of this topic.
Transactions with Related Parties. A federal savings bank’s authority to engage in transactions with its affiliates is limited by Sections 23A and 23B of the Federal Reserve Act and federal regulation. An affiliate is generally a company that controls, or is under common control with, an insured depository institution such as Sterling Bank. Sterling Bancorp is an affiliate of Sterling Bank because of its control of Sterling Bank. A subsidiary of a bank that is not also a depository institution or a financial subsidiary under federal law is not treated as an affiliate of the bank for the purposes of Sections 23A and 23B; however, the OCC has the discretion to treat subsidiaries of a bank as affiliates on a case-by-case basis. Section 23A limits the extent to which a bank or its subsidiaries may engage in covered transactions with any one affiliate to 10% of the bank’s capital stock and surplus. The amount of covered transactions with all affiliates is limited to 20% of the bank’s capital stock and surplus. “Covered transactions” include, among other things, the making of a loan to an affiliate, a purchase of assets from an affiliate, the issuance of a guarantee on behalf of an affiliate and the acceptance of securities of an affiliate as collateral for a loan. All such transactions are required to be on terms and conditions that are consistent with safe and sound banking practices and no transaction may involve the acquisition of any low-quality asset from an affiliate. Certain covered transactions, such as loans to or guarantees on behalf of an affiliate, must be secured by collateral in amounts ranging from 100 to 130 percent of the loan amount, depending upon the type of collateral. In addition, Section 23B requires that any covered transaction (and specified other transactions) between a bank and an affiliate must be on terms and conditions that are substantially the same, or at least as favorable, to the bank, as those that would be provided to a non-affiliate.
A bank’s loans to its executive officers, directors, any owner of more than 10% of its stock (each, an “insider”) and certain entities affiliated with any such person (an insider’s “related interest”) are subject to the conditions and limitations imposed by Section 22(h) of the Federal Reserve Act and the FRB’s Regulation O. The aggregate amount of a bank’s loans to any insider and the insider’s related interests may not exceed the loans-to-one-borrower limit applicable to national banks. Aggregate loans by a bank to its insiders and insiders’ related interests may not exceed the bank’s unimpaired capital and unimpaired surplus. With certain exceptions, such as education loans and certain residential mortgages, a bank’s loans to its executive officers, may not exceed the greater of $25,000 or 2.5% of the bank’s unimpaired capital and unimpaired surplus, but in no event more than $100,000. Regulation O also requires that any loan to an insider or a related interest of an insider be approved in advance by a majority of the board of directors of the bank, with any interested director not participating in the voting, if the loan, when aggregated with any existing loans to that insider or the insider’s related interests, would exceed the lesser of $500,000 or 5% of the bank’s unimpaired capital and surplus. Generally, such loans must (i) be made on substantially the same terms as and follow credit underwriting procedures that are no less stringent than, those that are prevailing at the time for comparable transactions with unaffiliated persons and that do not present more than a normal risk of repayment or present other unfavorable features, and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Sterling Bank’s capital. An exception is made for extensions of credit made pursuant to a benefit or compensation plan of a bank that is widely available to employees of the bank and that does not give any preference to insiders of the bank over other employees of the bank.
Enforcement. The OCC has primary enforcement responsibility over federal savings banks and has authority to bring enforcement action against all institution-affiliated parties, including directors, officers, shareholders, attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on a federal savings bank. Formal enforcement action by the OCC may range from the issuance of a capital directive, formal agreement (such as the agreement described below) or cease and desist order to removal of officers and/or directors of the institution and the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day (with such amounts subject to periodic adjustments based upon rates of inflation). The FDIC also has the authority to terminate deposit insurance or recommend to the OCC that enforcement action be taken with respect to a particular savings bank. If such action is not taken, the FDIC has authority to take the action under specified circumstances.
As discussed above under “Item 1. Business-General” and in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the Bank entered into the OCC Agreement on June 18, 2019 and was under formal investigation. Further, on September 27, 2022, the Bank was assessed a $6 million civil money penalty by the OCC with regard to the Bank’s credit underwriting processes and Bank Secrecy Act (“BSA”) and AML laws and regulations (“BSA/AML”) compliance controls relating to its Advantage Loan Program, resolving the OCC’s investigation of the Bank. In connection with such assessment, the OCC determined that the Bank had implemented all corrective actions required by OCC Agreement, and as a result, such agreement was terminated.
Standards for Safety and Soundness. The federal banking agencies have adopted the Interagency Guidelines for Establishing Standards for Safety and Soundness (the “Guidelines”). The Guidelines establish certain safety and soundness standards for all depository institutions. The operational and managerial standards in the Guidelines relate to the following: (1) internal controls and information systems; (2) internal audit systems; (3) loan documentation; (4) credit underwriting; (5) interest rate exposure; (6) asset growth; (7) compensation, fees and benefits; (8) asset quality; and (9) earnings. Rather than providing specific rules, the Guidelines set forth basic compliance considerations and guidance with respect to a depository institution. Failure to meet the standards in the Guidelines, however, could result in a request by the OCC to one of the federal savings banks to provide a written compliance plan to demonstrate its efforts to come into compliance with such Guidelines. Failure to provide a plan or to implement a provided plan requires the appropriate federal banking agency to issue an order to the institution requiring compliance.
Interstate Banking and Branching. Federal law permits well capitalized and well managed holding companies to acquire banks in any state, subject to FRB approval, certain concentration limits and other specified conditions. Interstate mergers of banks are also authorized, subject to regulatory approval and other specified conditions. Among other things, banks may establish de novo branches on an interstate basis provided that branching is authorized by the law of the host state for the banks chartered by that state.
Prompt Corrective Action. Federal law requires, among other things, that federal bank regulators take prompt corrective action with respect to institutions that do not meet minimum capital requirements. For this purpose, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. An institution is deemed to be well capitalized if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is adequately capitalized if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is undercapitalized if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be significantly undercapitalized if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be critically undercapitalized if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.
At each successive lower capital category, an insured depository institution is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on payment of dividends, and restrictions on the acceptance of brokered deposits. Furthermore, if an insured depository institution is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the appropriate federal banking agency, and the holding company must guarantee the performance of that plan. Based upon its capital levels, a bank that is classified as well capitalized, adequately capitalized or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment. An undercapitalized bank’s compliance with a capital restoration plan is required to be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5.0% of the institution’s total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an undercapitalized bank fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. Significantly undercapitalized banks must comply with one or more of a number of additional restrictions, including but not limited to an order by the applicable regulatory authority to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, cease receipt of deposits from correspondent banks or dismiss directors or officers, and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. Critically undercapitalized institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains such status.
As discussed in “Capital Requirements” section above, a qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework is considered to have met the well capitalized ratio requirements under prompt corrective action regulations and is not required to calculate or report risk-based capital ratios. Under the CBLR framework, which each of Sterling Bancorp and Sterling Bank has elected to adopt as of January 1, 2023, a Tier 1 leverage ratio of greater than 9.0%, calculated on a consolidated basis, is considered to have met the well capitalized ratio requirements applicable to each entity. Sterling Bancorp and Sterling Bank each satisfied this requirement as of December 31, 2024.
Federal Insurance of Deposit Accounts. The DIF insures deposits at FDIC-insured financial institutions such as Sterling Bank. Deposit accounts at Sterling Bank are insured by the FDIC generally up to a maximum of $250,000 per separately insured depositor. The FDIC charges insured depository institutions premiums to maintain the DIF.
The Dodd-Frank Act increased the minimum target DIF ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. Insured institutions with assets of $10 billion or more were given the responsibility for funding the increase. The Dodd-Frank Act eliminated the prior 1.5% maximum fund ratio, instead leaving the target fund ratio to the discretion of the FDIC, which has exercised that discretion by establishing a long-term target fund ratio of 2%.
Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other risk factors. Rates are based on each institution’s risk category and certain specified risk adjustments. Institutions deemed to be less risky pay lower rates while institutions deemed riskier pay higher rates. Assessment rates (inclusive of possible adjustments) currently range from 21/2 to 45 basis points of each institution’s total assets less tangible capital. However, in 2022, the FDIC adopted a final rule to increase initial base deposit insurance assessment rate schedules uniformly by 2 basis points, beginning in the first quarterly assessment period of 2023. The FDIC may increase or decrease the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment rulemaking.
Any significant increase in deposit insurance assessments would have an adverse effect on the operating expenses and results of operations of Sterling Bank. We cannot predict what assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or regulatory condition imposed by the FDIC. We do not know of any practice, condition or violation that might lead to termination of our deposit insurance.
Regulation of Brokered Deposits. Section 29 of the Federal Deposit Insurance Act establishes, among other things, a general prohibition on the acceptance by any insured depository institution that is not well capitalized of any deposit obtained, directly or indirectly, by or through any deposit broker. This statutory prohibition is further implemented through the regulations of the FDIC and, historically, numerous published and unpublished FDIC staff interpretations of the statute and the FDIC’s regulation.
The FDIC’s brokered deposits regulation provides a framework for determining whether an entity meets the statutory definition of “deposit broker.” Among other things, the regulation (1) identifies a number of business relationships in which the agent or nominee of the depositor is not deemed to be a “deposit broker” because the primary purpose of the agent or nominee is not the placement of funds with depository institutions; (2) provides for an application process for entities that seek to rely upon a “primary purpose” exception, but do not qualify as one of the enumerated business relationships to which the exception is deemed to apply; and (3) establishes that a third party with an exclusive deposit-placement arrangement with only one bank is not considered a deposit broker. Additionally, as mandated by the EGRRCPA, the regulation establishes a limited exception for reciprocal deposits for banks that are well rated and well capitalized (or adequately capitalized and have obtained a waiver from the FDIC). Under the limited exception, qualified banks are able to except from treatment as “brokered” deposits up to $5 billion or 20 percent of the institution’s total liabilities in reciprocal deposits (which is defined as deposits received by a financial institution through a deposit placement network with the same maturity (if any) and in the same aggregate amount as deposits placed by the institution in other network member banks). The Bank’s acceptance of brokered deposits could have an impact on its deposit insurance premiums, capital and liquidity risk management planning and regulatory monitoring and reporting obligations.
Supervisory Assessments. OCC-chartered banks are required to pay supervisory assessments to the OCC to fund its operations. The amount of the assessment paid by a federally-chartered bank to the OCC is calculated on the basis of the institution’s total assets, including consolidated subsidiaries, as reported to the OCC. For the 2024 calendar year, the OCC elected to maintain its general assessment schedule from calendar year 2023 with no adjustments for inflation. However, for the 2025 calendar year, the OCC increased the marginal rates in the general assessment fee schedule for assets under $40 billion by a factor of 2.65 percent to account for inflation.
Data Privacy and Cybersecurity. We are subject to a number of U.S. federal, state, local and foreign laws and regulations relating to consumer privacy and data protection. Under the privacy protection provisions of the Gramm-Leach-Bliley Act and related regulations, we are limited in our ability to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. Federal banking agencies, including the OCC, have adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the supervision of the board of directors. These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial services.
The changing privacy laws in the United States, Europe and elsewhere create new individual privacy rights and impose increased obligations on companies handling personal information, including the California Consumer Privacy Act, as amended by the California Privacy Rights Act. While we generally handle Gramm-Leach-Bliley Act -regulated nonpublic, personal information that is exempt under the California Consumer Privacy Act (as well as the other broad state consumer privacy laws), the California Consumer Privacy Act applies to the personal information of our employees and job applicants based in California as well as representatives of any business contacts that the Bank engages with who are California residents.
The other state privacy laws that exempt GLBA-protected personal information also apply to personal information that we may collect from consumers through initial contacts such as through our website or phone inquiries, before such consumers have applied for or received any financial services or products from us. With respect to residents of the states that have such laws, our obligations are similar to those we have under the CCPA with respect to residents of California.
In addition, Congress and federal regulatory agencies may enact similar laws, or promulgate regulations, that could create new individual privacy rights and impose increased obligations on companies handling personal data. Of note, the federal banking agencies have adopted joint regulations that impose upon banking organizations and their service providers notification requirements for significant cybersecurity incidents. Specifically, the regulations require banking organizations to notify their primary federal regulator promptly, and no later than 36 hours after, the discovery of a “computer-security incident” that rises to the level of a “notification incident” within the meanings attributed to those terms by the rule. Banks’ service providers are required to notify any affected bank to or on behalf of which they provide services “as soon as possible” after determining that they have experienced any incident that materially disrupts, degrades, or is reasonably likely to disrupt or degrade, covered services provided to a bank for four or more hours.
Recent and ongoing developments may also impact our data security- and privacy-related internal controls and risk profile. On October 22, 2024, the CFPB adopted a final rule regarding personal financial data rights that is designed to promote “open banking.” The final rule requires, among other things, that data providers, including any financial institution, make available to consumers and certain authorized third parties upon request certain covered transaction, account and payment information. IDIs with between $1.5 billion and $3 billion in total assets, including Sterling Bank, are required to comply with the final rule by April 1, 2029. On the same day the final rule was released, certain industry participants filed a complaint against the CFPB challenging the final rule. This legal challenge may delay or halt the final rule’s implementation.
BSA/AML Regulation, USA PATRIOT Act and National Defense Authorization Act. The BSA, the USA PATRIOT Act and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective AML program and to file timely reports such as suspicious activity reports and currency transaction reports. We are required to comply with these and other AML requirements. The federal banking agencies and the Financial Crimes Enforcement Network (“FinCEN”) are authorized to impose significant civil money penalties for violations of those requirements and have recently engaged in coordinated enforcement efforts against banks and other financial services providers with the DOJ, Drug Enforcement Administration and Internal Revenue Service. We are also subject to increased scrutiny of compliance with the sanctions programs administered by the Office of Foreign Assets Control.
The USA PATRIOT Act gives federal agencies additional powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened AML requirements. The USA PATRIOT Act mandates that financial service companies implement additional policies and procedures and take heightened measures designed to address any or all of the following matters: customer identification programs, money laundering, terrorist financing, identifying and reporting suspicious activities and currency transactions, currency crimes, and cooperation between financial institutions and law enforcement authorities.
On June 28, 2024 FinCEN issued a proposed rule to strengthen and modernize financial institutions’ AML and Countering the Financing of Terrorism (“CFT”) programs. Key requirements of the proposed rule include (1) conducting periodic risk assessments to measure AML/CFT risks; (2) designating a qualified AML/CFT officer; and (3) periodic testing of the AML/CFT program by an independent internal or external party. The proposed rule would also require that a financial institution’s AML/CFT program be established, maintained and enforced by persons in the United States who are accessible to, and subject to oversight and supervision by, the secretary of the Treasury and the appropriate federal functional regulator. Additionally, as noted above, President Trump has issued multiple Executive Orders addressing federal agency rulemaking priorities and processes that may have the effect of inhibiting or delaying future rulemaking activity, including in this area.
Prohibitions Against Tying Arrangements. Federal savings banks are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.
Climate-Related Regulation and Risk Management. In recent years, the federal banking agencies have increased their focus on climate-related risks impacting the operations of banks, the communities they serve and the broader financial system. Accordingly, the agencies have begun to enhance their supervisory expectations regarding the climate risk management practices of larger banking organizations, including by encouraging such banks to: ensure that management of climate-related risk exposures has been incorporated into existing governance structures; evaluate the potential impact of climate-related risks on the bank’s financial condition, operations and business objectives as part of its strategic planning process; account for the effects of climate change in stress testing scenarios and systemic risk assessments; revise expectations for credit portfolio concentrations based on climate-related
factors; consider investments in climate-related initiatives and lending to communities disproportionately impacted by the effects of climate change; evaluate the impact of climate change on the bank’s borrowers and consider possible changes to underwriting criteria to account for climate-related risks to mortgaged properties; incorporate climate-related financial risk into the bank’s internal reporting, monitoring and escalation processes; and prepare for the transition risks to the bank associated with the adjustment to a low-carbon economy and related changes in laws, regulations, governmental policies, technology, and consumer behavior and expectations.
In 2023, the OCC, the FDIC and the FRB jointly finalized principles for climate-related financial risk management for banking organizations with more than $100 billion in total assets. Although these risk management principles do not apply to the Bank directly based upon our current size, the regulators have indicated that all banks, regardless of their size, may have material exposures to climate-related financial and other risks that require prudent management. As climate-related supervisory guidance is further formalized, and relevant risk areas and corresponding control expectations are further refined, we may be required to expend significant capital and incur compliance, operating, maintenance and remediation costs in order to conform to such requirements. The Trump Administration has publicly discussed rolling back federal initiatives to address climate change. Accordingly, it is uncertain at this time whether these risk management expectations will continue to be applied to relevant banking organizations.
In addition, states in which we conduct business have taken, or are considering taking, similar actions on climate-related financial risks. In consideration of the anticipated shift in federal climate-related initiatives, it is possible that the states in which we operate may be more active than in previous years in establishing and enforcing climate-related risk management expectations for financial institutions.
Incentive Compensation Policies and Restrictions. In July 2010, the federal banking agencies issued guidance on sound incentive compensation policies that applies to all banking organizations supervised by the agencies (thereby including both Sterling Bancorp and Sterling Bank). Pursuant to the guidance, to be consistent with safety and soundness principles, a banking organization’s incentive compensation arrangements should: (1) provide employees with incentives that appropriately balance risk and reward; (2) be compatible with effective controls and risk management; and (3) be supported by strong corporate governance including active and effective oversight by the banking organization’s board of directors. Monitoring methods and processes used by a banking organization should be commensurate with the size and complexity of the organization and its use of incentive compensation.
The Dodd-Frank Act requires the federal banking agencies and the SEC to establish joint regulations or guidelines for specified regulated entities, such as us, having at least $1 billion in total assets, to prohibit incentive-based payment arrangements that encourage inappropriate risk-taking by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity. On May 6, 2024, the FDIC, the OCC and the FHFA issued a notice of proposed rulemaking to address incentive-based compensation arrangements. The proposed rule includes general qualitative requirements applicable to all covered financial institutions as well as additional requirements for financial institutions with total consolidated assets of $50 billion or more. The general qualitative requirements include (1) prohibiting incentive-based compensation arrangements that encourage inappropriate risks; (2) prohibiting incentive arrangements that encourage inappropriate risks that could lead to a material financial loss; (3) establishing requirements for performance measures to appropriately balance risk and reward; (4) requiring board oversight of incentive compensation arrangements; and (5) appropriate recordkeeping. The prospects and timing for the adoption of the proposed rule remain uncertain because both the Federal Reserve and the SEC have not joined the proposal. Additionally, as noted above, President Trump has issued multiple Executive Orders addressing federal agency rulemaking priorities and processes that may have the effect of inhibiting or delaying future rulemaking activity, including in this area.
Pursuant to the SEC rule adopted in 2022 and the related Nasdaq listing rule approved by the SEC thereafter, we adopted an incentive-based compensation recovery (or “clawback”) policy to recover incentive-based compensation from current or former executive officers in the event of material noncompliance with any financial reporting requirement under the securities laws. A copy of our clawback policy has previously been filed with the SEC.
The FRB will review, as part of its standard, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as Sterling Bancorp, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-
management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.
The scope and content of the federal banking agencies’ policies on executive compensation may continue to evolve in the near future. It cannot be determined at this time whether compliance with such policies will adversely affect our ability to hire, retain and motivate our key employees.
Impact of Presidential and Congressional Elections on Recent Rulemaking. Control of the White House and the U.S. Congress shifted to the Republican Party in January 2025 as a result of the November 2024 Presidential and Congressional elections. President Trump and many Republican members of Congress have advocated for a significant reduction of financial services regulation, potentially including amendments to the Dodd-Frank Act and other federal banking laws, and structural changes to the CFPB. The new Administration and Congress may also cause broader economic changes due to shifts in governing ideology and governing style. In consideration of these factors, it is possible, though uncertain, that Congress and/or the relevant federal agencies may seek to roll back or modify some or much of the rulemaking and regulatory guidance issued under the Biden administration, particularly the actions taken in the past year. Of note, since assuming office, President Trump has issued multiple Executive Orders addressing federal agency rulemaking priorities and processes as part of a broader deregulation and government efficiency initiative. In light of these actions, future rulemaking initiatives, as well as the agencies’ priorities regarding enforcement of existing rules, regulations and orders, is uncertain at this time.
Further, the FDIC, OCC and CFPB have experienced changes in leadership under the new Administration; however, the timing and impact of each such change in leadership on the regulatory, enforcement and supervisory priorities of each agency are not fully known at this time. It is therefore unclear at the present time what effect the aforementioned changes will have on the banking industry.
Other Regulations
Interest and other charges collected or contracted for by Sterling Bank are subject to state usury laws and federal laws concerning interest rates. Loan operations are also subject to state and federal laws applicable to credit transactions, such as the:
● Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
● Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves. Notably, the EGRRCPA exempted banks that originate fewer than 500 open-end and 500 closed-end mortgages from Home Mortgage Disclosure Act’s expanded data disclosures;
● Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
● Truth in Savings Act; governing disclosure of information about deposit accounts to customers;
● Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies; and
● Rules and regulations of the various federal and state agencies charged with the responsibility of implementing such federal and state laws.
The deposit operations of Sterling Bank also are subject to, among others, the:
● Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
● Check Clearing for the 21st Century Act (also known as Check 21), which gives substitute checks, such as digital check images and copies made from that image, the same legal standing as the original paper check; and
● Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.
Federal Home Loan Bank System
Sterling Bank is a member of the FHLB system, which consists of 11 regional FHLBs. The FHLB provides a central credit facility primarily for member institutions. The Bank is required to acquire and hold shares of capital stock in the FHLB of Indianapolis and was in compliance with this requirement at December 31, 2024. Based on redemption provisions of the FHLB of Indianapolis, the stock has no quoted market value and is carried at cost. The Bank reviews for impairment, based on the ultimate recoverability, the cost basis of the FHLB of Indianapolis stock.
Federal Reserve Bank System
Sterling Bank is a member of its regional Federal Reserve Bank. As a covered savings association, the Bank is required to acquire and hold shares of capital stock of the Federal Reserve Bank of Chicago and was in compliance with this requirement at December 31, 2024. Based on the redemption provisions of the Federal Reserve Bank of Chicago, the stock has no quoted market value and is carried at cost. The Bank reviews for impairment, based on the ultimate recoverability, the cost basis of the Federal Reserve Bank of Chicago stock.
Business Continuity Management
The Company is required to implement and maintain business continuity and disaster recovery plans to ensure its resilience and continued operations in the event of significant business disruptions related to cybersecurity events, natural disasters, pandemics, and other potentially catastrophic events. Such plans generally focus on banks’ critical business functions and are intended to be aligned with banking organizations’ risk profiles and roles within the overall financial services sector. Plans must contain proactive measures to safeguard banking organizations’ employees, customers, information systems, networks and facilities and establish response and recovery procedures in the event of significant business disruptions.
Holding Company Regulation
Sterling Bancorp is a unitary thrift holding company subject to regulation and supervision by the FRB. The FRB has enforcement authority over Sterling Bancorp and its non-savings institution subsidiaries. Among other things, this authority permits the FRB to restrict or prohibit activities that are determined to be a risk to Sterling Bancorp.
As a unitary thrift holding company, Sterling Bancorp’s activities are limited to those activities permissible by law for financial holding companies. A financial holding company may engage in activities that are financial in nature, incidental to financial activities or complementary to a financial activity. Such activities include lending and other activities permitted for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act of 1956, as amended, insurance and underwriting equity securities.
Federal law prohibits a unitary thrift holding company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or unitary thrift holding company without prior written approval of the FRB, and from acquiring or retaining control of any depository institution. In evaluating applications by holding companies to acquire savings institutions, the FRB must consider such things as the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on and the risk to the DIF, the convenience and needs of the community and competitive factors. A unitary thrift holding company may not acquire a savings institution in another state and hold the target institution as a separate subsidiary unless it is a supervisory acquisition under Section 13(k) of the Federal Deposit Insurance Act or the law of the state in which the target is located authorizes such acquisitions by out-of-state companies.
Notwithstanding Sterling Bancorp’s status as a unitary thrift holding company, as a company that controls a depository institution that has elected to be treated as a covered savings association, Sterling Bancorp generally is treated as a bank holding company for regulatory purposes.
Capital Requirements. As a unitary thrift holding company, Sterling Bancorp is subject to consolidated regulatory capital requirements that are similar to those that apply to Sterling Bank. As discussed above, the Company and the Bank presently are subject to the minimum Tier 1 leverage ratio requirement established under the CBLR framework. See “-Federal Banking Regulation-Capital Requirements.”
The Dodd-Frank Act extended the source of strength doctrine to unitary thrift holding companies. The FRB has promulgated regulations implementing the source of strength policy that require holding companies to act as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.
The FRB has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies and unitary thrift holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. The policy statement also states that a holding company should inform the FRB supervisory staff prior to redeeming or repurchasing common stock or perpetual preferred stock if the holding company is experiencing financial weaknesses or if the repurchase or redemption would result in a net reduction, as of the end of a quarter, in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. We are currently required to obtain the approval of the FRB prior to declaring any cash dividend on our capital stock or engaging in any repurchase of our common stock. We are also required to obtain the approval of the FRB prior to issuing any debt.
Change in Control Regulations
Under the Change in Bank Control Act, no person may acquire control of a unitary thrift holding company such as Sterling Bancorp unless the FRB has been given 60 days prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition. Control, as defined under federal law, means ownership, control of or holding irrevocable proxies representing more than 25% of any class of voting stock, control in any manner of the election of a majority of the institution’s directors, or a determination by the regulator that the acquirer has the power, directly or indirectly, to exercise a controlling influence over the management or policies of the institution. Acquisition of more than 10% of any class of a unitary thrift holding company’s voting stock constitutes a rebuttable determination of control under the regulations under certain circumstances including where, as in our case, the company has registered securities under Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”).
In addition, federal regulations provide that no company may acquire control of a unitary thrift holding company without the prior approval of the FRB. Any company that acquires such control becomes subject to registration, examination and regulation by the FRB.
Under the Federal Reserve’s regulations implementing the Bank Holding Company Act of 1956, as amended, and HOLA, control determinations are made according to a rules-based methodology. Presumptions of control generally are based on ownership of voting equity and total equity in a company, director representation and ability to elect directors, director and management interlocks, contractual rights to determine management or operational decisions, and business relationships. The regulations establish a general three-prong test for determining whether a company controls a bank or savings association. Pursuant to this test, a company controls another company if the first company, directly or indirectly or acting through one or more other persons, (i) owns, controls or has power to vote 25% or more of any class of voting securities of the second company, (ii) controls in any manner the election of a majority of the directors of the other company, or (iii) based on the facts and circumstances of the investment, directly or indirectly exercises a controlling influence over the management or policies of the other company.
The regulations also include rebuttable presumptions of control based on a tiered framework focused on equity ownership, business relationships, control over the election of directors, director and senior management interlocks, as well as business terms and contractual arrangements. In addition to the rebuttable presumptions under the tiered framework, the regulations establish other rebuttable presumptions of control and non-control focused on prior control relationships, management agreements, investment adviser arrangements, consolidation under generally accepted accounting principles, and equity ownership levels. As a general matter, the tiers will vary based on percentage of voting ownership with additional requirements to qualify for the rebuttable presumption at voting ownership levels of 5% or greater, 10% or greater, and 15% or greater.
On September 17, 2024, the FDIC, the OCC and the DOJ, each announced new rules and policy statements impacting their bank merger review processes. Among these actions, the FDIC approved a final statement of policy on bank merger transactions and the OCC approved a final rule updating the agency’s regulations for business combinations involving national banks and federal savings associations. The OCC’s final rule modifies its procedures for reviewing bank merger applications under the Bank Merger Act applications, including the elimination of the expedited bank merger review and the streamlined application procedures. The OCC’s final rule also includes a new policy statement that addresses the substantive standards that it will use to evaluate bank merger applications, including indicators that point in favor of likely approval or rejection. The FDIC's statement of policy adopts a principles-based approach and clarifies its policies and expectations in the evaluation of bank merger transactions subject to FDIC approval under the Bank Merger Act. However, Acting FDIC Chairman Travis Hill has indicated the possibility of withdrawing the new statement of policy, and it is unclear whether the OCC under anticipated new leadership will reconsider its new regulation and policy statement.
Concurrent with the FDIC and OCC announcements, the DOJ withdrew from its 1995 Bank Merger Guidelines and announced that it would consider bank mergers under its 2023 Merger Guidelines, which are not industry specific, as well as under a separate, recently adopted bank merger addendum.
AVAILABLE INFORMATION
Our Internet address is www.sterlingbank.com. We will make available free of charge in the investor relations section of our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports as soon as reasonably practicable after such materials are electronically filed with (or furnished to) the SEC. Information contained on our website is not incorporated by reference into this Annual Report on Form 10-K. In addition, the SEC maintains an Internet site, sec.gov, that includes filings of and information about issuers that file electronically with the SEC.

