Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-38290
Sterling Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Michigan
38-3163775
(State or other jurisdiction ofincorporation or organization)
(I.R.S. Employer Identification Number)
One Towne Square, Suite 1900
Southfield, Michigan 48076
(248) 355-2400
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, no par value per share
SBT
The NASDAQ Stock Market LLC (NASDAQ
Capital Market)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☒
Smaller reporting company ☒
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 6, 2021, 50,475,181 shares of the registrant’s Common Stock were outstanding.
STERLING BANCORP, INC.
INDEX
PART I — FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020
2
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2021 and 2020
3
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2021 and 2020
4
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three and six months ended June 30, 2021 and 2020
5
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020
6
Notes to the Condensed Consolidated Financial Statements (Unaudited)
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
40
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
59
Item 4.
Controls and Procedures
61
PART II — OTHER INFORMATION
Legal Proceedings
62
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
64
Item 6.
Exhibits
65
Exhibit Index
SIGNATURES
66
1
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets (Unaudited)
(dollars in thousands)
June 30,
December 31,
2021
2020
Assets
Cash and due from banks
$
774,478
998,497
Interest-bearing time deposits with other banks
805
7,021
Investment securities
195,974
304,958
Mortgage loans held for sale
15,107
22,284
Loans, net of allowance for loan losses of $70,669 and $72,387
2,287,857
2,434,356
Accrued interest receivable
9,660
10,990
Mortgage servicing rights, net
3,232
5,688
Leasehold improvements and equipment, net
9,423
8,512
Operating lease right-of-use assets
19,817
19,232
Federal Home Loan Bank stock, at cost
22,950
Cash surrender value of bank-owned life insurance
32,766
32,495
Deferred tax asset, net
23,749
24,326
Other assets
21,634
22,736
Total assets
3,417,452
3,914,045
Liabilities and Shareholders’ Equity
Liabilities:
Noninterest-bearing deposits
55,721
58,458
Interest-bearing deposits
2,481,198
3,040,508
Deposits held for sale
73,383
—
Total deposits
2,610,302
3,098,966
Federal Home Loan Bank borrowings
318,000
Subordinated notes, net
65,377
65,341
Operating lease liabilities
21,085
20,497
Accrued expenses and other liabilities
75,646
91,650
Total liabilities
3,090,410
3,594,454
Shareholders’ equity:
Preferred stock, authorized 10,000,000 shares; no shares issued and outstanding
Common stock, no par value, authorized 500,000,000 shares; issued and outstanding 50,475,181 shares at June 30, 2021 and 49,981,861 shares at December 31, 2020, respectively
82,157
80,807
Additional paid-in capital
13,796
13,544
Retained earnings
230,630
224,853
Accumulated other comprehensive income
459
387
Total shareholders’ equity
327,042
319,591
Total liabilities and shareholders’ equity
See accompanying notes to condensed consolidated financial statements.
Condensed Consolidated Statements of Operations (Unaudited)
(dollars in thousands, except per share amounts)
Three Months Ended
Six Months Ended
Interest income
Interest and fees on loans
30,074
37,501
61,368
77,026
Interest and dividends on investment securities and restricted stock
385
1,037
775
2,071
Other interest
227
141
490
575
Total interest income
30,686
38,679
62,633
79,672
Interest expense
Interest on deposits
5,236
9,576
11,938
19,940
Interest on Federal Home Loan Bank borrowings
847
877
1,685
1,687
Interest on subordinated notes
1,005
1,178
2,185
2,355
Total interest expense
7,088
11,631
15,808
23,982
Net interest income
23,598
27,048
46,825
55,690
Provision (recovery) for loan losses
(1,806)
4,297
(2,543)
25,150
Net interest income after provision (recovery) for loan losses
25,404
22,751
49,368
30,540
Non-interest income
Service charges and fees
144
95
303
212
Gain (loss) on sale of investment securities
(34)
199
Gain on sale of mortgage loans held for sale
70
751
468
1,020
Unrealized gains (losses) on equity securities
15
43
(75)
123
Net servicing loss
(908)
(207)
(1,338)
(1,118)
Income on cash surrender value of bank-owned life insurance
322
317
635
645
Other
88
358
191
771
Total non-interest income
(269)
1,323
184
1,852
Non-interest expense
Salaries and employee benefits
8,678
7,336
16,526
14,089
Occupancy and equipment
2,249
2,208
4,445
4,326
Professional fees
5,721
8,268
14,476
11,580
FDIC assessments
500
240
1,219
259
Data processing
440
351
786
686
Net provision (recovery) of mortgage repurchase liability
(512)
25
(665)
2,868
1,619
4,491
3,317
Total non-interest expense
19,944
20,047
41,278
34,282
Income (loss) before income taxes
5,191
4,027
8,274
(1,890)
Income tax expense (benefit)
1,739
1,160
2,497
(727)
Net income (loss)
3,452
2,867
5,777
(1,163)
Income (loss) per share, basic and diluted
0.07
0.06
0.12
(0.02)
Weighted average common shares outstanding:
Basic
50,009,053
49,837,948
49,930,563
49,837,805
Diluted
50,060,775
49,841,741
49,987,253
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on investment securities, arising during the period, net of tax effect of $51, $(66), $28, and $218, respectively
131
(171)
72
560
Reclassification adjustment for (gains) losses included in net income of $-, $34, $-, and $(199), respectively, included in gain (loss) on sale of investment securities, net of tax effect of $-, $(10), $-, and $56, respectively
(143)
Total other comprehensive income (loss)
(146)
417
Comprehensive income (loss)
3,583
2,721
5,849
(746)
Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
Accumulated
Additional
Total
Common Stock
Paid-in
Retained
Comprehensive
Shareholders’
Shares
Amount
Capital
Earnings
Income
Equity
Balance at January 1, 2020
49,944,473
80,889
13,210
238,319
196
332,614
Net loss
(4,030)
Repurchases of shares of common stock (Note 10)
(10,912)
(82)
Stock-based compensation
134,177
109
Other comprehensive income
563
Dividends distributed ($0.01 per share)
(499)
Balance at March 31, 2020
50,067,738
13,319
233,790
759
328,675
Net income
(60,323)
9
Other comprehensive loss
Balance at June 30, 2020
50,007,415
13,328
236,657
613
331,405
Balance at January 1, 2021
49,981,861
2,325
Repurchase of restricted shares to pay employee tax liability
(8,536)
(46)
36,082
105
(59)
Balance at March 31, 2021
50,009,407
13,603
227,178
328
321,916
Issuance of shares of common stock for cash ($4.50 per share) (Note 10)
300,000
1,350
165,774
193
Balance at June 30, 2021
50,475,181
Condensed Consolidated Statements of Cash Flows (Unaudited)
Cash Flows From Operating Activities
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Deferred income tax expense (benefit)
549
(8,159)
Gain on sale of investment securities
(199)
Unrealized (gains) losses on equity securities
75
(123)
Amortization (accretion), net, on investment securities
964
(127)
Depreciation and amortization on leasehold improvements and equipment
813
801
Origination, net of principal payments, mortgage loans held for sale
(7,599)
(103,713)
Proceeds from sale of mortgage loans held for sale
14,904
102,396
(468)
(1,020)
Increase in cash surrender value of bank-owned life insurance, net of premiums
(271)
(298)
Valuation allowance adjustments and amortization of mortgage servicing rights
2,555
2,989
298
118
492
80
Change in operating assets and liabilities:
1,330
2,862
2,010
(12,520)
(4,964)
Net cash provided by operating activities
6,553
13,657
Cash Flows From Investing Activities
Maturities of interest-bearing time deposits with other banks
6,216
Purchases of interest-bearing time deposits with other banks
(8,706)
Maturities and principal receipts of investment securities
108,045
83,231
Sales of investment securities
59,359
Purchases of investment securities
(246,749)
Net decrease in loans
316,804
186,902
Purchases of portfolio loans
(172,505)
(37,746)
Purchase of leasehold improvements and equipment
(1,772)
(452)
Net cash provided by investing activities
256,788
35,839
Cash Flows From Financing Activities
Net increase (decrease) in deposits
(488,664)
396,642
Proceeds from advances from Federal Home Loan Bank
100,000
Proceeds from issuance of shares of common stock
Repurchases of shares of common stock
Dividends paid to shareholders
Net cash provided by (used in) financing activities
(487,360)
496,061
Net change in cash and due from banks
(224,019)
545,557
Cash and due from banks at beginning of period
77,819
Cash and due from banks at end of period
623,376
Supplemental cash flows information
Cash paid:
Interest
25,432
30,589
Income taxes
838
Noncash investing and financing activities:
Right-of-use assets obtained in exchange for new operating lease liabilities
2,512
3,009
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1—Nature of Operations and Basis of Presentation
Nature of Operations
Sterling Bancorp, Inc. (the “Company”) is a unitary thrift holding company that was incorporated in 1989 and the parent company of its wholly owned subsidiary, Sterling Bank and Trust, F.S.B. (the “Bank”). The Company’s business is conducted through the Bank, which was formed in 1984. The Bank originates residential and commercial real estate loans, construction loans, commercial lines of credit and other consumer loans and provides deposit products, consisting primarily of checking, savings and term certificate accounts. The Bank operates through a network of 29 branches of which 26 branches are located in San Francisco and Los Angeles, California with the remaining branches located in New York, New York and Southfield, Michigan.
The Company is headquartered in Southfield, Michigan, and its operations are in the financial services industry. Management evaluates the performance of the Company’s business based on one reportable segment, community banking.
On March 19, 2021, the Bank entered into an agreement with First Federal Savings & Loan Association of Port Angeles, a Washington state chartered bank, to sell the Bank’s Bellevue, Washington branch office. The sale includes the transfer of all deposit accounts located at the branch, as well as the transfer of all branch premises and equipment. Subsequent to June 30, 2021, the Bank completed the sale of the branch office. Refer to Note 17—Subsequent Events for further details.