---

ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
We face a number of significant risks and uncertainties in connection with our operations. Our business and the results of our operations could be materially adversely affected by the factors described below. The risks described below are not the only risks facing our operations. Risks and uncertainties not currently known to us or that we currently deem to be immaterial also could have a material adverse impact on our business and results of operations.
Risks Related to the Transaction
The pendency of the Transaction may adversely affect our business, financial condition, and results of operations.
Uncertainty about the effect of the Transaction on our associates, clients, and other parties may have an adverse effect on our business, financial condition, and results of operations regardless of whether the Transaction is completed. These risks to our business include the following, among others, all of which may be exacerbated by a delay in the completion of the Transaction: (i) the impairment of our ability to attract, retain, and motivate our employees; (ii) the diversion of significant management time and attention from ongoing business operations towards the completion of the Transaction; (iii) difficulties maintaining relationships with clients, suppliers and other business partners; (iv) delays or deferments of certain business decisions by our clients, suppliers and other business partners; (v) the inability to pursue alternative business opportunities or make appropriate changes to our business because the Transaction requires us to, subject to certain exceptions, conduct business in the ordinary course of business and to not engage in certain kinds of transactions prior to the completion of the Transaction without the prior written consent of EverBank, even if such actions could prove beneficial; (vi) litigation relating to the Transaction and the costs and uncertainties related thereto; and (vii) the incurrence of significant costs, expenses, and fees for professional services and other Transaction costs in connection with the Transaction.
Regulatory approvals may not be received, may take longer than expected, or may impose conditions that are not presently anticipated.
The completion of the Transaction is conditioned on the receipt of all required regulatory approvals, the continuation of such regulatory approvals in full force and effect, the expiration of any applicable waiting periods relating to such regulatory approvals, and the absence of any material burdensome condition from such regulatory approvals. Even if the required regulatory approvals are received, the approvals may impose terms, conditions, limitations, obligations, or costs, may place restrictions on the conduct of our business or the conduct of EverBank’s business after the closing, or may require changes to the terms of the Transaction. There can be no assurance that regulators will not impose any such terms, conditions, limitations, obligations, restrictions or changes or that such terms, conditions, limitations, obligations, restrictions or changes will not have the effect of delaying the completion of the Transaction. In addition, there can be no assurance that any such terms, conditions, limitations, obligations, restrictions or changes will not result in the termination of the Stock Purchase Agreement and abandonment of the Transaction.
The Federal Reserve and the OCC take into consideration a number of factors when reviewing bank merger and acquisition proposals under the Bank Holding Company Act of 1956 and the Bank Merger Act, respectively. These factors include the effect of the transaction on competitiveness in affected banking markets, the financial and managerial resources of the companies and banks involved (including consideration of the capital adequacy, liquidity, and earnings performance, as well as the competence, experience and integrity of the officers, directors and principal shareholders, and the records of compliance with applicable laws and regulations) and future prospects of the combined organization. The Federal Reserve and the OCC also consider the effectiveness of the applicant in combatting money laundering, the convenience and needs of the communities to be served, as well as the extent to which the proposal would result in greater or more concentrated risks to the stability of the U.S. banking or financial system. Neither the Federal Reserve nor the OCC may approve a proposal that would have significant adverse effects on competition or on the concentration of resources in any banking market. On March 13, 2025, the Company received approval for the Transaction from the Office of the Comptroller of the Currency. The Transaction remains subject to the receipt of approval from the Board of Governors of the Federal Reserve System.
The Stock Purchase Agreement may be terminated in accordance with its terms, and the Transaction may not be completed.
The Stock Purchase Agreement is subject to a number of conditions which must be fulfilled in order to complete the Transaction. Those conditions include: (i) the approval of the Stock Purchase Agreement, the Transaction and the Plan of Dissolution by the affirmative vote of a majority of all the votes entitled to be cast on such matters by holders of our common stock (which approval was obtained at a special meeting of shareholders held on December 18, 2024), (ii) the absence of any law, statute, rule, regulation, executive order, decree, ruling, injunction (whether temporary, preliminary or permanent) or other order which has the effect of restraining, enjoining or otherwise prohibiting or making illegal the consummation of the Transaction, and (iii) the receipt of the regulatory approvals with respect to the Stock Purchase Agreement, the Transaction and the bank merger by the Federal Reserve and the OCC as described above. In addition, EverBank’s obligation to complete the Transaction is also subject to the following conditions: (i) the sale by the Bank of its portfolio of residential tenant-in-common loans to Bayview and receipt by the Bank of the purchase price specified in such agreement and (ii) the average daily closing balance of the Bank’s deposits for the monthly period ending on the last day of the month before closing is not less than 85% of the average daily closing balance of such deposits for the monthly period ending on July 31, 2024. Each party’s obligation to complete the Transaction is also subject to certain additional conditions, including (a) subject to certain exceptions, the accuracy of the representations and warranties of the other party and (b) performance in all material respects by the other party of its obligations under the Stock Purchase Agreement. On March 13, 2025, the Company received approval for the Transaction from the Office of the Comptroller of the Currency. The Transaction remains subject to the receipt of approval from the Board of Governors of the Federal Reserve System.
These conditions to the closing may not be fulfilled in a timely manner or at all, and, accordingly, the Transaction may not be completed. In addition, the parties can mutually decide to terminate the Stock Purchase Agreement at any time, before or after the shareholder approval. Also, either EverBank or we may elect unilaterally to terminate the Stock Purchase Agreement in certain circumstances.
Failure to complete the Transaction could negatively impact us.
If the Transaction is not completed for any reason, including as a result of the failure to obtain all needed regulatory approvals or if terminated by either party if the closing has not occurred on or before June 30, 2025, unless otherwise extended, there may be various adverse consequences and we may experience negative reactions from the financial markets and from our clients and associates.
For example, our business may be impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the Transaction. Additionally, termination of the Transaction would likely have a negative effect on our market price. We also could be subject to litigation related to any failure to complete the Transaction or to proceedings commenced against us to perform our obligations under the Transaction. If the Stock Purchase Agreement is terminated under certain circumstances, we would be required to pay to EverBank a termination fee of up to $9,135,000.
Additionally, we expect to incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the Stock Purchase Agreement, as well as the costs and expenses of all filing and other fees paid in connection with the Transaction. If the Transaction is not completed, we would have to pay a large portion of these expenses without realizing the expected benefits of the Transaction.
We will be subject to business uncertainties and contractual restrictions while the Transaction is pending.
Uncertainty about the effect of the Transaction on associates and clients may have an adverse effect on us. These uncertainties may impair our ability to attract, retain and motivate key personnel pending completion of the Transaction, and could cause clients and others that deal with us to seek to change existing business relationships with us. In addition, subject to certain exceptions, we have agreed to operate our business in the ordinary course prior to the closing, and we are restricted from making certain acquisitions and taking other specified actions without the consent of EverBank. These restrictions may prevent us from pursuing attractive business opportunities that may arise prior to the completion of the Transaction.
The Stock Purchase Agreement contains provisions that could discourage a potential competing acquiror that might be willing to pay more to acquire or merge with us.
The Stock Purchase Agreement contains provisions that restrict our ability to, among other things, initiate, solicit, knowingly encourage or knowingly facilitate, inquiries or proposals with respect to, or, subject to certain exceptions generally related to the exercise of fiduciary duties by our board of directors, engage in any negotiations concerning, or provide any confidential or nonpublic information or data relating to, any alternative acquisition proposals. These provisions, which include a termination fee of up to $9,135,000 payable by us under certain circumstances, might discourage a potential competing acquiror that might have an interest in acquiring the Company, the Bank or a significant part of the Bank’s assets from considering or proposing that acquisition even if it were prepared to pay a consideration with a higher per share price to our shareholders than what is contemplated in the Transaction, or might result in a potential competing acquiror proposing to pay a lower per share price to acquire us than it might otherwise have proposed to pay.
Shareholder litigation could prevent or delay the completion of the Transaction or otherwise negatively impact our business and operations.
One or more of our shareholders may file lawsuits against us and/or our directors and officers in connection with the Transaction. One of the conditions to the closing is the absence of any law, statute, rule, regulation, executive order, decree, ruling, injunction (whether temporary, preliminary or permanent) or other order which has the effect of restraining, enjoining or otherwise prohibiting or making illegal the consummation of the Transaction. If any plaintiff were successful in obtaining an injunction prohibiting us from completing the Transaction, then such injunction may delay or prevent the effectiveness of the Transaction and could result in significant costs to us, including any cost associated with the indemnification of our directors and officers. If a shareholder lawsuit is filed in connection with the Transaction, we may incur costs in connection with the defense or settlement of such lawsuit. Such litigation could have an adverse effect on our financial condition and results of operations and could prevent or delay the completion of the Transaction.
In November 2024, the Company received a books and records demand (the “Books and Records Demand”) from a purported Company shareholder pursuant to the Michigan Business Corporation Act which requests an array of documents for the purported purposes of investigating the decisions that led to, and other information with respect to, the Company’s execution of the Stock Purchase Agreement. Should such purported shareholder commence an action against the Company, there is no assurance that we would be successful in any defense thereof. Any such action may have a material adverse impact on our financial condition and results of operation and on the total amount of liquidating distributions to shareholders pursuant to the Plan of Dissolution.
Risks Related to the Plan of Dissolution
We cannot assure you as to the timing, amount, or number of distributions, if any, to be made to our shareholders pursuant to the Plan Dissolution.
Our current intention is that the Company would file a certificate of dissolution with the Michigan Department of Licensing and Regulatory Affairs upon the closing of the Transaction; however, the Company’s board of directors would retain the discretion to determine not to proceed with the dissolution in its sole discretion and, if it does proceed with the dissolution, would have discretion as to the timing of the filing of the certificate of dissolution. No further shareholder approval would be required to effect the dissolution. However, if the board of directors determines prior to complete distribution of the Company’s assets that the dissolution is not in the Company’s best interest or in the best interest of our shareholders, the board of directors may, in its sole discretion, abandon the dissolution and terminate the Plan of Dissolution, subject to approval by the Company’s shareholders. Revocation of the dissolution would require the board of directors to adopt a resolution revoking dissolution which would then require shareholder approval under Michigan law.
Under the Michigan Business Corporation Act (the “MBCA”), a dissolved corporation continues its existence after dissolution for such period as is necessary to complete the winding down of its affairs, including the payment of its debts, obligations and other liabilities and the distribution of its remaining assets to its shareholders. Any action, suit or proceeding begun by or against the corporation before or during the wind down period does not terminate by reason of the dissolution, and for the purpose of any such action, suit or proceeding, the corporation will continue beyond the dissolution until any related final judgments, orders or decrees are rendered, without the necessity for any special direction by the applicable court. A dissolved corporation must pay or make provision
for the payment (or reservation of funds as security for payment) of its debts, obligations and liabilities and claims against the corporation in accordance with the applicable provisions of the MBCA before the distribution of remaining assets to the corporation’s shareholders.
Any distribution to our shareholders will not occur until after the certificate of dissolution is filed, and we cannot predict with certainty the timing, amount, or number of any such distributions, or whether any such distributions will occur, as uncertainties as to the ultimate amount and scope of our liabilities, the operating costs and amounts to be set aside for claims, debts, obligations and provisions during the dissolution and wind down process, and the related timing to complete the wind down of our affairs, make it impossible to predict with certainty the actual net cash amount, if any, that will ultimately be available for distribution to shareholders or the timing of any such distributions. Among other things, our potential liabilities that may require provision could include those relating to indemnification obligations, if any, to third parties or to our current and former officers and directors, and to resolve any shareholder or other litigation that may emerge, including in connection with the Books and Records Demand. Examples of uncertainties that could reduce the value of distributions to our shareholders include: the incurrence by the Company of expenses relating to the dissolution being different than estimated; unanticipated costs relating to the defense, satisfaction or settlement of lawsuits or other claims that may be threatened against us or our current or former directors or officers; amounts necessary to resolve claims of any creditors or other third parties; and delays in the dissolution and wind down process.
If it was determined by a court that we failed to make adequate provision for expenses, debts, obligations and liabilities or if the amount required to be paid in respect of such expenses, debts, obligations and liabilities exceeded the amount available from the reserve, a creditor could seek an injunction against the making of liquidating distributions under the Plan of Dissolution on the grounds that the amounts to be distributed were needed to provide for the payment of expenses and liabilities. Any such action could delay, substantially diminish or negate the cash distributions contemplated to be made to shareholders under the Plan of Dissolution.
In addition, as we wind down, we will continue to incur expenses from operations, including directors’ and officers’ insurance, severance payments, payments to service providers and any continuing employees or consultants, taxes, legal, accounting and consulting fees, costs associated with maintaining the listing of our common stock, and/or its delisting, and expenses related to our filing obligations with the SEC and/or others, which will reduce any amounts available for distribution to our shareholders. As a result, we cannot assure you as to the amounts, if any, that may ultimately be distributable or distributed to our shareholders if the Transaction is completed and the board of directors proceeds with the dissolution.
It is the current intent of the board of directors that any cash will first be used to pay our outstanding current liabilities and obligations (including all transaction expenses incurred in connection with the negotiation and consummation of the Stock Purchase Agreement and any claims or demands received by the Company on behalf of any of its shareholders), and then will be retained to pay ongoing corporate and administrative costs and expenses associated with winding down the Company, liabilities and potential liabilities relating to or arising out of any litigation matters and potential liabilities relating to our indemnification obligations, if any, to our service providers, or to our current and former officers and directors, before such cash, if any remains, will be available for distribution to shareholders.
The board of directors will determine, in its sole discretion, the timing and number of the distributions of the remaining amounts, if any, to our shareholders in the dissolution. We can provide no assurance as to if or when any such distributions will be made, and we cannot provide any assurance as to the amounts, if any, that may ultimately be distributable or distributed to our shareholders in any such distributions, if any are to be made. Shareholders may receive substantially less than the amount that we currently estimate that they may receive, or they may receive no distribution at all.
Our shareholders may be liable to third parties for part or all of the amount received from us in our liquidating distributions if cash reserves are inadequate.
If the dissolution becomes effective, we are required to establish a cash reserve designed to satisfy any additional claims and obligations that may arise. Any reserve may not be adequate to cover all of our claims and obligations. Under the MBCA, in the event we fail to create an adequate reserve for the payment of expenses and liabilities and amounts have been distributed to the shareholders under the Plan of Dissolution, creditors may be able to pursue claims against shareholders directly to the extent that they have claims co-extensive with such shareholders’ receipt of liquidating distributions. Accordingly, in such event, a shareholder could be required to return part or all of the distributions previously made to such shareholder, and a shareholder could ultimately receive nothing from us under the Plan of Dissolution. Moreover, if a shareholder has paid taxes on amounts previously received, a repayment of all or a
portion of such amount could result in a situation in which a shareholder may incur a net tax cost if the repayment of the amount previously distributed does not cause a commensurate reduction in taxes payable in an amount equal to the amount of the taxes paid on amounts previously distributed.
Our shareholders of record will not be able to buy or sell shares of our common stock after we close our stock transfer books at the effective time of the dissolution.
If the board of directors determines to proceed with the dissolution, we intend to close our stock transfer books and discontinue recording transfers of our common stock at the effective time of the dissolution. After we close our stock transfer books, we will not record any further transfers of our common stock on our books except at our sole discretion by will, intestate succession, or operation of law. Therefore, shares of our common stock will not be freely transferable after the effective time. As a result of the closing of the stock transfer books, all liquidating distributions in the dissolution will likely be made to the same shareholders of record as the shareholders of record as of the effective time.
We plan to initiate steps to exit from certain reporting requirements under the Exchange Act, which may substantially reduce publicly available information about us. If the exit process is protracted, we will continue to bear the expense of being a public reporting company despite having no source of revenue.
Our common stock is currently registered under the Exchange Act, which requires that we, and our officers and directors with respect to Section 16 of the Exchange Act, comply with certain public reporting and proxy statement requirements thereunder. Compliance with these requirements is costly and time consuming. We plan to initiate steps to exit from such reporting requirements in order to curtail expenses; however, such process may be protracted and we may continue to be required to file Current Reports on Form 8-K to disclose material events, including those related to the dissolution, and other reports. Accordingly, we may continue to incur expenses that will reduce any amount available for distribution, including expenses of complying with public company reporting requirements and paying our service providers, among others. If our reporting obligations cease, publicly available information about us will be substantially reduced.
The loss of key personnel could adversely affect our ability to efficiently dissolve, delist, liquidate, and wind down.
We intend to rely on a few individuals in key management roles and contractor support to dissolve, delist from Nasdaq, liquidate our remaining assets, and wind down operations. Loss of one or more of these key individuals, or inability to contract with essential personnel, could hamper the efficiency or effectiveness of these processes, and may substantially increase the cost of the dissolution as we may need to rely on the services of third party restructuring and consulting firms to assist with the wind down and dissolution.
Risks Related to the Economy and Financial Markets
As a business operating in the financial services industry, our business, financial condition and results of operations may be adversely affected in numerous and complex ways by economic conditions and fiscal and monetary policies and regulations of the federal government and the FRB.
Our business and operations, which primarily consist of lending money to customers in the form of loans, borrowing money from customers in the form of deposits and investing in securities, are sensitive to general business and economic conditions in the United States. If the U.S. economy weakens, our growth and profitability from our lending, deposit and investment operations could be constrained. Uncertainty about the federal fiscal policymaking process, the medium- and long-term fiscal outlook of the federal government and future tax rates is a concern for businesses, consumers and investors in the United States. In addition, economic conditions in foreign countries could affect the stability of global financial markets, which could hinder U.S. economic growth. Weak economic conditions are characterized by deflation or elevated inflation, fluctuations in debt and equity capital markets, a lack of liquidity and/or depressed or inflated prices in the secondary market for mortgage loans, increased delinquencies on mortgage, consumer and commercial loans, residential and commercial real estate price declines and lower home sales and commercial activity.
In particular, interest rates are highly sensitive to many factors that are beyond our control, including global, domestic and local economic conditions and the policies of various governmental and regulatory agencies and, specifically, the Federal Reserve. Throughout 2022 and 2023, the FOMC raised the target range for the federal funds rate on eleven separate occasions, citing factors including the hardships caused by the ongoing Russia-Ukraine conflict, continued global supply chain disruptions and imbalances, and increased inflationary pressure. In the third and fourth quarters of 2024, however, the FOMC pivoted and lowered the federal funds rate from 5.50% to 4.50% based principally on reduced levels of inflation and labor market factors. At its January 29, 2025 meeting, the FOMC decided to maintain the target range for the federal funds rate at 4.25% to 4.50%.
As of December 31, 2024, various economic indicators suggested that real GDP had expanded solidly throughout 2024. The unemployment rate had increased, on net, but remained low relative to historic norms. Consumer price inflation, as measured by the 12-month change in the price index for personal consumption expenditures, had moved lower compared to its peak level in 2023, approaching the Federal Reserve’s 2 percent inflation objective. Against the backdrop of restrictive monetary policy, the U.S. economy had stronger-than-expected GDP growth, loosening of tight labor markets and falling inflation in 2024. While this positive growth may continue in 2025, some economists are projecting that, due to emerging policy risks such as stricter immigration policies and trade tariffs, the U.S. economy may be flat or experience a modest decrease in gross domestic output in 2025. For instance, the U.S. Bureau of Economic Analysis projects that real GDP will decrease modestly in 2025. Any such downturn in economic output, especially domestically and in the regions in which we operate, may adversely affect our asset quality, deposit levels, loan demand and results of operations.
As a result of the economic and geopolitical factors discussed above, financial institutions also face heightened credit risk, among other forms of risk. Of note, because we have a significant amount of real estate loans, decreases in real estate values could adversely affect the value of property used as collateral, which, in turn, can adversely affect the value of our loan and investment portfolios. Adverse economic developments, specifically including inflation-related impacts, may have a negative effect on the ability of our borrowers to make timely repayments of their loans or to finance future home purchases. According to the Federal Reserve's November 2024 Financial Stability Report, several economic indicators suggest that commercial real estate prices still remain high relative to fundamentals while market delinquency rates are elevated. However, the outlook for commercial real estate remains dependent on the broader economic environment and, specifically, how major subsectors respond to a high interest rate environment and continued higher prices for commodities, goods and services. In any case, credit performance over the medium- and long-term is susceptible to economic and market forces and therefore forecasts remain uncertain; however, some degree of instability in the commercial real estate markets is expected in the coming quarters as loans continue to be refinanced in markets with higher vacancy rates under current economic conditions. Instability and uncertainty in the commercial and residential real estate markets, as well as in the broader commercial and retail credit markets, could have a material adverse effect on our financial condition and results of operations.
Significant changes to the size, structure, powers and operations of the federal government may cause economic disruptions that could, in turn, adversely impact our business, results of operations and financial condition.
The Trump Administration has commenced efforts to implement significant changes to the size and scope of the federal government and reform its operations to achieve stated goals that include reducing the federal budget deficit and national debt, improving the efficiency of government operations, and promoting innovation and economic growth. To date, these efforts have been carried out through a mix of executive actions aimed at eliminating or modifying federal agency and federal program funding, reducing the size of the federal workforce, reducing or altering the scope of activities conducted by, and possibly eliminating, various federal agencies and bureaus, and encouraging the use of artificial intelligence and other advanced technologies within the public and private sectors. These changes, if implemented and taken as a whole, may have varied effects on the economy that are difficult to predict. For instance, the delivery of government services and the distribution of federal program funds and benefits may be disrupted or, in some cases, eliminated as a result of funding cuts or recasting of federal agency mandates. Further, a substantial reduction of the federal workforce could adversely affect regional and local economies, both directly and indirectly, in geographies with significant concentrations of federal employees and contractors. It is possible that such comprehensive changes to the federal government may be materially adverse to the regional and local economies where we conduct business and to our customers, which, in turn, could be materially adverse to our business, financial condition and results of operations.
Macroeconomic and geopolitical challenges and uncertainties affecting the stability of regions and countries around the globe could have a negative impact on our business, financial condition and results of operations.
Our business and operations are also sensitive to global business and economic conditions. Accordingly, macroeconomic and geopolitical challenges, uncertainties and volatility occurring across the globe may have a negative impact on our business and results of operations. These conditions include short-term and long-term interest rates, inflation, money supply, political issues, ramifications of conflicts including the Russia-Ukraine conflict, Israeli-Palestinian conflict, the recent coup in Syria and other conflicts and government turmoil in the Middle East and Europe, legislative and regulatory changes, fluctuations in both debt and equity capital markets, broad trends in industry and finance, the strength of the United States economy, and uncertainty in financial markets globally, all of which are beyond our control.
For additional information, see “-Risks Related to Interest Rates.”
In addition, economic trade and political tensions between the United States and China pose a risk to our business and customers. A substantial number of our customers have economic and cultural ties to China and are likely to feel the effects of adverse economic and political conditions in China, including the effects of rising inflation or slowing growth and volatility in the real estate and stock markets in China and other regions. United States and global economic and trade policies, military tensions and unfavorable global economic conditions may adversely impact the Chinese economy. As a result, we may experience a decrease in the demand for our financial products, a deterioration in the credit quality of the loans extended to customers affected by the foregoing circumstances, changes in loan repayment speeds or increased deposit outflows.
Each of the developments described above, or any combination of them, could adversely affect our business, financial condition and results of operations.
Changes in U.S. trade policies, including the imposition of tariffs and retaliatory tariffs, may adversely impact our business, financial condition, and results of operations.
The Trump Administration, during its first term from 2017 to 2021, imposed certain tariffs and retaliatory tariffs, as well as other trade restrictions on products and materials that our customers import or export. President Trump again has signaled that his new Administration will impose tariffs and retaliatory tariffs against U.S. trading partners. During his election campaign, President Trump indicated that he would impose a 25% tariff against all goods imported from Canada and Mexico, a 60% tariff on goods from China and a blanket tariff of 10% to 20% on other imports to the U.S. On February 1, 2025, President Trump issued an Executive Order imposing tariffs at various levels on imports from Canada, Mexico, and China. The newly imposed tariffs have resulted in immediate threats of retaliatory tariffs against U.S. goods and resulted in discussions with the countries which have delayed many of the U.S. imposed tariffs while discussions with each trading partner continue.
The above and other potential tariffs and trade restrictions may cause the prices of our customers' products to increase, which could reduce demand for such products, or reduce our customers’ margins, and adversely impact their revenues, financial results, and ability to service debt. This in turn could adversely affect our financial condition and results of operations. In addition, to the extent changes in the political environment have a negative impact on us or on the markets in which we operate our business, our results of operations and financial condition could be materially and adversely impacted in the future. At this time, it remains unclear what the U.S. government or foreign governments will or will not do with respect to additional tariffs that may be imposed or international trade agreements and policies.
Volatility in the banking sector, triggered by the failures of several larger banks in 2023, has resulted in agency rulemaking activities and changes in agency policies and priorities that could subject the Company and the Bank to enhanced government regulation and supervision.
After the significant bank failures that occurred in 2023, the federal banking agencies enhanced their scrutiny of the banks’ risk management practices, including liquidity risk management. The agencies concluded that a significant contributing factor to the failures of such institutions was the concentration of uninsured deposits, coupled with inadequate prudential regulation and supervision of regional banking organizations, poor management and inadequate risk management practices. Accordingly, the agencies enacted or proposed a variety of regulations and issued supervisory guidance to address these issues, including proposed Basel III “endgame” regulations, bank merger guidelines, long-term debt requirements, corporate governance and risk management standards for larger institutions, restrictions on banks’ acceptance of brokered deposits, and funding and liquidity risk management. Continued regulatory concern over possible future bank failures may lead to further governmental initiatives intended to prevent future bank failures and stem significant deposit outflows from the banking sector, including (i) legislation aimed at preventing similar future bank runs and failures and stabilizing confidence in the banking sector over the long term, (ii) agency rulemaking to modify and enhance relevant regulatory requirements, specifically with respect to liquidity risk management, deposit concentrations, capital adequacy, stress testing and contingency planning, and safe and sound banking practices, and (iii) enhancement of the agencies’ supervision and examination policies and priorities. However, the prospects and timing of these regulatory changes under the new Presidential Administration and Congress are unclear at this time.
Our customer activity is affected by changes in the state of the general economy and the financial markets, a slowdown or downturn of which could adversely affect demand for our loan services and our results of operations.
Our customer activity is intrinsically linked to the health of the economy generally and of the financial markets specifically. In addition to the economic factors discussed above, a downturn in the real estate or commercial markets generally, which might occur as a result of, among other things, an increase in unemployment, a decrease in real estate values, declining savings or a slowdown in housing demand, could cause our customers and potential customers to exit the market for real estate or commercial loans. As a result, we believe that fluctuations, disruptions, instability or downturns in the general economy and the financial markets could disproportionately affect demand for our residential and commercial loan products. If such conditions occur and persist, our business and financial results, including our liquidity and our ability to fulfill our debt obligations, could be materially adversely affected.
Fiscal challenges facing the U.S. government could negatively impact financial markets which, in turn, could have an adverse effect on our financial position or results of operations.
Federal budget deficit concerns and the potential for political conflict over legislation to fund U.S. government operations and raise the U.S. government’s debt limit may increase the possibility of a default by the U.S. government on its debt obligations, related credit-rating downgrades, or an economic recession in the United States. Many of our investment securities are issued by the U.S. government and government agencies and sponsored entities. As a result of uncertain domestic political conditions, including potential future federal government shutdowns, the possibility of the federal government defaulting on its obligations for a period of time due to debt ceiling limitations or other unresolved political issues, investments in financial instruments issued or guaranteed by the federal government pose liquidity risks. In connection with prior political disputes over U.S. fiscal and budgetary issues leading to the U.S. government shutdown in 2011, S&P lowered its long term sovereign credit rating on the U.S. from AAA to AA+. In 2023, Congress narrowly averted two separate government shutdowns by passing continuing resolutions. Again in 2024, Congress averted two more government shutdowns at the last minute. In part due to repeated debt- limit political standoffs and last-minute resolutions, in 2023 Fitch downgraded the U.S. long-term foreign-currency issuer default rating to AA+ from AAA, and the rating remained unchanged as of December 31, 2024. A further downgrade, or a downgrade by other rating agencies, as well as sovereign debt issues facing the governments of other countries, could have a material adverse impact on financial markets and economic conditions in the U.S. and worldwide.
Risks Related to Credit
Changes in economic conditions, including continued inflation and the possibility of a recession, could cause an increase in delinquencies and nonperforming assets, including loan charge offs, which could depress our net income and growth.
Our loan portfolio includes primarily secured real estate loans, demand for which may decrease and delinquencies of which may increase during economic downturns as a result of, among other things, an increase in unemployment, a decrease in real estate values, an increase in interest rates and a slowdown in housing. Significant ongoing financial risk continues to affect economic conditions in the United States as a whole and in the markets that we serve, including the risk of a recession. As a result of the economic uncertainty and should the economy worsen, we could experience higher delinquencies and loan charge offs, as well as increases in nonaccrual loans and loan modifications, which would reduce our net income and adversely affect our financial condition. In addition, a decline in real estate values as a result of adverse developments in the markets we serve could reduce the value of the real estate collateral securing our real estate loans, which could cause some of our real estate loans to be inadequately collateralized or affect our ability to sell such collateral upon foreclosure without a loss or additional losses. Furthermore, to the extent that real estate collateral is obtained through foreclosure, the costs of holding and marketing the real estate collateral, as well as the ultimate values obtained from disposition, could reduce our net income and adversely affect our financial condition.
Our concentration in residential real estate loans exposes us to risks.
At December 31, 2024 and 2023, one-to-four family residential real estate loans amounted to $849 million and $1.1 billion, or 73% and 80%, respectively, of our total gross loans. Our nonperforming residential real estate loans increased from $9.0 million at December 31, 2023 to $13.2 million at December 31, 2024. Residential mortgage lending is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. For example, in our residential lending markets in California, the current unemployment rate is higher than the national average. If borrowers are unable to meet their loan repayment obligations, our results of operations would be materially and adversely affected. In addition, a decline in residential real estate values as a result of an economic downturn in the markets we serve would reduce the value of the real estate collateral securing these types of loans. Such declines in real estate values could cause some of our residential mortgages to be inadequately collateralized, which would expose us to a risk of loss if we sought to recover on defaulted loans by selling the real estate collateral.
Our commercial real estate loans are subject to credit risks, including changes in operating cash flows from the underlying properties or businesses, that may adversely impact our results of operations and financial condition.
At December 31, 2024, our commercial real estate loans totaled $296.5 million, or 26% of our total gross loans. Commercial real estate loans generally have more risk than residential real estate loans and generally have a larger average size compared to other types of loans, so losses incurred on a small number of commercial loans could have a disproportionate and material adverse impact on our financial condition and results of operations. The repayment of commercial real estate loans is often more sensitive than other types of loans to adverse conditions in the real estate market or the general business climate and economy because it is dependent on the successful operation or development of the property or business involved. In addition, the collateral for commercial real estate loans is generally less readily marketable than for residential real estate loans, and its value may be more difficult to determine. A primary repayment risk for commercial real estate loans is the interruption or discontinuation of operating cash flows from the properties or businesses involved, which may be influenced by economic events, changes in governmental regulations, vacancies or other events not under the control of the borrower. Adverse developments affecting commercial real estate values in our market areas could increase the credit risk associated with these loans, impair the value of property pledged as collateral for these loans and affect our ability to sell the collateral upon foreclosure without a loss or additional losses.
Commercial real estate markets have been facing downward pressure since 2022 due in large part to higher interest rates, declining property values and a slowed transaction market. Accordingly, the federal banking agencies, including the OCC, have expressed concerns over weaknesses in the current commercial real estate market and have applied increased scrutiny to institutions with commercial real estate loan portfolios that are growing quickly or are large relative to an institution’s total capital. To address supervisory expectations regarding financial institutions’ handling of commercial real estate borrowers experiencing financial difficulties, in June 2023, the federal banking agencies issued an interagency policy statement addressing prudent commercial real estate loan accommodations, changes in accounting principles, and revisions and additions to commercial real estate loan workouts. Our failure to implement adequate risk management controls for commercial real estate credit underwriting and servicing, as well as related accounting processes, could adversely affect our business in this area.
A substantial majority of our loans and operations are in California, and therefore our business is particularly vulnerable to a downturn in the local economies in which we operate.
Unlike larger financial institutions that are more geographically diversified, a large portion of our business is concentrated primarily in the state of California, specifically in the San Francisco and Los Angeles metropolitan areas. As of December 31, 2024, approximately 75% of our loan portfolio was based in California with concentrations in the San Francisco and Los Angeles metropolitan areas of 52% and 23%, respectively. If the local California economies, and particularly local real estate markets, decline, the rates of delinquencies, defaults, foreclosures, bankruptcies and losses in our loan portfolio would likely increase. Similarly, catastrophic natural events such as earthquakes or wildfires, such as the wildfires that recently impacted Southern California, could have a disproportionate effect on our financial condition. More, an ongoing financial slowdown within the technology industry may pose unique financial hardships to the San Francisco Bay Area due to industry concentration in the region, thus impacting the overall regional economy. As a result of this lack of geographic diversification in our loan portfolio, a downturn in the local economies generally and in real estate markets specifically could significantly reduce our profitability and growth and have a material adverse effect on our results of operations and financial condition.
Our allowance for credit losses may not be sufficient to cover losses in our loan portfolio, and any resulting increase in our allowance for credit losses or loan charge offs could decrease our net income.
As of January 1, 2023, we adopted the current expected credit loss model for accounting for the estimate of 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. Under the current expected credit loss model, the allowance for credit losses is established based upon our current estimate of expected lifetime credit losses, for which we use relevant available information related to past events, current conditions and reasonable and supportable forecasts. In determining the total allowance for credit losses, we calculate the quantitative portion of the allowance for credit losses using the Probability of Default/Probability of Attrition model, which is a logistic regression model, and add the qualitative adjustments to the model results along with the results from any individual loan assessments.
The determination of the appropriate level of allowance for credit losses is subject to various assumptions and judgments and requires us to make significant estimates of current credit risks and the collectability of loans, the value of real estate and other assets serving as collateral for the repayment of loans and future trends, all of which are subject to material changes. If our assumptions and estimates prove to be incorrect, the allowance for credit losses may not cover current expected credit losses in the loan portfolio at the date of the financial statements. Significant increases to the allowance for credit losses would materially decrease net income. Nonperforming loans may increase, and nonperforming or delinquent loans may adversely affect future performance. In addition, federal regulators periodically review the allowance for credit losses and may require an increase in the allowance for credit losses or the recognition of further loan charge offs. Any significant increase in our allowance for credit losses or loan charge offs as required by these regulatory agencies could have a material adverse effect on our results of operations and financial condition.
Risks Related to Interest Rates
Future changes in interest rates could reduce our net interest income and otherwise negatively impact our financial condition and results of operations.
The majority of our banking assets are monetary in nature and subject to risk from changes in interest rates. Like most financial institutions, our net income and cash flows depend to a great extent upon the level of our net interest income, or the difference between the interest income we earn on loans, investments and other interest earning assets and the interest we pay on interest-bearing liabilities, such as deposits and borrowings. Changes in interest rates can increase or decrease our net interest income, which makes up a majority of our income, because different types of assets and liabilities may react differently, and at different times, to market interest rate changes.
To help address the impact of the COVID-19 pandemic on the economy and financial markets, in March 2020 the FOMC reduced the benchmark federal funds rate to a target range of 0% - 0.25%, and the yields on 10- and 30-year Treasury notes declined to historic lows. However, in light of elevated inflation, a strong labor market and supply chain disruptions at the time, the FOMC significantly increased the target range for the federal funds rate from 0.00% - 0.25% to 5.25% - 5.50% over the period from March 2022 to July 2023, as the FOMC believed such increases in the target range would be appropriate to return target inflation to 2% over time. As of January 29, 2025, the date of the FOMC’s most recent meeting, the target range for the federal funds rate was 4.25% to 4.50%, which is down from the recent peak of 5.25% to 5.50% prior to the FOMC meeting in September 2024. It remains uncertain whether the FOMC will further reduce the target range for the federal funds rate to stimulate economic activity and promote job growth or leave the rate at its relatively elevated level for an additional prolonged period of time.
Like many savings institutions, our liabilities generally have shorter contractual maturities than our assets. When interest-bearing liabilities mature or reprice more quickly, or to a greater degree than interest earning assets in a period, an increase in interest rates could reduce net interest income or adversely affect our overall balance sheet mix or liquidity. Similarly, rising interest rates could also reduce the demand for certain loans or cause certain borrowers to repay loans slower. A decrease in the general level of interest rates may affect us through, among other things, increased prepayments on our loan portfolio and mortgage-backed securities as borrowers refinance their debt to reduce their borrowing costs, a decrease in demand for our deposit products resulting in withdrawals of deposits from the Bank or a combination of the foregoing that may result in a further decrease of our balance sheet. To limit the extent of deposit withdrawals and maintain liquidity in a declining rate environment, we may need to maintain deposit rates at levels higher than the prevailing market rates, thus adversely impacting our net interest income. A decrease in interest rates can also create reinvestment risk that we may not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities and repricing risk that our loans and debt securities may reprice at a faster pace than we may be able to reprice our deposits without significantly affecting the demand for our deposit products. Furthermore, an inverted interest rate yield curve, where short-term interest rates (which are usually the rates at which financial institutions borrow funds) are higher than long-term interest rates (which are usually the rates at which financial institutions lend funds for fixed-rate loans) can reduce our net interest margin and create financial risk for financial institutions like us. Also impacting our net interest income and net interest rate spread is the level of prepayment activity on our mortgage-related assets. Mortgage prepayment rates will vary due to a number of factors, including the regional economy where the mortgage loan or the underlying mortgages of the mortgage-backed security were originated, seasonal factors, demographic variables, prevailing market interest rates, related mortgage refinancing opportunities and competition. Generally, the level of prepayment activity directly affects the yield earned on those assets, as the payments received on the interest-earning assets will be reinvested at the prevailing market interest rate. In a high interest rate environment, prepayment rates tend to decrease and, therefore, the yield earned on our existing mortgage-related assets may remain constant or increase; however, were interest rates to fall, prepayments could increase, which could decrease the yield earned on our mortgage-related assets. This could adversely affect our net interest margin and, therefore, our net interest income.
The interest we earn on our assets is primarily from our residential real estate loans, which comprises 73% of our total gross loans at December 31, 2024 and 49% of the interest earned from all of our interest-earning assets for the year ended December 31, 2024. At December 31, 2024, 98% of our residential real estate loan portfolio and 87% of our total loan portfolio were adjustable-rate loans. To that end, 69% of our adjustable-rate residential real estate loans’ repricing dates are currently scheduled to occur within the next 12 months, 25% after 12 months and up to 60 months, and 6% thereafter. Accordingly, our existing loan portfolio may reprice into the prevailing lower market rates in a lower interest rate environment.
Accordingly, changes in the level of market interest rates affect our net yield on interest-earning assets, demand for loans and deposits, and our overall results. We expect the operating environment to remain very challenging as the FRB continues to focus their efforts on the economy. We cannot predict future FRB actions or other factors that may cause interest rates to change. If we were to experience a decreasing interest rate environment where our cost of funds decreased slower than the yields on our loan portfolio, it may adversely affect our net interest income, net interest spread and net interest margin, and may cause us to change our operating leverage model or portfolio mix to compensate. Although our asset-liability management strategy is designed to control and mitigate exposure to the risks related to changes in market interest rates, those rates are affected by many factors outside of our control, including governmental monetary policies, inflation, deflation, recession, changes in unemployment, the money supply, geopolitical conflicts and instability in domestic and foreign financial markets. Such changes in interest rates could materially and adversely affect our results of operations and overall profitability.
An accelerated decrease in interest rates could reduce our net interest income and otherwise negatively impact our financial condition and results of operations.
Our balance sheet is currently in an asset-sensitive position. In the event of a significant decrease of the target federal funds rate by the FOMC in response to improved inflation outlook, we may not be able to lower our deposit rates at a similar pace in order to avoid significant deposit withdrawals as customers seek the highest yield possible for their funds. A significant, rapid decrease in interest rates could affect (i) the demand of our deposit products; (ii) our liquidity position if our depositors were to withdraw their funds; (iii) the expected yield of our loan portfolio and debt securities; (iv) the average duration of our loan portfolio and debt securities; (v) the fair value of our financial assets and liabilities; and (vi) our balance sheet mix and composition. In addition, the lack of robust loan originations will inhibit our ability to reinvest loan prepayments that occur as interest rates decline in interest earning assets at the higher end of the yield curve, thus either narrowing our interest rate spread and net interest margin or resulting in further significant decline in the size of our balance sheet. As a result, interest income may decline much more quickly in response to market rate declines than our interest expense, which would reduce our net interest income and adversely impact our financial condition and results of operations.
Risks Related to Liquidity
A lack of liquidity could adversely affect our financial condition and results of operations and result in regulatory limits being placed on the Company.
Liquidity is essential to our business. We rely on our ability to generate deposits and effectively manage the repayment and maturity schedules of our investment securities to ensure that we have adequate liquidity to fund our operations. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our most important source of funds is deposits. Deposit balances can decrease when customers perceive alternative investments as providing a better risk/return tradeoff. If customers move money out of deposits such as money market funds, we will lose a relatively low-cost source of funds, increasing our funding costs and reducing our net interest income and net income. Moreover, depending on the capitalization and regulatory treatment of depository institutions, including whether an institution is subject to a supervisory prompt corrective action directive, certain additional regulatory restrictions and prohibitions may apply, including restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on payment of dividends and restrictions on the acceptance of brokered deposits. In the event such restrictions on interest rates paid on deposits become applicable to us, we may need to reduce our interest rates paid on a segment of our deposits, which could result in deposit withdrawals. In addition, as of December 31, 2024, approximately 23% of our total deposits are not FDIC-insured, and a significant portion of those deposits could be withdrawn in the event of volatile economic conditions. Significant deposit withdrawals could materially reduce our liquidity, and, in such an event, we may be required to replace such deposits with higher cost borrowings.
Other primary sources of funds consist of cash flows from operations, from the repayment of loans and from the maturities and principal receipts of investment securities. Additional liquidity is provided by our ability to borrow from the FHLB of Indianapolis or our ability to sell portions of our loan portfolio. We also may borrow funds from third-party lenders, such as other financial institutions. Our access to funding sources in amounts adequate to finance or capitalize our activities, or on terms that are acceptable to us, could be impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry. Our access to funding sources could also be affected by a decrease in the ability to sell mortgage portfolios as a result of a downturn in our markets or by one or more adverse regulatory actions against us. A lack of liquidity could also attract increased regulatory scrutiny and potential restraints imposed on us by regulators.
Any decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, financial condition and results of operations.
We are currently disqualified from the small offering and private placement safe harbor exemptions otherwise available under the federal securities laws, which may adversely affect our ability to offer or sell our securities and raise capital in an efficient manner.
As a result of the guilty plea and criminal conviction pursuant to our Plea Agreement with the DOJ, we fall within the “bad actor” disqualification provisions of Regulation A and Regulation D under the Securities Act. These provisions prohibit an issuer from offering or selling securities in a private placement in reliance on Regulation A for certain small offerings and Regulation D for certain private placement transactions for a period of up to ten years under certain circumstances if, among other things, the issuer has been convicted of any felony or misdemeanor, or other “disqualifying event” under the rule. The SEC or the court may waive such disqualification upon a showing of good cause that disqualification is not necessary under the circumstances for which the safe harbor exemptions are being denied. Absent a waiver, we will be restricted in our ability to raise capital in a private placement in reliance on Regulation A or Regulation D, although we would remain eligible as an SEC registrant to access the equity capital markets through an SEC-registered offering or through another exemption from the registration requirements. We have submitted to the SEC a waiver request from the “bad actor” disqualifications. There is no assurance that the SEC will grant this request. If the SEC were to deny our waiver request, we will be limited in our ability to raise capital through a private placement under Regulation A or Regulation D. The application of the “bad actor” disqualifications to us could make capital raising more costly or inhibit our ability to raise capital. Reduced or more costly access to capital could inhibit our ability to pursue certain strategic alternatives for adding new products and services and potentially grow our balance sheet. Reduced or more costly access to capital is particularly critical to our ability to pursue certain strategic alternatives because the Bank reduced its excess capital when it distributed $90.0 million as a dividend to the Company in 2023 to fund the redemption of the Subordinated Notes and the restitution payment due under the Plea Agreement, both of which reduced the Bank’s excess capital and which otherwise could have supported future growth. Reduced access to capital also could adversely impact our ability to comply with regulatory capital requirements in the event of adverse economic circumstances in which we were to incur financial losses. Therefore, the failure to obtain a waiver of the “bad actor” disqualification could have an adverse impact on our business, financial condition and results of operations.
We rely on external financing to fund our operations, and the failure to obtain such financing on favorable terms, or at all, in the future could materially and adversely impact our growth strategy and prospects.
We rely in part on advances from the FHLB and brokered deposits to fund our operations. Although we consider such sources of funds adequate for our current needs, we may need to issue additional debt or equity in the future to (i) restore capital that has been depleted due to adverse results from and costs to defend government investigations and litigation, (ii) restore capital that may be depleted in the future due to other risks identified herein, and (iii) fund future growth. The sale of equity or equity-related securities in the future may be dilutive to our shareholders, and debt financing arrangements may require us to pledge some of our assets and enter into various affirmative and negative covenants, including limitations on operational activities and financing alternatives. Future financing sources, if sought, might be unavailable to us or, if available, could be on terms unfavorable to us and may require regulatory approval. In addition, we currently are required to obtain the prior approval of the FRB in order for the Company to issue any new debt. If financing sources are unavailable or are not available on favorable terms or we are unable to obtain regulatory approval, our capital base, growth strategy and future prospects could be materially and adversely impacted.
If the market for the sale of our mortgage loans to the secondary market were to significantly contract, or if purchasers were to lose confidence in the quality of our loans, our net income would be negatively affected and our ability to manage our balance sheet would be materially and adversely affected.
From time to time, we manage our liquidity and balance sheet risk by selling loans in our mortgage portfolio into the secondary market. If the market for our mortgages were to contract or our counterparties were to lose confidence in our asset quality, we would lose a key piece of our liquidity strategy and would need to find alternative means to manage our liquidity that may be less effective. In addition, in connection with residential mortgages packaged for sale in the secondary market, we make representations and warranties, which, if breached, may require us to repurchase such loans, substitute other loans or indemnify the purchasers of such loans for actual losses incurred in respect of such loans. To avoid the uncertainty of audits and inquiries by third-party investors in Advantage Loan Program loans sold to the secondary market, beginning at the end of the second quarter of 2020, we commenced making offers to each of those investors to repurchase 100% of our previously sold Advantage Loan Program loans. As of December 31, 2024, we had repurchased such loans with an aggregate unpaid principal balance of $309.1 million and had outstanding commitments to repurchase an additional $11.1 million through July 2025. At December 31, 2024, the unpaid principal balance of residential mortgage loans sold under the Advantage Loan Program that were subject to potential repurchase obligations for breach of representations and warranties totaled $20.8 million. If we experience loan repurchase demands in excess of what we have anticipated, our liquidity, capital ratios and financial condition may be materially and adversely affected.
The proportion of our deposit account balances that exceed FDIC insurance limits may expose the Bank to enhanced liquidity risk in times of financial distress.
In the aftermath of the significant bank failures that occurred in 2023, the federal banking agencies have enhanced their scrutiny of banks’ liquidity risk management. The agencies concluded that a significant contributing factor to the failures of the institutions in 2023 was the proportion of the deposits held by each institution that exceeded FDIC insurance limits. Noting that uninsured deposits accounted for nearly 47 percent of domestic deposits in 2021, the FDIC stated that large concentrations of uninsured deposits increase the potential for bank runs and can threaten financial stability. In the months preceding and following these failures, many large depositors withdrew deposits in excess of applicable deposit insurance limits and deposited these funds in other financial institutions and, in many instances, moved these funds into money market mutual funds or other similar securities accounts in an effort to diversify the risk of further bank failure(s).
Uninsured deposits historically have been viewed by the FDIC as less stable than insured deposits. According to statements made by the FDIC staff and the leadership of the federal banking agencies, customers with larger uninsured deposit account balances often are small- and mid-sized businesses that rely upon deposit funds for payment of operational expenses and, as a result, are more likely to closely monitor the financial condition and performance of their depository institutions. As a result, in the event of financial distress, uninsured depositors historically have been more likely to withdraw their deposits.
To that end, the federal banking agencies, including the FDIC and OCC, issued an interagency policy statement in July 2023 to underscore the importance of robust liquidity risk management and contingency funding planning. In the policy statement, the regulators noted that banks should maintain actionable contingency funding plans that take into account a range of possible stress scenarios, assess the stability of their funding and maintain a broad range of funding sources, ensure that collateral is available for borrowing, and review and revise contingency funding plans periodically and more frequently as market conditions and strategic initiatives change. As of December 31, 2024, approximately 23% of our total deposits of $2.0 billion were not insured by the FDIC. If a significant portion of our deposits were to be withdrawn within a short period of time such that additional sources of funding would be required to meet withdrawal demands, we may be unable to obtain funding at favorable terms, which may have an adverse effect on our net interest margin. Obtaining adequate funding to meet our deposit obligations may be more challenging during periods of elevated prevailing interest rates, such as the present, and our ability to attract depositors during a time of actual or perceived distress or instability in the marketplace may be limited. Further, interest rates paid for borrowings generally exceed the interest rates paid on deposits, and this spread may be exacerbated by higher prevailing interest rates.
In addition, because the fair value of our available for sale investment securities decreases when interest rates increase, after-tax proceeds resulting from the sale of such assets may be diminished during periods when interest rates are elevated. At December 31, 2024, our accumulated other comprehensive loss related to unrealized net losses on investment securities was $13.5 million, which currently does not impact our regulatory capital ratios. However, should we sell all or a material portion of our investment securities portfolio to increase liquidity in the face of depositor withdrawals in the current interest rate environment, we may recognize significant losses that would, in turn, reduce our regulatory capital position. Under such circumstances, we may access funding from sources such as the FRB’s discount window to manage our liquidity risk and mitigate the risk to our regulatory capital position.
The occurrence of any of these events could materially and adversely affect our business, results of operations or financial condition.
Risks Related to Our Highly Regulated Industry
Our business is limited by the highly regulated environment in which we operate and could be adversely affected by the extensive laws and regulations that govern our activities, operations, corporate governance and accounting principles, or changes in any of them.
As a unitary thrift holding company, we are subject to extensive examination, supervision and comprehensive regulation by various federal agencies that govern almost all aspects of our operations. These laws and regulations, among other things, prescribe minimum capital requirements, impose limitations on the business activities in which we can engage, limit the dividend or distributions that the Bank can pay to us, restrict the ability of institutions to guarantee our debt and impose certain specific accounting requirements on us. These laws and regulations are not intended to protect our shareholders. Rather, these laws and regulations are intended to protect customers, depositors, the DIF and the overall financial stability of the United States. Compliance with these laws and regulations is difficult and costly, and changes to these laws and regulations often impose additional compliance costs. Our failure to comply with these laws and regulations, even if the failure follows good faith effort or reflects a difference in interpretation, could subject us to restrictions on our business activities, fines and other penalties, any of which could materially adversely affect our results of operations, capital base and the price of our securities. Further, any new laws, rules and regulations could make compliance more difficult or expensive.
The Dodd-Frank Act may continue to affect our business, governance structure, financial condition or results of operations.
The Dodd-Frank Act, among other things, imposed new capital requirements on thrift holding companies; changed the base for FDIC insurance assessments to a bank’s average consolidated total assets minus average tangible equity, rather than upon its deposit base; permanently raised the current standard deposit insurance limit to $250,000; and expanded the FDIC’s authority to raise insurance premiums. The Dodd-Frank Act also established the CFPB as an independent entity within the FRB, which was granted broad rulemaking, supervisory and enforcement authority over consumer financial products and services, including deposit products, residential mortgages, home-equity loans and credit cards and contains provisions on mortgage-related matters, such as steering incentives, determinations as to a borrower’s ability to repay and prepayment penalties. Although the applicability of certain elements of the Dodd-Frank Act is limited to institutions with more than $10 billion in assets, there can be no guarantee that such applicability will not be extended in the future or that regulators or other third parties will not seek to impose such requirements on institutions with less than $10 billion in assets, such as the Company. The Dodd-Frank Act has had and may continue to have a material impact on our operations, particularly through increased regulatory burden and compliance costs.
The CFPB has adopted strict enforcement policies in respect of the fair lending laws and the prohibition against unfair, deceptive and abusive acts and practices.
The CFPB was granted broad rulemaking authority to administer the provisions of the Dodd-Frank Act regarding financial institutions that offer covered financial products and services to consumers. The CFPB was directed under the Dodd-Frank Act to write rules identifying practices or acts that are unfair, deceptive or abusive in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.
The CFPB pursued a more aggressive enforcement policy with respect to a range of regulatory compliance matters under the Biden Administration, specifically including fair lending, credit reporting, loan servicing, financial institution sales and marketing practices, and financial institution consumer fee and account management practices. CFPB enforcement actions may serve as precedent for how the CFPB interprets and enforces consumer protection laws, including practices or acts that are deemed to be unfair, deceptive or abusive, with respect to all supervised institutions, which may result in the imposition of higher standards of compliance with such laws. In addition, with the recent change in Administration, there have been, and likely will continue to be, corresponding changes in the leadership and senior staff of the CFPB. The Trump Administration has taken steps to halt the CFPB’s operations and receipt of funds, pause supervision, enforcement and rulemaking activity, drastically reduce staff, and terminate the CFPB’s agreements with service providers. Certain of the Administration’s actions are subject to ongoing litigation; however, in any event, significant changes to the agency’s policies, tactics and interpretations are expected. In addition, the new Administration and Congress may seek to fundamentally restructure the CFPB and/or limit the scope and reach of the CFPB’s authority. The extent and timing of any such changes and any resulting impact on our business and financial results cannot be predicted at this time.
There is likely no immediate impact arising from the above-described developments because the Bank has suspended the origination of residential loans. However, should the Bank recommence residential lending, the CFPB’s policies and guidance would likely increase the Bank’s compliance costs or result in additional compliance risk.
We are subject to stringent capital requirements.
We are subject to the regulatory capital rules implemented by the U.S. federal banking agencies in accordance with Basel III regulatory capital reforms and the Dodd-Frank Act. The regulatory capital rules are generally applicable to all U.S. banks as well as to unitary thrift holding companies with assets over $1 billion, such as the Company. The regulatory capital rules establish minimum regulatory capital ratios, including a common equity Tier 1 capital ratio, and require maintenance of a capital conservation buffer. The rules prescribe criteria that capital instruments must meet in order to be considered additional Tier 1 and Tier 2 capital for the purposes of the above requirements.
In order to be a well capitalized depository institution under the regulatory capital rules, an institution must maintain a common equity Tier 1 capital ratio of 6.5% or more; a Tier 1 capital ratio of 8% or more; a total capital ratio of 10% or more; and a leverage ratio of 5% or more. Institutions must also maintain a capital conservation buffer consisting of common equity Tier 1 capital. Further, qualifying community banking organizations may elect to utilize the CBLR framework, which provides a simplified measure of capital adequacy. In order to qualify for the CBLR framework, a community banking organization must have (i) a Tier 1 leverage ratio of greater than 9.0%, (ii) less than $10 billion in total consolidated assets, and (iii) limited amounts of off-balance-sheet exposure and trading assets and liabilities. The Company and the Bank have each elected to comply with the CBLR framework, effective as of January 1, 2023. Although we have benefitted from this election in terms of our ability to add a variety of assets to our consolidated balance sheet without the need to evaluate the highly complicated regulatory risk weight weighting system, our election may require us to maintain an overall higher capital base, potentially limiting our future total growth opportunities.
The failure to meet applicable regulatory capital requirements could result in one or more of our regulators placing limitations or conditions on our activities, including our growth initiatives, or restricting the commencement of new activities, and could materially adversely affect customer and investor confidence, our costs of funds and FDIC insurance costs, our ability to pay dividends on our common stock, our ability to make acquisitions, and our business, results of operations and financial condition, generally.
We face risks related to the adoption of future legislation and potential changes in federal regulatory agency policies and priorities.
Congress may enact legislation from time to time that affects the regulation of the financial services industry, and state legislatures may enact legislation from time to time affecting the regulation of financial institutions chartered by or operating in those states. Federal and state regulatory agencies also periodically propose and adopt changes to their regulations or change the manner in which existing regulations are applied. The substance or impact of pending or future legislation or regulation, or the application thereof, cannot be predicted, although enactment of the proposed legislation could impact the regulatory structure under which we operate and may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital and modify our business strategy, and limit our ability to pursue business opportunities in an efficient manner.
As a result of the 2024 Presidential and Congressional elections, Republicans are currently able to set the policy agenda both legislatively and in the regulatory agencies that have rulemaking and supervisory authority over the financial services industry generally and the Bank specifically. However, the Republican Party holds slim majorities in each of the Senate and the House of Representatives. Accordingly, the prospects for the enactment of major banking reform legislation under the new Congress are unclear at this time.
The recent turnover of the Presidential Administration has resulted in numerous changes in the leadership and senior staffs of the OCC, the FDIC, the CFPB, the SEC and the Treasury Department. These changes are expected to impact the rulemaking, supervision, examination and enforcement priorities and policies of the agencies, including the possible reversal of a number of final and proposed rules and policy statements promulgated under the Biden Administration. The potential impact of any changes in agency personnel, policies and priorities on the financial services sector, including the Bank, cannot be predicted at this time.
We are subject to the CRA and fair lending laws, and failure to comply with these laws could lead to material penalties.
The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The CRA requires the OCC, in connection with its examination of a federally chartered savings association, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. All institutions insured by the FDIC must publicly disclose their rating. As discussed in “Item 1. Business - Supervision and Regulation - Federal Banking Regulation - CRA and Fair Lending Laws,” in October 2023, the federal banking agencies issued a joint final rule to revise the regulations implementing CRA. The Bank is considered a “large bank” under the final rule and therefore will be evaluated under new lending, retail services and products, community development financing and community development services tests in respect of our compliance with the statute and rule. The final rule also imposes certain data reporting requirements that will apply to the Bank. Implementation of the final rule has been stayed pending the resolution of litigation against the federal banking agencies challenging their authority to adopt the final rule; however, in the event that the final rule is upheld in its current form, we expect to incur increased compliance costs, and we may be exposed to compliance-related risks after the final rule has been implemented in full.
The fair lending laws prohibit discrimination in the provision of banking services on the basis of prohibited factors including, among others, race, color, national origin, gender, and religion. The enforcement of these laws has been an increasing focus for the CFPB, the Department of Housing and Urban Development and other regulators. Under the fair lending laws, we may be liable if our policies result in a disparate treatment of or have a disparate impact on a protected class of applicants or borrowers and may also be subject to investigation by the DOJ. A successful challenge to our institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on mergers and acquisitions activity and restrictions on expansion activity. Private parties may also have the ability to challenge our performance under fair lending laws in private class action litigation.
Federal regulators periodically examine our business, and we may be required to remediate adverse examination findings.
The FRB and the OCC periodically examine our business operations, including our sales practices, supervisory procedures and internal controls, recordkeeping practices and financial position, to determine our compliance with applicable laws and regulations and to protect the solvency and safety and soundness of our organization. If, as a result of an examination, a federal banking agency were to determine that our financial condition, capital resources, asset quality, earnings prospects, management, interest rate risk and liquidity or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate. These actions include, among others, the power to enjoin unsafe or unsound practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil monetary penalties against our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into receivership or conservatorship. If we become subject to any regulatory actions, it could have a material adverse effect on our business, results of operations, financial condition and growth prospects.
The FRB or OCC may require us to commit capital resources to support the Bank.
As a matter of policy, the FRB expects bank holding companies and unitary thrift holding companies to act as a source of financial and managerial strength for their subsidiary banks and to commit resources to support such subsidiary banks. The Dodd-Frank Act codified the FRB’s policy on serving as a source of financial strength. As a result of the Bank’s election to operate as a covered savings association, Sterling Bancorp is treated as a bank holding company for most regulatory purposes; however, the source of strength applies to Sterling Bancorp in any case. Under the source of strength doctrine, the FRB may require a unitary thrift holding company to make capital injections into a troubled subsidiary bank and may charge the unitary thrift holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank. A capital injection may be required at times when the holding company may not have the resources to provide it and therefore may be required to borrow the funds or raise capital. Any loans by a holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of the subsidiary bank. In the event of a unitary thrift’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the institution’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by the Company to make a required capital injection becomes more difficult and expensive and could have an adverse effect on our business, financial condition and results of operations. The requirement that we serve as a source of strength to our Bank may be exacerbated by OCC requirements to maintain certain capital requirements at the bank level and we may not be able to access the necessary funds to do so, which would further materially adversely affect our business, financial condition and results of operations.
Recent actions by the U.S. government regarding competition in the financial services and technology sectors may adversely impact our business.
In 2024, the FDIC, the OCC and the DOJ announced changes to their bank merger review processes in 2024 in response to President Biden’s Executive Order on Promoting Competition in the American Economy. The FDIC approved a final statement of policy on bank merger transactions and the OCC approved a final rule updating the agency’s regulations for business combinations involving national banks and federal savings associations. The OCC’s final rule modifies its procedures for reviewing bank merger applications under the Bank Merger Act applications, including the elimination of the expedited bank merger review and the streamlined application procedures. The OCC’s final rule also includes as an appendix a policy statement which includes a list of characteristics of a merger transaction that the OCC would consider to be consistent or inconsistent with approval. The FDIC and the OCC take a similar risk-based approach to bank merger transactions, although there are some differences in how the FDIC and the OCC would consider each statutory factor under the Bank Merger Act. Each agency applies varying levels of enhanced scrutiny to transactions involving or resulting in institutions with $50 billion or more in total assets. However, Acting FDIC Chairman Travis Hill has announced the FDIC’s withdrawal of this statement of policy, and it is unclear whether the OCC will consider its new regulation and policy statement.
In addition, the DOJ withdrew from the 1995 Bank Merger Guidelines and announced that it would consider bank mergers under its 2023 Merger Guidelines, which includes a bank merger addendum. The new Chairman of the FTC has indicated that the 2023 Merger Guidelines will, until further notice, remain in effect.
With regard to CFPB rulemaking activity addressing financial transaction data portability, in October 2023, the CFPB announced a proposed rule regarding personal financial data rights that is designed to promote data portability and “open banking.” The adoption of a final rule, which is uncertain given the change in Administration and leadership of the CFPB, could result in increased volatility of consumer accounts and expose the Company to additional operational, strategic, regulatory and compliance risks.
Risks Related to Competition
Strong competition within our market areas or with respect to our products and pricing may limit our growth and profitability.
Competition in the banking and financial services industry is intense. In our market area, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking firms and unregulated or less regulated non-banking entities, operating locally and elsewhere. Many of these competitors have substantially greater resources and higher lending limits than we have and offer certain services that we do not or cannot provide. In addition, some of our competitors offer loans with lower interest rates on more attractive terms than loans we offer and/or deposit accounts with higher interest rates than we offer. Competition also makes it increasingly difficult and costly to attract and retain qualified employees. Our profitability depends upon our continued ability to successfully compete in our market areas. If we must raise interest rates paid on deposits or lower interest rates charged on our loans, our net interest margin and profitability could be adversely affected.
Our ability to grow in the future relies in part on growth in the communities we serve and our ability to develop relationships in particular locations, and we expect to continue to face strong competition from competitors in all of our markets. If we fail to compete effectively against our competitors, we may be unable to expand our market share in our existing markets, and we may be unable to retain our existing market share in key growth markets or in those markets in which we have traditionally had a strong presence. Failure to protect our market share on a regional level or to grow our market share in key growth markets and product categories could have a material adverse effect on our overall market share and on our profitability. Furthermore, we suspended all residential loan originations in early 2023.
Our modest size makes it more difficult to compete with other financial institutions, which are generally larger and able to achieve economies of scale and can more easily afford to invest in the marketing and technologies needed to attract and retain customers and to offer better pricing for the type of products and services we provide. Because our principal source of income is the net interest income we earn on our loans and investments after deducting interest paid on deposits and other sources of funds, our ability to generate the revenues needed to cover our expenses and finance such investments is limited by the size of our loan and investment portfolios. Accordingly, we are not always able to offer new products and services as quickly as our competitors. As a smaller institution, we are also disproportionately affected by the continually increasing costs of compliance with new banking and other regulations.
We are a community bank, and our reputation is critical to the success of our business but may continue to be affected by negative publicity.
We are a community bank, and our reputation is one of the most valuable components of our business. Negative publicity over the past five years regarding the Advantage Loan Program, including our criminal conviction for securities fraud pursuant to the terms of the Plea Agreement, has caused substantial damage to our reputation in the communities we serve, and the outcome of the government investigations may further damage our reputation. Significant harm to our reputation can arise from various other sources, including officer, director or employee misconduct; actual or perceived unethical behavior; conflicts of interest; security breaches; litigation or regulatory outcomes; compensation practices; failing to deliver minimum or required standards of service and quality; failing to address customer and agency complaints; compliance failures; unauthorized release of personal, proprietary, sensitive or confidential information due to cyberattacks or otherwise; perception of our ESG practices and disclosures; and the activities of our clients, customers and counterparties, including vendors. Actions by the financial services industry generally or by institutions or individuals in the industry also can adversely affect our reputation indirectly, by association. In addition, adverse publicity or negative information posted on social media, whether or not factually correct, may affect our business prospects. All of these could adversely affect our growth, results of operations and financial condition.
Our guilty plea and criminal conviction pursuant to the Plea Agreement may harm our reputation, harm our ability to engage with certain third parties and disqualify us from certain safe harbor exemptions from offering or selling our securities, and the failure to comply with the terms of the Plea Agreement may subject us to further prosecution.
In July 2023, the Company was convicted of one count of securities fraud primarily relating to disclosures with respect to the Advantage Loan Program contained in the Company’s 2017 Registration Statement for its initial public offering and its immediately following Annual Reports on Form 10-K filed in March 2018 and March 2019, all in accordance with the Plea Agreement entered into earlier in the year. In addition to the reputational risk and the negative publicity we have already received regarding the Advantage Loan Program, our criminal conviction pursuant to the Plea Agreement may cause further damage to our reputation in the communities we serve. Further, our criminal conviction pursuant to the Plea Agreement may cause third parties, including certain quasi-governmental agencies or exchanges, to elect to cease doing business with us, where they have the discretion to do such. Any such damage to our reputation and our ability to conduct business with third parties could materially adversely affect our business, results of operations and financial condition.
In addition, as a result of the guilty plea and criminal conviction pursuant to our Plea Agreement with the DOJ, we fall within the “bad actor” disqualification provisions of Regulation A and Regulation D under the Securities Act, which prohibit an issuer from offering or selling securities in a private placement that rely on such exemptions. See “-Risks Related to Liquidity” for further detail. Furthermore, if the Company were to breach the Plea Agreement, the Company would be subject to prosecution for any known or newly discovered criminal violations, including additional charges. In such an event, our ability to develop or introduce new loan products would once again be curtailed and become uncertain, which would have an adverse impact on our business and results of operations.
We must keep pace with technological change to remain competitive and introduce new products and services.
Financial products and services have become increasingly technologically driven. Our ability to meet the needs of our customers competitively and introduce new products in a cost-efficient manner is dependent on the ability to keep pace with technological advances, to invest in new technology as it becomes available, establish and implement adequate risk management processes related to new technology and to obtain and maintain related essential personnel. Many of our competitors have already implemented critical technologies and have greater resources to invest in technology than we do and may be better equipped to market new technologically driven products and services. In addition, we may not have the same ability to rapidly respond to technological innovations as our competitors do. Furthermore, the introduction of new technologies and products by financial technology companies and financial technology platforms, including the potential utilization of blockchain technology to provide alternative high speed payment systems and the adoption of artificial intelligence, may adversely affect our ability to obtain new customers and successfully grow our business. The increased demand for, and availability of, alternative payment systems and currencies not only increases competition for such services, but has created a more complex operating environment that, in certain cases, may require additional or different controls to manage fraud, operational, legal and compliance risks. The financial services industry could become even more competitive as a result of legislative and regulatory changes and continued consolidation. For example, in recent years, the OCC has begun to accept applications from financial technology companies to become special purpose national banks. The ability to keep pace with technological change is important, and the failure to do so, due to cost, proficiency or otherwise, could have a material adverse impact on our business and therefore on our financial condition and results of operations.
Consumers may decide not to use banks to complete their financial transactions.
Technology and other changes are allowing parties to complete financial transactions through alternative methods that historically have involved banks. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts, mutual funds or general-purpose reloadable prepaid cards. Consumers can also complete transactions, such as paying bills and/or transferring funds directly without the assistance of banks.
Transactions utilizing digital assets, including cryptocurrencies, stablecoins and other similar assets have increased substantially. Certain characteristics of digital asset transactions, such as the speed with which such transactions can be conducted, the ability to transact without the involvement of regulated intermediaries and the ability to engage in transactions across multiple jurisdictions are appealing to certain consumers, notwithstanding the various risks posed by such transactions. Accordingly, digital asset service providers-which, at present, are not subject to the extensive regulation as banking organizations and other financial institutions-have become active competitors for our customers’ banking business. Further, the initiative by the CFPB to promote “open and decentralized banking” through its proposal of a personal financial data rights regulation could lead to greater competition for products and services among banks and nonbanks alike. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income and the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.
Other Risks Related to Our Business
Our future success depends on our ability to identify, attract and retain key employees and other qualified personnel.
We have undergone significant effort to strategically hire new employees and retain existing employees, while also continuing to explore exiting certain unproductive or ancillary activities. However, we may not be successful in retaining our key employees, or replacing contract employees or departed employees, and the unexpected loss of services of one or more of our officers or directors could have a material adverse effect on our business because of their skills, knowledge of our market and financial products, years of industry experience and the difficulty of finding qualified replacement personnel. We recognize that the banking industry is competitive and replacing executive officers and key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to successfully manage, develop and grow in the banking industry. If we fail to identify and develop or recruit successors, we are at risk of being harmed by the departures of key employees.
We face risks related to our operational, technological and organizational infrastructure.
Our ability to grow and compete, including to develop and deliver new products that meet the needs of our existing customers and attract new ones, is dependent on our ability to build or acquire the necessary operational and technological infrastructure and to manage the cost of that infrastructure as we expand. Our ability to run our business in compliance with applicable laws and regulations is also dependent on that infrastructure. Operational risk can manifest itself in many ways, such as errors related to failed or inadequate processes, faulty or disabled computer systems, fraud by employees or outside persons and exposure to external events, and we are dependent on our operational infrastructure to help manage these risks. In addition, we are heavily dependent on the strength and capability of our technology systems, which we use both to interface with our customers and to manage our internal financial records and other systems. Any shortcomings in our technology systems subjects us to risk of misconduct by our employees that may go undetected.
We monitor our operational and technological capabilities and make modifications and improvements when we believe it will be cost effective to do so. If we experience difficulties, fail to comply with banking regulations or keep up with increasingly sophisticated technologies, our operations could be interrupted. If an interruption were to continue for a significant period of time, our business, financial condition and results of operations could be adversely affected, perhaps materially. Even if we are able to replace them, it may be at a higher cost to us, which could materially adversely affect our business, financial condition and results of operations.
Third-party vendors provide key components of our business infrastructure and our technology framework, such as internet connections, network access and core application processing. While we have selected these third-party vendors carefully in accordance with supervisory requirements, we do not control their actions. Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products and services to our customers and otherwise to conduct our business. Replacing these third-party vendors could also entail significant delay and expense. These third-party vendors are also subject to the same cyber risks and other risks that we encounter. These third-party risks continue to be an area of supervisory focus, so we will need to ensure the proper framework is in place to address them.
If our enterprise risk management framework is not effective at mitigating risk and loss to us, we could suffer unexpected losses and our results of operations could be materially adversely affected.
Our enterprise risk management framework seeks to achieve an appropriate balance between risk and return, which is critical to optimizing shareholder value. We have established processes and procedures intended to identify, measure, monitor, report and analyze the types of risk to which we are subject, including credit, liquidity, operational, regulatory, compliance and reputational risks. However, as with any risk management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. If our risk management framework proves ineffective, we could suffer unexpected losses and our business and results of operations could be materially adversely affected.
We face significant operational risks because the financial services business involves a high volume of transactions and increased reliance on technology, including risk of loss related to cybersecurity or privacy breaches.
We operate in diverse markets and rely on the ability of our employees and systems to process a high number of transactions and to collect, process, transmit and store significant amounts of confidential information regarding our customers, employees and others, as well as our own business, operations, plans and strategies. Operational risk is the risk of loss resulting from our operations, including but not limited to, the risk of fraud by employees or persons outside our Company, the execution of unauthorized transactions, errors relating to transaction processing and technology, systems failures or interruptions, breaches of our internal control systems and compliance requirements, and business continuation and disaster recovery. We face an increasing number of regulations and regulatory scrutiny related to our information technology systems, and security or privacy breaches with respect to our data could result in regulatory fines, reputational harm and customer losses, any of which would significantly impact our financial condition. As cybersecurity threats are inherently difficult to predict and can take many forms, insurance coverage may not be available for losses associated with cyberattacks or information security breaches, or where available, such losses may exceed insurance limits. In addition, we may not be able to rely on indemnification or another source of third-party recovery in the event of a breach of such functions.
In addition, we outsource some of our data processing to certain third-party providers. If these third-party providers encounter difficulties, including as a result of cyberattacks or information security breaches, or if we have difficulty communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations could be materially and adversely affected.
Although we have implemented and intend to continue to implement and enhance security technology and establish operational procedures to prevent such damage, there can be no assurance that these security measures will be successful in deterring or mitigating the effects of every cyberthreat that we face. In addition, advances in computer capabilities, new discoveries in the field of cryptography, quantum computing, artificial intelligence or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to protect client transaction data, other customer data and employee data. Any successful cyberattack or other information security breach involving the misappropriation, loss or other unauthorized disclosure of sensitive or confidential customer information or that compromises our ability to function could severely damage our reputation, erode confidence in the security of our systems, products and services, expose us to the risk of litigation and liability, disrupt our operations and have a material adverse effect on our business. Any successful cyberattack may also subject the Company to regulatory investigations, litigation or enforcement, or require the payment of regulatory fines or penalties or undertaking costly remediation efforts with respect to third parties affected by a cybersecurity incident, all or any of which could adversely affect the Company’s business, financial condition or results of operations and damage its reputation.
Cyberattacks, including those targeting critical infrastructure sectors, have become more frequent and sophisticated.
Risk related to cybersecurity remains elevated as cyberattacks evolve and have a greater and more pervasive economic impact. Critical infrastructure sectors, including financial services, increasingly have been the targets of cyberattacks, including attacks emanating from foreign countries such as the attack on the information technology company SolarWinds, which affected many Fortune 500 companies as well as U.S. government agencies. We have previously experienced cyberattacks on our business, none of which have had a material effect on our business or operations, and expect to continue to be the target of future cyberattacks.
Cyberattacks involving large financial institutions, including distributed denial of service attacks designed to disrupt external customer-facing services, nation state cyberattacks and ransomware attacks designed to deny organizations access to key internal resources or systems or other critical data, and targeted social engineering and phishing email and text message attacks designed to allow unauthorized persons to obtain access to an institution’s information systems and data or that of its customers, are becoming more common and increasingly sophisticated and can be difficult to prevent. In particular, there has been an observed increase in the number of distributed denial of service and ransomware attacks against the financial sector over the past year, which increase is believed to be partially attributable to politically motivated attacks as well as financial demands coupled with extortion. In addition, other recent threat trends have shown more sophisticated cyberattacks on financial systems throughout the United States, with an increase in business email compromises targeting executives. Reports of ransomware incidents specifically have increased in recent years and information technology software supply chain attacks, including those involving financial institutions, also have increased during this period, some of which have resulted in temporary, but impactful, disruptions to the functioning of critical infrastructure sectors or the operations of specific financial institutions. Threat actors continue to exploit publicly known software vulnerabilities and weak authentication controls used by large numbers of banking organizations to conduct malicious cyber activities. These types of attacks have resulted in increased supply chain and third-party risk. In addition, cybersecurity risks for financial institutions have evolved as a result of the use of new technologies, devices and delivery channels to transmit data and conduct financial transactions. The adoption of new products, services and delivery channels contribute to a more complex operating environment, which increases operational risk and presents the potential for additional structural vulnerabilities. As such, a single cyberattack is now able to compromise hundreds of organizations and affect a significant number of consumers. In addition, the adoption of remote and hybrid work environments has subjected institutions to additional cybersecurity vulnerabilities and risks.
Any successful cyberattack or other security breach involving the misappropriation, loss, leak or other unauthorized disclosure of sensitive or confidential customer information or that compromises our ability to function could severely damage our reputation, erode confidence in the security of our systems, products and services, expose us to the risk of litigation and liability, disrupt our operations and have a material adverse effect on our business. Any successful cyberattack may also subject us to regulatory investigations, litigation or enforcement, or require the payment of regulatory fines or penalties or undertaking of costly remediation efforts with respect to third parties affected by a cybersecurity incident, all or any of which could adversely affect our business, financial condition or results of operations and damage its reputation. Additionally, any failure by us to communicate cyberattacks or other security breaches appropriately to relevant parties could result in regulatory and reputational risk.
Other potential attacks have attempted to obtain unauthorized access to sensitive or confidential information or destroy data, often through the introduction of computer viruses or malware, cyberattacks and other means. To date and to the best of our knowledge, none of these types of attacks have had a material effect on our business or operations. Such security attacks can originate from a wide variety of sources, including persons who are involved with organized crime or who may be linked to terrorist organizations or hostile foreign governments. Those same parties may also attempt to fraudulently induce employees, customers or other users of our systems to disclose sensitive information in order to gain access to our data or that of our customers or clients. We are also subject to the risk that our employees may intercept and transmit unauthorized sensitive, confidential or proprietary information. An interception, misuse or mishandling of personal, sensitive, confidential or proprietary information being sent to or received from a customer or third party could result in legal liability, remediation costs, regulatory action and reputational harm.
We have operational risk associated with third-party vendors and other financial institutions.
We rely upon certain third-party vendors to provide products and services necessary to maintain our day-to-day operations. Accordingly, our operations are exposed to the risk that these vendors might not perform in accordance with applicable contractual arrangements or service level agreements. The failure of an external vendor to perform in accordance with applicable contractual arrangements or service level agreements could be disruptive to our operations and could have a material adverse effect on our financial condition or results of operations and/or damage our reputation. Further, third-party vendor risk management continues to be a point of regulatory emphasis. A failure to follow applicable regulatory guidance in this area could expose us to regulatory sanctions.
The commercial soundness of many financial institutions may be closely interrelated as a result of credit, trading, execution of transactions or other relationships between the institutions. As a result, concerns about, or a default or threatened default by, one institution could lead to significant market-wide liquidity and credit problems, losses or defaults by other institutions. This risk is sometimes referred to as “systemic risk” and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges with which we interact on a daily basis, and, therefore, could adversely affect us.
Any of these operational or other risks could result in our diminished ability to operate one or more of our businesses, financial loss, potential liability to customers, inability to secure insurance, reputational damage and regulatory intervention and could materially adversely affect us.
We depend on the accuracy and completeness of information provided by customers and counterparties.
In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information furnished to us by, or on behalf of, customers and counterparties, including financial statements and other financial information. We also may rely on representations of customers and counterparties as to the accuracy and completeness of that information. In deciding whether to extend credit, we may rely upon our customers’ representations that their financial statements are accurate. We also may rely on customer representations and certifications, or other audit or accountants’ reports, with respect to the business and financial condition of our commercial clients. Our financial condition, results of operations, financial reporting and reputation could be materially adversely affected if we rely on materially misleading, false, inaccurate or fraudulent information.
We could be adversely affected by the soundness of other financial institutions and other third parties we rely on.
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including banks, brokers and dealers, investment banks and other institutional entities. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when our collateral cannot be foreclosed upon or is liquidated at prices not sufficient to recover the full amount of the credit due.
Adherence to our internal policies and procedures by our employees is critical to our performance.
Our internal policies and procedures are a critical component of our corporate governance and, in some cases, compliance with applicable regulations. We adopt internal policies and procedures to guide management and employees regarding the operation and conduct of our business. Any deviation or non-adherence to these internal policies and procedures, such as the conduct leading to the termination of the Advantage Loan Program, whether intentional or unintentional, could have a detrimental effect on our management, operations or financial condition.
We and our borrowers in our California communities may be adversely affected by wildfires, earthquakes, floods or other natural disasters, and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.
The majority of our branches are located in the San Francisco and Los Angeles, California metropolitan areas, which in the past have experienced severe earthquakes, floods and wildfires, such as the wildfires that recently impacted Southern California. We do not carry earthquake insurance on our properties. Earthquakes, wildfires or other natural disasters could severely disrupt our operations, and have a material adverse effect on our business, results of operations, financial condition and prospects. In addition, our customers and loan collateral may be severely impacted by such events, resulting in losses.
If a natural disaster, power outage or other event occurred that prevented us from using all or a significant portion of our branches, that damaged critical infrastructure or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible, for us to continue our business for a substantial period of time in the San Francisco and/or Los Angeles, California metropolitan areas. The disaster recovery and business continuity plan that we have in place currently is limited and is unlikely to prove adequate in the event of a serious disaster or similar event. We may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans, which, particularly when taken together with our lack of earthquake insurance, could have a material adverse effect on our business.
We are subject to ESG and DEI risks that could adversely affect our reputation and the market price of our securities.
We are subject to a variety of risks arising from ESG/DEI matters. ESG/DEI matters include among other things, climate change, human capital, and human rights. Risks arising from such matters may adversely affect, among other things, our reputation and the market price of our securities. While we engage in various initiatives to help manage our ESG/DEI profile and respond to stakeholder expectations, which continue to evolve, such initiatives can be costly and may not have the desired effect. For example, many of these initiatives leverage methodologies, standards, and data that continue to evolve. As with other companies, our approach to such matters also evolves, and we cannot guarantee that our approach will align with the expectations or preferences of any particular stakeholder. Moreover, stakeholder expectations are not uniform, and both opponents and proponents of various ESG- and DEI-related matters have increasingly resulted in a range of activism to advocate for their positions. For example, in the last several years, certain state attorneys general, treasurers, and legislators have taken various actions to impact the extent to which ESG/DEI principles are considered by financial institutions, including to require or prohibit the consideration of various ESG/DEI matters in certain contexts.
In addition to the potential for broader “anti-ESG/DEI” policies and laws, on January 21, 2025, President Trump issued an Executive Order requiring all federal agencies to terminate any policies, programs, mandates, guidance, regulations, and other actions and orders establishing DEI-based preferences, and to enforce federal civil rights laws to combat such preferences, mandates, policies, programs and activities of entities operating in the private sector. Further, the Executive Order directs federal agencies to take appropriate action to discourage private sector DEI-based initiatives. To this end, federal agencies are required to submit recommendations to the Trump Administration identifying, among other things, (i) proposed plans or measures to deter DEI-based programs in the private sector, (ii) publicly-traded corporations and other private sector entities that could be considered for civil compliance investigations, (iii) appropriate sources of litigation, and (iv) potential regulatory action or guidance. While the enforceability of the Executive Order and the steps that various federal agencies may take in response to it are uncertain at this time, the Executive Order signals a material shift in federal DEI policy that reasonably can be expected to have implications for the private sector, including the banking industry. In this regard, any scrutiny by federal government authorities of the Corporation’s human capital and strategic businesses practices, or those of the banking sector generally, may have a material adverse effect on us. Please refer to Item 1 - Business - Human Capital Matters.
Additionally, certain disclosure rules that had been advanced or were under consideration by the SEC in the last few years (e.g., disclosure rules regarding climate risk, human capital management, and board diversity) may be abandoned by new leadership at the SEC, new regulations might be implemented that limit ESG shareholder proposals that may be considered, and Congress may continue to conduct investigations into corporations’ ESG initiatives and priorities.
In response to potential “anti-ESG/DEI” regulations, investigations, and sentiment, it is possible that proponents of ESG/DEI measures will become galvanized and increase their efforts to compel or pressure corporations to advance such initiatives both at the state level and the private investor level. For example, states may enact laws requiring enhanced ESG/DEI disclosures, and there may be a rise in pro-ESG/DEI shareholder activism or public relations campaigns aimed at influencing corporations to adopt ESG/DEI initiatives.
Navigating varying expectations of policymakers and other stakeholders has inherent costs, and any failure to successfully navigate such expectations may expose the Company to negative publicity, shareholder activism, and litigation or other engagement from pro- and anti-ESG/DEI stakeholders, as well as the potential for civil investigations and enforcement by federal governmental authorities. The Company could be required to incur significant costs responding to any such activity and the Company’s relationships and reputation with its existing and prospective customers and third parties with which we do business could be affected as well. This, in turn, could have an adverse effect on our ability to attract and retain customers and employees and could have a negative impact on the market price for the Company’s securities. Certain of our customers, suppliers, or other stakeholders are also subject to such expectations and risks, which may result in additional or augmented risks to us.
Climate change and related legislative and regulatory initiatives may materially affect the Company’s business and results of operations.
The current and anticipated effects of climate change are creating an increasing level of concern for the state of the global environment. As a result, political and social attention to the issue of climate change has increased. Various policymakers have adopted, or are considering adopting, requirements for companies to undertake various actions, such as disclosures, regarding climate and other environmental and social matters. For example, California has adopted laws requiring in-scope companies to provide certain climate-related information, including GHG emissions and climate-related financial risks and related management strategies, and similar laws are being considered in other states. Such requirements are not uniform and may be unevenly interpreted or applied (including the potential for novel interpretations of existing laws), which may increase the cost and complexity of compliance and any related risks. Simultaneously, some policymakers have adopted, or are considering adopting, requirements to constrain consideration of various environmental and social matters by financial institutions and other companies. Expectations on such matters continue to evolve quickly, including in some instances due to company size, sector, or otherwise. The new Trump Administration has publicly discussed rolling back federal initiatives to address climate change, and has already taken several such actions by executive order. These activities may increase the likelihood that certain individual states will address climate change risks. U.S. financial regulatory authorities recently have sharpened their focus on the risks posed by climate change to the financial sector and the institutions within it. In October 2021, the Financial Stability Oversight Council, whose members include the federal banking agencies (including the OCC), published a report on climate-related financial risk. In that report the Financial Stability Oversight Council concluded, for the first time, that climate change represents an emerging and increasing threat to U.S. financial stability. Accordingly, Financial Stability Oversight Council has recommended that its member agencies accelerate their existing efforts to further assess climate-related risks to financial stability, enhance financial institutions’ climate-related disclosure obligations, improve upon the availability of and access to actionable climate-related data for use in measuring and assessing climate-related financial risk, and expand upon existing capacity and expertise to ensure that climate-related financial risks are identified and managed properly.
Consistent with the objectives outlined above, the leadership of each of the OCC, FRB and the U.S. Treasury Department has emphasized that climate-related risks are faced by banking organizations of all types and sizes, specifically including physical and transition risks; is in the process of enhancing supervisory expectations regarding banks’ risk management practices; and has indicated increased expectations for larger financial institutions to measure, monitor and manage climate-related risk as part of their enterprise risk management processes. In October 2023, the federal banking agencies issued interagency guidance on principles for climate-related financial risk management for banks with total assets of over $100 billion. The largest banks are encouraged to address the climate-related risks that they face by accounting for the effects of climate change in stress testing scenarios and systemic risk assessments, revising expectations for credit portfolio concentrations based on climate-related factors, evaluating the impact of climate change on their borrowers, considering possible changes to underwriting criteria to account for climate-related risks to mortgaged properties, incorporating climate-related financial risk into their internal reporting and monitoring and escalation processes, planning for transition risk posed by the adjustments to a low-carbon economy and investing in climate-related initiatives and lending to communities disproportionately impacted by the effects of climate change. To the extent that these initiatives lead to the promulgation of new regulations or supervisory guidance applicable to us, we would expect to experience increased compliance costs and other compliance-related risks.
Certain measures may also result in the imposition of taxes and fees, the required purchase of emission credits and the implementation of significant operational changes, each of which may require the Company to upend significant capital and incur compliance, operating, maintenance and remediation costs. The lack of empirical data surrounding the credit and other financial risks posed by climate change render it impossible to predict how specifically climate change may impact our financial condition and results of operations; however, the physical effects of climate change may also directly impact and present certain unique risks to us. Specifically, unpredictable and more frequent weather disasters may adversely impact the value of real property securing the loans in our portfolios. Further, the effects of climate change may negatively impact regional and local economic activity, which could lead to an adverse effect on our customers and impact our ability to raise and invest capital in potentially impacted communities. Overall, climate change, its effects and the resulting, unknown impact could have a material adverse effect on our financial condition and results of operations.
Adverse conditions internationally could adversely affect our customers and business.
Many of our customers are recent immigrants or foreign nationals. U.S. and global economic policies, military tensions, and unfavorable global economic conditions may adversely impact the economies in which our customers have family or business ties. A significant deterioration of economic conditions internationally, and in Asia in particular, could expose us to, among other things, economic and transfer risk, and we could experience an outflow of deposits by those of our customers with connections to Asia. In addition, foreign currency restrictions, particularly on the movement of cash from abroad, could adversely affect many of our customers, including with respect to their ability to repay loans. Adverse economic conditions abroad, and in China or Taiwan in particular, may also negatively impact the profitability and liquidity of our customers with ties to these regions.
Changes in the valuation of our securities portfolio could hurt our profits and reduce our shareholders’ equity.
Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income (loss) and/or net income. Fluctuations in market value may be caused by changes in market interest rates, lower market prices for securities and limited investor demand.
At December 31, 2024, we owned available for sale debt securities with a carrying value of $338.1 million, which largely consisted of our positions in obligations of the U.S. government and government-sponsored enterprises. Our available for sale debt securities are stated at fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss), which is a component of shareholders’ equity. We evaluate our investment securities on at least a quarterly basis, and more frequently when economic and market conditions warrant such an evaluation. For available for sale debt securities in an unrealized loss position, we assess whether we intend to sell, or it is more likely than not that we will be required to sell, the security before recovery of its amortized cost 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. Because of changing economic and market conditions affecting issuers, we may be required to record an allowance for credit losses related to these securities. This could have a material impact on our results of operations.
Our critical accounting policies and estimates, risk management processes and controls rely on analytical and forecasting techniques and models, management judgments and assumptions about matters that are uncertain and may not accurately predict future events.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods, so they comply with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and reflect management’s judgment of the most appropriate manner in which to report our financial condition and results of operations. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which may be reasonable under the circumstances, yet which may result in our reporting materially different results than would have been reported under a different alternative.
Certain accounting policies are critical to presenting our financial condition and results of operations. They require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions or estimates. These critical accounting policies include the allowance for credit losses and the fair value of financial instruments. Because of the uncertainty of estimates involved in these matters, we may be required to significantly increase the allowance for credit losses or sustain credit losses that are significantly higher than the allowance for credit losses provided or reduce the carrying value of an asset measured at fair value. Any of these could have a material adverse effect on our business, financial condition or results of operations.
Our internal controls, disclosure controls, processes and procedures and corporate governance policies and procedures are based in part on certain assumptions and can provide only reasonable (not absolute) assurances that the objectives of the system are met. Any failure or circumvention of our controls, processes and procedures or failure to comply with regulations related to controls, processes and procedures could necessitate changes in those controls, processes and procedures, which may increase our compliance costs, divert management attention from our business or subject us to regulatory actions and increased regulatory scrutiny. Any of these could have a material adverse effect on our business, financial condition or results of operations.
Risks Related to Governance Matters
The Seligman family, directly and through the family’s trusts, has influenced and has the ability to continue to influence our operations and to control the outcome of matters submitted for shareholder approval and may have interests that differ from those of our other shareholders.
Scott J. Seligman and others of his family were the original founders of the Bank, and Mr. Seligman has had a variety of senior roles and positions over the course of many years. Prior to 2000, he served as a member of the Bank’s board and as chief executive officer of the Bank. After 2000 and through December 31, 2019, he served as a consulting director to the board of the Bank and retained the title of vice president of the Company. In these roles, Mr. Seligman participated in the conduct of the affairs of the Bank and had a significant influence over the Bank’s operations. In addition, Mr. Seligman previously caused the Bank to engage in various transactions with other Seligman-controlled businesses. Mr. Seligman resigned from his positions as consulting director to the board of the Bank and as vice president of the Company, effective December 31, 2019.
Trustees of the trusts established by and for the benefit of Scott J. Seligman have voting and dispositive power over approximately 47% of our common stock, effectively giving such trusts and Mr. Seligman control over the outcome of the shareholder votes on most matters. The trustee of the trusts created by Sandra Seligman has voting and dispositive power over approximately 18% of our common stock, and Seth Meltzer has voting and dispositive power, individually or through trust, over approximately 4% of our common stock. Minority stockholders, therefore, cannot decide the outcome of a stockholder vote without the support of any of Scott J. Seligman, Sandra Seligman, and/or Seth Meltzer.
Certain provisions of our corporate governance documents and Michigan law could discourage, delay or prevent a merger or acquisition at a premium price.
Our second amended and restated articles of incorporation contain provisions that may make the acquisition of our Company more difficult without the approval of our board of directors. These include provisions that, among other things:
● permit the board to issue up to 10 million shares of preferred stock, with any rights, preferences and privileges as they may determine (including the right to approve an acquisition or other change in control);
● provide that the authorized number of directors may be fixed only by the board in accordance with our second amended and restated bylaws;
● do not provide for cumulative voting rights (therefore allowing the holders of a majority of the shares entitled to vote in any election of directors to elect all of the directors standing for election);
● provide that all vacancies and newly created directorships may be filled by the affirmative vote of at least 80% of directors then in office, even if less than a quorum;
● prohibit removal of directors without cause;
● prohibit shareholders from calling special meetings of shareholders;
● require unanimous consent for shareholders to take action by written consent without approval of the action by our board;
● provide that shareholders seeking to present proposals before a meeting of shareholders or to nominate candidates for election as directors at a meeting of shareholders must provide advance notice in writing and also comply with specified requirements related to the form and content of a shareholder’s notice;
● require at least 80% supermajority shareholder approval to alter, amend or repeal certain provisions of our third amended and restated articles of incorporation; and
● require at least 80% supermajority shareholder approval in order for shareholders to adopt, amend or repeal certain provisions of our second amended and restated bylaws.
These provisions may frustrate or prevent any attempts by our shareholders to replace or remove our current management by making it more difficult for shareholders to replace members of the board of directors, which is responsible for appointing members of our management. Any matters requiring the approval of our shareholders will require the approval of the Seligman family and their trustees, which may have interests that differ from those of our other shareholders.
In addition, the 2017 Omnibus Equity Incentive Plan and the 2020 Omnibus Equity Incentive Plan each provide that restricted stock awards become fully vested in the event of a change in control and permit the board of directors or a committee thereof to accelerate, vest or cause the restrictions to lapse with respect to other outstanding awards including stock options, in the event of, or immediately prior to, a change in control. Such vesting or acceleration could discourage the acquisition of our Company.
We could also become subject to certain anti-takeover provisions under Michigan law which may discourage, delay or prevent someone from acquiring us or merging with us, whether or not an acquisition or merger is desired by or beneficial to our shareholders. If a corporation’s board of directors chooses to opt-in to certain provisions of Michigan Law, such corporation may not, in general, engage in a business combination with any beneficial owner, directly or indirectly, of 10% of the corporation’s outstanding voting shares unless the holder has held the shares for five years or more or, among other things, the board of directors has approved the business combination. Our board of directors has not elected to be subject to this provision but could do so in the future. Any provision of our second amended and restated articles of incorporation or amended and restated bylaws or Michigan law that has the effect of delaying or deterring a change in control could limit the opportunity for our shareholders to receive a premium for their shares and could also affect the price that some investors are willing to pay for our common stock otherwise.
The exclusive forum provision in our second amended and restated bylaws could limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.
Our second amended and restated bylaws provides that the courts of the State of Michigan located in Oakland County and the U.S. District for the Eastern District of Michigan shall be the sole and exclusive forum for (i) any action or proceeding brought on our behalf, (ii) any derivative action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, or employees to us or our shareholders, (iii) any action asserting a claim arising pursuant to any provision of the Michigan Business Corporation Act (as it may be amended from time to time), or (iv) any action asserting a claim against us governed by the State of Michigan’s internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our common stock shall be deemed to have notice of and consented to the provisions of our second amended and restated articles of incorporation described above. This choice of forum provision may limit a shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find these provisions of our second amended and restated bylaws inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.
Our ability to pay dividends is restricted by applicable law and regulations and depends on the success of both Sterling Bancorp, Inc. and the Bank.
Our ability to pay cash dividends is restricted by the applicable provisions of Michigan law and the rules and regulations of the OCC and the FRB. Under Michigan law, Sterling Bancorp, Inc. is prohibited from paying cash dividends if, after giving effect to the dividend, (i) it would not be able to pay its debts as they become due in the usual course of business or (ii) its total assets would be less than the sum of its total liabilities plus the preferential rights upon dissolution of shareholders with preferential rights on dissolution that are superior to those receiving the dividend, and we are currently required to obtain the prior approval of the FRB in order to pay any dividends to our shareholders.
Sterling Bancorp, Inc. is a separate and distinct legal entity from the Bank that receives substantially all of its revenue through the Bank. Dividends from the Bank are the principal source of funds used by Sterling Bancorp, Inc. to pay cash dividends. Our current capital plan contemplates we will not pay dividends to holders of our common stock during 2025. Any future determination to pay dividends to holders of our common stock will depend on our results of operations, financial condition, capital requirements, banking regulations and contractual restrictions, at both Sterling Bancorp, Inc. and the Bank and on a consolidated basis, and any other factors that our board of directors may deem relevant, and we can provide no assurance that we will pay any dividends to our shareholders prior to the completion of the Transaction or in the event the Transaction is terminated. The Bank is required to seek the non-objection of the FRB to pay dividends to the Company and, under certain circumstances, may be required to obtain the prior approval of the OCC.