The Company is subject to regulation, examination and supervision by the Board of Governors of the Federal Reserve System (the “FRB” or “Federal Reserve”). The Bank is a federally chartered stock savings bank that is subject to regulation, supervision and examination by the Office of the Comptroller of the Currency (“OCC”) of the U.S. Department of Treasury and the Federal Deposit Insurance Corporation (“FDIC”) and is a member of the Federal Home Loan Bank (“FHLB”) system.
Basis of Presentation
The condensed consolidated balance sheet as of June 30, 2021 and the condensed consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity and cash flows for the three and six months ended June 30, 2021 and 2020 are unaudited. The unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and reflect all adjustments, in the opinion of management, of a normal recurring nature that are necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. The financial data and other financial information disclosed in these notes to the condensed consolidated financial statements related to these periods are also unaudited. The results of operations for the three and six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the year ended December 31, 2021 or for any future annual or interim period. The consolidated balance sheet at December 31, 2020 included herein was derived from the audited financial statements as of that date. The accompanying unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on March 26, 2021 (the “2020 Form 10-K”).
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued
Note 2—New Accounting Standards
Recently Issued Accounting Guidance Not Yet Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which is intended to improve financial reporting by requiring recording of credit losses on loans and other financial instruments on a more timely basis. The guidance will replace the current incurred loss accounting model with an expected loss approach and requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The guidance requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which clarifies the scope of the credit losses standard and addresses issues related to accrued interest receivable balances and recoveries, among other things. In May 2019, the FASB issued ASU No. 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief. The amendments provide entities with an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis, upon adoption of Topic 326. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates. This update deferred the effective dates of Topic 326 to January 1, 2023 for certain entities including smaller reporting companies (as defined by the U.S. Securities and Exchange Commission (the “SEC”)). The Company, as a smaller reporting company as of the relevant measuring period, qualifies for this extension.
At this time, the Company has formed a cross-functional implementation team consisting of individuals from credit, finance and information systems. The implementation team has been working with a software vendor to assist in implementing required changes to credit loss estimation models and processes. The historical data set for model development has been finalized, and the credit loss estimation models are in the process of being developed and tested. The Company expects to recognize a cumulative effect adjustment to the opening balance of retained earnings as of the beginning of the first reporting period in which ASU No. 2016-13 is effective. The Company has not yet determined the magnitude of any such one-time cumulative adjustment or of the overall impact of ASU No. 2016-13 on its consolidated financial statements.
Note 3—Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The condensed consolidated financial statements include the results of the Company and its wholly-owned subsidiary.
On December 21, 2020, QCM, LLC, doing business as Quantum Capital Management, a wholly-owned subsidiary of Quantum Fund, LLC and an indirect wholly-owned subsidiary of the Bank, completed the sale of substantially all of its assets, which consisted primarily of client advisory agreements for aggregate consideration of $250. The operations of Quantum Capital Management were not significant.
All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Due to the inherent uncertainty involved in making estimates, actual results reported in the future periods may be based upon amounts that could differ from those estimates.
8
Concentration of Credit Risk
The loan portfolio consists primarily of residential real estate loans, which are collateralized by real estate. At June 30, 2021 and December 31, 2020, residential real estate loans accounted for 83% and 81%, respectively, of the loan portfolio. In addition, most of these residential loans and other commercial loans have been made to individuals and businesses in the state of California, which are dependent on the area economy for their livelihoods and servicing of their loan obligation. At June 30, 2021 and December 31, 2020, approximately 87% of the loan portfolio was originated with respect to properties or businesses located in California.
Starting December 9, 2019, the Bank suspended its Advantage Loan Program and announced on March 6, 2020 that it permanently discontinued this program. Loans originated under this Program comprised a significant component of the Bank’s total loan originations. Advantage Loan Program loans (including nonaccrual residential real estate loans held for sale of $14,867 and $19,375 at June 30, 2021 and December 31, 2020, respectively) totaled $1,427,467 and $1,515,248, or 73% and 74%, of the residential loan portfolio at June 30, 2021 and December 31, 2020, respectively. Refer to Note 16– Commitments and Contingencies.
Risks and Uncertainties – COVID-19
The coronavirus disease 2019 (“COVID-19”) pandemic, and related efforts to contain it, have caused significant disruptions in the functioning of the financial markets, resulted in an unprecedented slowdown in economic activity and a related increase in unemployment, and have increased economic and market uncertainty and volatility. The Company’s primary market areas of California and New York City have been hit particularly hard by the COVID-19 pandemic. Federal and state governments have taken, and continue to take, unprecedented actions to contain the spread of the disease, including vaccine distribution, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief for businesses and individuals impacted by the pandemic.
During the first half of 2021, the COVID-19 pandemic continued to create and exacerbate significant risks and uncertainties for the markets that the Bank serves. As the Bank’s residential and commercial customers are facing various levels of financial stress, the Bank continues to experience an elevated level of delinquent and nonaccrual loans, primarily in residential real estate, office, lodging, retail and construction loans.
The duration and severity of the effect of the COVID-19 pandemic on economic, market and business conditions remain uncertain. The Company continues to be subject to heightened business, operational, market, credit and other risks related to the COVID-19 pandemic, which may have an adverse effect on its business, financial condition, liquidity, results of operations, risk-weighted assets and regulatory capital.
Note 4—Investment Securities
Debt Securities
The following tables summarize the amortized cost and fair value of debt securities available for sale at June 30, 2021 and December 31, 2020 and the corresponding amounts of gross unrealized gains and losses:
June 30, 2021
Amortized
Gross Unrealized
Fair
Cost
Gain
Loss
Value
Available for sale:
U.S. Treasury & Agency securities
73,540
90
73,630
Mortgage-backed securities
29,408
91
(264)
29,235
Collateralized mortgage obligations
86,888
742
87,630
Collateralized debt obligations
(22)
190
190,048
923
(286)
190,685
December 31, 2020
138,742
255
138,997
33,743
(1)
33,814
126,359
628
(391)
126,596
214
(27)
187
299,058
955
(419)
299,594
Securities with a fair value of $73,630 were pledged as collateral on FHLB borrowings at June 30, 2021.
All of the Company’s mortgage-backed securities, and a majority of the Company’s collateralized mortgage obligations are issued and/or guaranteed by a U.S. government agency (Government National Mortgage Association) or a U.S. government-sponsored enterprise (Federal Home Loan Mortgage Corporation (“Freddie Mac”) or Federal National Mortgage Association (“Fannie Mae”)). The fair value of the private-label collateralized mortgage obligations was $705 and $816 at June 30, 2021 and December 31, 2020, 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 June 30, 2021 and December 31, 2020.
For the three and six months ended June 30, 2020, the proceeds from sales of debt securities available for sale were $36,315 and $59,359, respectively. The Company recorded gross realized gains of $44 and gross realized losses of $78 during the three months ended June 30, 2020 and gross realized gains of $279 and gross realized losses of $80 during the six months ended June 30, 2020. There were no debt securities sold during the six months ended June 30, 2021.
10
The amortized cost and fair value of the U.S. Treasury and Agency securities at June 30, 2021 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.
Due after one year through five years
The following table summarizes debt securities available for sale, at fair value, with unrealized losses at June 30, 2021 and December 31, 2020 aggregated by major security type and length of time the individual securities have been in a continuous unrealized loss position:
Less than 12 Months
12 Months or More
Unrealized
Losses
9,972
10,162
5,694
75,740
81,434
(392)
81,621
As of June 30, 2021, the debt securities portfolio consisted of 19 debt securities, with three debt securities in an unrealized loss position. For debt securities in an unrealized loss position, management has both the intent and ability to hold these investments until the recovery of the decline. The fair value is expected to increase as these securities approach their maturity date or repricing date or if market yields for such investments decline. Accordingly, as of June 30, 2021, the unrealized losses in these securities are due to non-credit-related factors, including changes in interest rates and other market conditions; thus, the impairment was determined to be temporary. All interest and dividends are considered taxable.
A collateralized debt obligation with a carrying value of $190 and $187 at June 30, 2021 and December 31, 2020, respectively, was rated high quality at inception, but it was subsequently rated by Moody’s as Ba1, which is defined as “speculative.” The issuers of the underlying investments (the collateral) of the collateralized debt obligation are primarily banks. Management uses in-house and third-party other-than-temporary impairment evaluation models to compare the present value of expected cash flows to the previous estimate to ensure there are no adverse changes in cash flows during the period. The other-than-temporary impairment model considers the structure and term of the collateralized debt obligations and the financial condition of the underlying issuers. Assumptions used in the model include expected future default rates and prepayments. The collateralized debt obligation remained classified as available for sale and represented $22 and $27 of the unrealized losses reported at June 30, 2021 and December 31, 2020, respectively.
11
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 June 30, 2021 and December 31, 2020, equity securities totaled $5,289 and $5,364, respectively, and are included in investment securities in the condensed consolidated balance sheets. Equity securities with readily determinable fair values are stated at fair value with realized and unrealized gains and losses reported in income.
At June 30, 2021 and December 31, 2020, equity securities with readily determinable fair values were $5,043 and $5,118, respectively. The following is a summary of unrealized and realized gains and losses recognized in the condensed consolidated statements of operations during the three and six months ended June 30, 2021 and 2020:
Net gains (losses) recorded during the period on equity securities
Less: net gains (losses) recorded during the period on equity securities sold during the period
Unrealized gains (losses) recorded during the period on equity securities held at the reporting date
The Company has elected to account for its investment in a thinly traded, restricted stock using the measurement alternative for equity securities without readily determinable fair values , resulting in the investment carried at cost based on no evidence of impairment or observable trading activity during the six months ended June 30, 2021 and 2020. The investment was reported at $246 at June 30, 2021 and December 31, 2020.