---

ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

---

ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
Our corporate headquarters is located at One Towne Square, Suite 1900, Southfield, Michigan 48076. In addition to our corporate headquarters, we operate 19 branch offices located in the San Francisco metropolitan area, six branch offices in the Los Angeles metropolitan area, one branch office located in New York City and one branch office located in Southfield. We lease our corporate headquarters and each of our retail branch offices at what we believe to be market rates.

---

ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiary 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 material pending or threatened legal proceedings, except as set forth or incorporated by reference below, other than routine legal proceedings. The Company believes that the ultimate dispositions or resolutions of its routine legal proceedings, in the aggregate, are immaterial to its financial position, results of operations and liquidity.
Legal Proceedings and Threatened Legal Proceedings Related to the Transaction
In connection with the Transaction and following the filing of the preliminary proxy statement filed with the SEC on October 16, 2024 (the “Preliminary Proxy Statement”), the Company received certain demand letters on behalf of purported Company shareholders (the “Shareholder Demand Letters”) alleging deficiencies regarding the disclosures contained in the Preliminary Proxy Statement and definitive proxy statement filed with the SEC on November 8, 2024 (the “Definitive Proxy Statement”). Certain of these purported shareholders have requested that the Company reimburse their attorneys’ fees allegedly incurred in connection with the Shareholder Demand Letters.
While the Company believes that the disclosures set forth in the Preliminary Proxy Statement and the Definitive Proxy Statement complied fully with all applicable law and denies the allegations in the Shareholder Demand Letters, in order to moot the purported shareholders’ disclosure claims, avoid nuisance and possible expense and disruption to the Transaction, and provide additional information to its shareholders, the Company voluntarily supplemented certain disclosures in the Definitive Proxy Statement on December 6, 2024. The Company specifically denies all allegations that any additional disclosure was or is required or material. On March 6, 2025, the Company entered into a settlement agreement with the purported Company shareholders who sent the Shareholder Demand Letters, pursuant to which the Company agreed to pay them $253,000, in the aggregate, to reimburse their alleged attorneys’ fees, and which provides for customary mutual releases from any further liability.
In November 2024, the Company received the Books and Records Demand from a purported Company shareholder pursuant to the Michigan Business Corporation Act which requests an array of documents for the purported purposes of investigating the decisions that led to, and other information with respect to, the Company’s execution of the Stock Purchase Agreement. This same purported shareholder filed a complaint to compel inspection of books and records with the Oakland County Circuit Court in the State of Michigan to compel the inspection of the categories of books and records set forth in the Books and Records Demand. The complaint has not been served on the Company. The Company has subsequently produced materials in an effort to amicably resolve the Books and Records Demand. Should such purported shareholder commence an action against the Company, there is no assurance that we would be successful in any defense thereof. Any such action may have a material adverse impact on our financial condition and results of operations and on the total amount of liquidating distributions to shareholders pursuant to the Plan of Dissolution.

---

ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II

---

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock has been listed on the Nasdaq Capital Market under the symbol “SBT” since November 17, 2017. Prior to that date, there was no public trading market for our common stock.
On February 28, 2025, we had 71 holders of record of our common stock. A substantially greater number of holders are beneficial owners whose shares are held of record banks, brokers and other nominees. The transfer agent and registrar for our common stock is Computershare Trust Company, N.A.
Dividend Policy
The Company has not paid a dividend in more than 5 years and has been required to obtain prior approval of the FRB to pay a dividend since 2020. Following receipt of the cash purchase price under the Stock Purchase Agreement, and pursuant to the terms of the Plan of Dissolution, the Company intends to make an initial liquidating distribution to shareholders currently estimated to be in an aggregate amount equal to substantially all of the proceeds received therefrom, with any remaining distributions to occur after the dissolution and wind down process is completed. Such distributions will not occur until after the certificate of dissolution is filed, and the Company cannot predict the exact timing or amount of any such distributions, as uncertainties as to the ultimate amount of liabilities, operating costs and amounts to be set aside for claims, debts, obligations and provisions during the dissolution and wind down process, and the related timing to complete the wind down of the Company’s affairs, make it impossible to predict with certainty the actual net cash amount that will ultimately be available for distribution to shareholders or the timing of any such distributions. Examples of uncertainties that could reduce the value of distributions, if any, to shareholders include, without limitation: the incurrence by the Company of costs and expenses relating to the dissolution being different than estimated; unanticipated costs relating to the defense, satisfaction or settlement of lawsuits or other claims threatened against the Company or its officers or directors (including currently unknown claims); amounts necessary to resolve claims of creditors; and delays in the dissolution and wind down process. The Company expects that the initial distribution will occur shortly following completion of the Transaction, with the final distribution of the Company’s remaining cash subject to first completing the wind down of the Company and paying or providing for the Company’s creditors and existing and reasonably foreseeable debts, liabilities, and obligations in accordance with Michigan law and the Plan of Dissolution. The closing date of the Transaction is expected to be the record date for the shareholder distributions under the Plan of Dissolution.
Purchases of Equity Securities by the Issuer
Withholding of Vested Restricted Stock Awards
During the three months ended December 31, 2024, the Company withheld shares of common stock representing a portion of the restricted stock awards that vested during the period under our employee stock benefit plans in order to pay employee tax liabilities associated with such vesting. These withheld shares are treated the same as repurchased shares for accounting purposes.
The following table provides certain information with respect to our purchases of shares of the Company’s common stock, as of the settlement date, during the three months ended December 31, 2024, all of which represent tax withholding of restricted stock awards:
Issuer Purchases of Equity Securities
Total Number of
Approximate Dollar
Shares Purchased as
Value of Shares that
Total Number
Average
Part of Publicly
May Yet Be Purchased
of Shares
Price Paid
Announced Plans or
Under the
Period
Purchased(1)
per Share
Programs
Plans or Programs(2)
October 1 - 31, 2024
$
4.55
-
$
19,568,117
November 1 - 30, 2024
4.79
-
19,568,117
December 1 - 31, 2024
4.86
-
19,568,117
Total
2,025
$
4.74
-
(1)
These shares were purchased from employees to satisfy income tax withholding requirements in connection with vesting share awards during the three months ended December 31, 2024.
(2)
In 2018, the Company announced a stock repurchase program for up to $50 million of its outstanding stock. At December 31, 2024, $19.6 million remains of the $50 million authorized repurchase amount. In March 2020, the Company suspended the stock repurchase program. We are currently required to obtain approval of the FRB prior to engaging in a repurchase of our common stock other than a purchase of shares to satisfy income tax withholding requirements.

---

ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. [RESERVED]

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis should be read in conjunction with the accompanying consolidated financial statements and notes included elsewhere in this Annual Report on Form 10-K. Forward-looking statements in this Management’s Discussion and Analysis are not guarantees of future performance and may involve risks and uncertainties that could cause actual results to differ materially from those projected. See “Cautionary Note Regarding Forward-Looking Statements” above and “Item 1A. Risk Factors” for discussions of these risks and uncertainties. A comparative discussion of results of operations for the years ended December 31, 2023 and 2022 is provided in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 and is incorporated by reference herein.
Company Overview
We are a unitary thrift holding company incorporated in 1989 and headquartered in Southfield, Michigan and our primary business is the operation of our wholly owned subsidiary, Sterling Bank. Through Sterling Bank, we currently originate commercial real estate loans and commercial and industrial loans, and provide deposit products, consisting primarily of checking, savings and term certificate accounts. The Bank also engages in mortgage banking activities and, as such, acquires, sells and services residential mortgage loans.
The Bank operates through a network of 27 branches of which 25 branches are located in the San Francisco and Los Angeles, California metropolitan areas with the remaining branches located in New York, New York and Southfield, Michigan. In October 2024, we published notice of the planned closing of the branch office located at our headquarters in Southfield, Michigan in connection with the closing of the Transaction.
Executive Summary
In 2023, all remaining governmental investigations into us with respect to our former Advantage Loan Program were resolved and we elected to be a covered savings association.
On September 15, 2024, we entered into the Stock Purchase Agreement with EverBank, which provides for us to sell all of the issued and outstanding shares of capital stock of the Bank to EverBank for a fixed purchase price of $261 million to be paid in cash to the Company. Following the completion of the Transaction, EverBank will cause the Bank to merge with and into EverBank, National Association, the bank subsidiary of EverBank, with EverBank, National Association as the surviving bank. Following the bank merger, the separate corporate existence of the Bank will cease.
Also on September 15, 2024, our board of directors unanimously approved the Plan of Dissolution, which provides for the dissolution of the Company under Michigan law following the closing of the Transaction. We intend to file a certificate of dissolution with the Michigan Department of Licensing and Regulatory Affairs and subject to first completing the wind down of the Company and paying or providing for our creditors and existing and reasonably foreseeable debts, liabilities, and obligations of and claims against us (including all transaction expenses incurred in connection with the negotiation and consummation of the Stock Purchase Agreement and any claims or demands received by us on behalf of any of our shareholders) in accordance with Michigan law and the Plan of Dissolution, distribute the remaining cash to our shareholders according to their respective rights and interests, in one or more distributions.
Our shareholders approved the Stock Purchase Agreement, the Transaction and the Plan of Dissolution at a Special Meeting of Shareholders held on December 18, 2024. The Transaction is expected to close early in the second quarter of 2025. The Transaction is subject to customary closing conditions, including the receipt of required regulatory approvals. On March 13, 2025, the Company received approval for the Transaction from the Office of the Comptroller of the Currency. The Transaction remains subject to the receipt of approval from the Board of Governors of the Federal Reserve System. In addition, EverBank’s obligation to complete the Transaction is also subject to the following conditions: (i) the sale by the Bank of its portfolio of residential tenant-in-common loans (with an aggregate principal balance of approximately $349 million at December 31, 2024) and receipt by us of the purchase price specified in such agreement and (ii) the average daily closing balance of the Bank’s deposits for the monthly period ending on the last day of the month before closing is not less than 85% of the average daily closing balance of such deposits for the monthly period ending on July 31, 2024.
Simultaneously with the execution of the Stock Purchase Agreement, we entered into the Mortgage Loan Purchase Agreement with Bayview. The Mortgage Loan Purchase Agreement provides that Bayview will purchase our residential tenant-in-common loans for an aggregate purchase price equal to 87% of the aggregate unpaid principal balance of the loans on the agreed upon purchase date plus all accrued and unpaid interest. Our obligation to consummate the sale contemplated by the Mortgage Loan Purchase Agreement is subject to certain conditions, including the receipt by us of evidence of the regulatory approvals required for the Transaction. As of December 31, 2024, the residential tenant-in-common loans were not held for sale as our intent to liquidate our tenant-in-common loan portfolio is based upon our ability to close the Transaction and receipt of the required approvals for the Transaction. The closing of the loan sale is to occur after receipt of all regulatory approvals for the Transaction and shortly prior to the closing of the Transaction.
Overview of 2024 Performance
Selected Financial Data
The following table sets forth our financial information for the years indicated.
Year Ended December 31,
(Dollars in thousands, except per share amounts)
Income Statement Data:
Interest income
$
135,135
$
126,789
$
99,932
Interest expense
78,665
61,830
21,130
Net interest income
56,470
64,959
78,802
Provision for (recovery of) credit losses
(8,536)
(8,527)
(9,934)
Net interest income after provision for (recovery of ) credit losses
65,006
73,486
88,736
Non-interest income
1,057
2,786
1,347
Non-interest expense
61,813
65,710
97,648
Income (loss) before income taxes
4,250
10,562
(7,565)
Income tax expense
2,112
3,149
6,629
Net income (loss)
$
2,138
$
7,413
$
(14,194)
Income (loss) per share, basic and diluted
$
0.04
$
0.15
$
(0.28)
Weighted average common shares outstanding:
Basic
50,971,884
50,630,928
50,346,198
Diluted
51,340,966
50,778,559
50,346,198
Other Financial Information / Performance Ratios:
Return on average assets
0.09
%
0.30
%
(0.54)
%
Return on average shareholders’ equity
0.65
%
2.35
%
(4.19)
%
Yield on average interest-earning assets
5.68
%
5.23
%
3.88
%
Cost of average interest-bearing liabilities
3.89
%
3.02
%
0.98
%
Net interest spread
1.79
%
2.21
%
2.90
%
Net interest margin
2.37
%
2.68
%
3.06
%
Efficiency ratio(1)
107.45
%
97.00
%
121.83
%
Total average shareholders’ equity to total average assets
13.64
%
12.83
%
12.97
%
As of December 31,
(Dollars in thousands)
Balance Sheet Data:
Cash and due from banks
$
878,181
$
577,967
Debt securities available for sale
338,105
419,213
Equity securities
4,661
4,703
Loans, net of allowance for credit losses
1,134,925
1,319,568
Total assets
2,436,512
2,416,003
Total deposits
2,070,890
2,003,986
Federal Home Loan Bank borrowings
-
50,000
Total liabilities
2,102,549
2,088,280
Total shareholders’ equity
333,963
327,723
Asset Quality Ratios:
Nonperforming loans(2)
$
14,584
$
8,973
Nonperforming loans to total loans(2)
1.26
%
0.67
%
Nonperforming assets to total assets
0.60
%
0.37
%
Allowance for credit losses to total loans
1.80
%
2.18
%
Allowance for credit losses to nonperforming loans(2)
%
%
Nonaccrual loans to total loans
1.26
%
0.66
%
Net charge offs (recoveries) to average loans
(0.04)
%
0.40
%
Capital Ratios:
Regulatory Capital Ratios-Consolidated:
Tier 1 (core) capital to average total assets (leverage ratio)
14.08
%
13.95
%
Regulatory Capital Ratios-Bank:
Tier 1 (core) capital to average total assets (leverage ratio)
13.76
%
13.38
%
(1)
Efficiency ratio is computed as the ratio of non-interest expense divided by the sum of net interest income and non-interest income.
(2)
Nonperforming loans include nonaccrual loans and loans past due 90 days or more and still accruing interest.
Net income in 2024 was $2.1 million, a $5.3 million decrease from last year’s net income of $7.4 million. The decrease in net income was primarily due to decreases in net interest income and non-interest income of $8.5 million and $1.7 million, respectively, partially offset by a decrease in non-interest expense of $3.9 million. Our net interest margin continued to compress in 2024, declining to 2.37% as compared to 2.68% in 2023.
With the pending Transaction we continued to focus on maintaining our deposit base by continuing to offer competitive rates and providing exemplary customer service. Total deposits were $2.1 billion at December 31, 2024, an increase of $66.9 million, or 3%, from December 31, 2023. During 2024, time deposits increased $79.8 million, or 9% and money market, savings and NOW deposits decreased $15.8 million, or 1%. Our liquidity was further enhanced by the decline in the balance of our loans. Loans at December 31, 2024 were $1.2 billion, a decrease of $193.2 million, or 14%, from December 31, 2023. During 2024, residential real estate loans decreased $236.4 million, or 22%, and commercial real estate loans increased $59.5 million, or 25%. In addition, debt securities decreased $81.1 million. As a result of the improvement in our liquidity from the activity in our deposit, loan and debt security balances, the Company repaid with existing cash $50.0 million of a long-term fixed rate borrowing that the Federal Home Loan Bank called, as expected, and increased cash and due from banks by $300.2 million, or 52%, from $578.0 million at December 31, 2023.
We continued to improve our overall credit profile and metrics in 2024, driven by improvements in the commercial loan portfolio. Total past due loans at December 31, 2024 were $21.7 million, a decrease of $6.2 million, or 22%, from $27.9 million at December 31, 2023, although nonaccrual loans increased to $14.6 million at December 31, 2024 from $8.9 million at December 31, 2023. Criticized and classified loans at December 31, 2024 were $38.3 million, a decrease of $19.6 million, or 34%, from $57.9 million at December 31, 2023.
At December 31, 2024, the Tier 1 leverage capital ratios of both the Company and the Bank remained above the capital ratio requirements to be considered well capitalized for regulatory purposes.
Critical Accounting Policies and Estimates
Our 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 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.
We have identified the following accounting policies and estimates that, due to the difficult, subjective or complex judgments and assumptions inherent in those policies and estimates, and the potential sensitivity of our consolidated financial statements to those judgments and assumptions, are critical to an understanding of our financial condition and results of operations. We believe that the judgments, estimates and assumptions used in the preparation of our consolidated financial statements are appropriate.
Allowance for Credit Losses - Loans
The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of held for investment loans to present the net amount expected to be collected from the loans. The allowance for credit losses is adjusted through a charge (recovery) to provision for (recovery of) credit losses. Changes in the allowance for credit losses and, therefore, in the related provision can materially affect net income. In applying the judgment and review required to determine the allowance for credit losses, management considers changes in economic conditions, customer behavior, and collateral value, among other factors. From time to time, economic factors or business decisions may affect the composition and mix of the loan portfolio, causing management to increase or decrease the allowance for credit losses. When the Company determines that all or a portion of a loan is uncollectible, the appropriate amount is written off, and the allowance for credit losses is reduced by the same amount. The Company applies judgment to determine when a loan is deemed uncollectible; however, generally a loan will be considered uncollectible no later than when all efforts at collection have been exhausted. Subsequent recoveries, if any, are credited to the allowance for credit losses when received.
The allowance for credit losses is based on the accuracy of credit risk ratings on individual borrowers, the use of estimates and significant judgment as to the amount and timing of expected future cash flows on nonaccrual loans, significant reliance on estimated loss rates on portfolios and consideration of our evaluation of macro-economic factors and trends. While our methodology in establishing the allowance for credit losses attributes portions of the allowance for credit losses to the residential and commercial portfolios, and other consumer portfolios, the entire allowance for credit losses is available to absorb credit losses in the total loan portfolio.
The Company estimates the allowance for credit losses in accordance with the current expected credit loss methodology for loans measured at amortized cost. The allowance for credit losses is established based upon the Company’s current estimate of expected lifetime credit losses. Arriving at an appropriate amount of allowance for credit losses involves a high degree of judgment that requires management’s ongoing review and grading of the loan portfolio. The Company estimates credit losses on a collective basis for loans sharing similar risk characteristics using a quantitative model combined with an assessment of certain qualitative factors. Management’s judgment is required for the selection and application of these qualitative factors. Qualitative factors that the Company considers include, among other things, adjustments for imprecision inherent in the forecasts of macroeconomic variables, levels of criticized and classified loans and collection strategies management may employ to reduce these levels, portfolio dispersion and the unique characteristics of our Advantage Loan Program loans which could result in behavior different than our historic losses in a downside economic cycle. Loans that no longer share similar risk characteristics with any portfolio segment are subject to individual assessment and are removed from the collectively assessed segments. Management performs periodic sensitivity and stress testing using available economic forecasts in order to evaluate the adequacy of the allowance for credit losses under varying scenarios.
The allowance for credit losses may increase or decrease due to changes in economic conditions affecting borrowers and macroeconomic variables that our financial assets are more susceptible to, including unforeseen events such as natural disasters and pandemics, new information regarding existing financial assets, identification of additional problem assets, the fair value of underlying collateral, and other factors. These changes, both within and outside the Company’s control, may frequently update and have a material impact on our financial results.
The Company’s methodologies for estimating the allowance for credit losses considers available relevant information about the collectability of cash flows, including past events, current conditions, and reasonable supportable forecasts. For additional discussion of the Company’s methodology in determining the allowance for credit losses, see Note 2-Summary of Significant Accounting Policies-Allowance for Credit Losses-Loans to our consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data.”
Fair Value
Fair value is defined as the exit price, the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants on the measurement date under current market conditions.
We use fair value measurements to record fair value adjustments to certain financial instruments and to determine our fair value disclosures. For example, available for sale debt securities are carried at fair value at each reporting period. Other financial instruments are not carried at fair value each period but may require nonrecurring fair value adjustments due to application of lower-of-cost-or-market accounting. We also disclose our estimate of fair value for financial instruments not recorded at fair value, such as loans held for investment or time deposits.
The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market inputs. For financial instruments that are traded actively and have quoted market prices or observable market inputs, there is minimal subjectivity involved in measuring fair value. However, when quoted market prices or observable market inputs are not fully available, significant management judgment may be necessary to estimate fair value.
When developing fair value measurements, we maximize the use of observable inputs and minimize the use of unobservable inputs. When available, we use quoted prices in active markets to measure fair value. If quoted prices in active markets are not available, fair value measurement is based upon models that use primarily market-based or independently sourced market parameters, such as interest rate yield curves and prepayment speeds.
In certain cases, when market observable inputs for model-based valuation techniques are not readily available, we are required to make judgments about assumptions market participants would use to estimate fair value.
Significant judgment is also required to determine whether certain assets measured at fair value are classified as Level 2 or Level 3 of the fair value hierarchy. When making this judgment, we consider available information, including observable market data, indications of market liquidity and orderliness, and our understanding of the valuation techniques and significant inputs used. The classification of Level 2 or Level 3 is based upon the specific facts and circumstances of each instrument or instrument category and judgments are made regarding the significance of the Level 3 inputs to the instruments’ fair value measurement in its entirety. If Level 3 inputs are considered significant, the instrument is classified as Level 3.
See Note 16- Fair Value to our consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” for more information on our use of fair value estimates.
Balance Sheet and Capital Analysis
Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.
At December 31,
Amount
%
Amount
%
(Dollars in thousands)
Real estate:
Residential real estate
$
849,350
%
$
1,085,776
%
Commercial real estate
296,457
%
236,982
%
Construction
2,509
%
10,381
%
Total real estate
1,148,316
%
1,333,139
%
Commercial and industrial
7,395
%
15,832
%
Other consumer
-
%
-
%
Total loans
1,155,730
%
1,348,972
%
Less: allowance for credit losses
(20,805)
(29,404)
Loans, net
$
1,134,925
$
1,319,568
Most of our residential loans and other commercial loans have been made to individuals and businesses in the state of California, specifically in the San Francisco and Los Angeles metropolitan areas. As of December 31, 2024, approximately 75% of our loan portfolio was based in California with 52% and 23% in the San Francisco and Los Angeles metropolitan areas, respectively.
Residential Loans. Our loan portfolio consists primarily of residential real estate loans. At December 31, 2024 and 2023, residential real estate loans accounted for 73% and 80%, respectively, of total gross loans held for investment. Our residential loans totaled $849.4 million at December 31, 2024, a decrease of $236.4 million, or 22%, from $1.1 billion at December 31, 2023. Our overall decline in residential loans is primarily attributable to loans that were paid in full and payments of the loan principal. We ceased originating residential real estate loans in first quarter of 2023 and have not had substantial residential loan originations since 2019.
Commercial Loans. We offer a variety of commercial loan products, consisting of commercial real estate loans, construction loans and commercial and industrial loans. Commercial loans totaled $306.4 million at December 31, 2024, an increase of $43.2 million, or 16%, from December 31, 2023. During the twelve months ended December 31, 2024, we originated commercial loans with an aggregate principal balance of $126.1 million at the time of origination. The majority of our commercial loans are secured by real estate or other business assets. Our commercial loans are almost exclusively recourse loans, as we generally obtain personal guarantees on each loan.
At December 31, 2024, commercial real estate loans totaled $296.5 million of which the largest portion of these loans, or 37%, are secured by multifamily properties. The repayment of commercial real estate loans is often more sensitive than other types of loans to adverse conditions in the real estate market or the general business climate and economy because it is dependent on the successful operation or development of the property or business involved. In addition, the collateral for commercial real estate loans is generally less readily marketable than for residential real estate loans, and its value may be more difficult to determine. A primary repayment risk for commercial real estate loans is the interruption or discontinuation of operating cash flows from the properties or businesses involved, which may be influenced by economic events, changes in governmental regulations, vacancies or other events not under the control of the borrower. Additionally, with the higher interest rate environment and slowed transaction market, the commercial real estate sector faces increased risk of economic distress. See “Item 1A. Risk Factors-Risks Related to Credit” for further detail regarding the risks related to our commercial real estate loans. The table below summarizes the commercial real estate loan portfolio, by property type, as of December 31, 2024:
At December 31, 2024
Percent of
Amount
Total
(Dollars in thousands)
Commercial real estate:
Retail
$
56,176
%
Multifamily
110,644
%
Office
38,777
%
Hotels/Single-room occupancy hotels
3,477
%
Industrial
54,104
%
Mixed-use
11,382
%
Other
21,897
%
Total
$
296,457
%
Maturities and Sensitivities of Loans to Changes in Interest Rates. The Company’s loan portfolio includes adjustable-rate loans, primarily tied to Prime, U.S. Treasuries and SOFR, and fixed-rate loans, for which the interest rate does not change through the life of the loan. The following table sets forth the recorded investment by interest rate type in our loan portfolio at December 31, 2024:
Adjustable Rate
December 31, 2024
Prime
Treasury
SOFR
Total
Fixed Rate
Total
(Dollars in thousands)
Residential real estate
$
7,601
$
278,072
$
547,515
$
833,188
$
16,162
$
849,350
Commercial real estate
-
147,140
21,494
168,634
127,823
296,457
Construction
2,487
-
-
2,487
2,509
Commercial and industrial
-
6,515
6,884
7,395
Other consumer
-
-
-
-
Total
$
10,088
$
425,581
$
575,524
$
1,011,193
$
144,537
$
1,155,730
% by rate type at December 31, 2024
%
%
%
%
%
%
Across our loan portfolio, our adjustable-rate loans are typically based on a 30-year amortization schedule and generally interest rates and payments adjust annually after a one-, three-, five- or seven-year initial fixed period. Our prime-based loans, which typically are commercial and industrial loans, construction loans and home equity loans, adjust to an interest rate equal to Prime or up to 238 basis points above Prime. Our commercial real estate loans predominately adjust based on the U.S. Treasury five-year constant maturity Treasury rate. Interest rates on our adjustable-rate SOFR-based loans adjust to an interest rate typically equal to 350 to 450 basis points above the one-year SOFR. Our Treasury-based residential loans adjust to an interest rate based on the U.S. Treasury one- and five-year constant maturity treasury rates.
The following table sets forth the contractual maturities of our loan portfolio and sensitivities of those loans to changes in interest rates at December 31, 2024. Overdraft loans are reported as being due in one year or less. The table does not include any estimate of prepayments that could significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below.
Due in One
Due After One
Due After Five
Due After
December 31, 2024
Year or Less
To Five Years
To Fifteen Years
Fifteen Years
Total
(In thousands)
Residential real estate
$
-
$
$
11,593
$
837,353
$
849,350
Commercial real estate
43,254
100,299
152,888
296,457
Construction
2,487
-
-
2,509
Commercial and industrial
7,026
-
-
7,395
Other consumer
-
-
-
Total
$
46,129
$
107,751
$
164,481
$
837,369
$
1,155,730
Total loans with:
Adjustable interest rates
$
24,350
$
6,692
$
153,929
$
826,222
$
1,011,193
Fixed interest rates
21,779
101,059
10,552
11,147
144,537
Total loans
$
46,129
$
107,751
$
164,481
$
837,369
$
1,155,730
The table set forth below contains the repricing dates of the adjustable-rate loans included within our loan portfolio at December 31, 2024:
Residential
Commercial
Commercial
Other
December 31, 2024
Real Estate
Real Estate
Construction
and Industrial
Consumer
Total
(In thousands)
Amounts to adjust in:
6 months or less
$
250,912
$
54,671
$
2,487
$
6,884
$
-
$
314,954
After 6 months through 12 months
324,286
-
-
-
-
324,286
After 12 months through 24 months
97,478
1,640
-
-
-
99,118
After 24 months through 36 months
40,657
62,234
-
-
-
102,891
After 36 months through 60 months
74,304
50,089
-
-
-
124,393
After 60 months
45,551
-
-
-
-
45,551
Fixed to Maturity
16,162
127,823
144,537
Total
$
849,350
$
296,457
$
2,509
$
7,395
$
$
1,155,730
At December 31, 2024, $96.0 million, or 9%, of our adjustable-rate loans were at their interest rate floor.
Asset Quality
Nonperforming Assets. Nonperforming assets include nonaccrual loans, loans that are past due 90 days or more and still accruing interest and nonaccrual loans held for sale. Restructuring of loans to borrowers who are experiencing financial difficulty are accounted for as a modification and further evaluated as to classification of a performing or nonperforming asset.
In addition, a loan may be placed on nonaccrual at any other time management has serious doubts about further collectability of principal or interest according to the contractual terms, even though the loan is currently performing or when a loan becomes 90 days past due as to principal or interest. For nonaccrual loans, interest previously accrued but not collected is reversed and charged against income at the time a loan is placed on nonaccrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
The following table sets forth information regarding our nonperforming assets at the dates indicated.
At December 31,
(Dollars in thousands)
Nonaccrual loans(1)
Residential real estate
$
13,136
$
8,942
Commercial real estate
1,422
-
Loans past due 90 days or more and still accruing interest
Total nonperforming assets
$
14,584
$
8,973
Total loans(1)
$
1,155,730
$
1,348,972
Total assets
$
2,436,512
$
2,416,003
Total nonaccrual loans to total loans
1.26
%
0.66
%
Total nonperforming assets to total assets
0.60
%
0.37
%
(1) Loans are classified as held for investment and are presented before the allowance for credit losses.
At December 31, 2024, nonperforming assets totaled $14.6 million, an increase of $5.6 million from $9.0 million at December 31, 2023. This increase in nonperforming assets is primarily due to the addition of residential real estate loans of $11.6 million and commercial real estate loans of $2.6 million on nonaccrual status which was partially offset by loans totaling $2.5 million that were returned to accrual status, loans that were paid in full totaling $4.9 million and payments of the loan principal of $1.2 million.
As a result of the increase in nonaccrual loans, the ratio of nonaccrual loans to total loans held for investment increased to 1.26% at December 31, 2024 from 0.66% at December 31, 2023. Also, our ratio of nonperforming assets to total assets increased to 0.60% at December 31, 2024 from 0.37% at December 31, 2023.
The total amount of additional interest income on nonaccrual loans that would have been recorded if interest on all such loans had been recorded based upon the original contract terms was approximately $1.0 million, $0.4 million and $2.0 million for the years ended December 31, 2024, 2023 and 2022, respectively. The Company does not record interest income on nonaccrual loans.
Delinquent Loans. The following table sets forth our loan delinquencies, including nonaccrual loans, by type and amount at the dates indicated.
At December 31,
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
$
6,078
$
1,011
$
13,162
$
16,634
$
2,305
$
8,973
Commercial real estate
-
-
1,422
-
-
-
Total
$
6,078
$
1,011
$
14,584
$
16,634
$
2,305
$
8,973
Total loans 90 days or more past due, including nonaccrual loans, increased $5.6 million, or 63%, from $9.0 million at December 31, 2023. This increase was primarily attributable to the change in nonaccrual loans discussed in “-Nonperforming Assets” above.
Classified Loans. We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The 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 and industrial, construction and commercial real estate loans. This analysis is performed at least quarterly. The four risk categories utilized are Pass, Special Mention, Substandard and Doubtful. Loans in the Pass category are considered of satisfactory quality, while the remaining three categories indicate varying levels of increasing credit risk. See Note 5-Loans-Credit Quality to our consolidated financial statements for additional information about our risk categories.
Loans classified as Special Mention, Substandard and Doubtful were as follows at the dates indicated:
December 31,
December 31,
(Dollars in thousands)
Special Mention:
Commercial real estate
$
5,570
$
21,516
Substandard:
Residential real estate
13,162
8,973
Commercial real estate
17,117
18,678
Construction
2,487
8,776
Total Substandard
32,766
36,427
Total (1)
$
38,336
$
57,943
Total Loans
$
1,155,730
$
1,348,972
Classified assets to total loans
%
%
(1) We did not have any loans classified as Doubtful at December 31, 2024 and 2023.
Total Special Mention and Substandard loans were $38.3 million, or 3% of total gross loans, at December 31, 2024, compared to $57.9 million, or 4% of total gross loans, at December 31, 2023.
The decrease of $15.9 million in Special Mention loans was primarily attributable to loans that were upgraded from Special Mention to Pass totaling $16.2 million and loans that were downgraded from Special Mention to Substandard totaling $5.8 million. The impact of these changes was partially offset by loans downgraded to Special Mention from Pass totaling $5.4 million.
The decrease of $3.7 million in Substandard loans was primarily attributable to loans that were paid in full totaling $12.4 million, loans that were upgraded from Substandard to Pass totaling $4.9 million, and principal reductions totaling $3.8 million. The impact of these changes was partially offset by loans downgraded to Substandard totaling $17.5 million.
Allowance for Credit Losses
We adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“2016-13”) on January 1, 2023 on a modified retrospective basis. This guidance changed the accounting for credit losses from an incurred loss model, which estimates a loss allowance based on current known and inherent losses within the loan portfolio, to an expected loss model, which estimates a credit loss based on losses expected to be recorded over the lifetime of the loan portfolio. We recorded a pre-tax cumulative effect adjustment to decrease the allowance for credit losses by $1.7 million and we established a liability for unfunded commitments of $0.6 million. The decrease in the allowance for credit losses was primarily due to our construction portfolio which has short contractual maturities and was partially offset by an increase in the allowance for credit losses in both our residential real estate and commercial real estate portfolios which have longer contractual maturities.
Based on our evaluation of our available for sale debt securities, we did not record an allowance for credit losses on these securities, upon adoption. See Note 3-Debt Securities in our consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data.”
The allowance for credit losses is a valuation allowance estimated at each balance sheet date in accordance with U.S. GAAP that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. When the Company deems all or a portion of a loan to be uncollectible the appropriate amount is written off and the allowance for credit losses is reduced by the same amount. Subsequent recoveries, if any, are credited to the allowance for credit losses when received. See Note 2-Summary of Significant Accounting Policies in the notes to the consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” for a discussion of our allowance for credit losses accounting policy.
The Company estimates the allowance for credit losses on loans using a Probability of Default/Probability of Attrition model which incorporates probability of default, loss given default, exposure to default and probability of attrition attributes. The model considers relevant available information at both the portfolio and loan level from internal data that is supplemented by information sourced from a third party. The model also incorporates reasonable and supportable forecasts over an 8-quarter forecast period. We continued to consider the impact of inflation and the risk of a recession in our process for estimating expected credit losses along with the uncertainty related to the severity and duration of the economic consequences resulting from such events. Our methodology and framework along with the 8-quarter forecast period and 2-quarter reversion period, which is the period where the macroeconomic variables are relaxed and revert to the average historical loss rates, have remained consistent since the implementation of the current expected credit loss model on January 1, 2023.
Since adoption, we have recalibrated the risk scaling of our loan portfolios compared to the shared pool data within our model. Key economic indicators used at December 31, 2023 showed lower unemployment, higher property values and stronger growth in gross domestic product than at adoption. Key economic indicators for unemployment and property values at December 31, 2024 compared to the prior year end were essentially unchanged in our base forecasts, but interest rates remained higher for longer.
Also included in the allowance for credit losses on loans are qualitative amounts to cover risks that, in the Company’s assessment, may not be adequately reflected in the quantitative analysis. Factors that the Company considers include, among other things, adjustments for imprecision inherent in the forecasts of macroeconomic variables, levels of criticized and classified loans and collection strategies management may employ to reduce these levels, portfolio dispersion and the unique characteristics of our Advantage Loan Program loans which could result in behavior different than our historic losses in a downside economic cycle.
Prior to the adoption of the current expected credit loss model, the allowance for loan losses was maintained at levels considered adequate by management to provide for probable loan losses inherent in the loan portfolio as of the consolidated balance sheet reporting dates. The allowance for loan losses was based on management’s assessment of various quantitative and qualitative factors affecting the loan portfolio, including portfolio composition, net charge-offs, delinquent and nonaccrual loans, foreclosures, Bank-specific factors (e.g., staff experience, underwriting guidelines etc.), national and local business conditions, historical loss experience, an overall evaluation of the quality of the underlying collateral and other external factors. These qualitative components included unemployment, commercial property vacancy rates, uncertainty in property values and deterioration in the overall macro-economic environment.
The following tables present the activity in the allowance for credit losses by portfolio segment for the year ended December 31, 2024 and 2023:
Commercial
Residential
Commercial
and
Other
Year Ended December 31, 2024
Real Estate
Real Estate
Construction
Industrial
Consumer
Total
(Dollars in thousands)
Allowance for credit losses:
Beginning balance
$
14,322
$
13,550
$
1,386
$
$
-
$
29,404
Provision for (recovery of) credit losses
(3,659)
(4,632)
(980)
-
(9,051)
Net (charge offs) recoveries
Charge offs
-
-
-
-
-
-
Recoveries
-
-
Total net (charge offs) recoveries
-
-
Total ending balance
$
11,102
$
8,918
$
$
$
-
$
20,805
Average gross loans during period
$
970,804
$
275,043
$
5,536
$
10,167
$
$
1,261,576
Net (charge offs) recoveries to average gross loans during period
0.05
%
0.0
%
0.20
%
0.02
%
-
0.04
%
Commercial
Residential
Commercial
Lines of
Other
Year Ended December 31, 2023
Real Estate
Real Estate
Construction
Credit
Consumer
Total
(Dollars in thousands)
Allowance for loan losses:
Beginning balance
$
27,951
$
11,694
$
5,781
$
$
-
$
45,464
Adoption of ASU 2016-13
1,151
(3,633)
(34)
-
(1,651)
Provision of ASU 2022-02
(11)
-
-
-
Provision for (recovery of) loan losses
(8,433)
(1,158)
-
(8,844)
Net (charge offs) recoveries
Charge offs
(6,478)
-
-
-
-
(6,478)
Recoveries
-
-
Total net (charge offs) recoveries
(6,050)
-
-
(5,945)
Total ending balance
$
14,322
$
13,550
$
1,386
$
$
-
$
29,404
Average gross loans during period
$
1,231,521
$
228,963
$
29,020
$
9,827
$
$
1,499,369
Net (charge offs) recoveries to average gross loans during period
(0.49)
%
0.04
%
0.02
%
-
%
-
%
(0.40)
%
The following table presents the activity in the allowance for loan losses for the year ended December 31, 2022, as determined in accordance with ASC 310, Receivables (“ASC 310”), prior to the adoption of ASU 2016-13:
Commercial
Residential
Commercial
Lines of
Other
Year Ended December 31, 2022
Real Estate
Real Estate
Construction
Credit
Consumer
Total
(Dollars in thousands)
Allowance for loan losses:
Beginning balance
$
32,202
$
12,608
$
11,730
$
$
-
$
56,548
Provision for (recovery of) loan losses
(5,105)
3,060
(7,919)
-
(9,934)
Net (charge offs) recoveries
Charge offs
(197)
(4,064)
-
-
-
(4,261)
Recoveries
1,051
1,970
-
-
3,111
Total net (charge offs) recoveries
(3,974)
1,970
-
-
(1,150)
Total ending balance
$
27,951
$
11,694
$
5,781
$
$
-
$
45,464
Average gross loans during period
$
1,524,331
$
225,480
$
63,841
$
$
$
1,814,573
Net (charge offs) recoveries to average gross loans during period
0.06
%
(1.76)
%
3.09
%
-
%
-
%
(0.06)
%
Our allowance for credit losses at December 31, 2024 was $20.8 million, or 1.80% of total loans held for investment, compared to $29.4 million, or 2.18% of total loans held for investment, at December 31, 2023. Our allowance for credit losses as a percentage of total gross loans decreased due in part to the improved credit quality of the commercial real estate portfolio and the continued aging in the residential real estate portfolio. Our allowance for credit losses as a percentage of nonaccrual loans was 143% and 329% as of December 31, 2024 and 2023, respectively.
Our net recoveries during the year ended December 31, 2024 were $452 thousand compared to net charge offs of $5.9 million for the comparable period in 2023. Our net charge offs during the year ended December 31, 2023 included $6.5 million in write-downs of our recorded investment in connection with the transfer of nonaccrual and delinquent residential real estate loans to held for sale.
The following table sets forth the allowance for credit losses allocated by loan category at the dates indicated. The allowance for credit losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance for credit losses to absorb losses in other categories.
At December 31,
Percent of
Percent of
Percent of
Percent of
Allowance
Loans in
Allowance
Loans in
for Credit
Each
for Credit
Each
Allowance
Losses to
Category to
Allowance
Losses to
Category to
for Credit
Category
Total
for Credit
Category
Total
Losses
of Loans
Loans
Losses
of Loans
Loans
(Dollars in thousands)
Residential real estate
$
11,102
1.31
%
%
$
14,322
1.32
%
%
Commercial real estate
8,918
3.01
%
%
13,550
5.72
%
%
Construction
16.62
%
-
%
1,386
13.35
%
%
Commercial and industrial
4.98
%
%
0.92
%
%
Total
$
20,805
1.80
%
%
$
29,404
2.18
%
%
Nonaccrual loans
$
14,558
$
8,942
Nonperforming loans and specified loan modifications (1)(2)
$
14,584
$
8,973
Total loans
$
1,155,730
$
1,348,972
Allowance for credit losses to nonaccrual loans
%
%
Allowance for credit losses to total loans
1.80
%
2.18
%
(1) Effective January 1, 2023, loan modifications involving borrowers experiencing financial difficulty are evaluated under the new credit loss model. There were no such loan modifications during the year ended December 31, 2024 and 2023.
(2) Nonperforming loans include loans 90 days or more past due and still accruing interest.
Although we believe that we use the best information available to establish the allowance for credit losses, future adjustments to the allowance for credit 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 credit losses. Furthermore, while we believe we have established our allowance for credit 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 credit 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 credit losses is adequate or that increases will not be necessary should the quality of any loans deteriorate. Any material increase in the allowance for credit losses may adversely affect our financial condition and results of operations.
Collateral-Dependent Loans
Collateral-dependent loans are those for which repayment (on the basis of the Company’s assessment as of the reporting date) is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. As of December 31, 2024, the amortized cost basis of collateral-dependent loans was $3.2 million. These loans were collateralized by residential real estate property and the fair value of collateral on substantially all collateral-dependent loans were significantly in excess of their amortized cost basis.
Modifications to Borrowers Experiencing Financial Difficulty
In January 2023, the Company adopted ASU 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) which eliminated the recognition and measurement accounting guidance for troubled debt restructurings while enhancing disclosures requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. Previously, loans that were modified resulting in a concession, and for which the borrower was experiencing financial difficulties, were considered troubled debt restructurings. The Company adopted the provisions of ASU 2022-02 on January 1, 2023, along with its adoption of ASU 2016-13. On the date of adoption, the Company increased its allowance for credit losses by $0.4 million, and recorded a cumulative effect adjustment of $0.3 million, net of the income tax impact of $0.1 million, to decrease the opening balance of retained earnings as of January 1, 2023, for the initial application of ASU 2022-02. The cumulative effect adjustment (before tax) represents the difference between the allowance previously determined under the troubled debt restructuring model and the allowance determined under the new credit loss accounting model for such loans on the adoption date.
Modifications to borrowers experiencing financial difficulty may include interest rate reductions, principal or interest forgiveness, forbearances, term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Historically, the Company has provided loan forbearances to residential borrowers when mandated and modified construction loans by providing term extensions. The Company did not have any loans held for investment made to borrowers experiencing financial difficulty that were modified during the year ended December 31, 2024 and 2023. The Company did not have any loans held for investment made to borrowers experiencing financial difficulty that were previously modified that subsequently defaulted during the year ended December 31, 2024 and 2023.
Investment Securities Portfolio
The following table sets forth the amortized cost and estimated fair value of our debt securities available for sale portfolio at the dates indicated.
At December 31,
Amortized
Fair
Amortized
Fair
Cost
Value
Cost
Value
(In thousands)
U.S. Treasury and Agency securities
$
154,727
$
152,594
$
253,107
$
248,988
Mortgage-backed securities
30,634
27,045
35,757
31,927
Collateralized mortgage obligations
171,240
158,323
151,196
138,157
Collateralized debt obligations
Total
$
356,746
$
338,105
$
440,211
$
419,213
We decreased the size of our debt securities available for sale portfolio (on an amortized-cost basis) by $83.5 million, or 19%, from December 31, 2023 to December 31, 2024. We continually evaluate our investment securities portfolio in response to established asset/liability management objectives and changing market conditions that could affect profitability and the level of interest rate risk to which we are exposed. These evaluations may cause us to change the level of funds we deploy into investment securities and change the composition of our investment securities portfolio.
For debt securities available for sale in an unrealized loss position, we first assess whether we intend to sell, or it is more likely than not that we will be required to sell the security before recovery of its amortized cost. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For debt securities available for sale that do not meet the aforementioned criteria, we evaluate at the individual security level whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of income taxes.
We review the debt securities portfolio on a quarterly basis to determine the cause and magnitude of declines in the fair value of each security. At December 31, 2024, gross unrealized losses on debt securities totaled $18.9 million. Our U.S. Treasury and Agency securities, mortgage-backed securities and the majority of the collateralized mortgage obligations are issued or guaranteed by the U.S. government, its agencies and government-sponsored enterprises. The Company has a long history with no credit losses from issuers of U.S. government, its agencies and government-sponsored enterprises. Also, our available for sale debt securities are explicitly or implicitly fully guaranteed by the U.S. government. As a result, management does not expect any credit losses on its available for sale debt securities. Accordingly, we have not recorded an allowance for credit losses for our available for sale debt securities at December 31, 2024.
Our equity securities consist of an investment in a qualified community reinvestment act investment fund, which is a publicly traded mutual fund, and an investment in the common equity of Pacific Coast Banker’s Bank, a thinly traded restricted stock. At December 31, 2024 and 2023, our equity securities totaled $4.7 million.
We are required to hold non-marketable equity securities, comprised of FHLB stock, as a condition of our membership in the FHLB system. Our FHLB stock is accounted for at cost, which equals its par value. During the year ended December 31, 2024 and 2023, the FHLB redeemed shares of its stock, at par value. We received proceeds from the redemption of $0.5 million and $1.4 million, respectively. At December 31, 2024 and 2023, we held FHLB stock of $18.4 million and $18.9 million, respectively.
During the year ended December 31, 2024, we purchased additional FRB stock as a condition of our membership in the Federal Reserve System, which is required of us as a covered savings association. Our FRB stock is considered a non-marketable equity security that is accounted for at cost, which equals its par value. At December 31, 2024 and 2023, we held $9.2 and 9.0 million in FRB stock, respectively.
Investment Portfolio Maturities and Yields. The table below presents the maturity distribution at amortized cost and weighted-average yield to maturity of our debt securities available for sale portfolio at December 31, 2024. The weighted average yields were calculated using the amortized cost of the debt securities (on a pre-tax basis). The maturities are based on the final contractual payment dates and do not reflect the impact of prepayments or early redemptions that may occur.
At December 31, 2024
More Than
More Than
One Year
Five Years
One Year
Through
Through
More Than
or Less
Five Years
Ten Years
Ten Years
Total
Amortized
Amortized
Amortized
Amortized
Amortized
Cost
Yield
Cost
Yield
Cost
Yield
Cost
Yield
Cost
Yield
(Dollars in thousands)
U.S. Treasury and Agency securities
$
129,809
4.0
%
$
24,918
1.1
%
$
-
-
%
$
-
-
%
$
154,727
3.5
%
Mortgage-backed securities
-
-
-
-
18,975
1.3
%
11,659
3.2
%
30,634
2.0
%
Collateralized mortgage obligations
-
-
14,302
4.1
-
-
%
156,938
3.8
%
171,240
3.8
%
Collateralized debt obligations
-
-
-
-
6.8
%
-
-
%
6.8
%
Total available for sale debt securities
$
129,809
4.0
%
$
39,220
2.2
%
$
19,120
1.3
%
$
168,597
3.7
%
$
356,746
3.5
%
Deposits
Deposits are the primary source of funding for the Company. We regularly review the need to adjust our deposit offering rates on various deposit products to maintain a stable liquidity profile and a competitive cost of funds. We obtain funds from depositors by offering a range of deposit types, including demand, savings, money market and time. The following table sets forth the composition of our deposits by account type at the dates indicated.
At December 31,
(In thousands)
Noninterest-bearing deposits
$
38,086
$
35,245
Money market, savings and NOW
1,079,744
1,095,521
Time deposits
953,060
873,220
Total deposits
$
2,070,890
$
2,003,986
Total deposits were $2.1 billion as of December 31, 2024, reflecting an increase of $66.9 million, or 3%, compared to December 31, 2023. Our time deposits increased by $79.8 million, or 9%, and our money market, savings and NOW deposits decreased by $15.8 million, or 1%. Our noninterest-bearing demand deposits were $38.1 million as of December 31, 2024, an increase of $2.8 million, or 8%, compared to December 31, 2023. Our current strategy is to continue to offer market interest rates on our deposit products to maintain our existing customer base and our liquidity position.
The following table sets forth the distribution of average deposits by account type and weighted average rates at the dates indicated.
Year Ended December 31,
Percent of
Percent of
Average
Total
Average
Average
Total
Average
Balance
Deposits
Rate
Balance
Deposits
Rate
(Dollars in thousands)
Demand deposits
$
34,279
%
-
%
$
43,702
%
-
%
Money Markets, Savings and NOW
1,073,095
%
3.63
%
1,049,818
%
2.82
%
Time deposits
925,058
%
4.23
%
912,966
%
3.02
%
Total deposits
$
2,032,432
%
3.84
%
$
2,006,486
%
2.85
%
Our estimated uninsured deposits were $469.4 million, or 23%, of total deposits and were $434.4 million, or 22% of total deposits at December 31, 2024 and 2023, respectively. The uninsured amounts are estimated based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements, which does not reflect an evaluation of all of the account styling distinctions that would determine the availability of deposit insurance to individual accounts based on FDIC regulations.
The portion of our U.S. time deposits, by account, that are in excess of the FDIC insurance limit of $250,000 was $105.4 million at December 31, 2024. See “Item 1. Business-Supervision and Regulation-Federal Banking Regulation-Federal Insurance of Deposit Accounts” for additional discussion of the FDIC insurance limits. The following table presents the amount of time deposits in excess of $250,000, segregated by time remaining until maturity, at December 31, 2024:
At December 31, 2024
(In thousands)
Maturing Period:
Three months or less
$
57,487
Over three months through six months
23,699
Over six months through twelve months
5,667
Over twelve months
18,511
Total
$
105,364
Borrowings
In addition to deposits, we use short-term borrowings, such as FHLB advances and drawdowns on an overdraft credit line with the FHLB, as sources of funds to meet the daily liquidity needs of our customers. Our short-term advances with the FHLB consist primarily of advances of funds for one- or two-week periods.
In May 2024, the Company repaid with existing cash $50.0 million of a long-term fixed rate borrowing that the Federal Home Loan Bank called, as expected. We repaid the FHLB advance with our existing cash funds. The FHLB advance required monthly interest-only payments at 1.96% per annum.
In July 2023, the Company redeemed the Subordinated Notes in the principal amount of $65.0 million at a redemption price equal to 100% of the outstanding principal amount plus accrued interest for a total cash payment of $66.8 million. Prior to redemption, the Subordinated Notes had a variable interest rate equal to the three-month LIBOR rate plus a margin of 5.82%.
At December 31, 2024, we had the ability to borrow an additional $397.2 million from the FHLB, which included an available line of credit of $20.0 million. We also had available credit lines with other banks totaling $60.0 million. There were no borrowings outstanding on the lines of credit with other banks.
Shareholders’ Equity
Total shareholders’ equity was $334.0 million at December 31, 2024 compared to $327.7 million at December 31, 2023. The increase in shareholders’ equity is attributable to net income of $2.1 million for the year, a $1.7 million reduction in the unrealized loss on our investment securities portfolio included in accumulated other comprehensive loss on our debt securities and $2.4 million of activity related to equity-based compensation.
Analysis of Results of Operations
Year Ended December 31, 2024 compared to Year Ended December 31, 2023
General. The Company had net income of $2.1 million for the year ended December 31, 2024 compared to net income of $7.4 million for the year ended December 31, 2023.
Average Balance Sheet and Related Yields and Rates. The following table sets forth the average balance sheet, interest income or interest expense, average interest rate for each category of interest-earning assets and interest-bearing liabilities, net interest spread and net interest margin on average interest-earning assets. The average balances are daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of discount accretion and net deferred loan origination costs accounted for as yield adjustments.
Year Ended December 31,
Average
Average
Average
Average
Average
Average
Balance
Interest
Yield/Rate
Balance
Interest
Yield/Rate
Balance
Interest
Yield/Rate
(Dollars in thousands)
Interest-earning assets
Loans(1)
Residential real estate and other consumer
$
970,830
$
65,609
6.76
%
$
1,231,559
$
71,491
5.80
%
$
1,524,373
$
71,229
4.67
%
Commercial real estate
275,043
14,923
5.43
%
228,963
11,401
4.98
%
225,480
10,921
4.84
%
Construction
5,536
11.65
%
29,020
2,987
10.29
%
63,841
5,179
8.11
%
Commercial and industrial
10,167
8.64
%
9,827
8.19
%
5.23
%
Total loans
1,261,576
82,055
6.50
%
1,499,369
86,684
5.78
%
1,814,573
87,375
4.82
%
Securities, includes restricted stock(2)
450,861
17,734
3.93
%
393,767
12,056
3.06
%
377,959
6,426
1.70
%
Other interest-earning assets
668,760
35,346
5.29
%
532,789
28,049
5.26
%
380,236
6,131
1.61
%
Total interest-earning assets
2,381,197
135,135
5.68
%
2,425,925
126,789
5.23
%
2,572,768
99,932
3.88
%
Noninterest-earning assets
Cash and due from banks
3,811
4,326
3,942
Other assets
29,001
28,648
33,547
Total assets
$
2,414,009
$
2,458,899
$
2,610,257
Interest-bearing liabilities
Money market, savings and NOW
$
1,073,095
$
39,043
3.63
%
$
1,049,818
$
29,559
2.82
%
$
1,215,059
$
7,006
0.58
%
Time deposits
925,058
39,255
4.23
%
912,966
27,550
3.02
%
782,760
7,986
1.02
%
Total interest-bearing deposits
1,998,153
78,298
3.91
%
1,962,784
57,109
2.91
%
1,997,819
14,992
0.75
%
FHLB borrowings
18,443
1.98
%
50,000
1.99
%
89,822
1,169
1.30
%
Subordinated Notes, net
-
-
0.00
%
34,683
3,727
10.60
%
65,310
4,969
7.50
%
Total borrowings
18,443
1.96
%
84,683
4,721
5.50
%
155,132
6,138
3.90
%
Total interest-bearing liabilities
2,016,596
78,665
3.89
%
2,047,467
61,830
3.02
%
2,152,951
21,130
0.98
%
Noninterest-bearing liabilities
Demand deposits
34,279
43,702
67,953
Other liabilities
33,940
52,220
50,740
Shareholders’ equity
329,194
315,510
338,613
Total liabilities and shareholders’ equity
$
2,414,009
$
2,458,899
$
2,610,257
Net interest income and spread(2)
$
56,470
1.79
%
$
64,959
2.21
%
$
78,802
2.90
%
Net interest margin(2)
2.37
%
2.68
%
3.06
%
(1) Nonaccrual loans are included in the respective average loan balances. Income, if any, on such loans is recognized on a cash basis.
(2) Interest income does not include taxable equivalence adjustments.
The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities for the periods indicated. The table distinguishes between: (1) changes attributable to volume (changes in volume multiplied by the prior period’s rate), (2) changes attributable to rate (change in rate multiplied by the prior period’s volume) and (3) total increase (decrease) (the sum of the previous columns). Changes attributable to both volume and rate are allocated ratably between the volume and rate categories.
Year Ended
Year Ended
December 31, 2024 vs 2023
December 31, 2023 vs 2022
Increase
Increase
(Decrease)
Net
(Decrease)
Net
due to
Increase
due to
Increase
Volume
Rate
(Decrease)
Volume
Rate
(Decrease)
(In thousands)
Change in interest income:
Loans
Residential real estate and other consumer
$
(16,572)
$
10,690
$
(5,882)
$
(15,130)
$
15,392
$
Commercial real estate
2,431
1,091
3,522
Construction
(2,692)
(2,342)
(3,333)
1,141
(2,192)
Commercial and industrial
Total loans
(16,805)
12,176
(4,629)
(17,577)
16,886
(691)
Securities, includes restricted stock
1,918
3,760
5,678
5,350
5,630
Other interest-earning assets
7,137
7,297
3,295
18,623
21,918
Total change in interest income
(7,750)
16,096
8,346
(14,002)
40,859
26,857
Change in interest expense:
Money market, savings and NOW
8,805
9,484
(1,084)
23,637
22,553
Time deposits
11,331
11,705
1,530
18,034
19,564
Total interest-bearing deposits
1,053
20,136
21,189
41,671
42,117
FHLB borrowings
(627)
-
(627)
(644)
(175)
Subordinated Notes, net
(3,727)
-
(3,727)
(2,813)
1,571
(1,242)
Total change in interest expense
(3,301)
20,136
16,835
(3,011)
43,711
40,700
Change in net interest income
$
(4,449)
$
(4,040)
$
(8,489)
$
(10,991)
$
(2,852)
$
(13,843)
Net Interest Income. Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends primarily upon the volume of interest-earning assets and interest-bearing liabilities and the corresponding interest rates earned or paid. Our net interest income is significantly impacted by changes in interest rates and market yield curves and their related impact on cash flows.
Net interest income was $56.5 million for the year ended December 31, 2024, a decrease of $8.5 million, or 13%, from $65.0 million for the same period in 2023. The decrease primarily reflects the continued decline in our interest-earning assets, as well as the decline in our net interest margin and net interest spread. The decrease in net interest income primarily reflects interest expense, principally on deposits, increasing more than interest income. The prevailing market rate environment combined with significant competition for deposits resulted in significant disparity between the impact on interest expense compared to interest income. In addition, the decline in net interest income partially reflects the continued reduction of our loan portfolio as we have discontinued the origination of residential mortgage loans.
Interest income was $135.1 million for the year ended December 31, 2024, an increase of $8.3 million, or 7%, from $126.8 million for the same period in 2023. The increase in interest income was primarily due to the yield on average loans increasing 72 basis points primarily due to rates resetting higher on our adjustable-rate residential real estate loans as these mortgages repriced at higher rates under the prevailing interest rate environment. Additionally, interest income increased due to the yield on our average investments increasing by 87 basis points in 2024 and the average balance of interest-earning assets (primarily interest-bearing cash deposits) increasing $136.0 million, or 26%. Partially offsetting these increases, the average balance of loans decreased $237.8 million, or 16%, primarily attributable to the continued repayment of our outstanding residential loans and prior decision to cease originating residential mortgage loans.
Interest expense was $78.7 million for the year ended December 31, 2024, an increase of $16.8 million, or 27%, from the year ended December 31, 2023. The increase in interest expense was primarily due to a 100 basis point increase in the average rate paid on interest-bearing deposits. We continued to competitively price our deposits as competition for deposits remained high in 2024. Partially offsetting the increase in interest expense relating to interest-bearing deposits, interest expense on our Subordinated Notes declined $3.7 million due to the redemption of all of our Subordinated Notes in the third quarter of 2023.
Net Interest Margin and Interest Rate Spread. Net interest margin was 2.37% for the year ended December 31, 2024, reflecting a decline of 31 basis points from 2.68% for the year ended December 31, 2023. The interest rate spread was 1.79% for the year ended December 31, 2024, reflecting a decline of 42 basis points from 2.21% for the year ended December 31, 2023. Our net interest margin and interest rate spread for the year ended December 31, 2024 compared to the prior year were negatively impacted by the 87 basis points increase in interest-bearing liabilities outpacing the 45 basis points increase in interest-earning assets.
Provision for (Recovery of) Credit Losses. The following table presents the components of our provision for (recovery of) credit losses:
Year Ended
December 31,
(In thousands)
Provision for (recovery of) credit losses:
Loans
$
(9,051)
$
(8,844)
Off-balance sheet credit exposures
Total
$
(8,536)
$
(8,527)
Our recovery for credit losses was $(8.5) million for both years ended December 31, 2024 and 2023. Our recovery for credit losses for the year ended December 31, 2024 and 2023 is primarily due to the $193.2 million or 14%, and $309.9 million, or 19%, reduction in our loan portfolio, respectively. The overall credit quality of our loan portfolio improved in 2024 and 2023, driven by improvement in the commercial loan portfolio and the economic forecast utilized in the analysis of our allowance for credit losses was stable to improving throughout this time period. In addition, the residential loan portfolio continued to decline as our outstanding loans continued to repay while we had ceased originating residential loans. Total classified loans at December 31, 2024 totaled $38.3 million, a decrease of $19.7 million, or 34%, from $57.9 million at December 31, 2023. See “-Asset Quality-Allowance for Credit Losses” for additional information.
Non-interest Income. The components of non-interest income were as follows:
Year Ended
December 31,
Change
Amount
Percent
(Dollars in thousands)
Service charges and fees
$
$
$
(30)
(9)
%
Gain (loss) on sale of investment securities
-
(113)
%
Gain on sale of mortgage loans held for sale
-
1,623
(1,623)
(100)
%
Unrealized gain (loss) on equity securities
(42)
(103)
N/M
Net servicing income
(70)
(23)
%
Income earned on company-owned life insurance
%
Other
(21)
(9)
%
Total non-interest income
$
1,057
$
2,786
$
(1,729)
(62)
%
N/M - not meaningful
Non-interest income of $1.1 million for the year ended December 31, 2024 reflected a decrease of $1.7 million compared to the same period in 2023. The decrease was primarily attributable to a $1.6 million gain on the sale of held for sale loans, comprised primarily of nonperforming and chronically delinquent residential real estate loans, which sold in the second quarter of 2023.
Non-interest Expense. The components of non-interest expense were as follows:
Year Ended
December 31,
Change
Amount
Percent
(Dollars in thousands)
Salaries and employee benefits
$
33,583
$
35,937
$
(2,354)
(7)
%
Occupancy and equipment
8,123
8,369
(246)
(3)
%
Professional fees
10,065
10,076
(11)
(0)
%
FDIC assessments
1,048
1,058
(10)
(1)
%
Data processing
2,950
2,941
%
Other
6,044
7,329
(1,285)
(18)
%
Total non-interest expense
$
61,813
$
65,710
$
(3,897)
(6)
%
Non-interest expense of $61.8 million for the year ended December 31, 2024 reflected a decrease of $3.9 million, or 6%, compared to $65.7 million for the year ended December 31, 2023.
Salaries and employee benefits decreased $2.4 million for the year ended December 31, 2024 as compared to the prior year primarily due to staff reductions in various support functions. In addition, our chief executive officer’s compensation package was restructured several times during 2024 and 2023. His annual base salary was reduced from $3.0 million to $950 thousand in 2023 and further reduced to $850 thousand in 2024. In 2023, he was granted a restricted stock award valued at approximately $2.0 million which vested over an 18-month period.
Although professional fees decreased only $11 thousand during the year ended December 31, 2024 as compared to the prior year, the components of our professional fees changed significantly. We incurred $3.5 million of Transaction related expenses in 2024. In 2023, we incurred substantial expenses related to the government investigations, which were resolved in 2023. This 2023 expense was partially offset by the receipt of $6.0 million in reimbursements from our insurance carriers for expenses previously incurred relating to the investigations.
Other non-interest expense decreased $1.3 million from the prior year due in part to lower marketing expenses largely reflecting the suspension of our digital marketing campaign and general cost-saving initiatives undertaken in 2024, partially offset by expenses incurred to settle disputes with former employees.
Income Tax Expense. The Company recorded an income tax expense of $2.1 million, a 49.7% effective rate, for the year ended December 31, 2024 and $3.1 million, or an effective rate of 29.8%, for the year ended December 31, 2023. Income tax expense includes an additional $0.6 million in the third quarter of 2024 to reverse a tax position previously taken on the deductibility of interest earned on U.S. government obligations under applicable state tax law. Our effective tax rate varies from the statutory rate primarily due to the adjustment in the third quarter of 2024 as well as the impact of non-deductible compensation-related expenses.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations when they come due. We rely on our ability to generate deposits and effectively manage the repayment and maturity schedules of our loans to ensure we have adequate liquidity to fund our operations.
Our primary sources of funds consist of cash flows from operations, deposits and principal repayments on loans and maturities and principal receipts on our available for sale debt securities. Additional liquidity is provided by our ability to borrow from the FHLB, our ability to sell portions of our loan portfolio and access to the discount window of the Federal Reserve and brokered deposits. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
We have substantial cash requirements going forward, which we plan to fund through our total available liquidity, cash flows from operations and additional liquidity measures, if determined to be necessary. Our cash requirements based on contractual payment dates of our known contractual and other obligations as of December 31, 2024 are summarized in the following table:
Contractual Maturities as of December 31, 2024
More Than
More Than
One Year
Three Years
Less Than
Through
Through
Over
One Year
Three Years
Five Years
Five Years
Total
(In thousands)
Noncancelable operating lease obligations(1)
$
4,020
$
5,141
$
2,425
$
$
12,472
Time deposits
797,391
155,378
-
953,060
Total
$
801,411
$
160,519
$
2,716
$
$
965,532
(1) Our operating lease obligations include contractual payments required under our noncancelable operating lease contracts.
Commitments to extend credit, standby letters of credit and commercial letters of credit do not necessarily represent future cash requirements in that these commitments often expire without being drawn upon; therefore, these items are not included in the table above. We are a party to these financial instruments in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments that are not reflected in our consolidated balance sheets, as well as commitments on unused lines of credit that involve elements of credit and interest rate risk in excess of the amount recorded in the consolidated balance sheets. Our exposure to credit loss is represented by the contractual amount of these instruments. At December 31, 2024, we had unfunded commitments on lines of credit totaling $24.8 million and standby letters of credit outstanding of $24 thousand. The Company is required to estimate the expected credit losses for off-balance sheet credit exposures, including unfunded loan commitments and letters of credit, which are not unconditionally cancellable. At December 31, 2024, the Company has recorded a liability for unfunded commitments of $1.4 million. Refer to Note 19-Commitments and Contingencies to our consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” for further details of these off-balance sheet arrangements.
Our most liquid asset is cash and due from banks. These funds offer substantial resources to meet on-going operational need and or to help offset reductions in our deposit funding base. At December 31, 2024 and 2023, cash and due from banks totaled $878.2 million and $578.0 million, respectively.
Our liquidity is further enhanced by our ability to pledge loans and investment securities to access secured borrowings from the FHLB. Our debt securities available for sale at December 31, 2024 and 2023 totaled $338.1 million and $419.2 million, respectively. During the year ended December 31, 2024, we purchased investment securities of $219.3 million and had maturing and principal receipts of investment securities of $306.4 million. We regularly review the need to adjust our investments in liquid assets based upon our assessment of: (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest earning deposits and securities and (4) the objectives of our asset/liability management program. The Company’s Asset Liability Management Committee monitors sources and uses of funds and modifies asset and liability positions as liquidity requirements change. Excess liquid assets are generally invested in interest-earning deposits and short-term securities.
Based on our collateral, consisting of certain residential mortgage loans and investment securities, and holdings of FHLB stock, the Company had additional borrowing capacity with the FHLB of $397.2 million at December 31, 2024. We also had available credit lines with other banks totaling $60.0 million.
Cash flows from financing activities are primarily impacted by our deposits. Our total deposits were $2.1 billion at December 31, 2024, an increase of $66.9 million, or 3%, from December 31, 2023. We generate deposits from local businesses and individuals through customer referrals and other relationships and through our retail presence. We obtain funds from depositors by offering a range of deposit types, including demand, savings money market and time. We utilize borrowings and brokered deposits to supplement funding needs and manage our liquidity position though we have not used brokered deposits during the past three years. At December 31, 2024, time deposits due within one year were $797.4 million, or 39% of total deposits. At December 31, 2023, time deposits due within one year were $761.7 million, or 38% of total deposits. In addition, we estimated our total uninsured deposits were approximately 23% of total deposits at December 31, 2024.
Cash flows from investing activities are primarily impacted by our loan and investment securities activity, as discussed above. The Company’s goal is to obtain as much of its funding for loans held for investment and other earning assets as possible from customer deposits. The Company suspended originating residential real estate loans in early in 2023, resulting in loan payoffs far exceeding loan originations in 2024 and 2023. During the year ended December 31, 2024 and 2023, net cash inflows from loans were $193.8 million and $273.3 million, respectively. From time to time, we also sell residential mortgage loans in the secondary market primarily to third party investors. Often, the agreements under which we sell residential mortgage loans may contain provisions that include various representations and warranties regarding origination and characteristics of the residential mortgage loans. The Company has an outstanding commitment to repurchase a pool of Advantage Loan Program loans sold to an investor with an unpaid principal balance of $11.1 million at December 31, 2024. This commitment expires in July 2025.
The Company is a separate and distinct legal entity from the Bank, and, on a parent company-only basis, the Company’s primary source of funding is dividends received from the Bank. Federal banking regulations limit the dividends that may be paid by the Bank. Regulatory approval is required if the Bank’s total capital distributions for the applicable calendar year exceed the sum of the Bank’s net income for that year to date plus the Bank’s retained net income for the preceding two years, or the Bank would not be at least “adequately capitalized” under applicable regulations following the distribution. Federal banking regulations also limit the ability of the Bank to pay dividends under other circumstances. Even if an application is not otherwise required, every savings bank that is a subsidiary of a unitary thrift holding company, such as the Bank, must still file a notice with the FRB at least 30 days before its board of directors declares a dividend or approves a capital distribution. The Company has the legal ability to access the debt and equity capital markets for funding, although the Company currently is required to obtain the prior approval of the FRB in order to issue debt.
As a result of the guilty plea and criminal conviction pursuant to our Plea Agreement with the DOJ, we fall within the “bad actor” disqualification provisions of Regulation A and Regulation D under the Securities Act. These provisions prohibit an issuer from offering or selling securities in a private placement in reliance on Regulation A for certain small offerings and Regulation D for certain private placement transactions for a period of up to five years under certain circumstances. The SEC may waive such disqualification upon a showing of good cause that disqualification is not necessary under the circumstances for which the safe harbor exemptions are being denied. Absent a waiver, we will be restricted in our ability to raise capital in a private placement in reliance on the safe harbors provided by Regulation A or Regulation D. We have submitted to the SEC a waiver request from the “bad actor” disqualifications. If the SEC were to deny our waiver request, we will be limited in our ability to raise capital through a private placement under Regulation A or Regulation D, although we would remain eligible as an SEC registrant to access the equity capital markets through an SEC-registered offering or through another exemption from the registration requirements. See “Item 1. Business-Our Business-Resolution of the Department of Justice Investigation” for further detail.
The Company’s primary funding needs on a parent company-only basis consists of expenses attributable to the Transaction and public company operations. The Company suspended cash dividends to shareholders and its share repurchase program early in 2020, and does not currently plan to pay cash dividends to shareholders, other than liquidating distributions pursuant to the Plan of Dissolution following the closing of the Transaction.
The Company’s ability to pay cash dividends is restricted by the terms of the applicable provisions of Michigan law and the rules and regulations of the OCC and the FRB. In addition, under Michigan law, the Company is prohibited from paying cash dividends if, after giving effect to the dividend, (i) it would not be able to pay its debts as they become due in the usual course of business or (ii) its total assets would be less than the sum of its total liabilities plus the preferential rights upon dissolution of shareholders with preferential rights on dissolution that are superior to those receiving the dividend, and we are currently required to obtain the prior approval of the FRB in order to pay any dividends to our shareholders. Upon completion of the Transaction, the Company will no longer be a thrift holding company and will no longer be subject to bank regulatory restrictions or prior regulatory approval with respect to payment of dividends or payment of liquidating distributions pursuant to the Plan of Dissolution. For additional information on our dividend policy, see “Market for Common Stock - Dividend Policy.”
The Company and the Bank are subject to minimum capital adequacy requirements administered by the Federal Reserve and the OCC, respectively. We manage our capital to comply with our internal planning targets and regulatory capital standards administered by the Federal Reserve and the OCC. We review capital levels on a quarterly basis.
Effective as of January 1, 2023, the Company and the Bank have each elected to use the CBLR framework for compliance with regulatory capital requirements. At December 31, 2024, the Company and Bank satisfied the requirements of the CBLR framework with leveraged capital ratios of 14.07% and 13.76%, respectively, compared to a minimum 9% requirement, and therefore are considered to have met the minimum capital requirements to be “well capitalized” under applicable prompt corrective action requirements.
Recently Issued Accounting Guidance
See Note 2-Summary of Significant Accounting Policies to our consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” for a discussion of recently issued accounting guidance and related impact on our financial condition and results of operations.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General. The principal objective of our asset and liability management function is to evaluate the interest rate risk within the balance sheet and pursue a controlled assumption of interest rate risk while maximizing net income and preserving adequate levels of liquidity and capital. The Asset Liability Committee of our board of directors serves as oversight of our asset and liability management function, which is implemented and managed by our Management Asset Liability Committee. Our Management Asset Liability Committee meets regularly to review, among other things, the sensitivity of our assets and liabilities to product offering rate changes, local and national market conditions and market interest rates. That group also reviews our liquidity, capital, deposit mix, loan mix and investment positions.
We manage our exposure to interest rates primarily by structuring our balance sheet in the ordinary course of business based on a risk management infrastructure approved by our board of directors that outlines reporting and measurement requirements. In particular, this infrastructure sets limits, calculated quarterly, for various interest rate-related metrics, our economic value of equity (“EVE”) and net interest income simulations involving parallel shifts in interest rate curves. Steepening and flattening yield curves and various prepayment and deposit duration assumptions are prepared at least annually. Our interest rate management policies also require periodic review and documentation of all key assumptions used, such as identifying appropriate interest rate scenarios, setting loan prepayment rates and deposit durations based on historical analysis.
We do not typically enter into derivative contracts for the purpose of managing interest rate risk, but we may do so in the future. Based upon the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets.
Net Interest Income Simulation. We use an interest rate risk simulation model to test the interest rate sensitivity of net interest income and the balance sheet. Instantaneous parallel rate shift scenarios are modeled and utilized to evaluate risk and establish exposure limits for acceptable changes in net interest income. These scenarios, known as rate shocks, simulate an instantaneous change in interest rates on a static balance sheet and use various assumptions, including, but not limited to, prepayments on loans and securities, deposit decay rates and pricing decisions on loans and deposits.
Because these scenarios simulate instantaneous changes in interest rates on a static balance sheet that are subject to various assumptions, the scenarios below may not fully reflect our exposure to interest rate risk. For example, in the event of a significant decrease of the target federal funds rate by the FOMC we may not be able to lower our deposit rates at a similar pace in order to avoid significant deposit withdrawals as customers seek the highest yield possible for their funds. A significant, rapid decrease in interest rates could affect (i) the demand of our deposit products; (ii) our liquidity position if our depositors were to withdraw and move their funds to competing financial institutions; (iii) the expected yield of our loan portfolio and debt securities; (iv) the average duration of our loan portfolio and debt securities; (v) the fair value of our financial assets and financial liabilities; and (vi) our balance sheet mix and composition. In addition, the lack of robust loan originations will inhibit our ability to reinvest loan prepayments that occur as interest rates decline in interest earning assets at the higher end of the yield curve, thus either narrowing our interest rate spread and net interest margin or resulting in further significant decline in the size of our balance sheet. See “Risk Factors-Risks Related to Interest Rates.”
The following table presents the estimated changes in net interest income of the Bank, calculated on a bank-only basis, which would result from changes in market interest rates over a 12-month period beginning December 31, 2024 and 2023. Net interest income in the zero rate change scenario decreased from December 31, 2023. Balance sheet mix changes reduced the benefit of rate increases on interest-earning assets, as higher yielding loans were replaced with lower yielding cash and investment securities. Reduced rates paid on money market accounts offset much of the lower assets yield. Asset sensitivity of our balance sheet increased from December 31, 2023. Greater sensitivity to rate changes was due to longer duration loans paying off, increasing cash which reprices immediately.
At December 31,
Estimated
Estimated
12-Months
12-Months
Net Interest
Net Interest
Change in Interest Rates (Basis Points)
Income
Change
Income
Change
(Dollars in thousands)
$
67,168
%
$
62,356
%
63,560
%
62,560
%
59,265
61,652
−100
56,105
(5)
%
60,057
(3)
%
−200
53,613
(10)
%
57,636
(7)
%
Economic Value of Equity Simulation. We also analyze our sensitivity to changes in interest rates through an EVE model. EVE represents the present value of the expected cash flows from our assets less the present value of the expected cash flows arising from our liabilities. EVE attempts to quantify our economic value using a discounted cash flow methodology. We estimate what our EVE would be as of a specific date. We then calculate what EVE would be as of the same date throughout a series of interest rate scenarios representing immediate and permanent parallel shifts in the yield curves.
As described above, due to the nature of the EVE model and its underlying assumptions, the scenarios below may not fully reflect our exposure to interest rate risk. See “-Net Interest Income Simulation” above for further discussion regarding how our exposure to interest rate risk may change, particularly upon a significant, rapid decrease in interest rates.
The following table presents, as of December 31, 2024 and 2023, respectively, the impacts of immediate and permanent parallel hypothetical changes in market interest rates on EVE of the Bank, calculated on a bank-only basis. The base EVE increased from December 31, 2023 primarily due to the increased value of our money market accounts. We lowered our money market rates during 2024 while the yield curve normalized. The sensitivity of our balance sheet to rising rates improved from December 31, 2023 primarily as a result of the shift in asset mix from rate sensitive loans to non-rate sensitive cash. Since EVE is a long-term measurement of value, the change in EVE is not indicative of the short term (12-months) effects on earnings.
At December 31,
Economic
Economic
Change in Interest Rates (Basis Points)
Value of Equity
Change
Value of Equity
Change
(Dollars in thousands)
$
324,166
(10)
%
$
261,202
(17)
%
345,607
(4)
%
293,190
(6)
%
359,717
313,220
−100
368,445
%
322,399
%
−200
374,726
%
326,171
%
As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing tables. Many assumptions are used to calculate the impact of interest rate fluctuations. Actual results may be significantly different than our projections due to several factors, including the timing and frequency of rate changes, market conditions and the shape of the yield curve. The computations of interest rate risk shown above do not include actions that our management may undertake to manage the risks in response to anticipated changes in interest rates, and actual results may also differ due to any actions taken in response to the changing rates. Accordingly, the data presented in the tables in this section should not be relied upon as indicative of actual results in the event of changes in interest rates and the resulting EVE and net interest income estimates are not intended to represent and should not be construed to represent our estimate of the underlying EVE or forecast of net interest income. Furthermore, the EVE presented in the foregoing table is not intended to present the fair market value of the Company, nor does it represent amounts that would be available for distribution to shareholders in the event of the liquidation of the Company.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of Sterling Bancorp, Inc.
Southfield, Michigan
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Sterling Bancorp, Inc. (the “Company”) as of December 31, 2024 and 2023, the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2024, and the related notes (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control - Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2024 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control - Integrated Framework: (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Controls over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses for Loans
The Company measures expected credit losses on pooled loans with similar risk characteristics using a Probability of Default / Probability of Attribution model and qualitative factor framework which estimates credit losses over the expected life of the loan as described in Notes 2 and 5 of the consolidated financial statements. The Company adjusts its quantitative model for certain qualitative factors to reflect the extent to which management expects current conditions and reasonable and supportable forecasts to differ from the conditions that existed for the period over which historical information was evaluated.
The Company estimates the allowance for credit losses for pooled loans initially through the deployment of a Probability of Default / Probability of Attrition model, which uses macroeconomic variables, including but not limited to unemployment rates, gross domestic product, and the Treasury Yield Curve and peer loss data, when required to develop a statistical estimate of credit losses. Adjustments to the statistical model are made for imprecision inherent in the forecasts of macroeconomic variables, for portfolio dispersion, for levels of criticized and classified loans, for management’s collection strategy and for unique characteristics of the Advantage loan portfolio. These adjustments are formulated through a qualitative factor framework that comprises the aforementioned factors and quantifies the Company’s exposure to credit losses associated with each.
Auditing the Probability of Default / Probability of Attrition model and the qualitative factor framework used in determining the allowance for credit losses was identified by us as a critical audit matter. It required significant auditor judgment and significant audit effort to evaluate the subjective and complex judgments made by management related to the application of the Probability of Default / Probability of Attrition model and the selection of and application of the qualitative factor framework, including the need to use our valuation specialists.
The primary procedures performed to address the critical audit matter included:
● Testing the effectiveness of management’s controls addressing:
o Management’s application of the Probability of Default / Probability of Attrition model, including validating the chosen regression development methodology and evaluating the conceptual design of the model;
o Management’s review of the relevance and reliability of data used in the Probability of Default / Probability of Attrition model;
o Management’s review over the Company’s judgments and assumptions used in the formulation of the qualitative factor framework; and
o Management’s review over the relevance and reliability of the internal and external data used in the formulation of the qualitative factor framework.
● Substantive testing included:
o With the assistance of our valuation specialists, evaluating management’s judgments and assumptions related to the application of the Probability of Default / Probability of Attrition model, including evaluating the conceptual design of the model and the mathematical accuracy of the Probability of Default / Probability of Attrition model;
o Evaluating the relevance and reliability of data used in the Probability of Default/Probability of Attrition model;
o Evaluating management’s judgments and assumptions used in the formulation of the qualitative factor framework; and
o Evaluating the relevance and reliability of the internal and external data used in the formulation of the qualitative factor framework.
/s/ Crowe LLP
We have served as the Company’s auditor since 2003.
Grand Rapids, Michigan
March 14, 2025