Note 5—Loans
Major categories of loans were as follows:
Residential real estate
1,948,892
2,033,526
Commercial real estate
263,278
259,958
Construction
144,385
206,581
Commercial lines of credit
1,971
6,671
Other consumer
Total loans
2,358,526
2,506,743
Less: allowance for loan losses
(70,669)
(72,387)
Loans, net
Loans totaling $521,218 and $630,197 were pledged as collateral on FHLB borrowings at June 30, 2021 and December 31, 2020, respectively.
12
The following tables present the activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2021 and 2020:
Commercial
Residential
Lines of
Three Months Ended June 30, 2021
Real Estate
Credit
Consumer
Unallocated
Allowance for loan losses:
Beginning balance
33,056
22,763
15,966
86
71,871
(579)
(287)
(912)
(28)
Charge offs
Recoveries
587
604
Total ending balance
33,064
22,491
15,056
58
70,669
Six Months Ended June 30, 2021
32,366
21,942
17,988
72,387
(93)
518
(2,935)
(33)
791
31
825
Three Months Ended June 30, 2020
19,154
11,261
11,439
368
390
42,613
(344)
4,492
557
(18)
(390)
17
21
18,812
15,770
11,998
350
46,931
Six Months Ended June 30, 2020
12,336
5,243
3,822
21,730
Provision for loan losses
6,464
10,491
8,173
22
36
51
13
The following tables present the balance in the allowance for loan losses and the recorded investment by portfolio segment and based on impairment evaluation method as of June 30, 2021 and December 31, 2020:
Ending allowance balance attributable to loans:
Individually evaluated for impairment
160
3,011
3,171
Collectively evaluated for impairment
32,904
12,045
67,498
Total ending allowance balance
Loans:
Loans individually evaluated for impairment
18,981
33,779
120
53,238
Loans collectively evaluated for impairment
1,948,534
244,297
110,606
1,851
2,305,288
Total ending loans balance
41
287
1,905
2,237
32,325
21,655
16,083
87
70,150
208
20,974
48,871
3,981
74,034
2,033,318
238,984
157,710
2,690
2,432,709
14
The following tables present information related to impaired loans by class of loans as of and for the periods indicated:
At June 30, 2021
At December 31, 2020
Unpaid
Allowance
Principal
Recorded
for Loan
Balance
Investment
With no related allowance for loan losses recorded:
Residential real estate, first mortgage
108
82
116
94
Commercial real estate:
Retail
1,239
1,010
1,247
1,029
Hotels/Single-room occupancy hotels
17,869
17,835
11,428
11,419
136
23,327
22,422
42,669
41,951
Commercial lines of credit, private banking
3,857
Subtotal
42,799
41,605
59,317
58,350
With an allowance for loan losses recorded:
275
276
114
Commercial real estate, hotels/single-room occupancy hotels
8,645
8,526
11,400
11,357
6,920
124
11,675
11,633
15,803
15,684
54,474
75,120
Three Months Ended June 30,
Average
Cash Basis
Recognized
1,013
1,070
17,926
3,502
22,801
29
32,047
344
Commercial lines of credit:
Private banking
122
1,243
C&I lending
1,284
42,084
45
30
39,240
379
277
11,104
55
37
129
11,381
56
38
245
53,465
101
68
39,485
382
216
Six Months Ended June 30,
97
1,089
24
17,914
30,207
138
30,394
810
597
1,645
1,245
42
35
51,010
127
37,611
881
656
10,721
107
89
130
10,998
246
62,008
249
217
37,857
887
661
In the tables above, the unpaid principal balance is not reduced for partial charge offs. Also, the recorded investment excludes accrued interest receivable on loans, which was not significant.
Also presented in the table above is the average recorded investment of the impaired loans and the related amount of interest recognized during the time within the period that the impaired loans were impaired. When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual status, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the total principal of an impaired loan is not in doubt and the loan is on nonaccrual status, contractual interest is credited to interest income when received under the cash basis method. The average balances are calculated based on the month-end balances of the loans for the period reported.
16
The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of June 30, 2021 and December 31, 2020:
Loans Past
Due Over
90 Days Still
Nonaccrual
Accruing
Residential real estate:
Residential first mortgage
27,157
44
20,043
46
Residential second mortgage
714
1,011
20
17,945
19,945
27,803
41,873
2,285
1,572
74,766
86,424
The following tables present the aging of the recorded investment in past due loans as of June 30, 2021 and December 31, 2020 by class of loans:
Greater
30 - 59
60 - 89
than
Days
89 Days
Loans Not
Past Due
33,222
16,802
27,201
77,225
1,855,556
1,932,781
822
15,289
16,111
14,981
15,992
Multifamily
3,661
94,381
98,042
Offices
2,769
20,773
23,542
60,344
78,289
Industrial
4,000
5,851
1,471
1,607
39,955
41,562
3,323
31,126
113,259
41,123
24,233
74,810
140,166
2,218,360
37,819
14,524
20,089
72,432
1,943,602
2,016,034
362
134
1,182
16,310
17,492
1,030
15,170
16,200
3,835
75,374
79,209
27,061
47,690
67,635
13,186
56,667
8,593
2,514
52,980
153,601
2,409
4,262
51,619
17,172
86,470
155,261
2,351,482
The aging of the loans in the table above as of June 30, 2021 has not been adjusted for customers granted a payment deferral in response to COVID-19. These loans remain in the aging category that was applicable at the time of payment deferral. Interest continues to accrue on these loans. Refer to — Forbearance Loans for further information.
The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential real estate and other consumer loans, the Company also evaluates credit quality based on the aging status of the loan, which is presented above, and by payment activity. The Company reviews the status of nonperforming loans, which include loans 90 days past due and still accruing and nonaccrual loans.
18
Troubled Debt Restructurings
At June 30, 2021 and December 31, 2020, the balance of outstanding loans identified as troubled debt restructurings, along with the allocated portion of the allowance for loan losses with respect to these loans, was as follows:
Allowance for
Loan Losses
200
209
Commercial real estate, retail
23,843
1,965
26,985
1,906
25,174
2,005
28,347
1,951
During the six months ended June 30, 2021, the Bank modified the terms of two construction loans and one private banking loan with an extension of the maturity dates at the contracts’ existing rates of interest, which are presently lower than the current market rate for a new loan with similar risk. The total outstanding recorded investments were $10,863 both before and after modification. During the six months ended June 30, 2021, there were $14,183 troubled debt restructurings that had defaulted for which the payment default occurred within one year of modification. Eight loans totaling $22,234 modified as troubled debt restructurings were in default under their modified terms as of June 30, 2021.
During the six months ended June 30, 2020, the Bank modified the terms of three construction loans and one private banking loan with an extension of the maturity dates at the contracts’ existing rates of interest, which were lower than the current market rate for a new loan with similar risk. The total outstanding recorded investments were $13,777 both before and after modification. During the six months ended June 30, 2020, there was one construction loan of $5,263 identified as a troubled debt restructuring that had defaulted for which the payment default occurred within one year of modification.
The terms of certain other loans have been modified during the six months ended June 30, 2021 and 2020 that did not meet the definition of a troubled debt restructuring. These other loans that were modified were not considered significant.
Forbearance Loans
As a response to the COVID-19 pandemic, the Company has offered forbearance under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) to customers facing COVID-19-related financial difficulties. The CARES Act created a forbearance program for impacted borrowers and imposed a temporary 60-day moratorium on foreclosures and foreclosure-related evictions related to federally backed mortgage loans, which include loans secured by a first or subordinate lien on residential one-to-four family real property that have been purchased by Fannie Mae or Freddie Mac, are insured by HUD or are insured or guaranteed by other listed agencies. Borrowers of such federally backed mortgage loans experiencing a financial hardship as a result of COVID-19 may request forbearance, regardless of delinquency status, for up to 360 days. Subsequently, the federal agencies as well as the state of California announced extensions of their moratoria on single-family foreclosures and evictions and Federal Housing Administration insured loans through June 30, 2021. On August 3, 2021, the U.S. Centers for Disease and Control issued a temporary extension of the moratoria on evictions of certain covered persons in counties with heightened levels of community transmission of COVID-19 through October 3, 2021.
Certain provisions of the CARES Act, as amended in December 2020 by the Consolidated Appropriations Act of 2021, encourage financial institutions to practice prudent efforts to work with borrowers impacted by the COVID-19 pandemic. Under these provisions, a modification deemed to be COVID-19-related would not be considered a troubled debt restructuring if the loan was not more than 30 days past due as of December 31, 2019 and the deferral was executed between March 1, 2020 and the earlier of 60 days after the date of termination of the COVID-19 national emergency or January 1, 2022. The banking regulators issued similar guidance, which also clarified that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not troubled debt restructurings.
19
In this context, the Company implemented a COVID-19 forbearance program that generally provided for principal and interest forbearance for 120 days to residential borrowers with extensions available to qualified borrowers available for up to a maximum deferral period of twelve months, and these loans were not considered troubled debt restructurings. Under the forbearance program, interest continues to accrue at the note rate. At the end of the forbearance period, the borrower’s accrued but unpaid interest will be added to their outstanding principal balance while keeping the principal and interest payment at the amount determined in accordance with the terms of the note, thus extending the loan’s maturity date. The terms of commercial loan forbearances are reviewed and determined on a case-by-case basis, and these loans were not considered troubled debt restructurings. Forbearance loans under the CARES program totaled $11,775 and $15,785 at June 30, 2021 and December 31, 2020, respectively. Total accrued interest receivables on these loans were $188 and $146 at June 30, 2021 and December 31, 2020, respectively.
As applications for the forbearance program continued to decrease in July 2021, the Bank terminated the forbearance program, effective July 31, 2021.