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
STERLING BANCORP, INC.
Consolidated Balance Sheets
(dollars in thousands)
December 31,
Assets
Cash and due from banks
$
878,181
$
577,967
Interest-bearing time deposits with other banks
-
5,226
Debt securities available for sale, at fair value (amortized cost $356,746 and $440,211 at December 31, 2024 and 2023, respectively)
338,105
419,213
Equity securities
4,661
4,703
Loans, net of allowance for credit losses of $20,805 and $29,404 at December 31, 2024 and 2023, respectively
1,134,925
1,319,568
Accrued interest receivable
8,592
8,509
Mortgage servicing rights, net
1,279
1,542
Leasehold improvements and equipment, net
4,480
5,430
Operating lease right-of-use assets
10,640
11,454
Federal Home Loan Bank stock, at cost
18,423
18,923
Federal Reserve Bank stock, at cost
9,238
9,048
Company-owned life insurance
8,926
8,711
Deferred tax asset, net
15,389
16,959
Other assets
3,673
8,750
Total assets
$
2,436,512
$
2,416,003
Liabilities and Shareholders’ Equity
Liabilities
Noninterest-bearing deposits
$
38,086
$
35,245
Interest-bearing deposits
2,032,804
1,968,741
Total deposits
2,070,890
2,003,986
Federal Home Loan Bank borrowings
-
50,000
Operating lease liabilities
11,589
12,537
Other liabilities
20,070
21,757
Total liabilities
2,102,549
2,088,280
Commitments and contingencies (Note 19)
Shareholders’ equity
Preferred stock, authorized 10,000,000 shares; no shares issued and outstanding
-
-
Common stock, no par value, authorized 500,000,000 shares; issued and outstanding 52,305,036 shares and 52,070,361 at December 31, 2024 and 2023, respectively
84,323
84,323
Additional paid-in capital
19,053
16,660
Retained earnings
244,102
241,964
Accumulated other comprehensive loss
(13,515)
(15,224)
Total shareholders’ equity
333,963
327,723
Total liabilities and shareholders’ equity
$
2,436,512
$
2,416,003
See accompanying notes to consolidated financial statements.
STERLING BANCORP, INC.
Consolidated Statements of Operations
(dollars in thousands, except per share amounts)
Year Ended December 31,
Interest income
Interest and fees on loans
$
82,055
$
86,684
$
87,375
Interest and dividends on investment securities and restricted stock
17,734
12,056
6,426
Interest on interest-bearing cash deposits
35,346
28,049
6,131
Total interest income
135,135
126,789
99,932
Interest expense
Interest on deposits
78,298
57,109
14,992
Interest on Federal Home Loan Bank borrowings
1,169
Interest on subordinated notes
-
3,727
4,969
Total interest expense
78,665
61,830
21,130
Net interest income
56,470
64,959
78,802
Provision for (recovery of) credit losses
(8,536)
(8,527)
(9,934)
Net interest income after provision for (recovery of) credit losses
65,006
73,486
88,736
Non-interest income
Service charges and fees
Gain (loss) on sale of investment securities
-
(113)
Gain on sale of mortgage loans held for sale
-
1,623
Unrealized gain (loss) on equity securities
(42)
(580)
Net servicing income (loss)
(20)
Income earned on company-owned life insurance
Other
Total non-interest income
1,057
2,786
1,347
Non-interest expense
Salaries and employee benefits
33,583
35,937
33,507
Occupancy and equipment
8,123
8,369
8,657
Professional fees
10,065
10,076
23,908
FDIC assessments
1,048
1,058
1,146
Data processing
2,950
2,941
3,058
Provision for contingent losses
-
-
18,239
Other
6,044
7,329
9,133
Total non-interest expense
61,813
65,710
97,648
Income (loss) before income taxes
4,250
10,562
(7,565)
Income tax expense
2,112
3,149
6,629
Net income (loss)
$
2,138
$
7,413
$
(14,194)
Income (loss) per share, basic and diluted
$
0.04
$
0.15
$
(0.28)
Weighted average common shares outstanding:
Basic
50,971,884
50,630,928
50,346,198
Diluted
51,340,966
50,778,559
50,346,198
See accompanying notes to consolidated financial statements.
STERLING BANCORP, INC.
Consolidated Statements of Comprehensive Income (Loss)
(dollars in thousands)
Year Ended December 31,
Net income (loss)
$
2,138
$
7,413
$
(14,194)
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on investment securities, arising during the year, net of tax effect of $649, $1,599 and $(7,048), respectively
1,709
4,220
(18,605)
Reclassification adjustment for the (gain) loss included in net income (loss) of $-, $113 and $(32), respectively, included in gain (loss) on sale of investment securities, net of tax effect of $- , $32 and $(9), respectively
-
(23)
Total other comprehensive income (loss)
1,709
4,301
(18,628)
Comprehensive income (loss)
$
3,847
$
11,714
$
(32,822)
See accompanying notes to consolidated financial statements.
STERLING BANCORP, INC.
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
(Loss)
Equity
Balance at January 1, 2022
50,460,932
$
82,157
$
14,124
$
248,243
$
(897)
$
343,627
Net loss
-
-
-
(14,194)
-
(14,194)
Repurchase of restricted shares to pay employee tax liability
(32,929)
-
(216)
-
-
(216)
Issuance of shares of common stock to defined contribution retirement plan (Note 11)
160,978
1,138
-
-
-
1,138
Stock-based compensation
206,890
-
-
-
Other comprehensive loss
-
-
-
-
(18,628)
(18,628)
Balance at December 31, 2022
50,795,871
83,295
14,808
234,049
(19,525)
312,627
Cumulative effect adjustment of change in accounting principle, net of tax, on adoption of ASU 2016-13 (Note 2)
-
-
-
-
Cumulative effect adjustment of change in accounting principle, net of tax, on adoption of ASU 2022-02 (Note 2)
-
-
-
(276)
-
(276)
Net income
-
-
-
7,413
-
7,413
Repurchase of restricted shares to pay employee tax liability
(42,753)
-
(245)
-
-
(245)
Issuance of shares of common stock to defined contribution retirement plan (Note 11)
184,928
1,028
-
-
-
1,028
Stock-based compensation
1,132,315
-
2,097
-
-
2,097
Other comprehensive income
-
-
-
-
4,301
4,301
Balance at December 31, 2023
52,070,361
84,323
16,660
241,964
(15,224)
327,723
Net income
-
-
-
2,138
-
2,138
Repurchase of restricted shares to pay employee tax liability
(157,130)
-
(836)
-
-
(836)
Stock-based compensation
391,805
-
3,229
-
-
3,229
Other comprehensive income
-
-
-
-
1,709
1,709
Balance at December 31, 2024
52,305,036
$
84,323
$
19,053
$
244,102
$
(13,515)
$
333,963
See accompanying notes to consolidated financial statements.
STERLING BANCORP, INC.
Consolidated Statements of Cash Flows
(dollars in thousands)
Year Ended December 31,
Cash Flows From Operating Activities
Net income (loss)
$
2,138
$
7,413
$
(14,194)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Provision for (recovery of) credit losses
(8,536)
(8,527)
(9,934)
Deferred income taxes
4,924
4,779
Gain on extinguishment of Subordinated Notes
-
(234)
-
(Gain) loss on sale of debt securities
-
(32)
Unrealized (gain) loss on equity securities
(61)
Net accretion on debt securities
(3,591)
(2,938)
(841)
Depreciation and amortization on leasehold improvements and equipment
1,030
1,331
1,541
Originations, net of principal payments, of loans held for sale
-
(9,438)
(3,641)
Proceeds from sale of mortgage loans held for sale
-
9,691
8,798
Gain on sale of mortgage loans held for sale
-
(1,623)
(143)
Net provision for (recovery of) of mortgage repurchase liability
(258)
(59)
(639)
Provision for contingent losses
-
-
18,239
Increase in cash surrender value of company-owned life insurance, net of premiums
(215)
(210)
(345)
Valuation allowance adjustments and amortization of mortgage servicing rights
Stock-based compensation
3,229
2,097
Other
(3)
Change in operating assets and liabilities:
Accrued interest receivable
(83)
(680)
(133)
Other assets
5,002
2,723
4,887
Other liabilities
(2,071)
(29,681)
(8,493)
Net cash provided by (used in) operating activities
(2,122)
(24,910)
2,338
Cash Flows From Investing Activities
Maturities of interest-bearing time deposits with other banks
5,233
Purchases of interest-bearing time deposits with other banks
-
(4,974)
(685)
Maturities and principal receipts of debt securities
306,387
71,856
87,748
Proceeds from sale of debt securities
-
9,578
6,999
Purchases of debt securities
(219,330)
(148,484)
(154,460)
Maturities of debt securities, net
-
-
Proceeds from redemption of Federal Home Loan Bank stock
1,365
2,662
Purchase of shares of Federal Reserve Bank stock
(190)
(4,524)
-
Net decrease in loans
193,756
273,257
433,903
Purchases of portfolio loans
-
-
(97,974)
Principal payments received on loans held for sale previously classified as portfolio loans
-
1,959
2,531
Proceeds from loans held for sale previously classified as portfolio loans
-
37,930
67,584
Proceeds received from settlement of company-owned life insurance policies
-
-
24,877
Proceeds from the sale of equipment
-
-
Purchases of leasehold improvements and equipment
(88)
(472)
(421)
Net cash provided by investing activities
286,268
238,375
373,698
Cash Flows From Financing Activities
Net increase (decrease) in deposits
66,904
49,949
(307,698)
Repayment of advance from Federal Home Loan Bank
(50,000)
-
(135,000)
Proceeds from advances from Federal Home Loan Bank
-
-
35,000
Payments on redemption of Subordinated Notes
-
(65,000)
-
Cash paid for surrender of vested shares to satisfy employee tax liability
(836)
(245)
(216)
Net cash provided by (used in) financing activities
16,068
(15,296)
(407,914)
Net change in cash and due from banks
300,214
198,169
(31,878)
Cash and due from banks, beginning of period
577,967
379,798
411,676
Cash and due from banks, end of period
$
878,181
$
577,967
$
379,798
Supplemental cash flows information
Cash paid for:
Interest
$
78,603
$
62,004
$
19,835
Income taxes
2,279
Noncash investing and financing activities:
Transfers of residential and commercial real estate loans to loans held for sale
-
34,581
-
Transfers of residential real estate loans from loans held for sale
-
3,906
-
Right-of-use assets obtained in exchange for new operating lease liabilities
2,773
Shares of common stock issued in satisfaction of matching contribution in defined contribution retirement plan
-
1,028
1,138
See accompanying notes to consolidated financial statements.
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
Note 1-Nature of Operations
Sterling Bancorp, Inc. (unless stated otherwise or the context otherwise requires, together with its subsidiary, 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”), which was formed in 1984. The Company’s business is conducted through the Bank. The Bank originates commercial real estate loans and commercial and industrial loans, and provides deposit products, consisting primarily of checking, savings and term certificate accounts. The Bank also engages in mortgage banking activities and, as such, acquires, sells and services residential mortgage loans. The Bank operates through a network of 27 branches of which 25 branches are located in the San Francisco and Los Angeles, California metropolitan areas with the remaining branches located in New York, New York and Southfield, Michigan. In February 2024, the Company closed one of its branches in San Francisco and consolidated the operations into a nearby branch office. The Company is headquartered in Southfield, Michigan. In October 2024, we published notice of the planned closing of the branch office located at our headquarters in Southfield, Michigan in connection with the closing of the Transaction (as described below).
Historically, the Company’s largest asset class has been residential mortgage loans. In 2023, the Bank discontinued originating residential loans. In May 2022, the Company outsourced the residential loan origination function to a third-party residential lending service provider. In November 2022, the service provider notified the Company of its intention to cease conducting business. Residential loan applications were processed through February 2023. At that time, the Company explored possible other service providers but decided to suspend the origination of residential lending.
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 has elected to operate as a covered savings association, effective August 9, 2023. As a covered savings association, the Bank will generally function as a commercial bank without the constraints applicable to a thrift institution. Prior to the election becoming effective, the Bank was subject to the Qualified Thrift Lender (“QTL”) test. Under the QTL test, a savings institution is required to maintain at least 65% of its portfolio assets in certain qualified thrift investments (primarily residential mortgages and related investments, including certain mortgage-backed and related securities) in at least nine months out of each 12-month period. The Bank 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 FRB system and Federal Home Loan Bank (“FHLB”) system.
Proposed Sale of the Bank and Dissolution of the Company
On September 15, 2024, the Company and the Bank entered into a definitive stock purchase agreement (the “Stock Purchase Agreement”) with EverBank Financial Corp, a Delaware corporation (“EverBank”), which provides for the Company to sell all of the issued and outstanding shares of capital stock of the Bank to EverBank for a fixed purchase price of $261,000 to be paid in cash to the Company (the “Transaction”). Following the completion of the Transaction, EverBank will cause the Bank to merge with and into EverBank, National Association, the bank subsidiary of EverBank, with EverBank, National Association as the surviving bank. Following the bank merger, the separate corporate existence of the Bank will cease.
Also on September 15, 2024, the Company’s board of directors unanimously approved a plan of dissolution (the “Plan of Dissolution”), which provides for the dissolution of the Company under Michigan law following the closing of the Transaction. The Company intends to file a certificate of dissolution with the Michigan Department of Licensing and Regulatory Affairs and subject to first completing the wind down of the Company and paying or providing for the Company’s creditors and existing and reasonably foreseeable debts, liabilities, and obligations of and claims against the Company (including all transaction expenses incurred in connection with the negotiation and consummation of the Stock Purchase Agreement and any claims or demands received by the Company on behalf of any of its shareholders) in accordance with Michigan law and the Plan of Dissolution, distribute the remaining cash to its shareholders according to their respective rights and interests, in one or more distributions.
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
The Company’s shareholders approved the Stock Purchase Agreement, the Transaction and the Plan of Dissolution at a Special Meeting of Shareholders held on December 18, 2024. The Transaction is expected to close early in the second quarter of 2025. The Transaction is subject to customary closing conditions, including the receipt of required regulatory approvals. On March 13, 2025, the Company received approval for the Transaction from the Office of the Comptroller of the Currency. The Transaction remains subject to the receipt of approval from the Board of Governors of the Federal Reserve System. In addition, EverBank’s obligation to complete the Transaction is also subject to the following conditions: (i) the sale by the Bank of its portfolio of residential tenant-in-common loans (with an aggregate principal balance of approximately $349,000 at December 31, 2024) and receipt by the Bank of the purchase price specified in such agreement and (ii) the average daily closing balance of the Bank’s deposits for the monthly period ending on the last day of the month before closing is not less than 85% of the average daily closing balance of such deposits for the monthly period ending on July 31, 2024.
Simultaneously with the execution of the Stock Purchase Agreement, the Bank entered into the mortgage loan purchase agreement (the “Mortgage Loan Purchase Agreement”) with Bayview Acquisitions LLC, a Delaware limited liability company (“Bayview”). The Mortgage Loan Purchase Agreement provides that Bayview will purchase the Bank’s residential tenant-in-common loans for an aggregate purchase price equal to 87% of the aggregate unpaid principal balance of the loans on the agreed upon purchase date plus all accrued and unpaid interest. The Bank’s obligation to consummate the sale contemplated by the Mortgage Loan Purchase Agreement is subject to certain conditions, including the receipt by the Bank of evidence of the shareholder and regulatory approvals required for the Transaction. As of December 31, 2024, the residential tenant-in-common loans were not held for sale as the Bank’s intent to liquidate its tenant-in-common loan portfolio is based solely upon its ability to close the Transaction and receipt of the required approvals for the Transaction of which regulatory approval was not yet received as of December 31, 2024. The closing of the loan sale is to occur after receipt of all regulatory approvals for the Transaction and shortly prior to the closing of the Transaction.
Note 2-Summary of Significant Accounting Policies
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The consolidated financial statements include the results of Sterling Bancorp, Inc. and its wholly-owned subsidiary.
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 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.
Fair Value Measurements
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine its fair value disclosures. The determination of fair values of financial instruments often requires the use of estimates. In cases where quoted market values in an active market are not readily available, the Company uses present value techniques and other valuation methods, as disclosed in Note 16-Fair Value, to estimate the fair value of its financial instruments. These valuation methods require considerable judgment, and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used.
Debt securities available for sale and equity securities with readily determinable fair values are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record other assets and liabilities at fair value on a nonrecurring basis, such as loans, other real estate owned, nonmarketable equity securities and certain other assets and liabilities.
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
These nonrecurring fair value adjustments generally involve write-downs of individual assets or application of lower of amortized cost or fair value accounting.
Consolidated Statements of Cash Flows
The Company presents the cash flows from cash receipts and payments pertaining to short-term borrowings and investments when the turnover is quick, the amounts are large, and maturities are less than ninety days on a net basis in its consolidated statements of cash flows. Also, net cash flows are reported for customer loan and deposit transactions.
Cash flows related to customer loans are classified within operating and investing activities in the consolidated statements of cash flows based on their initial classification of the loan.
Cash and Due from Banks
Cash and due from banks, consisting of cash, certificates of deposit and other deposits held with other banks with original maturities of three months or less, are considered cash and cash equivalents for purposes of the consolidated statements of cash flows.
Interest-bearing Time Deposits with Other Banks
Interest-bearing time deposits with other banks consists of certificates of deposit with maturities greater than three months and are carried at cost. Each certificate of deposit is below the FDIC insurance limit of $250. Interest income is recorded when earned.
Concentration of Credit Risk
The loan portfolio consists primarily of residential real estate loans, which are collateralized by real estate. At December 31, 2024 and 2023, residential real estate loans accounted for 73% and 80%, respectively, of total gross loans. In addition, most of these residential loans and other commercial loans have been made to individuals and businesses in the state of California, which are dependent on the area economy for their livelihoods and servicing of their loan obligation. At December 31, 2024 and 2023, approximately 75% and 80%, respectively, of gross loans were originated with respect to properties or businesses located in the state of California.
Also, the loan portfolio consists of a loan product 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 was terminated at the end of 2019 and continues to be the largest portion of gross residential loans. An internal review of the Advantage Loan Program and investigations conducted by the U.S. Department of Justice (the “DOJ”) and the OCC indicated that certain employees engaged in misconduct in connection with the origination of a significant number of such loans, including the falsification of information with respect to verification of income, the amount of income reported for borrowers, reliance on third parties and related documentation. Refer to Note 19-Commitments and Contingencies. This former loan product totaled $443,036 and $628,245, or 52% and 58% of gross residential loans, at December 31, 2024 and 2023, respectively.
Debt Securities
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 at December 31, 2024 and 2023.
Debt securities available for sale are stated at fair value, with unrealized gains and losses reported in other comprehensive income (loss), net of income taxes. Held to maturity securities are carried at amortized cost when management has the positive intent and ability to hold them to maturity. The amortized cost of debt securities classified as held to maturity or available for sale 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.
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
Effective January 1, 2023, for debt securities available for sale 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 debt securities available for sale 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 (loss).
Changes in the allowance for credit losses are recorded as a provision for (recovery 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.
For debt securities held to maturity, the Company utilizes the current expected credit loss approach to estimate lifetime expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of debt securities held to maturity to present the net amount expected to be collected from debt securities held to maturity.
Accrued interest receivable on debt securities available for sale is recorded separately from the amortized cost basis of the debt securities in the consolidated balance sheets and is excluded from the estimate of credit losses.
Prior to January 1, 2023, Management evaluated debt securities for other-than-temporary impairment at least on a quarterly basis and more frequently when economic or market conditions warrant such an evaluation. In determining other-than-temporary impairment for debt securities, management considered many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether a decline was other-than-temporary involved a high degree of subjectivity and judgment and was based on the information available to management at a point in time. A charge was recognized against income for all or a portion of the impairment if the loss was determined to be other-than-temporary.
Under the other-than-temporary impairment model, if the Company’s intention was to sell the debt security or it was more likely than not that the Company would be required to sell the debt security prior to the recovery of its amortized cost basis, the debt security was written down to fair value, and the full amount of any impairment charge was recorded as a loss in the consolidated statements of operations. If the Company did not intend to sell the debt security and it was more likely than not that the Company would not be required to sell the debt security prior to recovery of its amortized cost basis, only the current period credit loss of any impairment of a debt security was recognized in the consolidated statements of operations, with the remaining impairment recorded in other comprehensive income (loss).
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.
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
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 is 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 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 residential real estate 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 residential real estate 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 in the consolidated statements of operations.
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 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.
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.
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 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.
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
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)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 the Probability of Default/Probability of Attrition model, which is a logistic regression model, and add the qualitative adjustments to the model results along with the results from any individual loan assessments.
The Probability of Default/Probability of Attrition model estimates the expected lifetime net charge off balance utilizing the following: (i) probability that the loan will stop performing or default; and (ii) probability that a loan will pay-off entirely prior to maturity. Data used in the development of the probability of default includes macroeconomic variables, including but not limited to unemployment rates, gross domestic product, and the Treasury Yield Curve and peer loss data, when required, which is sourced from a third party. The information is specific to each portfolio segment, though not necessarily solely reliant on internally sourced data. 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, among other things, adjustments for imprecision inherent in the forecasts of macroeconomic variables, levels of criticized and classified loans and collection strategies management may employ to reduce these levels, portfolio dispersion and the unique characteristics of the Advantage Loan Program loans which could result in behavior different than our historic losses in a downside economic cycle.
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
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 Mortgage 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 a 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 Loan portfolio includes commercial loans made to many types of businesses secured by 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 Loan 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.
The Commercial and Industrial Loan 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 and the Company typically seeks personal guarantees on commercial and industrial loans.
Allowance for Loan Losses (Prior to January 1, 2023)
The allowance for loan losses was a valuation allowance for probable incurred credit losses, increased or decreased by the provision for loan losses and decreased by charge offs less recoveries. Loan losses were charged against the allowance for loan losses when a loan was considered partially or fully uncollectible or had such little value that continuance as an asset was not warranted. Subsequent recoveries, if any, were credited to the allowance for loan losses. Management estimated the allowance for loan losses balance using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations, estimated collateral values, economic conditions and other factors. Allocations of the allowance for loan losses may be made for specific loans, but the entire allowance for loan losses was available for any loan that, in management’s judgment, should be charged off.
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
The allowance for loan losses consisted of specific and general components. The specific component related to loans that were individually classified as impaired. The general component covers all other loans and was based on historical loss experience adjusted for general economic conditions and other qualitative factors by portfolio segment. The historical loss experience was determined by portfolio segment and was based on the actual loss history experienced over the most recent three-year period. Significant judgment was used to assign each qualitative factor a level of risk, which was translated into additional basis points added to the historical loss rates. These economic and other risk factors included consideration of the following: levels of and trends in delinquencies and classified loans; trends in loan growth; effects of any changes in underwriting standards; other changes in lending policies, procedures and practices; experience, ability and depth of lending management and other relevant staff; national and local economic trends and conditions as indicated by unemployment rates, consumer confidence and household income; industry conditions such as property values and vacancy risk; and effects of changes in credit concentrations.
Mortgage Servicing Rights, net
Servicing assets (mortgage servicing rights) are recognized separately when residential real estate loans are sold with servicing rights retained by the Company. Mortgage servicing rights are initially recorded at fair value, which is determined based on an internal valuation model that calculates the present value of estimated future net servicing income. The servicing assets are subsequently measured using the amortization method which requires servicing assets to be amortized into non-interest income in the consolidated statements of operations in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.
On a quarterly basis, servicing assets are evaluated for impairment based upon the fair value of the mortgage servicing rights compared to their carrying amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. If the carrying amount of an individual grouping exceeds fair value, impairment is recorded on that grouping so that the servicing asset is carried at fair value. Impairment is recognized through a valuation allowance for an individual grouping. If it is later determined that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the valuation allowance may be recorded as an increase to income. Changes in valuation allowances are reported within net servicing income (loss) on the consolidated statements of operations. The fair values of servicing assets are subject to significant fluctuations due to changes in estimated and actual prepayment speeds and default rates and losses.
Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal, or a fixed amount per loan, and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing income. Servicing fees totaled $487, $551 and $905 for the year ended December 31, 2024, 2023 and 2022, respectively. Late fees and ancillary fees related to loan servicing were not material for the periods presented.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Federal Home Loan Bank Stock
The Bank is a member of the FHLB system. Members are required to own a certain amount of FHLB stock based on the level of FHLB borrowings and other factors and may invest additional amounts. The FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of its par value. The FHLB stock does not have a readily determinable fair value and no quoted market value as the ownership is restricted to member institutions. Also, the FHLB stock is pledged as collateral on FHLB borrowings. Cash and stock dividends on FHLB stock are reported as income in interest and dividends on investment securities and restricted stock in the consolidated statements of operations. Cash dividends received amounted to $935, $653 and $433 for the year ended December 31, 2024, 2023 and 2022, respectively.
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
Federal Reserve Bank Stock
The Bank is a member of its regional Federal Reserve Bank. As a covered savings association, the Bank is required to own a certain amount of capital stock of the Federal Reserve Bank of Chicago, of which 50% has been paid. The remaining 50% is subject to a call by the Federal Reserve Bank. The capital stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on the ultimate recovery of its par value. The capital stock does not have a readily determinable fair value and no quoted market value as ownership is restricted to member institutions. Cash and stock dividends on the Federal Reserve Bank stock are reported as income in interest and dividends on investment securities and restricted stock in the consolidated statements of operations. Cash dividends received amounted to$274 and $106 for the year ended December 31, 2024 and 2023, respectively.
Company-Owned Life Insurance
The Company owns life insurance policies on retired and former employees and officers. These policies are recorded at the amount that can be realized under the insurance contract at the consolidated balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Income from these policies and changes in the cash surrender value of the life insurance policies are recorded in non-interest income in the consolidated statements of operations and are generally not subject to income taxes.
During the year ended December 31, 2022, the Company surrendered certain life insurance policies related to former executives and a controlling shareholder. Refer to Note 15-Employee Benefit Plans.
Long-Lived Assets
Long-lived assets, such as leasehold improvements and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require long-lived assets or asset groups to be tested for possible impairment, the Company compares the undiscounted cash flows expected to be generated by that asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment charge is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques, such as discounted cash flow models and third-party independent appraisals.
Liability for Unfunded Commitments
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 other liabilities in the consolidated balance sheets, is adjusted through the provision for (recovery of) credit losses in the consolidated statements of operations.
Mortgage Repurchase Liability
In connection with portfolio loans sold in the secondary market, the Company makes customary representations and warranties about certain characteristics of each loan. The Company establishes a liability which may result from breaches in such representations and warranties. The mortgage repurchase liability reflects management’s estimate of such losses based on a combination of factors. The Company’s estimation process requires management to make subjective and complex judgments about matters that are inherently uncertain, such as expectations of future repurchase demands and economic factors. The actual loss on repurchases could vary significantly from the recorded repurchase liability, depending on the outcome of various factors.
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
A loss incurred on the repurchase of the Advantage Loan Program loans is charged against the mortgage repurchase liability, except when the unpaid principal balance of the loan is greater than its fair value on the date of repurchase. The amount in excess of fair value is recorded as a loss on repurchase in other non-interest expense. The disposition of the mortgage servicing rights related to servicing the respective loans (as mortgage servicing of these loans was retained at the time of sale) is recorded in net servicing income (loss) in non-interest income in the consolidated statements of operations. The Advantage Loan Program loans that have been repurchased are then included in loans held for investment. The mortgage repurchase liability is included in other liabilities in the consolidated balance sheets.
Legal Contingencies and Litigation Accruals
On a quarterly basis, management assesses potential losses in relation to their legal proceedings and other pending or threatened legal matters. If a loss is considered probable and the amount can be reasonably estimated, the Company recognizes an expense for the estimated loss. Estimates of any such loss are subjective in nature and require the evaluation of numerous facts and assumptions as to future events, including the application of legal precedent that may be conflicting. To the extent these estimates are more or less than the actual liability resulting from the resolution of these matters, net income (loss) would be increased or decreased accordingly. The Company accounts for the related legal costs of litigating a claim and taking legal actions by expensing the legal costs as incurred.
Revenue from Contracts with Customers
In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”), the Company recognizes revenue when control of promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those goods or services as performance obligations are satisfied.
The majority of the Company’s revenues are from interest income and other sources, including loans and investment securities, as well as fees related to mortgage servicing activities, which are not within the scope of ASC 606 and are instead subject to other accounting guidance. The Company’s services that are within the scope of ASC 606 are recorded within non-interest income, which includes service charges on deposit accounts, interchange income and other service charges and fees. Descriptions of these activities that are within the scope of ASC 606, which are presented in the consolidated statements of operations as components of non-interest income, are as follows:
Service charges on deposit accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligations. Service charges on deposit accounts are withdrawn from the customer’s account balance.
Interchange fees: The Company earns interchange fees from debit cardholder transactions conducted through the MasterCard payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Such interchange activity is shown on a net basis through non-interest income, other income.
Other service charges and fees: Other charges and fees includes revenue generated from wire transfers, lockboxes and the issuance of checks. Such fees are recognized at the point in time the customer requests the service, and the service is rendered.
Stock-based Compensation
Compensation cost is recognized for stock options and restricted stock awards issued to employees and independent members of the Company’s board of directors, based on the fair value of these awards at the date of grant. The fair value of stock options is estimated using a Black-Scholes option pricing model, and the fair value of restricted stock awards is based on the market price 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.
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
Compensation cost is recorded over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recorded on a straight-line basis over the requisite service period of the entire award. Forfeitures are recorded in the period in which they occur.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on debt securities available for sale, net of income taxes, which is also recognized as a separate component of shareholders’ equity. The Company releases the income tax effects on unrealized gains and losses on debt securities available for sale that are reported in other comprehensive income (loss) on a security-by-security basis when debt securities are sold.
Income Taxes
Income taxes are provided for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period the change occurs. A deferred tax valuation allowance is established if it is more likely than not that a deferred tax asset will not be realized. Deferred tax assets are reduced, through a valuation allowance, if necessary, by the amount of such benefits that are not expected to be realized based on current available evidence.
A tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
Income (Loss) per Share, Basic and Diluted
Basic income (loss) per share represents net income (loss) divided by the weighted average number of common shares outstanding during the period. In periods of income, diluted income per share represents net income divided by the weighted average number of common shares outstanding during the period, plus the effect of outstanding potential dilutive common shares. In periods of a net loss, basic and diluted per share information are the same.
Operating Segments
The Company’s operations are in the financial services industry. Operations are managed and financial performance is evaluated on a Company-wide basis since discrete financial information is not available other than on a consolidated basis. Accordingly, the Chief Executive Officer, who is designated as the chief operating decision-maker (“CODM”), evaluates the performance of the Company’s business based on one reportable segment, community banking. The CODM assesses the Company’s performance and decides how to allocate resources based on net income that also is reported on the consolidated statements of operations as consolidated net income.
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
New Accounting Standards Adopted in 2023
In March 2022, the FASB issued Accounting Standards Update (“ASU”) 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”), which eliminates the recognition and measurement 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 below. On the date of adoption, the Company recorded a cumulative effect adjustment of $276, net of tax, to decrease the opening balance of retained earnings as of January 1, 2023, for the initial application of ASU 2022-02. The cumulative effect adjustment (before tax) represents the difference between the allowance previously determined under the troubled debt restructuring model and the allowance determined under the new credit loss accounting model for such loans on the adoption date.
In June 2016, the FASB issued ASU 2016-13 (and subsequent amendments), which significantly changes estimates for credit losses related to financial assets measured at amortized cost, including loan receivables and other contracts, such as off-balance sheet credit exposure, specifically, loan commitments and standby letters of credit, financial guarantees and other similar instruments. The guidance replaced the current incurred loss accounting model with an expected loss model, which is referred to as the current expected credit loss model. The current expected credit loss 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 debt securities available for sale to be presented as an allowance rather than as a write-down under the previous other-than-temporary impairment model. 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 U.S. GAAP. The Company recorded a cumulative effect adjustment of $778, net of tax, to increase the opening balance of retained earnings as of January 1, 2023, for the initial application of current expected credit loss model. Upon adoption, the allowance for credit losses for loans decreased by $1,651 primarily driven by the allowance for credit losses on the construction loan portfolio due to the short contractual maturities of the loans in this portfolio segment. This was partially offset by an increase in the allowance for credit losses in both the residential real estate and commercial real estate portfolio segments which have longer contractual maturities. In addition, the Company established a liability for unfunded commitments of $579.
The details of the changes and quantitative impact on the financial statement line items in the consolidated balance sheet as of January 1, 2023 for the adoption of ASU 2016-13, along with the adoption of ASU 2022-02, were as follows:
Prior to
Adjustments for
Adjustments for
After
Adoption
ASU 2016-13
ASU 2022-02
Adoption
Assets:
Allowance for credit losses - loans
$
45,464
$
(1,651)
$
$
44,193
Liabilities:
Liability for unfunded commitments
-
-
Pretax cumulative effect adjustment of a change in accounting principle
(1,072)
Less: income taxes
(104)
Cumulative effect adjustment of a change in accounting principle, net of tax
$
(778)
$
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
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 consolidate balance sheets.
The Company’s debt securities available for sale are comprised of U.S. Treasury and Agency securities, mortgage-backed securities and collateralized mortgage obligations. The mortgage-backed securities and the majority of the collateralized mortgage obligations are issued by the U.S. government, its agencies and government-sponsored enterprises. The Company has a long history with no credit losses from these issuers. Thus, the Company has not recorded an allowance for credit losses for its debt securities available for sale 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.
New Accounting Standard Adopted in 2024
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”) to improve reportable segment disclosures by requiring public business entities to disclose significant expense categories and amounts for each reportable segment, where significant expense categories are defined as those that are regularly reported to an entity’s chief operating decision-maker and included in a segment’s reported measures of profit or loss. ASU 2023-07 became effective for the Company on January 1, 2024. The adoption of ASU 2023-07 did not have a material effect on the Company’s consolidated financial statements.
Recently Issued Accounting Standard Not Yet Adopted
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”), which requires greater disaggregation of information in a reporting entity’s effective tax rate reconciliation as well as disaggregation of income taxes paid by jurisdiction. This ASU 2023-09 is effective for annual periods beginning after December 15, 2024 with early adoption is permitted. The adoption of ASU 2023-09 will not have a material impact on the Company’s income tax disclosures.
Note 3-Debt Securities
The following tables summarize the amortized cost and fair value of debt securities available for sale at December 31, 2024 and 2023 and the corresponding amounts of gross unrealized gains and losses:
December 31, 2024
Amortized
Gross Unrealized
Fair
Cost
Gain
Loss
Value
Available for sale:
U.S. Treasury and Agency securities
$
154,727
$
$
(2,237)
$
152,594
Mortgage-backed securities
30,634
-
(3,589)
27,045
Collateralized mortgage obligations
171,240
(13,070)
158,323
Collateralized debt obligations
-
(2)
Total
$
356,746
$
$
(18,898)
$
338,105
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
December 31, 2023
Amortized
Gross Unrealized
Fair
Cost
Gain
Loss
Value
Available for sale:
U.S. Treasury and Agency securities
$
253,107
$
$
(4,176)
$
248,988
Mortgage-backed securities
35,757
-
(3,830)
31,927
Collateralized mortgage obligations
151,196
(13,066)
138,157
Collateralized debt obligations
-
(10)
Total
$
440,211
$
$
(21,082)
$
419,213
Debt securities with a fair value of $77,490 and $61,078 were pledged as collateral on the FHLB borrowings at December 31, 2024 and 2023, respectively.
Accrued interest receivable on debt securities available for sale totaled $2,049 and $1,535 at December 31, 2024 and 2023, respectively.
The mortgage-backed securities, and a majority of the collateralized mortgage obligations are issued and/or guaranteed by a U.S. government agency (Government National Mortgage Association) or a U.S. government-sponsored enterprise (Federal Home Loan Mortgage Corporation (“Freddie Mac”) or Federal National Mortgage Association (“Fannie Mae”)). The fair value of the private-label collateralized mortgage obligations was $269 and $308 at December 31, 2024 and 2023, respectively.
No securities of any single issuer, other than debt securities issued by the U.S. government, government agency and government-sponsored enterprises, were in excess of 10% of total shareholders’ equity as of December 31, 2024 and 2023.
Information pertaining to sales of debt securities available for sale for the years ended December 31, 2024, 2023, and 2022 is as follows:
Year Ended December 31,
Proceeds from the sale of debt securities
$
-
$
9,578
$
6,999
Gross realized gains
$
-
$
$
Gross realized losses
-
(115)
(1)
Total net realized gains (loss)
$
-
$
(113)
$
The income tax expense (benefit) related to the net realized gains (loss) was $0, $ (32) and $9 for the year ended December 31, 2024, 2023 and 2022, respectively.
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
The amortized cost and fair value of U.S. Treasury and Agency securities at December 31, 2024 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
$
129,809
$
129,000
Due after one year through five years
24,918
23,594
Mortgage-backed securities
30,634
27,045
Collateralized mortgage obligations
171,240
158,323
Collateralized debt obligations
Total
$
356,746
$
338,105
The following table summarizes debt securities available for sale, at fair value, in an unrealized loss position for which an allowance for credit losses has not been recorded at December 31, 2024 and 2023, aggregated by major security type and length of time the individual securities have been in a continuous unrealized loss position:
December 31, 2024
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
$
-
$
-
$
77,490
$
(2,237)
$
77,490
$
(2,237)
Mortgage-backed securities
4,091
(41)
22,954
(3,548)
27,045
(3,589)
Collateralized mortgage obligations
37,074
(346)
93,619
(12,724)
130,693
(13,070)
Collateralized debt obligations
-
-
(2)
(2)
Total
$
41,165
$
(387)
$
194,206
$
(18,511)
$
235,371
$
(18,898)
December 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
$
49,836
$
(1)
$
125,183
$
(4,175)
$
175,019
$
(4,176)
Mortgage-backed securities
-
-
31,927
(3,830)
31,927
(3,830)
Collateralized mortgage obligations
10,297
(221)
111,554
(12,845)
121,851
(13,066)
Collateralized debt obligations
-
-
(10)
(10)
Total
$
60,133
$
(222)
$
268,805
$
(20,860)
$
328,938
$
(21,082)
As of December 31, 2024, the debt securities portfolio consisted of 35 debt securities, with 28 debt securities in an unrealized loss position. For debt securities in an unrealized loss position, the Company has both the intent and ability to hold these investments and, based on the current conditions, the Company does not believe it is likely that it will be required to sell these debt securities prior to recovery of the amortized cost. As the Company had the intent and the ability to hold the debt securities in an unrealized loss position at December 31, 2024, each security with an unrealized loss position was further assessed to determine if a credit loss exists.
The Company’s mortgage-backed securities and the majority of the collateralized mortgage obligations are issued by the U.S. government, its agencies and government-sponsored enterprises. The Company has a long history with no credit losses from issuers of U.S. government, its agencies and government-sponsored enterprises. Also, the Company’s debt securities available for sale are explicitly or implicitly fully guaranteed by the U.S. government. As a result, management does not expect any credit losses on its debt securities available for sale. Accordingly, the Company has not recorded an allowance for credit losses for its debt securities available for sale at December 31, 2024 and 2023, respectively.
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
Note 4-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 December 31, 2024 and 2023, equity securities totaled $4,661 and $4,703, respectively.
Equity securities with readily determinable fair values are stated at fair value with realized and unrealized gains and losses reported in non-interest income in the consolidated statements of operations. At December 31, 2024 and 2023, equity securities with readily determinable fair values were $4,415 and $4,457, respectively. The following is a summary of unrealized and realized gains and losses recognized in the consolidated statements of operations:
Year Ended
December 31,
Net gains (loss) recorded during the year on equity securities
$
(42)
$
$
(580)
Less: net gains (loss) recorded during the year on equity securities sold during the period
-
-
-
Unrealized gains (loss) recorded during the year on equity securities held at the reporting date
$
(42)
$
$
(580)
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 2024 and 2023. The investment was reported at $246 at December 31, 2024 and 2023.
Note 5-Loans
Loans Held for Sale
At December 31, 2024 and 2023, no loans were held for sale. In March 2023, residential real estate loans held for investment with an amortized cost of $41,059 were transferred to loans held for sale due to management’s change in intent and decision to sell the loans. On the transfer, the Company recorded a $6,478 charge off applied against the allowance for credit losses to reflect these loans at their estimated fair value. In addition, residential real estate loans held for sale with an amortized cost of $3,906 were transferred to loans held for investment due to management’s change in intent and decision to not sell the loans.
During the year ended December 31, 2023, the Company sold loans held for sale, with a carrying value of $36,210 on the date of sale, to a third party for net cash proceeds of $37,930.
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
Loans Held for Investment
The major categories of loans held for investment and the allowance for credit losses were as follows:
December 31,
Residential real estate
$
849,350
$
1,085,776
Commercial real estate
296,457
236,982
Construction
2,509
10,381
Commercial and industrial
7,395
15,832
Other consumer
Total loans
1,155,730
1,348,972
Less: allowance for credit losses
(20,805)
(29,404)
Loans, net
$
1,134,925
$
1,319,568
Accrued interest receivable related to total gross loans, including loans held for sale, was $5,910 and $6,617 as of December 31, 2024 and 2023, respectively.
Loans totaling $461,994 and $428,358 were pledged as collateral on the FHLB borrowings at December 31, 2024 and 2023, respectively. Residential real estate loans collateralized by properties that were in the process of foreclosure totaled $3,158 and $4,004 at December 31, 2024 and 2023, respectively.
As disclosed above, residential real estate loans with an amortized cost of $41,059 were transferred to loans held for sale and subsequently sold in May 2023. Also, in March 2023, residential real estate loans with an amortized cost of $3,906 were transferred from loans held for sale to loans held for investment.
During the year ended December 31, 2022, the Company charged off $4,064 of its recorded investment in certain higher risk commercial real estate loans held in its portfolio. These commercial real estate loans were then sold to a third-party investor for net cash proceeds of $17,794. No gain or loss was recorded on the sale of the commercial real estate loans.
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
Allowance for Credit Losses
The allowance for credit losses at December 31, 2024 and 2023 was estimated using the current expected credit loss model. The Company’s estimate of the allowance for credit losses reflects losses expected over the remaining contractual life of the loans. The contractual term does not consider extensions, renewals or modifications unless the Company has identified a loan where the individual borrower is experiencing financial difficulty. The following tables present the activity in the allowance for credit losses related to loans held for investment by portfolio segment for the year ended December 31, 2024 and 2023:
Commercial
Residential
Commercial
and
December 31, 2024
Real Estate
Real Estate
Construction
Industrial
Total
Allowance for credit losses:
Beginning balance
$
14,322
$
13,550
$
1,386
$
$
29,404
Provision for (recovery of) credit losses
(3,659)
(4,632)
(980)
(9,051)
Charge offs
-
-
-
-
-
Recoveries
-
Total ending balance
$
11,102
$
8,918
$
$
$
20,805
Commercial
Residential
Commercial
and
December 31, 2023
Real Estate
Real Estate
Construction
Industrial
Total
Allowance for credit losses:
Beginning balance
$
27,951
$
11,694
$
5,781
$
$
45,464
Adoption of ASU 2016-13
1,151
(3,633)
(34)
(1,651)
Adoption of ASU 2022-02
(11)
-
-
Provision for (recovery of) credit losses
(8,433)
(1,158)
(8,844)
Charge offs
(6,478)
-
-
-
(6,478)
Recoveries
-
Total ending balance
$
14,322
$
13,550
$
1,386
$
$
29,404
The following table presents the activity in the allowance for loan losses for the year ended December 31, 2022, as determined in accordance with ASC 310, Receivables (“ASC 310”), prior to the adoption of ASU 2016-13:
Commercial
Residential
Commercial
Lines of
December 31, 2022
Real Estate
Real Estate
Construction
Credit
Total
Allowance for loan losses:
Beginning balance
$
32,202
$
12,608
$
11,730
$
$
56,548
Provision for (recovery of) credit losses
(5,105)
3,060
(7,919)
(9,934)
Charge offs
(197)
(4,064)
-
-
(4,261)
Recoveries
1,051
1,970
-
3,111
Total ending balance
$
27,951
$
11,694
$
5,781
$
$
45,464
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
The following table presents information related to impaired loans by class of loans as of and for the year ended December 31, 2022, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13:
At December 31, 2022
Year Ended December 31, 2022
Unpaid
Average
Interest
Cash Basis
Principal
Recorded
Allowance for
Recorded
Income
Interest
Balance
Investment
Loan Losses
Investment
Recognized
Recognized
With no related allowance for loan losses recorded:
Commercial real estate:
Retail
$
$
-
$
-
$
-
$
-
$
-
Construction
2,485
2,485
-
6,004
Commercial lines of credit:
Private banking
-
Subtotal
2,819
2,592
-
6,116
With an allowance for loan losses recorded:
Residential real estate, first mortgage
Total
$
2,898
$
2,637
$
$
6,285
$
$
In the table 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. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan. Factors considered by management in determining if a loan was impaired include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. 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.
Nonaccrual Loans and Past Due Loans
Past due loans held for investment are loans contractually past due 30 days or more as to principal or interest payments. A loan held for investment is classified as nonaccrual, and the accrual of interest on such loan is discontinued, when the contractual payment of principal or interest becomes 90 days past due. In addition, a loan may be placed on nonaccrual at any other time management has serious doubts about further collectability of principal or interest according to the contractual terms, even though the loan is currently performing. A loan held for investment may remain in accrual status if it is in the process of collection and well secured. When a loan held for investment is placed in nonaccrual status, interest accrued but not received is reversed against interest income. Interest received on such loans is applied to the principal balance of the loan until qualifying for return to accrual status. Loans are returned to accrual status after all principal and interest amounts contractually due are made and future payments are reasonably assured.
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
The following table presents the total amortized cost basis of loans on nonaccrual status, the amortized cost basis of loans on nonaccrual status with no related allowance for credit losses and loans past due 90 days or more and still accruing at December 31, 2024 and 2023:
December 31,
Nonaccrual
Past Due 90
Nonaccrual
Past Due 90
With No
Days or More
With No
Days or More
Nonaccrual
Allowance for
and Still
Nonaccrual
Allowance for
and Still
Loans
Credit Losses
Accruing
Loans
Credit Losses
Accruing
Residential real estate
$
13,136
$
3,509
$
$
8,942
$
4,079
$
Commercial real estate
1,422
-
-
-
-
-
Total
$
14,558
$
3,509
$
$
8,942
$
4,079
$
At December 31, 2024 and December 31, 2023, the Company had nonaccrual loans of $14,558 and $8,942, respectively, in its held for investment loan portfolio. The increase in nonaccrual loans from December 31, 2023 was due to the addition of residential loans of $11,601 and commercial real estate loans of $1,422 on nonaccrual status which was partially offset by loans totaling $2,453 that were returned to accrual status, loans that were paid in full totaling $3,727 and payments of the loan principal of $1,226.
The total interest income that would have been recorded if the nonaccrual loans had been current in accordance with their original terms was $1,003, $401 and $2,028 for the year ended December 31, 2024, 2023 and 2022, respectively. The Company does not record interest income on nonaccrual loans.
Aging Analysis of Past Due Loans
The following tables present an aging of the amortized cost basis of contractually past due loans at December 31, 2024 and 2023:
30 - 59
60 - 89
90 Days
Days Past
Days Past
or More Past
Total
Current
December 31, 2024
Due
Due
Due
Past Due
Loans
Total
Residential real estate
$
6,078
$
1,011
$
13,162
$
20,251
$
829,099
$
849,350
Commercial real estate
-
-
1,422
1,422
295,035
296,457
Construction
-
-
-
-
2,509
2,509
Commercial and industrial
-
-
-
-
7,395
7,395
Other consumer
-
-
-
-
Total
$
6,078
$
1,011
$
14,584
$
21,673
$
1,134,057
$
1,155,730
30 - 59
60 - 89
90 Days
Days
Days
or More
Total
Current
December 31, 2023
Past Due
Past Due
Past Due
Past Due
Loans
Total
Residential real estate
$
16,634
$
2,305
$
8,973
$
27,912
$
1,057,864
$
1,085,776
Commercial real estate
-
-
-
-
236,982
236,982
Construction
-
-
-
-
10,381
10,381
Commercial and industrial
-
-
-
-
15,832
15,832
Other consumer
-
-
-
-
Total
$
16,634
$
2,305
$
8,973
$
27,912
$
1,321,060
$
1,348,972
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
Collateral-Dependent Loans
Collateral-dependent loans are those for which repayment (on the basis of the Company’s assessment as of the reporting date) is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. As of December 31, 2024 and 2023, the amortized cost basis of collateral-dependent loans was $3,158 and $4,004, respectively. These loans were collateralized by residential real estate property and the fair value of collateral on substantially all collateral-dependent loans were significantly in excess of their amortized cost basis.
Loan Modifications
Modifications to borrowers experiencing financial difficulty may include interest rate reductions, principal or interest forgiveness, forbearances, term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Historically, the Company has provided loan forbearances to residential borrowers when mandated and modified construction loans by providing term extensions. The Company did not have any loans held for investment to borrowers experiencing financial difficulty that were modified during the year ended December 31, 2024 and 2023. The Company did not have any loans held for investment to borrowers experiencing financial difficulty that were previously modified that subsequently defaulted during the year ended December 31, 2024 and 2023.
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes homogeneous loans, such as residential real estate and other consumer loans, and non-homogeneous loans, such as commercial and industrial, construction and commercial real estate loans. This analysis is performed at least quarterly. The Company uses the following definitions for risk ratings:
Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.
Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the loan. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing facts, conditions and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered pass-rated loans.
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
For residential real estate and other consumer loan portfolio segments, the Company evaluates credit quality based on the accrual status of the loan. The following tables present the amortized cost in residential real estate loans based on accrual status:
Revolving
Revolving
Loans
Loans
Term Loans Amortized Cost Basis by Origination Year
Amortized
Converted
As of December 31, 2024
Prior
Costs Basis
to Term
Total
Residential lending
Residential real estate loans:
Payment performance:
Accrual
$
-
$
$
68,211
$
118,853
$
89,924
$
551,027
$
7,193
$
$
836,214
Nonaccrual
-
-
-
-
12,227
-
13,136
Total residential real estate loans
$
-
$
$
68,965
$
118,853
$
89,924
$
563,254
$
7,348
$
$
849,350
Residential real estate loans:
Current period gross write offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Revolving
Revolving
Loans
Loans
Term Loans Amortized Cost Basis by Origination Year
Amortized
Converted
As of December 31, 2023
Prior
Costs Basis
to Term
Total
Residential lending
Residential real estate loans:
Payment performance:
Accrual
$
$
72,840
$
132,567
$
99,676
$
202,793
$
560,185
$
7,729
$
$
1,076,834
Nonaccrual
-
-
-
-
1,739
7,203
-
-
8,942
Total residential real estate loans
$
$
72,840
$
132,567
$
99,676
$
204,532
$
567,388
$
7,729
$
$
1,085,776
Residential real estate loans:
Current period gross write offs
$
-
$
-
$
-
$
-
$
1,858
$
4,601
$
$
-
$
6,478
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
The amortized cost basis by year of origination and credit quality indicator of the Company’s commercial loans based on the most recent analysis performed was as follows:
Revolving
Revolving
Loans
Loans
Term Loans Amortized Cost Basis by Origination Year
Amortized
Converted
As of December 31, 2024
Prior
Costs Basis
to Term
Total
Commercial lending
Construction:
Risk rating
Pass
$
-
$
$
-
$
-
$
-
$
-
$
-
$
-
$
Special mention
-
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
2,487
-
-
2,487
Total construction
$
-
$
$
-
$
-
$
-
$
2,487
$
-
$
-
$
2,509
Construction:
Current period gross charge offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Commercial and industrial:
Risk rating
Pass
$
-
$
$
-
$
-
$
-
$
-
$
6,883
$
-
$
7,395
Total commercial and industrial
$
-
$
$
-
$
-
$
-
$
-
$
6,883
$
-
$
7,395
Commercial and industrial:
Current period gross charge offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Commercial real estate:
Risk rating
Pass
$
110,055
$
22,858
$
78,237
$
7,465
$
33,361
$
21,794
$
-
$
-
$
273,770
Special mention
-
-
2,868
-
-
2,702
-
-
5,570
Substandard
-
-
-
11,808
-
5,309
-
-
17,117
Total Commercial real estate
$
110,055
$
22,858
$
81,105
$
19,273
$
33,361
$
29,805
$
-
$
-
$
296,457
Commercial real estate:
Current period gross charge offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
Revolving
Revolving
Loans
Loans
Term Loans Amortized Cost Basis by Origination Year
Amortized
Converted
As of December 31, 2023
Prior
Costs Basis
to Term
Total
Commercial lending
Construction:
Risk rating
Pass
$
$
-
$
-
$
1,591
$
-
$
-
$
-
$
-
$
1,605
Special mention
-
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
8,776
-
-
-
8,776
Total construction
$
$
-
$
-
$
1,591
$
8,776
$
-
$
-
$
-
$
10,381
Construction:
Current period gross charge offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Commercial and industrial:
Risk rating
Pass
$
14,461
$
1,071
$
-
$
-
$
-
$
$
$
$
15,832
Total commercial and industrial
$
14,461
$
1,071
$
-
$
-
$
-
$
$
$
$
15,832
Commercial and industrial:
Current period gross charge offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Commercial real estate:
Risk rating
Pass
$
28,975
$
79,013
$
33,694
$
35,148
$
6,938
$
13,020
$
-
$
-
$
196,788
Special mention
3,574
1,407
2,724
8,610
4,253
-
-
21,516
Substandard
-
-
11,778
-
2,805
4,095
-
-
18,678
Total commercial real estate
$
29,923
$
82,587
$
46,879
$
37,872
$
18,353
$
21,368
$
-
$
-
$
236,982
Commercial real estate:
Current period gross charge offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
There were no loans classified as doubtful at December 31, 3024 or 2023.
Note 6-Leasehold Improvements and Equipment, net
Leasehold improvements and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are determined using the straight-line method. Leasehold improvements and equipment at December 31, 2024 and 2023 are as follows:
Estimated
Useful
Life
December 31,
(in years)
Leasehold improvements
*
$
11,337
$
11,658
Furniture and equipment
3 - 7
10,641
12,270
Total
21,978
23,928
Less: accumulated depreciation and amortization
(17,498)
(18,498)
Leasehold improvements and equipment, net
$
4,480
$
5,430
* Amortized over the shorter of the lease term or estimated useful life.
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
The amount charged to occupancy and equipment in the consolidated statements of operations for depreciation and amortization was $1,030, $1,331 and $1,541 for the year ended December 31, 2024, 2023, and 2022, respectively.
Note 7-Mortgage Servicing Rights, net
The Company records servicing assets from the sale of residential real estate mortgage loans to the secondary market for which servicing has been retained. Residential real estate mortgage loans serviced for others are not included in the consolidated balance sheets. The principal balance of these loans at December 31, 2024 and 2023 are as follows:
December 31,
Residential real estate mortgage loan portfolios serviced for:
FNMA
$
97,482
$
105,689
FHLB
28,275
31,016
Private investors
20,777
33,044
Total
$
146,534
$
169,749
Custodial escrow balances maintained with these serviced loans were $849 and $620 at December 31, 2024 and 2023, respectively. These balances are included in noninterest-bearing deposits in the consolidated balance sheets.
Activity for mortgage servicing rights and the related valuation allowance are as follows:
Year Ended December 31,
Mortgage servicing rights:
Beginning of year
$
1,590
$
1,840
$
3,332
Additions
-
-
Disposals
-
-
(863)
Amortization
(281)
(250)
(640)
End of year
1,309
1,590
1,840
Valuation allowance:
Beginning of year
Additions (recoveries)
(18)
(564)
End of year
Mortgage servicing rights, net
$
1,279
$
1,542
$
1,794
Servicing income (loss), net of amortization of servicing rights and changes in the valuation allowance, was $238, $308 and $(20) for the year ended December 31, 2024, 2023 and 2022, respectively.
The fair value of mortgage servicing rights was $1,589 and $1,857 at December 31, 2024 and 2023, 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 December 31, 2024 was determined using discount rates ranging from 10.00% to 12.50%, prepayment speeds with a weighted average of 9.1% (depending on the stratification of the specific right), a weighted average life of the mortgage servicing right of 79 months and a weighted average default rate of 0.2%. The fair value at December 31, 2023 was determined using discount rates ranging from 10.0% to 12.5%, prepayment speeds with a weighted average of 9.8% (depending on the stratification of the specific right), a weighted average life of the mortgage servicing right of 77 months and a weighted average default rate of 0.2%.
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 December 31, 2024 and 2023, the carrying amount of certain individual groupings exceeded their fair value, resulting in write-downs to fair value. Refer to Note 16-Fair Value.
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
Note 8-Deposits
Time deposits, included in interest-bearing deposits, were $953,060 and $873,220 at December 31, 2024 and 2023, respectively. The Company did not have any brokered deposits at December 31, 2024 and 2023.
Time deposits that meet or exceed the FDIC insurance limit of $250 were $296,864 and $255,222 at December 31, 2024 and 2023, respectively.
At December 31, 2024, the scheduled maturities of time deposits for the next five years were as follows:
$
797,391
153,183
2,195
Note 9-FHLB Borrowings
FHLB Advances
At December 31, 2023, the Company had a long-term fixed rate FHLB advance with an outstanding balance of $50,000 with an original maturity date of May 2029. On May 15, 2024, the FHLB exercised its call right to require repayment of the FHLB advance. The Company repaid the FHLB advance with its existing cash funds. The FHLB advance required monthly interest-only payments at 1.96% per annum.
FHLB Overdraft Line of Credit and Letters of Credit
The Company has established a short-term overdraft line of credit agreement with the FHLB, which provides for maximum borrowings of $20,000. The overdraft line of credit was not used during the year ended December 31, 2024 and 2023. Borrowings accrue interest at a variable-rate based on the FHLB’s overnight cost of funds rate, which was 4.67% and 5.76% at December 31, 2024 and 2023, respectively. The overdraft line of credit is issued for a one-year term and was automatically renewed and extended in October 2024 for an additional one-year period through October 2025.
The Company entered into irrevocable standby letters of credit arrangements with the FHLB to provide credit support for certain of its obligations related to its commitment to repurchase certain pools of Advantage Loan Program loans. At December 31, 2023, an irrevocable standby letter of credit of $2,000 was outstanding which had a 36-month term and was not required to be renewed when it expired in July 2024. There were no borrowings outstanding on these standby letters of credit during the year ended December 31, 2024 and 2023.
The overdraft line of credit is collateralized by certain securities and loans. Based on this collateral and holdings of FHLB, stock, the Company had additional borrowing capacity with the FHLB of $397,169 at December 31, 2024. Refer to Note 3-Debt Securities for further information on securities pledged and Note 5-Loans for further information on loans pledged.
Other Borrowings
At December 31, 2024, the Company had available unsecured federal funds credit lines with two banks which were reduced to $60,000 in March 2024. Previously, these unsecured federal funds credit lines were held by three banks totaling $80,000. There were no borrowings under these unsecured credit lines during the year ended December 31, 2024 and 2023.
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
Note 10-Subordinated Notes
On July 15, 2023, the Company redeemed all of its outstanding Subordinated Notes, at a redemption price equal to 100% of the outstanding principal amount plus accrued interest, for a total cash payment of $66,821. The Company recorded a gain on the extinguishment of the Subordinated Notes of $234 which equaled the remaining unamortized note premium. The gain on the extinguishment of the Subordinated Notes was recorded in other income within non-interest income in the consolidated statements of operations for the year ended December 31, 2023.
The Subordinated Notes accrued interest at a variable interest rate based on the three-month London Interbank Offered Rate (“LIBOR”) plus a margin of 5.82%, payable quarterly in arrears. Note premium costs were amortized over the contractual term of the Subordinated Notes into interest expense using the effective interest method. Interest expense on these Subordinated Notes was $3,727 and $4,969 for the year ended December 31, 2023 and 2022, respectively.
Note 11- Shareholders’ Equity
Capital Stock
The Company’s authorized capital stock consists of 10,000,000 shares of preferred stock and 500,000,000 shares of no par common stock.
Preferred Stock
The board of directors is authorized to issue preferred stock from time to time in one or more series, with such designations and such relative voting, dividend, liquidation and other rights, preferences and limitations as may be adopted by the board of directors. No shares of preferred stock are currently issued or outstanding.
No Par Common Stock
Holders of common stock are entitled to one vote per share on all matters submitted to shareholders and entitled to dividends at the sole direction of the board of directors. The holders have no preemptive, conversion or subscription rights, and there is no redemption or sinking fund provisions with respect to such shares. The common stock is subordinate to the series preferred stock with respect to dividend rights or rights upon liquidation, winding up and dissolution of the Company.
In April 2023, the Company issued and contributed 184,928 shares of common stock to fund the matching contribution made under the Bank’s defined contribution retirement plan. The contribution amount of $1,028 was valued using the closing market price of the stock on the date contributed or $5.56 per share.
In April 2022, the Company issued and contributed 160,978 shares of common stock to fund the matching contribution made under the Bank’s defined contribution retirement plan. The contribution amount of $1,138 was valued using the closing market price of the stock on the date contributed or $7.07 per share.
Stock Repurchase Program
The board of directors previously 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. 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. As of December 31, 2024, 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.
The Company is required to obtain the prior approval of the FRB in order to repurchase shares of the Company's common stock.
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
Note 12-Stock-based Compensation
The Company’s board of directors established the 2020 Omnibus Equity Incentive Plan (the “2020 Plan”), which was approved by the Company shareholders in December 2020. The 2020 Plan provides for the grant of up to 3,979,661 shares of common stock for stock options, stock appreciation rights, restricted stock, restricted stock units, performance units and performance shares for issuance to employees, consultants and the board of directors of the Company, of which 1,799,970 shares were available for future grants. The stock-based awards are issued at no less than the market price on the date the awards are granted.
Previously, the Company’s board of directors had established a 2017 Omnibus Equity Incentive Plan (the “2017 Plan”) which was approved by the Company shareholders. The 2017 Plan initially provided for the grant of up to 4,237,100 shares of common stock for stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards for issuance to employees, consultants and the board of directors of the Company. The stock-based awards were issued at no less than the Company’s market price of its stock on the date the awards were granted. Due to the adoption of the 2020 Plan, no further grants will be issued under the 2017 Plan.
Stock Options
Stock option awards are granted with an exercise price equal to the market price of the Company’s common stock on the date of grant. Beginning with grants in 2020, stock option awards vest ratably over three years (one-third per year) after the date of grant, while stock option awards granted prior to 2020 generally vest in installments of 50% in each of the third and fourth year after the date of grant. All stock option awards have a maximum term of ten years.
A summary of the stock option activity as of and for the year ended December 31, 2024 is as follows:
Weighted
Weighted
Average
Average
Remaining
Aggregate
Number
Exercise
Contractual
Intrinsic
of Shares
Price
Term
Value
(Years)
Outstanding at January 1, 2024
340,395
$
4.96
6.23
$
Granted
-
-
-
-
Exercised
-
-
-
-
Forfeited/expired
-
-
-
-
Outstanding and Exercisable at December 31, 2024
340,395
$
4.96
5.22
$
The Company recorded stock-based compensation expense associated with stock options of $0, $1 and $(6) for the year ended December 31, 2024, 2023 and 2022, respectively.
Restricted Stock Awards
Restricted stock awards are issued to independent directors and certain key employees. The restricted stock awards generally vest one-third per year over three years after the date of grant, unless the Executive Compensation Committee determines to establish a different vesting schedule for specific grants. The value of a restricted stock award is based on the market value of the Company’s common stock at the date of grant reduced by the present value of dividends per share expected to be paid during the period the shares are not vested. Upon a change in control, as defined in the 2020 Plan, the outstanding restricted stock awards will immediately vest.
In January 2025, the Executive Compensation Committee took action to fully accelerate the vesting of all unvested shares of restricted stock previously granted to independent directors and certain key employees on the first day on which all of the following have occurred: (i) the Company has received shareholder approval of the Transaction; (ii) all applicable regulatory approvals have been received; and (iii) all other material closing conditions with respect to the Transaction, as determined by the Executive Compensation Committee in its sole discretion, have been satisfied.
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
During the year ended December 31, 2024, the Company’s board of directors approved the issuance of 499,888 shares of restricted stock, of which 60,000 were awarded to independent directors with a weighted average grant-date fair value of $5.77 and 439,888 shares were awarded to key employees with a weighted average grant - date fair value of $5.10. During the year ended December 31, 2023, the Company's board of directors approved the issuance of 1,195,838 shares of restricted stock, of which 60,000 shares were awarded to independent directors with a weighted average grant - date fair value of $6.09 and 1,135,838 shares were awarded to key employees with a weighted average grant-date fair value of $5.10. During the year ended December 31, 2022, the board of directors approved the issuance of 231,842 shares of restricted stock, of which 45,000 shares were awarded to independent directors with a weighted average grant-date fair value of $5.75 and 186,842 shares were awarded to key employees with a weighted average grant-date fair value of $6.77.
During the year ended December 31, 2024, 2023 and 2022, the Company withheld 157,130 shares, 42,753 shares and 32,929 shares, respectively, of common stock representing a portion of the restricted stock awards that vested during the period in order to satisfy certain related employee tax withholding liabilities of $836, $245 and $216, respectively, associated with vesting. These withheld shares are treated the same as repurchased shares for accounting purposes.
A summary of the restricted stock awards activity as of and for the year ended December 31, 2024 is as follows:
Weighted Average
Number
Grant Date
of Shares
Fair Value
Nonvested at January 1, 2024
1,364,570
$
5.27
Granted
499,888
5.18
Vested
(516,179)
5.40
Forfeited
(108,083)
5.21
Nonvested at December 31, 2024
1,240,196
$
5.19
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 $3,229, $2,096 and $906 for the year ended December 31, 2024, 2023 and 2022, respectively. At December 31, 2024, there was $4,049 of total unrecognized compensation cost related to the nonvested stock granted which is expected to be recognized over a weighted-average period of 2.72 years. The total fair value of shares vested during the year ended December 31, 2024, 2023 and 2022 was $2,773. $911 and $673, respectively.
Note 13-Regulatory Capital Requirements
The Bank is subject to the capital adequacy requirements of the OCC. The Company, as a thrift holding company, generally is subject to the capital adequacy requirements of the Federal Reserve. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Prompt corrective action regulations provide five classifications for depository institutions like the Bank, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors, and the regulators, in their discretion, can require the Company to lower classifications in certain cases. Failure to meet minimum capital requirements can initiate regulatory action that could have a direct material effect on the Company’s business, financial condition and results of operations.
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
The federal banking agencies’ regulations provide for an optional simplified measure of capital adequacy for qualifying community banking organizations (that is, the “CBLR” framework), as implemented pursuant to the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018. The CBLR framework is designed to reduce the burden of the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. In order to qualify for the CBLR framework, a community banking organization must have (i) a Tier 1 leverage ratio of greater than 9.0%, (ii) less than $10 billion in total assets, and (iii) limited amounts of off-balance-sheet exposure and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the capital ratio requirements for the “well capitalized” capital category under applicable prompt corrective action regulations and will not be required to report or calculate risk-based capital under generally applicable capital adequacy requirements. Failure to meet the qualifying criteria within the grace period of two reporting periods, or to maintain a leverage ratio of 8.0% or greater, would require the institution to comply with the generally applicable capital adequacy requirements. An eligible banking organization can opt out of the CBLR framework and revert to compliance with general capital adequacy requirements and capital measurements under prompt corrective action regulations without restriction.
The Company and the Bank have determined the organization is a qualifying community banking organization and has elected to measure capital adequacy under the CBLR framework, effective as of January 1, 2023. Management believes as of December 31, 2024, the Company and the Bank meet all capital adequacy requirements to which they are subject. The following table presents the consolidated Company’s and Bank’s actual and minimum required capital amounts and ratios under the CBLR framework at December 31, 2024 and 2023:
To be Well
Capitalized Under
Prompt Corrective
Action Regulations
Actual
(CBLR Framework)
Amount
Ratio
Amount
Ratio
December 31, 2024
Tier 1 (core) capital to average total assets (leverage ratio)
Consolidated
$
345,989
14.07
%
$
221,188
9.00
%
Bank
$
336,751
13.76
%
$
220,185
9.00
%
December 31, 2023
Tier 1 (core) capital to average total assets (leverage ratio)
Consolidated
$
342,368
13.95
%
$
220,950
9.00
%
Bank
$
328,362
13.38
%
$
220,920
9.00
%
Dividend Restrictions
As noted above, federal banking regulations require the Bank to maintain certain capital levels and may limit the dividends paid by the Bank to the holding company or by the holding company to its shareholders. The holding company’s principal source of funds for dividend payments is dividends received from the Bank. Regulatory approval is required if (i) the total capital distributions for the applicable calendar year exceed the sum of the Bank’s net income for that year to date plus the Bank’s retained net income for the preceding two years or (ii) the Bank would not be at least “adequately capitalized” following the distribution. In addition, the Company currently is required to obtain the prior approval of the FRB in order to pay dividends to the Company’s shareholders. Upon completion of the Transaction, the Company will no longer be a thrift holding company and will no longer be subject to regulatory restrictions or prior regulatory approval with respect to payment of dividends or payment of liquidating distributions pursuant to the Plan of Dissolution.
The QTL test requires that a minimum of 65% of its portfolio assets be maintained in qualified thrift investments, primarily residential mortgages and related investments, including certain mortgage-backed and related securities in at least nine months out of each 12-month period. 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 commercial bank charter. Effective August 9, 2023, the Bank operates as a covered savings association, which allows the Bank to operate as a commercial bank without being subject to the QTL test. Management believes that the QTL test had been met prior to becoming a covered savings association.
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
Note 14-Income (Loss) Per Share
Basic income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted income per common share further includes any common shares available to be issued upon the exercise of outstanding stock options and restricted stock awards if such inclusions would be dilutive. The Company determines the potentially dilutive common shares using the treasury stock method. In periods of a net loss, basic and diluted per share information are the same. The following table presents the computation of income (loss) per share, basic and diluted:
Year Ended December 31,
Numerator:
Net income (loss)
$
2,138
$
7,413
$
(14,194)
Denominator:
Weighted average common shares outstanding, basic
50,971,884
50,630,928
50,346,198
Weighted average effect of potentially dilutive common shares:
Stock options
63,595
89,910
-
Restricted stock
305,487
57,721
-
Weighted average common shares outstanding, diluted
51,340,966
50,778,559
50,346,198
Income (loss) per share:
Basic
$
0.04
$
0.15
$
(0.28)
Diluted
$
0.04
$
0.15
$
(0.28)
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:
Year Ended December 31,
Stock options
40,395
44,578
349,808
Restricted stock
294,220
664,864
372,395
Total
334,615
709,442
722,203
Note 15-Employee Benefits
Defined Contribution Retirement Plan
The Company maintains a defined contribution plan which provides for an annual matching contribution in an amount equal to 100% of the employee’s contribution up to 6% of the employee’s eligible compensation and also provides that such matching contribution may be made in shares of the Company’s common stock. In this case, an employee’s 401(k) plan account would hold interests in a unitized stock fund instead of a direct interest in the shares of common stock. The employee is not required to be employed by the Company on the date the matching contribution is made in order to receive it. The Company also has the discretion to make additional contributions.
The Company’s plan expense was $1,203, $1,259 and $1,463 for the year ended December 31, 2024, 2023 and 2022, respectively.
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
Executive Incentive Retirement Plan Agreement
The Bank entered into an individual executive incentive retirement plan agreement with a certain employee. The agreement provided for payments, if payable in accordance with their respective terms and in accordance with applicable law, upon a separation from service or a change of control (as defined in such agreements) if the individual met specified vesting requirements. The agreement also provided for death benefits in the event of death in active service to the Company. During the year ended December 31, 2024 the remaining agreement was forfeited. The aggregate liability accrued for the potential payment under this agreement was $359 at December 31, 2023. The aggregate expense, net of forfeitures, for such agreements was $(359), $- and $(405) for the year ended December 31, 2024, 2023 and 2022, respectively.
Split-Dollar Life Insurance Agreement and Company-Owned Life Insurance
The Bank entered into a split-dollar life insurance agreement with respect to its controlling shareholder and former chief executive officer of the Bank. Pursuant to the agreement with the Bank, a portion of the death benefits arising from life insurance policies owned by the Company would be paid to beneficiaries designated by the controlling shareholder. The Bank cancelled the split-dollar life insurance agreement in 2022 and surrendered the related split-dollar life insurance policy as well as certain company-owned life insurance policies related to former executives with an aggregate cash surrender value of $24,877. This resulted in a payout in such amount to the Company. Upon the surrender of the policies, the remaining accrued liability of $4,109 was reversed and included as a reduction in salaries and employee benefits expense in the consolidated statements of operations for the year ended December 31, 2022.
The increase in the cash surrender value of $13,142 during the duration of ownership of these policies was previously considered tax-exempt income and became taxable income upon the surrender of the policies. The Company recorded income taxes of $3,614 and additional tax of $1,314, which is included in other expense within non-interest expense, upon the surrender of the policies during the year ended December 31, 2022.
Note 16-Fair Value
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 consolidated financial statements. Fair value is defined as the exit price, the price that would be received for an asset or paid to transfer a liability in the most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date under current market conditions. The inputs to valuation techniques used to measure fair value are prioritized into a three-level hierarchy. The hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
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). The fair value of the collateralized debt obligations, which are categorized as Level 3, is obtained from third-party pricing information. It is determined by calculating discounted cash flows that include spreads that adjust for credit risk and illiquidity. The Company also performs an internal analysis that considers the structure and term of the collateralized debt obligations and the financial condition of the underlying issuers to corroborate the information used from the independent third party.
Loans Held for Sale
Loans held for sale are carried at the lower of amortized cost or fair value. 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).
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 7-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).
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 December 31, 2024 and 2023:
Fair Value Measurements at
December 31, 2024
Quoted Prices in
Significant
Active Markets
Other
Significant
for Identical
Observable
Unobservable
Assets
Inputs
Inputs
Total
(Level 1)
(Level 2)
(Level 3)
Financial Assets
Debt securities available for sale:
U.S. Treasury and Agency securities
$
152,594
$
47,734
$
104,860
$
-
Mortgage-backed securities
27,045
-
27,045
-
Collateralized mortgage obligations
158,323
-
158,323
-
Collateralized debt obligations
-
-
Equity securities
4,415
4,415
-
-
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
Fair Value Measurements at
December 31, 2023
Quoted Prices in
Significant
Active Markets
Other
Significant
for Identical
Observable
Unobservable
Assets
Inputs
Inputs
Total
(Level 1)
(Level 2)
(Level 3)
Financial Assets
Debt securities available for sale:
U.S. Treasury and Agency securities
$
248,988
$
219,582
$
29,406
$
-
Mortgage-backed securities
31,927
-
31,927
-
Collateralized mortgage obligations
138,157
-
138,157
-
Collateralized debt obligations
-
-
Equity securities
4,457
4,457
-
-
The table below presents a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2024 and 2023:
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
Collateralized Debt Obligations
Balance of recurring Level 3 assets at beginning of year
$
$
Total gains or losses (realized/unrealized):
Included in other comprehensive income (loss)
-
Principal maturities/settlements
(6)
(6)
Balance of recurring Level 3 assets at end of year
$
$
Assets Measured at Fair Value on a Nonrecurring Basis
From time to time, the Company may be required to measure certain other assets at fair value on a nonrecurring basis in accordance with U.S. GAAP. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis that were recorded in the consolidated balance sheets at December 31, 2024 and 2023, the following table provides the level of valuation assumptions used to determine each adjustment and the related carrying value:
Fair Value Measurements at December 31, 2024
Quoted Prices in
Significant
Active Markets
Other
Significant
Identical
Observable
Unobservable
Fair
Assets
Inputs
Inputs
Value
(Level 1)
(Level 2)
(Level 3)
Mortgage servicing rights
$
$
-
$
-
$
Fair Value Measurements at December 31, 2023
Quoted Prices in
Significant
Active Markets
Other
Significant
Identical
Observable
Unobservable
Fair
Assets
Inputs
Inputs
Value
(Level 1)
(Level 2)
(Level 3)
Mortgage servicing rights
$
$
-
$
-
$
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
The following tables present quantitative information about Level 3 fair value measurements for assets measured at fair value on a nonrecurring basis at December 31, 2024 and 2023:
Quantitative Information about Level 3 Fair Value Measurements at December 31, 2024
Range
Fair Value
Valuation Technique
Unobservable Inputs
(Weighted Average)(1)
Mortgage servicing rights
$
Discounted cash flow
Discount rate
10.0% - 12.5%
(11.8)%
Prepayment speed
7.2% - 21.5%
(15.5)%
Default rate
0.1% - 0.2%
(0.2)%
Quantitative Information about Level 3 Fair Value Measurements at December 31, 2023
Range
Fair Value
Valuation Technique
Unobservable Inputs
(Weighted Average)(1)
Mortgage servicing rights
$
Discounted cash flow
Discount rate
10.0% - 12.5%
(12.2)%
Prepayment speed
6.9% - 22.7%
(18.5)%
Default rate
0.1% - 0.2%
(0.1)%
(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.
Fair Value of Financial Instruments
The carrying amounts and estimated fair values of financial instruments not carried at fair value at December 31, 2024 and 2023, are as follows:
Fair Value Measurements at December 31, 2024
Carrying
Fair
Amount
Value
Level 1
Level 2
Level 3
Financial Assets
Cash and due from banks
$
878,181
$
878,181
$
878,181
$
-
$
-
Loans, net
1,134,925
1,130,585
-
-
1,130,585
Financial Liabilities
Time deposits
953,060
953,896
-
953,896
-
Fair Value Measurements at December 31, 2023
Carrying
Fair
Amount
Value
Level 1
Level 2
Level 3
Financial Assets
Cash and due from banks
$
577,967
$
577,967
$
577,967
$
-
$
-
Interest-bearing time deposits with other banks
5,226
5,226
5,226
-
-
Loans, net
1,319,568
1,313,282
-
-
1,313,282
Financial Liabilities
Time deposits
873,220
874,274
-
874,274
-
Federal Home Loan Bank borrowings
50,000
49,370
-
49,370
-
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
Note 17-Income Taxes
The components of the income tax expense are as follows:
Year Ended December 31,
Current:
Federal
$
$
(760)
$
1,636
State
(1,015)
Deferred:
Federal
3,290
3,251
State
1,634
1,528
Total income tax expense
$
2,112
$
3,149
$
6,629
The reconciliation between income taxes computed at the U.S. federal statutory income tax rate to our income tax expense is as follows:
Year Ended December 31,
Income tax expense (benefit) at U.S. federal statutory rate of 21%
$
$
2,218
$
(1,589)
Effect of:
State taxes, net of federal benefit
1,376
Taxable income on surrender of company-owned life insurance
-
-
2,760
Contingent loss
-
-
3,830
Nontaxable cancellation of split-dollar life insurance
-
-
(863)
Nondeductible items
Other, net
(5)
Total income tax expense
$
2,112
$
3,149
$
6,629
The components of deferred tax assets and liabilities at December 31, 2024 and 2023 comprised the following:
December 31,
Deferred tax assets:
Allowance for credit losses
$
5,949
$
8,162
Net unrealized loss on investment securities
5,295
5,815
Operating lease liabilities
3,104
3,377
Compensation plans
1,605
1,535
Tax loss carryforwards
1,485
Other
2,387
Total deferred tax assets
19,085
21,103
Less: valuation allowance
(158)
(158)
Total deferred tax assets, net of valuation allowance
18,927
20,945
Deferred tax liabilities:
Operating lease right-of-use asset
(2,850)
(3,086)
Other
(688)
(900)
Total deferred tax liabilities
(3,538)
(3,986)
Deferred tax asset, net
$
15,389
$
16,959
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
At December 31, 2024, the Company had federal net operating loss carryforwards of $1,675 which never expire and state net operating loss carryforwards of $2,341 that will expire beginning in 2043. A capital loss of $574 can be carried forward and utilized against capital gains during the carryforward period which expires in December 2025. The Company has recorded a deferred tax asset of $745 reflecting the benefit of the tax loss carryforwards. As of December 31, 2024, a valuation allowance of $158 has been established against the portion of the deferred tax asset that is more likely than not to be realized.
Realization of the remaining deferred tax assets is dependent upon the generation of future taxable income. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. Management evaluated the deferred tax assets for recoverability by considering negative and positive evidence. Based on the weight of all available evidence, the Company believes it is more likely than not that the deferred tax asset at December 31, 2024 will be realized through the future reversals of existing taxable temporary differences and projected future taxable income.
The Bank is subject to U.S. federal income tax as well as income taxes of the state of New York and California. The Bank’s federal income tax returns are subject to examination by the taxing authorities for the years after 2020.
There were no unrecognized tax benefits at December 31, 2024, and the Bank does not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months.
Note 18-Operating Leases
The Company leases its headquarters and branch offices through noncancelable operating lease contracts. Such noncancelable operating lease contracts have remaining terms ranging from 2025 to 2032 and generally have options to extend for one or two five-year periods. The lease term may include options to extend the lease when it is reasonably certain that the option will be exercised based on the facts and circumstances at lease commencement. The lease contracts, most often, provide for rental payments that increase over the lease term based on a fixed percentage or based on a specified consumer price index. Any changes in the consumer price index after the lease commencement date are considered variable lease payments and recorded in the period when incurred. Additionally, the Company, in most cases, is required to pay insurance costs, real estate taxes and other operating expenses such as common area maintenance. The Company has made an accounting policy election for property leases to not separate nonlease components from lease components.
The Company subleased certain office space to entities owned by the Company’s controlling shareholders. Amounts received under such subleases totaled $97 for the year ended December 31, 2022. The sublease agreement ended on March 31, 2022.
The Company’s operating leases are included in operating lease right-of-use assets and operating lease liabilities in the consolidated balance sheets. The lessors’ respective rates implicit in these operating leases are generally not available and were not determinable from the terms of the lease. Therefore, the Company uses its incremental borrowing rate in determining the present value of the future lease payments when measuring the operating lease liabilities. The incremental borrowing rates are not observable, and therefore the rates are estimated primarily using observable borrowing rates on the Company’s FHLB advances. The FHLB borrowing rates are generally for over-collateralized advances with varying lengths of maturities. Therefore, the risk-free U.S. government bond rate and high-credit quality unsecured corporate bond rates are also considered in estimating the incremental borrowing rates. The Company’s incremental borrowing rates are developed considering its monthly payment amounts and the initial terms of its leases.
The components of total lease costs, which are recorded in non-interest expense - occupancy and equipment, in the consolidated statements of operations for the year ended December 31, 2024, 2023 and 2022 were as follows:
Year Ended December 31,
Operating lease costs
$
3,957
$
3,979
$
4,083
Variable lease costs
1,032
Total lease costs
$
4,989
$
4,900
$
4,944
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
Maturities of lease liabilities, including reconciliation to the lease liabilities, based on required contractual payments, were as follows:
Year Ended December 31,
$
4,020
2,984
2,157
1,675
Thereafter
Total lease payments
12,472
Less: future interest costs(1)
(883)
Present value of lease liabilities
$
11,589
(1) Computed using the estimated interest rate for each lease
Other information related to the lease liabilities as of and for the year ended December 31, 2024, 2023 and 2022 was as follows:
Year Ended December 31,
Other Information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
$
4,090
$
4,086
$
4,110
Weighted average remaining lease term (years)
4.00
4.06
4.85
Weighted average discount rate
3.57
%
3.00
%
2.97
%
Note 19-Commitments and Contingencies
Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off - balance sheet risk in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit, such as loan commitments and unused credit lines, and standby letters of credit, which are not reflected in the consolidated financial statements.
The Company adopted ASU 2016-13, effective January 1, 2023, which requires the Company to estimate expected credit losses for off-balance sheet credit exposures. The Company maintains an estimated liability for unfunded commitments, primarily related to commitments to extend credit, on the consolidated balance sheets. The liability for unfunded commitments is reduced in the period in which the off-balance sheet financial instruments expire, loan funding occurs or is otherwise settled. The following presents the activity in the liability for unfunded commitments for the year ended December 31, 2024 and 2023:
Residential
Commercial
Commercial
December 31, 2024
Real Estate
Real Estate
Construction
and Industrial
Total
Balance, January 1, 2023
$
-
$
-
$
-
$
-
$
-
Adoption of ASU 2016-13
Increase (decrease) in provision for (recovery of) credit losses
(52)
(1)
Balance December 31, 2023
$
$
$
$
$
Increase (decrease) in provision for (recovery of) credit losses
(47)
Balance December 31, 2024
$
$
$
$
$
1,412
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
Unfunded Commitments to Extend Credit
A commitment to extend credit, such as a loan commitment, credit line and overdraft protection, is a legally binding agreement to lend funds to a customer, usually at a stated interest rate and for a specific purpose. Such commitments have fixed expiration dates and generally require a fee. The extension of a commitment gives rise to credit risk. The actual liquidity requirements or credit risk that the Company may experience is expected to be lower than the contractual amount of commitments to extend credit because a significant portion of those commitments are expected to expire without being used. Certain commitments are subject to loan agreements containing covenants regarding the financial performance of the customer that must be met before the Company is required to fund the commitment. The Company uses the same credit policies in making commitments to extend credit as it does in making loans.
Unused Lines of Credit
The Company also issues unused lines of credit to meet customer financing needs. At December 31, 2024, the unused lines of credit include residential second mortgages of $8,190, construction loans of $4,985, commercial real estate of $2,565 and commercial and industrial loans of $9,084, totaling $24,824. These unused lines of credit consisted of fixed rate loans of $5,386 with an interest rates ranging from 6.00% to 6.25% and maturities ranging from one year to 17 years and variable-rate loans of $19,438 with interest rates ranging from 4.43% to 10.13% and maturities ranging from nine months to 21 years.
Standby Letters of Credit
Standby letters of credit are issued on behalf of customers in connection with construction contracts between the customers and third parties. Under standby letters of credit, the Company assures that the third parties will receive specified funds if customers fail to meet their contractual obligations. The credit risk to the Company arises from its obligation to make payment in the event of a customer’s contractual default. The maximum amount of potential future payments guaranteed by the Company is limited to the contractual amount of these letters. Collateral may be obtained at exercise of the commitment. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.
The following is a summary of the total amount of unfunded commitments to extend credit and standby letters of credit outstanding at December 31, 2024 and 2023:
December 31,
Unused lines of credit
$
24,824
$
18,542
Standby letters of credit
Lease Commitments
The Company’s lease commitments are disclosed in Note 18-Operating Leases.
Legal Proceedings
The Company and its subsidiary may be subject to legal actions and claims arising from contracts or other matters from time to time in the ordinary course of business. Except as described herein, management is not aware of any pending or threatened legal proceedings 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 not material to its financial position, results of operations or liquidity.
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
In July 2023, the United States District Court for the Eastern District of Michigan approved the Company’s Plea Agreement (the “Plea Agreement”) with the DOJ, resolving the DOJ’s investigation focused on the Bank’s Advantage Loan Program and related issues, including residential lending practices and public disclosures about that program contained in the Company's filings with the SEC. Under the Plea Agreement, the Company pleaded guilty to one count of securities fraud primarily relating to disclosures with respect to the Advantage Loan Program contained in the Company’s 2017 Registration Statement for its initial public offering and its immediately following Annual Reports on Form 10-K filed in March 2018 and March 2019. Consistent with the Plea Agreement, the sentence issued by the court required the Company to pay $27,239 in restitution for the benefit of non-insider victim shareholders; further enhance its compliance program and internal controls with respect to securities law compliance; and provide periodic reports to the DOJ with respect to compliance matters. No criminal fine was imposed. The Company’s obligations under the Plea Agreement are generally effective for three years. This resolution released the Company, as well as the Bank, from further prosecution for securities fraud and underlying mortgage fraud in the Advantage Loan Program.
The Company had a liability for estimated contingent losses of $27,239 for the outcome of the investigations which was recorded in other liabilities in the consolidated balance sheet at December 31, 2022. The restitution amount of $27,239 was paid in the third quarter of 2023 and is being administered by a special master appointed by the court. The restitution payment was recorded against the liability for contingent losses in 2023.
In connection with the Transaction and following the filing of the preliminary proxy statement filed with the SEC on October 16, 2024 (the “Preliminary Proxy Statement”), the Company received certain demand letters on behalf of purported Company shareholders (the “Shareholder Demand Letters”) alleging deficiencies regarding the disclosures contained in the Preliminary Proxy Statement and definitive proxy statement filed with the SEC on November 8, 2024 (the “Definitive Proxy Statement”). Certain of these purported shareholders have requested that the Company reimburse their attorneys’ fees allegedly incurred in connection with the Shareholder Demand Letters.
While the Company believes that the disclosures set forth in the Preliminary Proxy Statement and the Definitive Proxy Statement complied fully with all applicable law and denies the allegations in the Shareholder Demand Letters, in order to moot the purported shareholders’ disclosure claims, avoid nuisance and possible expense and disruption to the Transaction, and provide additional information to its shareholders, the Company voluntarily supplemented certain disclosures in the Definitive Proxy Statement on December 6, 2024. The Company specifically denies all allegations that any additional disclosure was or is required or material. On March 6, 2025, the Company entered into a settlement agreement with the purported Company shareholders who sent the Shareholder Demand Letters, pursuant to which the Company agreed to pay them $253,000, in the aggregate, to reimburse their alleged attorneys’ fees, and which provides for customary mutual releases from any further liability.
In November 2024, the Company received a books and records demand (the “Books and Records Demand”) from a purported Company shareholder pursuant to the Michigan Business Corporation Act which requests an array of documents for the purported purposes of investigating the decisions that led to, and other information with respect to, the Company’s execution of the Stock Purchase Agreement. This same purported shareholder filed a complaint to compel inspection of books and records with the Oakland County Circuit Court in the State of Michigan to compel the inspection of the categories of books and records set forth in the Books and Records Demand. The complaint has not been served on the Company. The Company has subsequently produced materials in an effort to amicably resolve the Books and Records Demand.
Mortgage Repurchase Liability
The Company has previously sold portfolio loans originated under the Advantage Loan Program to private investors in the secondary market. The Company also sold conventional residential real estate loans (which excludes Advantage Loan Program loans) in the secondary market primarily to Fannie Mae. In connection with these loans sold, the Company makes customary representations and warranties about various characteristics of each loan. The Company may be required pursuant to the terms of the applicable mortgage loan purchase and sale agreements to repurchase any previously sold loan or indemnify (make whole) the investor for which the representation or warranty of the Company proves to be inaccurate, incomplete or misleading. In the event of a repurchase, the Company is typically required to pay the unpaid principal balance, the proportionate premium received when selling the loan and certain expenses. As a result, the Company may incur a loss with respect to each repurchased loan.
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
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. These loans were previously sold to third-party investors with servicing of the loan retained. Losses expected to be incurred upon the repurchase of such loans are reflected in the mortgage repurchase liability.
Pursuant to the existing agreements with such investors, the Company also agreed to repurchase additional pools of Advantage Loan Program loans at the predetermined repurchase prices as stated in the agreements. At December 31, 2024, there is an outstanding agreement to repurchase an additional pool of Advantage Loan Program loans with an unpaid principal balance of $11,070 that extends to July 2025, with the final decision to effect any such repurchase, as determined by the applicable investor.
At December 31, 2024 and 2023, the mortgage repurchase liability was $492 and $750, respectively, which is included in other liabilities in the consolidated balance sheets. The unpaid principal balance of residential real estate loans that were subject to potential repurchase obligations in the event of breach of representations and warranties totaled $22,409 and $49,667 at December 31, 2024 and 2023, respectively, including Advantage Loan Program loans totaling $20,777 and $33,044 at December 31, 2024 and 2023, respectively.
Note 20-Condensed Financial Information of Sterling Bancorp, Inc. (Parent Company Only)
CONDENSED BALANCE SHEETS
December 31,
ASSETS
Cash
$
11,010
$
14,512
Investment in subsidiary
323,474
313,718
Other assets
1,505
Total assets
$
335,989
$
328,536
LIABILITIES AND SHAREHOLDERS’ EQUITY
Other liabilities
$
2,026
$
Total shareholders’ equity
333,963
327,723
Total liabilities and shareholders’ equity
$
335,989
$
328,536
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Year Ended December 31,
Income:
Interest Income
$
$
-
$
-
Other Income
-
-
Total income
-
Expenses:
Interest expense
$
-
$
3,727
$
4,969
Other expense
7,597
7,602
Provision for contingent losses
-
-
27,239
Total expenses
7,597
4,398
39,810
Loss before income tax and equity in subsidiary income
(7,417)
(4,164)
(39,810)
Income tax benefit
(1,737)
(1,122)
(3,461)
Loss before equity in subsidiary income
(5,680)
(3,042)
(36,349)
Equity in subsidiary income
7,818
10,455
22,155
Net income (loss)
$
2,138
$
7,413
$
(14,194)
Other comprehensive income
Equity in other comprehensive income (loss) of subsidiary
1,709
4,301
(18,628)
Comprehensive income (loss)
$
3,847
$
11,714
$
(32,822)
CONDENSED STATEMENT OF CASH FLOWS
Year Ended December 31,
Cash flows from operating activities
Net income
$
2,138
$
7,413
$
(14,194)
Adjustments to reconcile net income to net cash used in operating activities:
Equity in subsidiary income
(7,818)
(10,455)
(22,155)
Provision for contingent losses
-
-
27,239
Other
-
(271)
(72)
Changes in operating assets and liabilities:
Change in other assets
(1,199)
Change in other liabilities
1,213
(28,876)
Net cash used in operating activities
(5,666)
(31,335)
(7,763)
Cash flows from investing activities
Dividends received from subsidiary
3,000
90,000
-
Net cash provided by investing activities
3,000
90,000
-
Cash flows from financing activities
Consideration received for issuance of shares of common stock to defined contribution plan
-
1,028
1,138
Repurchase of restricted shares to pay employee tax liability
(836)
(245)
(216)
Payments on redemption of Subordinated Notes
-
(65,000)
-
Net cash provided by (used in) financing activities
(836)
(64,217)
Net decrease in cash
(3,502)
(5,552)
(6,841)
Cash, beginning of year
14,512
20,064
26,905
Cash, end of year
$
11,010
$
14,512
$
20,064
Supplemental cash flows information:
Cash paid for:
Interest
-
5,195
4,484
STERLING BANCORP, INC.
Notes to Consolidated Financial Statements
(dollars in thousands, except share and per share amounts)
Note 21-Segment Information
The CODM determines the Company’s reportable segment. The Chief Executive Officer along with others in the Company’s executive management evaluates performance and allocates resources based upon analysis of the Company as one operating segment or unit. The activities of the Company comprise one reportable segment, "Community Banking." All of the Company’s activities are interrelated, and each activity is dependent and assessed based on the manner in which it supports the other activities of the Company. All the consolidated assets are attributable to the Community Banking segment. The accounting policies of the Community Banking segment are the same as those described in the Note 2 “Summary of Significant Accounting Policies.”
The Company offers a range of loan products as well as retail and business banking services and has primary branch operations in the San Francisco and Los Angeles, California metropolitan areas and New York City.
The CODM is provided with the Company’s consolidated balance sheets and statements of operations and evaluates the Company’s operating results based on consolidated net interest income, non-interest income, non-interest expense, and net income (loss), which can be seen on the consolidated statements of operations. Other significant non-cash items assessed by the CODM are right of use assets exchanged for new operating lease liabilities and provision for (recovery of) credit losses consistent with the reporting on the consolidated statements of cash flows. Expenditures for long-lived assets are also evaluated and are consistent with the reporting on the consolidated statements of cash flows. Strategic plans and budget to actual monitoring are evaluated as one reportable segment. The actual results are used in assessing performance of the segment. All revenues are derived from banking operations within the United States, and for the years ended December 31, 2024, 2023 and 2022, there was no customer that accounted for more than 10% of the Company's consolidated revenue.
Note 22-Subsequent Events - Unaudited
On March 3, 2025, the Bank and the Company received (i) a demand letter dated February 27, 2025 from counsel for Thomas Lopp, the former Chairman of the Board, President and Chief Executive Officer of the Company and the Bank and (ii) a demand letter dated February 27, 2025 from counsel for Michael Montemayor, the former President of Retail and Commercial Banking of the Bank (such demand letters, the “Demand Letters”). Each Demand Letter alleges that (i) the Bank wrongfully withheld benefits under the officer’s Executive Incentive Retirement Plan dated as of May 8, 2007 (“EIRP”); (ii) the Company wrongfully determined that the officer was not entitled to indemnification and advancement of legal fees and costs in connection with an internal investigation and investigations by the Department of Justice and the Office of the Comptroller of the Currency into misconduct at the Company and Bank; and (iii) members of the Bank’s Board of Directors made defamatory statements about the officer’s role in connection with the aforementioned investigations. Each Demand Letter states the officer’s intention to (i) pursue arbitration with respect to the officer’s claim for benefits under his EIRP and (ii) initiate litigation over his claims pertaining to his purported right to indemnification and alleged defamation. Neither Demand Letter states a specific monetary demand in connection with the claims. No complaint has been filed nor arbitration proceeding commenced with respect to either Demand Letter and there is no assurance as to whether any litigation or arbitration will be commenced against the Company or the Bank with respect to the claims set forth in the Demand Letters.