Foreclosure Proceedings
At June 30, 2021 and December 31, 2020, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $4,694 and $5,320, respectively. Of the loans in formal foreclosure proceedings, $4,683 and $3,209 were included in mortgage loans held for sale in the condensed consolidated balance sheets at June 30, 2021 and December 31, 2020, respectively, and were carried at the lower of amortized cost or fair value. The balance of loans are classified as held for investment and receive an allocation of the allowance for loan losses consistent with a substandard loan loss allocation rate as these loans were classified as substandard at June 30, 2021 and December 31, 2020, respectively.
Credit Quality
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes homogeneous loans, such as residential real estate and other consumer loans, and non-homogeneous loans, such as commercial lines of credit, construction and commercial real estate loans. This analysis is performed at least quarterly. The Company uses the following definitions for risk ratings:
Pass: Loans are of satisfactory quality.
Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.
Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the loan. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing facts, conditions and values, highly questionable and improbable.
At June 30, 2021 and December 31, 2020, the risk rating of loans by class of loans was as follows:
Special
Pass
Mention
Substandard
Doubtful
1,905,579
26,944
258
15,397
13,432
1,549
61,860
10,176
26,006
9,600
1,602
12,340
Hotels/ Single-room occupancy hotels
12,113
20,538
45,638
30,107
5,868
5,587
81,593
25,477
29,444
7,871
1,824
27
2,137,476
65,237
147,684
8,129
1,995,945
19,995
16,806
13,599
55,772
14,238
9,199
12,014
1,623
13,424
9,115
17,984
40,536
5,867
7,319
43,193
7,732
5,742
152,577
14,234
32,850
3,573
689
2,308,592
59,668
131,469
7,014
During the three and six months ended June 30, 2021, the Bank repurchased pools of Advantage Loan Program loans with a total outstanding principal balance of $79,818 and $167,762, respectively. During the three and six months ended June 30, 2020, the Bank repurchased pools of Advantage Loan Program loans with a total outstanding principal balance of $38,704. The repurchased Advantage Loan Program loans are recorded in loans held for investment. Any loss on the repurchase of the Advantage Loan Program loans is charged against the mortgage repurchase liability. 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 loss in non-interest income in the condensed consolidated statements of operations. The Advantage Loan Program loans that have been repurchased and included in the loan portfolio had an outstanding principal balance of $205,505 and $57,039 at June 30, 2021 and December 31, 2020, respectively. For more information on the repurchases of mortgage loans, refer to Note 16—Commitments and Contingencies.
Note 6—Mortgage Servicing Rights, net
The Bank records servicing assets from the sale of residential real estate mortgage loans to the secondary market for which servicing has been retained. Residential real estate mortgage loans serviced for others are not included in the condensed consolidated balance sheets. The principal balance of these loans at June 30, 2021 and December 31, 2020 are as follows:
Residential real estate mortgage loan portfolios serviced for:
FNMA
143,354
171,553
FHLB
47,712
64,661
Private investors
190,097
429,816
381,163
666,030
Custodial escrow balances maintained with these serviced loans were $2,509 and $6,051 at June 30, 2021 and December 31, 2020, respectively.
Activity for mortgage servicing rights and the related valuation allowance are as follows:
Mortgage servicing rights:
Beginning of period
5,855
10,302
7,853
10,845
Additions
383
99
Amortization
(1,680)
(1,116)
(3,752)
(1,766)
End of period
4,200
9,569
Valuation allowance at beginning of period
1,229
2,326
2,165
1,080
Additions (recoveries)
(261)
(23)
(1,197)
1,223
Valuation allowance at end of period
968
2,303
7,266
Servicing fee income, net of amortization of servicing rights and changes in the valuation allowance, was $(908) and $(207) for the three months ended June 30, 2021 and 2020, respectively, and $(1,338) and $(1,118) for the six months ended June 30, 2021 and 2020, respectively.
The fair value of mortgage servicing rights was $3,404 and $5,841 at June 30, 2021 and December 31, 2020, respectively. The fair value of mortgage servicing rights is highly sensitive to changes in underlying assumptions. Changes in prepayment speed assumptions have the most significant impact on the estimate of the fair value of mortgage servicing rights. The fair value at June 30, 2021 was determined using discount rates ranging from 9.5% to 12.0%, prepayment speeds with a weighted average of 19.7% (depending on the stratification of the specific right), a weighted average life of the mortgage servicing right of 49 months and a weighted average default rate of 0.2%.The fair value at December 31, 2020 was determined using discount rates ranging from 9.5% to 12.0%, prepayment speeds with a weighted average of 22.5% (depending on the stratification of the specific right), a weighted average life of the mortgage servicing right of 43 months and a weighted average default rate of 0.2%.
Impairment is determined by stratifying the mortgage servicing rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. At June 30, 2021 and December 31, 2020, the carrying amount of certain individual groupings exceeded their fair values, resulting in write-downs to fair value. Refer to Note 13—Fair Values of Financial Instruments.
Note 7—Deposits
Time deposits, included in interest-bearing deposits, were $1,191,895 and $1,646,523 at June 30, 2021 and December 31, 2020, respectively. Time deposits included brokered deposits of $35,000 and $42,751 at June 30, 2021 and December 31, 2020, respectively.
Time deposits that meet or exceed the FDIC insurance limit of $250 were $333,192 and $487,340 at June 30, 2021 and December 31, 2020, respectively.
Note 8—FHLB Borrowings
FHLB borrowings at June 30, 2021 and December 31, 2020 consist of the following:
Interest Rates
Long-term fixed rate advances
0.43%-1.96%
FHLB Advances
The long-term fixed rate advances have maturity dates ranging from July 2021 to February 2030. Interest on these advances is payable monthly, and each advance is payable at its maturity date and may contain a prepayment penalty if paid before maturity. At June 30, 2021, advances totaling $307,000 were callable by the FHLB as follows: $100,000 in August 2021; $67,000 in September 2021; $90,000 in October 2021; and $50,000 in May 2024. At June 30, 2021, the Bank had additional borrowing capacity of $53,238 from the FHLB.
FHLB Overdraft Line of Credit and Letter of Credit
The Bank has established an overdraft line of credit agreement with the FHLB providing maximum borrowings of $50,000. The overdraft line of credit has not been drawn upon in 2021. The average amount outstanding during the six months ended June 30, 2020 was $3 . Borrowings accrue interest based on a variable rate based on the FHLB’s overnight cost of funds rate, which was 0.43% and 0.46% at June 30, 2021 and December 31, 2020, respectively. At June 30, 2021 and December 31, 2020, there were no outstanding borrowings under this agreement. The agreement has a one-year term and terminates in October 2021.
The Bank also has a $7,500 standby letter of credit 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. This letter of credit has a 16-month term and expires in July 2022. There were no borrowings outstanding on this standby letter of credit during the six months ended June 30, 2021.
The FHLB advances, the overdraft line of credit and letter of credit are collateralized by pledged securities and loans. Refer to Note 4—Investment Securities for further information on securities pledged and Note 5—Loans for further information on loans pledged.
Other Borrowings
The Bank had available unsecured credit lines with other banks totaling $80,000 and $100,000 at June 30, 2021 and December 31, 2020, respectively. There were no borrowings under these credit lines during the six months ended June 30, 2021 and 2020.
23
Note 9—Subordinated Notes, net
The subordinated notes (the “Notes”) were as follows:
Subordinated notes (principal amount)
65,000
Unamortized note premium
377
411
Unamortized debt issuance costs
(70)
The Notes bore interest at 7% per annum, payable semi-annually on April 15 and October 15 in arrears, through April 2021, after which the Notes have a variable interest rate of the three-month LIBOR rate plus a margin of 5.82%. The interest rate was 6.0% and 7.0% at June 30, 2021 and December 31, 2020, respectively. Premiums and debt issuance costs are amortized over the contractual term of the Notes into interest expense using the effective interest method. Interest expense on these Notes was $1,005 and $1,178 for the three months ended June 30, 2021 and 2020, respectively, and $2,185 and 2,355 for the six months ended June 30, 2021 and 2020, respectively. The Notes mature in April 2026.
On or after April 14, 2021, the Company may redeem the Notes, in whole or in part, at an amount equal to 100% of the outstanding principal amount being redeemed plus accrued interest, in a principal amount with integral multiples of $1. There have been no redemptions of the Notes. The Notes are not subject to redemption by the noteholders.
The Notes are unsecured obligations and are subordinated in right of payment to all existing and future indebtedness, deposits and other liabilities of the Company’s current and future subsidiaries, including the Bank’s deposits as well as the Company’s subsidiaries’ liabilities to general creditors and liabilities arising during the ordinary course of business. The Notes may be included in Tier 2 capital for the Company under current regulatory guidelines and interpretations. As long as the Notes are outstanding, the Company is permitted to pay dividends if prior to such dividends, the Bank is considered well capitalized, as defined by regulatory guidelines.
The Company currently may not issue new debt without the prior approval of the FRB.
Note 10— Shareholders’ Equity
Issuance of Shares of Common Stock
In May 2021, the Company issued and sold 300,000 unregistered shares of common stock to its chief executive officer pursuant to the terms of a stock purchase agreement entered into at the time of the chief executive officer’s employment for cash consideration of $1,350 or $4.50 per share, the fair market value on date of sale.
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.
In March 2020, the Company suspended the stock repurchase program for at least the near term in connection with the issues related to the Advantage Loan Program. Refer to Note 16─Commitments and Contingencies for further information regarding the internal review of the Advantage Loan Program (the “Internal Review”). The Company currently may not repurchase any common stock without the approval of the FRB.
During the six months ended June 30, 2020, the Company repurchased and cancelled 10,912 shares of its common stock for $82, including commissions and fees (average repurchase price of $7.57 per share). Such repurchases of common stock were funded through cash generated from operations.
As of June 30, 2021, the Company had $19,568 of common stock purchases remaining that may be made under the program.