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Exchange Act is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Exchange Act) as of December 31, 2024 as required by paragraph (b) of Rules 13a-15 or 15d-15. Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2024.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. This system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. GAAP. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, misstatements due to error or fraud may not be prevented or detected on a timely basis. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management performed an assessment of the effectiveness of our internal control over financial reporting at December 31, 2024, utilizing the criteria discussed in the “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. The objective of this assessment was to determine whether our internal control over financial reporting was effective as of December 31, 2024. Based on management’s assessment, we have concluded that our internal control over financial reporting was effective as of December 31, 2024.
The effectiveness of our internal control over financial reporting has been audited by Crowe LLP (PCAOB ID: 173), an independent registered public accounting firm, as stated in its report included herein.
Changes in Internal Control Over Financial Reporting
There have not been any changes in our internal control over financial reporting during the three months ended December 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

---

ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance.
Information with respect to our board of directors, as well as information regarding Section 16(a) Beneficial Ownership Compliance, will be set forth in our definitive Proxy Statement involving the election of certain members of our board of directors, which will be filed with the SEC pursuant to Regulation 14A not later than 120 days after December 31, 2024 (“Proxy Statement”), or will be included in an amendment to this Form 10-K, and is incorporated herein by reference. Information relating to the executive officers of the Company will be set forth in the Proxy Statement under the section captioned “Executive Officers” or will be included in an amendment to this Form 10-K and is incorporated herein by reference. The Audit Committee of our board of directors and the information regarding audit committee financial experts will be set forth under the caption “Board of Directors and Committees” in our Proxy Statement or will be included in an amendment to this Form 10-K and is incorporated herein by reference.
Information with respect to the Insider Trading Policy will be set forth in the Proxy Statement under the section captioned “Insider Trading Policy and Anti-Hedging Policy” or will be included in an amendment to this Form 10-K and is incorporated herein by reference.
Our Code of Business Conduct and Ethics is available on our website, investors.sterlingbank.com/corporate-governance/governance-overview, in the “Governance Documents” of the “Corporate Governance” section. We will disclose on our website amendments to or waivers from our Code of Ethics in accordance with all applicable laws and regulations. Information contained on our website is not deemed to be a part of this Annual Report.

---

ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation.
Information with respect to executive compensation and the report of the compensation committee of our board of directors will be set forth in the Proxy Statement or will be included in an amendment to this Form 10-K and are incorporated herein by reference.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information with respect to security ownership of certain owners and management will be set forth in the Proxy Statement, or will be included in an amendment to this Form 10-K and is incorporated herein by reference.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information with respect to certain relationships and related transactions and director independence will be set forth in the Proxy Statement, or will be included in an amendment to this Form 10-K and is incorporated herein by reference.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services.
Information with respect to principal accountant fees and services will be set forth in the Proxy Statement or will be included in an amendment to this Form 10-K and is incorporated herein by reference.
PART IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules
(a) 1. Financial Statements
The following consolidated financial statements of Sterling Bancorp, Inc. are included in Part II, Item 8 of this report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - As of December 31, 2024 and 2023
Consolidated Statements of Operations - For the year ended December 31, 2024, 2023 and 2022
Consolidated Statements of Comprehensive Income (Loss) - For the year ended December 31, 2024, 2023 and 2022
Consolidated Statements of Changes in Shareholders’ Equity - For the year ended December 31, 2024, 2023 and 2022
Consolidated Statements of Cash Flows - For the year ended December 31, 2024, 2023 and 2022
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All financial statement schedules are omitted as the information is not applicable or the information is presented in the consolidated financial statements and notes thereto in Part II, Item 8 of this report.
3. Exhibits
The exhibits required by Item 601 of Regulation S-K are included under Item 15(b) below.
(b)Exhibits
Incorporated by reference
Exhibit
number
Exhibit description
Filed/Furnished
herewith
Form
Period
ending
Exhibit
number
Filing
date
2.1
Stock Purchase Agreement, dated as of September 15, 2024, by and among Sterling Bancorp, Inc., Sterling Bank and Trust, F.S.B. and EverBank Financial Corp
8-K
2.1
09/17/2024
2.2
Mortgage Loan Purchase Agreement, dated as of September 15, 2024, by and between Sterling Bank and Trust, F.S.B. and Bayview Acquisitions LLC
8-K
2.2
09/17/2024
2.3
Plan of Dissolution, as approved by the board of directors of Sterling Bancorp, Inc. on September 15, 2024
8-K
2.3
09/17/2024
3.1
Third Amended and Restated Articles of Incorporation of Sterling Bancorp, Inc.
8-K
3.1
03/25/2022
3.2
Second Amended and Restated Bylaws of Sterling Bancorp, Inc.
8-K
3.2
03/25/2022
Incorporated by reference
Exhibit
number
Exhibit description
Filed/Furnished
herewith
Form
Period
ending
Exhibit
number
Filing
date
4.1
Form of Common Stock Certificate of Sterling Bancorp, Inc.
S-1/A
4.1
11/07/2017
4.2
Description of Securities
10-K
12/31/2019
4.2
10/06/2020
10.1*
Sterling Bancorp, Inc. 2017 Omnibus Equity Incentive Plan
S-1/A
10.3
11/07/2017
10.2*
Form of Restricted Stock Award Agreement with respect to the 2017 Omnibus Equity Incentive Plan
8-K
10.1
03/27/2018
10.3*
Form of Notice of Grant of Stock with respect to the 2017 Omnibus Equity Incentive Plan
8-K
10.2
03/27/2018
10.4*
Sterling Bancorp, Inc. 2020 Omnibus Equity Incentive Plan
DEF 14A
11/09/2020
10.5*
Form of Restricted Stock Award Agreement (Employees and Consultants) with respect to the 2020 Omnibus Equity Incentive Plan
10- K
12/31/2020
10.5
03/26/2021
10.6*
Form of Restricted Stock Award Agreement (Non-Employee Directors) with respect to the 2020 Omnibus Equity Incentive Plan
10 -K
12/31/2020
10.6
03/26/2021
10.7*
Form of Notice of Grant of Stock Option and Stock Option Agreement with respect to the 2020 Omnibus Equity Incentive Plan
10- K
12/31/2020
10.7
03/26/2021
10.8*
Form of Notice of Grant of Incentive Stock Option and Incentive Stock Option Agreement with respect to the 2020 Omnibus Equity Incentive Plan
10- K
12/31/2020
10.8
03/26/2021
10.9*
Employment Agreement entered into as of June 1, 2020 by and between Sterling Bancorp, Inc. and Thomas M. O’Brien
8-K
10.1
06/01/2020
10.10*
Stock Purchase Agreement effective as of June 1, 2020 between Sterling Bancorp, Inc. and Thomas M. O’Brien
8-K
10.3
06/01/2020
10.11*
Nonqualified Stock Option Agreement dated as of June 5, 2020 between Sterling Bancorp, Inc. and Thomas M. O’Brien
10-K
12/31/2019
10.16
10/6/2020
10.12*
Change of Control Agreement dated March 10, 2021 by and between Sterling Bancorp, Inc. and Christine Meredith
10-K
12/31/2020
10.20
03/26/2021
10.13
Plea Agreement dated March 15, 2023 by and between Sterling Bancorp, Inc. and the U.S. Department of Justice
8-K
10.1
03/15/2023
Incorporated by reference
Exhibit
number
Exhibit description
Filed/Furnished
herewith
Form
Period
ending
Exhibit
number
Filing
date
10.14*
First Amendment to Employment Agreement, dated as of June 22, 2023, by and between Sterling Bancorp, Inc. and Thomas M. O’Brien
8-K
10.1
6/23/2023
10.15*
Change of Control Agreement, dated as of June 22, 2023, by and between Sterling Bancorp, Inc. and Thomas M. O’Brien
8-K
10.2
6/23/2023
10.16*
Change of Control Agreement, dated as of June 22, 2023, by and between Sterling Bancorp, Inc. and Elizabeth M. Keogh
8-K
10.3
6/23/2023
10.17*
First Amendment to Change of Control Agreement, dated as of March 6, 2024, by and between Sterling Bancorp, Inc. and Christine Meredith
8-K
10.1
03/11/2024
10.18*
Change of Control Agreement, dated as of September 3, 2024, by and between Sterling Bank and Trust, F.S.B. and Karen Knott
8-K
10.1
09/03/2024
10.19*
Change of Control Agreement, dated as of June 21, 2023, by and between Sterling Bank and Trust, F.S.B. and Eleni Willis
10-Q
10.4
11/07/2024
10.20
Voting and Support Agreement, dated as of September 15, 2024, by and among EverBank Financial Corp, Sterling Bancorp, Inc., and K.I.S.S. Dynasty Trust No. 9
8-K
10.1
09/17/2024
10.21
Voting and Support Agreement, dated as of September 15, 2024, by and among EverBank Financial Corp, Sterling Bancorp, Inc., and K.I.S.S. Bank Stock Trust
8-K
10.2
09/17/2024
Sterling Bancorp, Inc. Insider Trading Policy
X
Subsidiaries of Sterling Bancorp, Inc.
X
23.1
Consent of Crowe LLP
X
31.1
Section 302 Certification-Chief Executive Officer
X
31.2
Section 302 Certification-Chief Financial Officer
X
32.1
Section 906 Certification-Chief Executive Officer
X
32.2
Section 906 Certification-Chief Financial Officer
X
97.1
Sterling Bancorp, Inc. Clawback Policy
10-K
97.1
3/14/2024
Incorporated by reference
Exhibit
number
Exhibit description
Filed/Furnished
herewith
Form
Period
ending
Exhibit
number
Filing
date
99.1
Notice of Proposed Derivative Settlement
8-K
99.1
04/29/2022
99.2
Company’s Corporate Governance Enhancements
8-K
99.2
09/29/2022
101.INS
Inline XBRL Instance Document**
101.SCH
Inline XBRL Taxonomy Extension Schema Document
X
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
X
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
X
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
X
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
X
Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)
X
*
Indicates a management contract or compensatory plan or arrangement.
**
The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.