Note 11—Stock-based Compensation
The board of directors established the 2020 Omnibus Equity Incentive Plan (the “2020 Plan”), which was approved by the shareholders in December 2020. The 2020 Plan provides for the grant of up to 3,979,661 shares of common stock for stock options, stock appreciation rights, restricted stock, restricted stock units, performance units and performance shares for issuance to employees, consultants and the board of directors of the Company. The stock-based awards are issued at no less than the market price on the date the awards are granted.
Previously, the board of directors had established a 2017 Omnibus Equity Incentive Plan (the “2017 Plan”) which was approved by the shareholders. The 2017 Plan initially provided for the grant of up to 4,237,100 shares of common stock for stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards for issuance to employees, consultants and board of directors of the Company. The stock-based awards were issued at no less than the market price on the date the awards are granted. Due to the adoption of the 2020 Plan, no further grants will be issued under the 2017 Plan.
Stock Options
Stock option awards are granted with an exercise price equal to the market price of the Company’s common stock on the date of grant. Starting in 2020, stock option awards 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.
The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted below. Estimating the grant date fair values for employee stock options requires management to make assumptions regarding expected volatility of the value of those underlying shares, the risk-free rate over the expected life of the stock options and the date on which share-based payments will be settled. Expected volatilities are based on a weighted average of the Company’s historic volatility and an implied volatility for a group of industry-relevant bank holding companies as of the measurement date. The expected term of options granted is calculated using the simplified method (the midpoint between the end of the vesting period and the end of the maximum term). The risk-free rate for the expected term of the option is based upon U.S. Treasury yield curve in effect at the time of grant. Expected dividend yield represents what the Company anticipates will be declared during the expected term of the options.
A summary of the Company’s stock option activity as of and for the six months ended June 30, 2021 is as follows:
Weighted
Remaining
Aggregate
Number
Exercise
Contractual
Intrinsic
of Shares
Price
Term
(Years)
Outstanding at January 1, 2021
377,882
5.61
9.09
Granted
Exercised
Forfeited/expired
(10,115)
12.62
Outstanding at June 30, 2021
367,767
5.41
8.13
165
Exercisable at June 30, 2021
226,550
4.98
8.22
110
The Company recorded stock-based compensation expense associated with stock options of $46 and $29 for the three months ended June 30, 2021 and 2020, respectively, and $103 and $55 for the six months ended June 30, 2021 and 2020, respectively. At June 30, 2021, there was $101 of total unrecognized compensation cost related to nonvested stock options. The unrecognized compensation cost related to nonvested stock options is expected to be recognized over a weighted-average period of 0.83 years.
Restricted Stock Awards
During the six months ended June 30, 2021, the Company awarded 45,000 shares of restricted stock to non-employee independent directors and awarded 182,702 shares of restricted stock to certain key employees. The restricted stock awards generally vest ratably over three years (one-third per year) after the date of grant. Upon a change in control, as defined in the Plan, the outstanding restricted stock awards will immediately vest. The value of a restricted stock award is based on the market value of the Company’s common stock at the date of grant.
A summary of the Company’s restricted stock awards activity for the six months ended June 30, 2021 is as follows:
Weighted Average
Grant Date Fair
Nonvested at January 1, 2021
137,936
7.90
227,702
4.97
Vested
(31,906)
7.67
Forfeited
(25,846)
6.25
Nonvested at June 30, 2021
307,886
5.89
During the six months ended June 30, 2021, the Company withheld 8,536 shares 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 $46 associated with vesting. These withheld shares are treated the same as repurchased shares for accounting purposes.
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 $147 and $(20) for the three months ended June 30, 2021 and 2020, respectively, and $195 and $63 for the six months ended June 30, 2021 and 2020, respectively. At June 30, 2021, there was $1,460 of total unrecognized compensation cost related to the nonvested restricted stock. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 1.94 years. The total fair value of restricted shares that vested during the six months ended June 30, 2021 was $173.
26
Note 12—Income (Loss) Per Share
Basic income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted income (loss) per common share further includes any common shares available to be issued upon the exercise of outstanding stock options and restricted stock awards if such inclusions would be dilutive. In periods of a net loss, basic and diluted per share information are the same. The Company determines the potentially dilutive common shares using the treasury stock method. The following table presents the computation of income (loss) per share, basic and diluted:
Numerator:
Denominator:
Weighted average common shares outstanding, basic
Weighted average effect of potentially dilutive common shares:
Stock options
41,055
45,423
Restricted stock
10,667
3,793
11,267
Weighted average common shares outstanding, diluted
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 of such items would be anti-dilutive, are summarized as follows:
67,767
460,068
71,325
330,617
241,732
163,490
153,190
198,882
309,499
623,558
224,515
529,499
Note 13—Fair Values of Financial Instruments
Financial instruments include assets carried at fair value, as well as certain assets and liabilities carried at cost or amortized cost but disclosed at fair value in these condensed consolidated financial statements. Fair value is defined as the exit price, the price that would be received for an asset or paid to transfer a liability in the most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date under current market conditions. The inputs to valuation techniques used to measure fair value are prioritized into a three-level hierarchy. The hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The following methods and significant assumptions are used to estimate fair value:
Investment Securities
The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar investment securities (Level 2). For investment securities where quoted prices or market prices of similar investment securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Discounted cash flows are calculated using spread to LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the analysis. Rating agency and industry research reports as well as defaults and deferrals on individual investment securities are reviewed and incorporated into the calculations.
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at lower of amortized cost or fair value. Mortgage loans held for sale may be carried at fair value on a nonrecurring basis when fair value is less than cost. The fair value is based on outstanding commitments from investors or quoted prices for loans with similar characteristics (Level 2).
Impaired Loans
The fair value of collateral-dependent impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach, such as comparable sales or the income approach, or a combination of both. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.
Appraisals for collateral-dependent impaired loans are performed by certified general appraisers whose qualifications and licenses have been reviewed and verified by us. Once received, an appraisal compliance review is completed in accordance with regulatory guidelines.
Mortgage Servicing Rights
Fair value of mortgage servicing rights is initially determined at the individual grouping level based on an internal valuation model that calculates the present value of estimated future net servicing income. On a quarterly basis, mortgage servicing rights are evaluated for impairment based upon third party valuations obtained. As disclosed in Note 6—Mortgage Servicing Rights, net, the valuation model utilizes interest rate, prepayment speed, and default rate assumptions that market participants would use in estimating future net servicing income (Level 3).
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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 June 30, 2021 and December 31, 2020:
Fair Value Measurements at
Quoted Prices
in Active
Significant
Markets for
Identical
Observable
Unobservable
Inputs
(Level 1)
(Level 2)
(Level 3)
Financial Assets
Available for sale debt securities:
Equity securities
5,043
Available-for-sale debt securities:
40,192
98,805
5,118
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 six months ended June 30, 2021 and 2020:
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
Collateralized Debt Obligations
June 30, 2020
Balance of recurring Level 3 assets at beginning of period
Total gains or losses (realized/unrealized):
Included in income-realized
Included in other comprehensive income (loss)
(14)
Principal maturities/settlements
Sales
Transfers in and/or out of Level 3
Balance of recurring Level 3 assets at end of period
Unrealized losses on Level 3 investments for collateralized debt obligations was $22 and $27 at June 30, 2021 and December 31, 2020, respectively. In addition to the amounts included in income as presented in the table above, interest income recorded on collateralized debt obligations was $3 and $4 for the six months ended June 30, 2021 and 2020, respectively.
The fair value of the collateralized debt obligations is obtained from third party pricing information. It is determined by calculating discounted cash flows using LIBOR curves plus spreads that adjust for credit risk and illiquidity. The Company also performs an internal analysis that considers the structure and term of the collateralized debt obligations and the financial condition of the underlying issuers to corroborate the information used from the independent third party.
Assets Measured at Fair Value on a Non-Recurring Basis
From time to time, the Bank may be required to measure certain other assets at fair value on a nonrecurring basis in accordance with U.S. GAAP. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis that were recorded in the condensed consolidated balance sheet at June 30, 2021 and December 31, 2020, the following table provides the level of valuation assumptions used to determine each adjustment and the related carrying value:
Fair Value Measurements at June 30, 2021
Quoted Prices in
Active Markets
for Identical
Fair Value
Impaired loans:
5,906
Mortgage servicing rights
2,438
Fair Value Measurements at December 31, 2020
8,240
5,015
19,375
5,175
As discussed above, the fair values of collateral-dependent impaired loans carried at fair value are determined by third-party appraisals. Management adjusts these appraised values based on the age of the appraisal and the type of the property. The following tables present quantitative information about Level 3 fair value measurements at June 30, 2021 and December 31, 2020:
Quantitative Information about Level 3 Fair Value Measurements at June 30, 2021
Range
Valuation Technique
Unobservable Inputs
(Weighted Average) (1)
Sales comparison approach
Adjustments for differences between the comparable sales
N/A(15%)
Hybrid of sales comparison and income capitalization approaches
Adjustments for differences between the comparable sales and income data for similar loans and collateral underlying such loans
N/A (15%)
Discounted cash flow
Discount rate
9.5% - 12.0%(11.3)%
Prepayment speed
11.6% - 38.8%(22.2)%
Default rate
0.1% - 0.2%(0.2)%
(1) The range and weighted average for an asset category consisting of a single investment represents the significant unobservable input used in the fair value of the investment.
Quantitative Information about Level 3 Fair Value Measurements at December 31, 2020
Valuation
Technique
Sales comparison approach/Income capitalization approach
N/A(36%)
9.5% - 12.0%(11.6%)
10.5% - 37.0%(23.7%)
0.1% - 0.2%(0.2%)
Fair Value of Financial Instruments
The carrying amounts and estimated fair values of financial instruments not carried at fair value at June 30, 2021 and December 31, 2020, are as follows:
Carrying
Level 1
Level 2
Level 3
15,613
Loans, net(1)
2,280,659
2,401,320
Financial Liabilities
Time deposits(2)
1,191,895
1,196,803
321,930
65,431
2,909
3,052
2,521,874
Time deposits
1,646,523
1,658,020
328,150
65,753
Note 14—Regulatory Capital Requirements
The Bank is subject to the capital adequacy requirements of the OCC. The Company, as a thrift holding company, is subject to the capital adequacy requirements of the Federal Reserve. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors, and the regulators, in their discretion, can require the Company to lower classifications in certain cases. Prompt corrective action provisions are not applicable to thrift holding companies. Failure to meet minimum capital requirements can initiate regulatory action that could have a direct material effect on our business, financial condition and results of operations.
Prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition.
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Under the Basel III capital rules, the Company and the Bank must hold a capital conservation buffer (“CCB”) over the adequately capitalized risk-based capital ratios. At present, in order to avoid the imposition of restrictions on capital distributions and discretionary bonus payments, the Company is required to maintain a CCB of at least 2.50%. The net unrealized gain or loss on investment securities is not included in regulatory capital. Banking organizations are required to maintain a minimum total capital ratio of 10.5%, a minimum Tier 1 capital ratio of 8.5% and a minimum common equity Tier 1 capital ratio of 7.0% (in each case accounting for the required CCB). Management believes that at June 30, 2021, the Company and the Bank meet all regulatory capital requirements to which they are subject.
At June 30, 2021 and December 31, 2020, the Bank exceeded all capital requirements to be categorized as well capitalized, and the Company exceeded applicable capital adequacy requirements as presented below. The Company’s consolidated and the Bank’s actual and minimum required capital amounts and ratios, with such regulatory minimums not including the CCB as discussed above, at June 30, 2021 and December 31, 2020 are as follows:
For Capital
To be Well
Actual
Adequacy Purposes
Capitalized
Ratio
Total adjusted capital to risk-weighted assets
Consolidated
399,367
24.61
%
129,837
8.00
N/A
Bank
393,962
24.50
128,624
160,780
10.00
Tier 1 (core) capital to risk-weighted assets
326,081
20.09
97,378
6.00
373,241
23.21
96,468
Common Equity Tier 1 (CET1)
73,033
4.50
72,351
104,507
6.50
Tier 1 (core) capital to adjusted tangible assets
9.16
142,369
4.00
10.53
141,766
177,207
5.00
407,733
22.58
144,466
386,237
21.56
143,339
179,174
319,204
17.68
108,350
363,224
20.27
107,504
81,262
80,628
116,463
8.08
158,067
9.20
157,954
197,442
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Dividend Restrictions
As noted above, banking regulations require the Bank to maintain certain capital levels and may limit the dividends paid by the bank to the holding company or by the holding company to its shareholders. The Company’s principal source of funds for dividend payments is dividends received from the Bank, and banking regulations limit the dividends that may be paid. Approval by regulatory authorities is required if (i) the total capital distributions for the applicable calendar year exceed the sum of the Bank’s net income for that year to date plus the Bank’s retained net income for the preceding two years or (ii) the Bank would not be at least adequately capitalized following the distribution.
The Qualified Thrift Lender (“QTL”) test requires that a minimum of 65% of assets be maintained in qualified thrift investments, including mortgage loans, housing- and real estate-related finance and other specified areas. If the QTL test is not met, limits are placed on growth, branching, new investments, FHLB advances and dividends, or the Bank must convert to a commercial bank charter. Management believes that the QTL test has been met. Also, pursuant to the terms of the subordinated note agreements, the Company may pay dividends if it is well capitalized as defined by regulatory guidelines.
The Bank is currently required to obtain the prior approval of the OCC in order to pay dividends to the Company due to the existence of a formal agreement with the OCC. Refer to Note 16—Commitments and Contingencies. In addition, the Company currently is required to obtain the prior approval of the FRB in order to pay dividends to the Company’s shareholders.
Note 15—Related Party Transactions
From time to time, the Company had made charitable contributions to a foundation for which certain members of the boards of directors of the Company and Bank, and who are also related to the Company’s controlling shareholders, serve as trustees. The Company paid $150 and $375 to the foundation during the three and six months ended June 30, 2020, respectively. The Company ceased making charitable contributions beginning in the second quarter of 2020.
In May 2021, the Company issued and sold unregistered shares of common stock to its Chief Executive Officer in exchange for cash consideration. Refer to Note 10—Shareholders’ Equity.
The Bank had provided monthly data processing and programming services to entities controlled by the Company’s controlling shareholders. Aggregate fees received for such services amounted to $23 and $50 during the three and six months ended June 30, 2020, respectively. The Bank terminated such data processing agreement, effective as of November 2020.
The Company historically had leased certain storage and office space from entities owned by the Company’s controlling shareholders. Amounts paid under such leases totaled $60 and $120 during the three and six months ended June 30, 2020, respectively. The Company terminated such leases as of December 31, 2020.
The Company subleases certain office space to entities owned by the Company’s controlling shareholders. Amounts received under such subleases totaled $97 and $69 during the three months ended June 30, 2021 and 2020, respectively, and $192 and $138 during the six months ended June 30, 2021 and 2020, respectively.
Note 16—Commitments and Contingencies
Financial Instruments with Off-Balance Sheet Risk
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit, which are not reflected in the condensed consolidated financial statements.
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Unfunded Commitments to Extend Credit
A commitment to extend credit, such as a loan commitment, credit line and overdraft protection, is a legally binding agreement to lend funds to a customer, usually at a stated interest rate and for a specific purpose. Such commitments have fixed expiration dates and generally require a fee. The extension of a commitment gives rise to credit risk. The actual liquidity requirements or credit risk that the Bank will experience is expected to be lower than the contractual amount of commitments to extend credit because a significant portion of those commitments are expected to expire without being drawn upon. Certain commitments are subject to loan agreements containing covenants regarding the financial performance of the customer that must be met before the Bank is required to fund the commitment. The Bank uses the same credit policies in making commitments to extend credit as it does in making loans.
The commitments outstanding to make loans include primarily residential real estate loans that are made for a period of 90 days or less. At June 30, 2021, outstanding commitments to make loans consisted of fixed rate loans of $264 with interest rates ranging from 2.5% to 2.625% and maturities of 15 years and variable rate loans of $9,150 with varying interest rates (ranging from 3.375% to 3.875% at June 30, 2021) and maturities ranging from 15 years to 30 years.
Unused Lines of Credit
The Bank also issues unused lines of credit to meet customer financing needs. At June 30, 2021, the unused lines of credit include residential second mortgages of $14,081 and construction loans of $66,491, totaling $80,572. These unused lines of credit are associated with variable rate commitments with interest rates ranging from 3.25% to 7.50% and maturities ranging from 1 month to 14 years.
Standby Letters of Credit
Standby letters of credit are issued on behalf of customers in connection with construction contracts between the customers and third parties. Under standby letters of credit, the Bank assures that the third parties will receive specified funds if customers fail to meet their contractual obligations. The credit risk to the Bank arises from its obligation to make payment in the event of a customer’s contractual default. The maximum amount of potential future payments guaranteed by the Bank is limited to the contractual amount of these letters. Collateral may be obtained at exercise of the commitment. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.
The following is a summary of the total amount of unfunded commitments to extend credit and standby letters of credit outstanding at June 30, 2021 and December 31, 2020:
Commitments to make loans
9,414
40,331
Unused lines of credit
80,572
140,665
Standby letters of credit
The Company and its subsidiaries may be subject to legal actions and claims arising from contracts or other matters from time to time in the ordinary course of business. Management is not aware of any pending or threatened legal proceedings, except as described below, that are considered other than routine legal proceedings. The Company believes that the ultimate disposition or resolution of its routine legal proceedings, in the aggregate, are immaterial to its financial position, results of operations or liquidity.
The Bank is currently under formal investigation by the OCC and continues to be subject to a publicly available formal agreement with the OCC, dated June 18, 2019 (the “OCC Agreement”), relating primarily to certain aspects of its Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) compliance program as well as the Bank’s credit administration. The OCC Agreement generally requires that the Bank enhance its policies and procedures to ensure compliance with BSA/AML laws and regulations and ensure effective controls over residential loan underwriting. Specifically, the OCC Agreement requires the Bank to: (i) establish a compliance committee to monitor and oversee the Bank’s compliance with the provisions of OCC Agreement; (ii) develop a revised customer due diligence and enhanced due diligence program; (iii) develop a revised suspicious activity monitoring program; (iv) engage an independent, third-party consultant to review and provide a written report on the Bank’s suspicious activity monitoring; (v) develop revised policies and procedures to ensure effective BSA/AML model risk management for the Bank’s automated suspicious activity monitoring system, which must be validated by a qualified, independent third party; (vi) ensure that the Bank’s BSA Department maintains sufficient personnel; and (vii) develop revised policies and procedures to ensure effective controls over loan underwriting. In addition to these requirements, while the OCC Agreement remains in effect, the Bank is subject to certain restrictions on expansion activities, such as growth through acquisition or branching to supplement organic growth of the Bank. Further, any failure to comply with the requirements of the OCC Agreement could result in further enforcement actions, the imposition of material restrictions on the activities of the Bank, or the assessment of fines or penalties. The Bank established a Compliance Committee to monitor and assure compliance with the OCC Agreement, oversee the completion of an independent review of account and transaction activity to be conducted by a third-party vendor and engage a third party to conduct a model validation for its BSA/AML monitoring software.
The Bank is fully cooperating with the OCC investigation and implementing the items necessary to achieve compliance with the obligations in the OCC Agreement. A finding by the OCC that the Bank failed to comply with the OCC Agreement or adverse findings in the OCC investigation could result in additional regulatory scrutiny, constraints on the Bank’s business, or other formal enforcement action. Any of those events could have a material adverse effect on our future operations, financial condition, growth, or other aspects of our business. The Bank has incurred and expects to continue to incur significant costs in its efforts to comply with the OCC Agreement and respond to the OCC investigation, which are reflected in the Company’s results of operations for the three and six months ended June 30, 2021 and 2020.
The Bank also has received grand jury subpoenas from the U.S. Department of Justice (the “DOJ”) beginning in 2020 requesting the production of documents and information in connection with an investigation that appears to be focused on the Bank’s Advantage Loan Program and related issues, including residential lending practices and public disclosures about that program. During 2021, the DOJ charged by criminal information the former managing director of residential lending of the Bank and two other former loan officers with conspiracy to commit bank and wire fraud in connection with the Advantage Loan Program, and each individual has pled guilty to that charge. The criminal information and plea agreement with respect to the former managing director of residential lending asserts that the individual acted with the knowledge and encouragement of certain former members of senior management. The Bank is fully cooperating with this ongoing investigation. Adverse findings in the DOJ investigation could result in material losses due to damages, penalties, costs, and/or expenses imposed on the Company, which could have a material adverse effect on our future operations, financial condition, growth, or other aspects of our business. The Bank has and expects to continue to incur significant costs in its efforts to comply with the DOJ investigation in 2021.
In the first quarter of 2021, the Company learned of a formal investigation recently initiated by the SEC. This investigation appears to be focused on accounting, financial reporting and disclosure matters, as well as the Company’s internal controls, related to the Advantage Loan Program. The Company has received document and information requests from the SEC and is fully cooperating with this investigation. Adverse findings in the SEC investigation could result in material losses due to penalties, disgorgement, costs and/or expenses imposed on the Company, which could have a material adverse effect on the Company’s future operations, financial condition, growth or other aspects of its business. The Company expects to incur significant costs in its efforts to comply with the SEC investigation in 2021.
In addition, the Company, certain of its current and former officers and directors and other parties were named as defendants in a shareholder class action captioned Oklahoma Police Pension and Retirement System v. Sterling Bancorp, Inc., et al., Case No. 5:20-cv-10490-JEL-EAS, filed on February 26, 2020 in the U.S. District Court for the Eastern District of Michigan. The plaintiffs filed an amended complaint on July 2, 2020, seeking damages and reimbursement of fees and expenses. This action alleges violations of the federal securities laws, primarily with respect to disclosures concerning the Bank’s residential lending practices that were made in the Company’s registration statement and prospectus for its initial public offering, in subsequent press releases, in periodic and other filings with the SEC and during earnings calls. On September 22, 2020, the Company filed with the court a motion to dismiss the amended complaint. In February 2021, the Company, each individual defendant and the plaintiff reached an agreement in principle to settle the securities class action lawsuit. On April 19, 2021, the plaintiff, the Company and each of the other defendants entered into the final settlement agreement and submitted it to the court. Preliminary approval was granted by the court on April 28, 2021, and a final approval hearing is scheduled to be held before the court on September 16, 2021. The final agreement provides for a single $12,500 cash payment in exchange for the release of all of the defendants from all alleged claims therein and remains subject to final documentation, court approval and other conditions. This $12,500 liability has been accrued for as of June 30, 2021 and December 31, 2020. The full amount of the settlement will be paid by the Company’s insurance carriers under applicable insurance policies and has been recorded as a receivable in other assets in the condensed consolidated balance sheet. In the event final court approval is not received, or the settlement is not finalized for any other reason, the Company intends to vigorously defend this action.
The Company maintained a liability of $27,500 for contingent losses at June 30, 2021 and December 31, 2020. The outcome of the pending investigations and litigation is uncertain. There can be no assurance (i) that the Company will not incur material losses due to damages, penalties, costs and/or expenses as a result of such investigations and litigation, (ii) that the accrual for contingent losses will be sufficient to cover such losses, or (iii) that such losses will not materially exceed such accrual and have a material impact on the Company’s business, financial condition or results of operations.
In addition, on July 28, 2020, the Company received a demand letter from two law firms representing a purported shareholder of the Company alleging facts and claims substantially the same as many of the alleged facts and claims in the class action lawsuit. The demand letter requests that the board of directors take action to (1) recover damages the Company has purportedly sustained as a result of alleged breaches of fiduciary duties by certain of its officers and directors; (2) recover for the benefit of the Company the amounts by which certain of its officers and directors purportedly were unjustly enriched; and (3) correct alleged deficiencies in the Company’s internal controls. The demand letter states that, if the board of directors has not taken the actions demanded within 90 days after the receipt of the letter, or in the event the board of directors refuses to take the actions demanded, the purported shareholder would commence a shareholder derivative action on behalf of the Company seeking appropriate relief. The board of directors established a demand review committee to evaluate the matters raised in the demand letter and to determine the actions, if any, that should be taken by the Company with respect to those matters. The Company responded to the demand letter advising the purported shareholder of the appointment of the demand review committee. The demand review committee’s investigation is ongoing; accordingly, no additional actions with respect to this matter have been taken by the board of directors. Further, legal action has not yet been brought by the purported shareholder. Nevertheless, expenses related to the evaluation by the demand review committee have been significant. There can be no assurance as to whether any litigation will be commenced by or against the Company with respect to the demand letter or that, if any such litigation is commenced, the Company will not incur material losses due to damages, penalties, costs and/or expenses as a result of such litigation or that any such losses will not have a material impact on the Company’s financial condition or results of operations.
Mortgage Repurchase Liability
During the period 2015 through 2019, the Company sold portfolio loans originated under the Advantage Loan Program to private investors in the secondary market. The Company also sells conventional residential real estate loans (which excludes Advantage Loan Program loans) in the secondary market primarily to Fannie Mae on an ongoing basis. In connection with these loans sold, the Company makes customary representations and warranties about various characteristics of each loan. The Company may be required pursuant to the terms of the applicable mortgage loan purchase and sale agreements to repurchase any previously sold loan or indemnify (make whole) the investor for which the representation or warranty of the Company proves to be inaccurate, incomplete or misleading. In the event of a repurchase, the Company is typically required to pay the unpaid principal balance, the proportionate premium received when selling the loans and certain expenses.
As of June 30, 2021 and December 31, 2020, the Bank maintained a mortgage repurchase liability in connection with the above mentioned investigations stemming from the Advantage Loan Program totaling $4,292 and $9,699, respectively, which is included in accrued expenses and other liabilities in the condensed consolidated balance sheets. The unpaid principal balance of residential real estate loans sold that were subject to potential repurchase obligations for breach of representations and warranties totaled $303,747 and $562,139 at June 30, 2021 and December 31, 2020, respectively, including Advantage Loan Program loans totaling $190,097 and $429,816 at June 30, 2021 and December 31, 2020, respectively.
The mortgage repurchase liability reflects management’s estimate of losses based on a combination of factors. The Company’s estimation process requires management to make subjective and complex judgements about matters that are inherently uncertain, such as future repurchase demand expectations, economic factors and findings from the Internal Review. The actual repurchase losses could vary significantly from the recorded mortgage repurchase liability, depending on the outcome of various factors, including those previously discussed.
To avoid the uncertainty of audits and inquiries by third-party investors in the Advantage Loan Program, beginning at the end of the second quarter of 2020, the Company commenced making offers to each of those investors to repurchase 100% of the previously sold Advantage Loan Program loans.
In March 2021, the Company repurchased a pool of Advantage Loan Program loans with an outstanding principal balance of $87,944 from a third-party investor. These loans were previously sold to such third-party investor with servicing retained and were considered to be performing at the repurchase date. In connection with this repurchase during the first quarter of 2021, the Company recognized a disposition of $1,255 mortgage servicing rights and charged a loss of $2,917 against the mortgage repurchase liability. In addition, the Company entered into another agreement with the same investor to repurchase an additional pool prior to July 22, 2023, with the specific timing for the repurchase at the discretion of the investor. The aggregate principal balance of the loans in this pool at June 30, 2021 was $35,124.
In June 2021, the Company repurchased a pool of Advantage Loan Program loans with an outstanding principal balance of $79,818 from another third-party investor. These loans were previously sold to such third-party investor with servicing retained and were considered to be performing at the repurchase date. In connection with this repurchase during the second quarter of 2021, the Company recognized a disposition of $1,054 mortgage servicing rights and charged a loss of $1,825 against the mortgage repurchase liability. In addition, the Company entered into another agreement with the same investor to repurchase additional pools prior to various dates in 2023, with the specific timing for the repurchases at the discretion of the investor. The aggregate principal balance of the loans in these pools at June 30, 2021 was $58,714.
Activity in the mortgage repurchase liability was as follows:
Balance, beginning of period
9,699
7,823
Net provision (recovery)
Loss on loan repurchases
(4,742)
Balance, end of the period
4,292
7,848
Note 17—Subsequent Events
Sale of Bellevue, Washington Branch Office
On July 23, 2021, the Bank completed the sale of the Bellevue, Washington branch office to First Federal Savings & Loan Association of Port Angeles. The sale included the transfer of customer deposit accounts of $65,437 as well as the transfer of all premises and equipment. The Company recorded a gain of $1,417 on the sale.
Repurchases of Residential Real Estate Mortgage Loans
In July 2021, the Company repurchased from a third-party investor a pool of Advantage Loan Program loans with an outstanding principal balance of $4,944. These loans were previously sold to such third-party investor with servicing retained and were considered to be performing at the acquisition date.
Letter of Credit
In July 2021, the Bank obtained an additional $4,000 irrevocable standby letter of credit from the FHLB to provide credit support for certain of its obligations related to its commitment to repurchase certain pools of Advantage Loan Program loans. This letter of credit expires in July 2024 and is collateralized by certain investment securities and loans.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with the unaudited condensed consolidated financial statements, related notes, and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and related notes included in our 2020 Form 10-K.
Unless we state otherwise or the context otherwise requires, references in this Quarterly Report on Form 10-Q to “Sterling,” “we,” “our,” “us” or “the Company” refer to Sterling Bancorp, Inc., a Michigan corporation, and its subsidiaries, including Sterling Bank & Trust, F.S.B., which we sometimes refer to as “Sterling Bank,” “the Bank” or “our Bank.”
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain statements that are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), regarding the Company’s plans, expectations, thoughts, beliefs, estimates, goals, and outlook for the future that are intended to be covered by the protections provided under the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “attribute,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “goal,” “target,” “outlook,” “aim,” “would” and “annualized” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and they are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. Accordingly, you should not place undue reliance on any such forward-looking statements.
The risks, uncertainties and other factors identified in our filings with the SEC, and others, may cause actual future results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. A summary of these factors is below, under the heading “Risk Factors Summary.” For additional information on factors that could materially affect the forward-looking statements included in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, see the risk factors set forth under “Item 1A. Risk Factors” in our 2020 Form 10-K. You should carefully consider the factors discussed below, and in our Risk Factors and other disclosures, in evaluating these forward-looking statements.
Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise except as required by law. New risks and uncertainties arise from time to time, and it is not possible for us to predict those events or how they may affect us. In addition, we cannot assess the impact of any particular risk, uncertainty or other factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Risk Factors Summary
The following is a summary of the material risks we are exposed to in the course of our business activities. The below summary does not contain all of the information that may be important to you, and you should read the below summary together with the more detailed discussion of risks set forth under “Part II, Item 1A. Risk Factors” and in our 2020 Form 10-K, as well as under this “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Risks Related to the Advantage Loan Program
Risks Related to the COVID-19 Pandemic
Risks Related to the Economy and Financial Markets
Risks Related to Credit
Risks Related to Our Highly Regulated Industry
Risks Related to Competition
Risks Related to Interest Rates
Other Risks Related to Our Business
Risks Related to Governance Matters
The foregoing risk factors should not be construed as an exhaustive list and should be read in conjunction with the cautionary statements that are included under “Cautionary Note Regarding Forward-Looking Statements” above, under “Item 1A. Risk Factors” in our 2020 Form 10-K and elsewhere in this Quarterly Report on Form 10-Q, as well as the items set forth under “Part II, Item 1A. Risk Factors.”
Executive Summary
The following overview should be read in conjunction with our MD&A in its entirety.
Company Overview
We are a unitary thrift holding company headquartered in Southfield, Michigan and our primary business is the operation of our wholly owned subsidiary, Sterling Bank. Through Sterling Bank, we offer a range of loan products to the residential and commercial markets, as well as retail banking services.
Internal Review, Investigations and Regulatory Matters Related to the Advantage Loan Program
On December 9, 2019, the Company announced it had voluntarily suspended its Advantage Loan Program in connection with the Internal Review. The primary focus of the Internal Review, which has been led by outside legal counsel under the direction of a special committee of independent directors (the “Special Committee”), has involved the origination of residential real estate loans under the Advantage Loan Program and related matters. The Internal Review has indicated that certain employees engaged in misconduct in connection with the origination of a significant number of such loans, including with respect to verification of income and employment, the amount of income reported for borrowers, reliance on third parties, and related documentation. As a result, the Company permanently discontinued the Advantage Loan Program, and a significant number of officers and employees have been terminated or resigned, including the top loan producers within the Advantage Loan Program. While the Internal Review is substantially complete, the Company expects it to remain open during the pendency of the government investigations discussed below, and it is possible additional work will be required in connection with the Internal Review.
The Bank is currently under formal investigation by the OCC, is responding to grand jury subpoenas from the DOJ and is responding to a formal investigation recently initiated by the SEC, all of which are related to the Advantage Loan Program. The Bank also continues to be subject to the OCC Agreement, which relates primarily to certain aspects of the Bank’s BSA/AML compliance program as well as its credit administration. The OCC Agreement requires the Bank to: (i) establish a compliance committee to monitor and oversee the Bank’s compliance with the provisions of OCC Agreement; (ii) develop a revised customer due diligence and enhanced due diligence program; (iii) develop a revised suspicious activity monitoring program; (iv) engage an independent, third-party consultant to review and provide a written report on the Bank’s suspicious activity monitoring; (v) develop revised policies and procedures to ensure effective BSA/AML model risk management for the Bank’s automated suspicious activity monitoring system, which must be validated by a qualified, independent third party; (vi) ensure that the Bank’s BSA Department maintains sufficient personnel; and (vii) develop revised policies and procedures to ensure effective controls over loan underwriting. In addition to these requirements, while the OCC Agreement remains in effect, the Bank is subject to certain restrictions on expansion activities, such as growth through acquisition or branching to supplement organic growth of the Bank.
The Company has incurred and continued to incur significant legal, consulting and other third-party expenses in the second quarter of 2021 in connection with the Internal Review, the government investigations, compliance with the OCC Agreement and defending litigation and threatened litigation related to the Advantage Loan Program.
For further information regarding these matters, see “Part II, Item 1. Legal Proceedings” and “Part II, Item 1A. Risk Factors.”
Update on Impact of COVID-19
The COVID-19 pandemic continues to create extensive disruptions to U.S. and global economic conditions and financial markets and to businesses and the lives of individuals throughout the world. Although in various locations certain activity restrictions have been relaxed with some level of success, in many states and localities the number of individuals diagnosed with COVID-19 has increased significantly, causing a freezing or, in certain cases, a reversal of previously announced relaxation of activity restrictions and prompting the need for additional aid and other forms of relief. Recently, COVID-19 vaccinations have been increasing, though at a decreasing rate with significant resistance to vaccination in certain geographies and among certain groupings of people. Further, variant strains of the COVID-19 virus have appeared, notably the “delta” variant, further complicating efforts of the medical community and federal, state and local governments in response to the pandemic. The ultimate impact of the COVID-19 pandemic will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken currently or in the future by governmental authorities in response to the pandemic.
Congress and various state governments and federal agencies have taken actions to require lenders to provide forbearance and other relief to borrowers (for example, waiving late payment and other fees). At June 30, 2021, pandemic-related forbearances totaled $11.8 million, or 0.50% of total loans, down significantly from peak levels in 2020. The remaining forbearances consist of $5.9 million residential real estate loans and $5.9 million commercial real estate loans. As applications for the forbearance program continued to decrease in July 2021, the Bank terminated the forbearance program, effective July 31, 2021.
The economic disruptions related to the COVID-19 pandemic have resulted in a significant increase in delinquencies and loans on nonaccrual status across our commercial real estate loan, construction loan and residential real estate loan portfolios as certain industries have been particularly hard-hit by the COVID-19 pandemic, which has adversely affected the ability of many of our borrowers to repay their loans. For example, as of June 30, 2021, our commercial real estate loan portfolio includes loans secured by
single-room occupancy hotels (“SROs”), hotels, retail properties and offices, totaling $117.8 million, representing 5.0% of total loans, including $78.3 million of loans secured by SROs and hotels. According to data from an independent real estate services firm, the office vacancy rate in San Francisco continued to rise during the second quarter of 2021 and was 20.1% as of June 30, 2021. In addition, operating cash flows from tenants have decreased as a result of the COVID-19 pandemic, and decreased travel as a result of the COVID-19 pandemic has affected our SRO borrowers by reducing demand from tourists for travel accommodations in San Francisco. Our construction loan portfolio also includes similar substantial exposures. In addition, the elevated unemployment rate will continue to have a significant adverse impact on the ability of our residential real estate borrowers to repay their loans.
Overview of Quarterly Performance
Our historical lending strategy has been to offer a range of loan products to the residential and commercial markets. The majority of our loan portfolio consists of residential real estate mortgages, which accounted for 83% of our loan portfolio as of June 30, 2021. The balance of our loan portfolio consists of commercial real estate, construction, and commercial lines of credit.
Our focus for 2021 is to continue to work hard to resolve our outstanding compliance issues and re-establish strong credit metrics for new lending initiatives. Going forward, we plan to focus on the diversification of our overall loan production and develop new residential loan products. However, the implementation of any new loan products takes time and may be subject to the prior review and approval of applicable bank regulatory authorities. In addition, we continued to maintain a high level of liquidity to prepare for potential Advantage Loan Program repurchase requests, which we have solicited from loan investors, and to compensate for the Bank’s reduced borrowing capacity from the FHLB as a result of a reduction in collateral pledged, as well as to prepare for additional uncertainties related to our ongoing examinations and investigations. The Bank repurchased $167.8 million of Advantage Loan Program loans in during the first six months of 2021 and has entered into commitments to repurchase another $93.8 million of Advantage Loan Program loans over the next two years.
On March 19, 2021, the Bank entered into an agreement with First Federal Savings & Loan Association of Port Angeles, a Washington state chartered bank, to sell the Bank’s Bellevue, Washington branch office. This transaction was completed on July 23, 2021 and included the transfer of $65.4 million in total deposits at a premium of $1.4 million, representing 2.1% of the total balance of deposits transferred. The total balance of the deposit accounts located at the branch at June 30, 2021 was $73.4 million.
During the first six months of 2021, the Bank prepared to initiate a conversion of the core IT system, which is scheduled to occur during the third quarter of 2021. The new core IT system will allow the Bank to capitalize on advanced technologies to better achieve regulatory compliance.
As of June 30, 2021, the Company had total consolidated assets of $3.42 billion, total consolidated deposits of $2.61 billion and total consolidated shareholders’ equity of $327.0 million. Liquid assets, comprising cash and due from banks and investment securities, decreased $333.0 million, or 26%, to $970.5 million from $1.30 billion at December 31, 2020. Total loans held for investment decreased $148.2 million, or 6%, to $2.36 billion from $2.51 billion at December 31, 2020. Net principal payments continued to exceed new loan production in 2021. This decrease was partially offset by the repurchase of $167.8 million of Advantage Loan Program loans in 2021. Cash utilized in the repurchase helped reduce our excess liquidity position. Total loans 90 days or more past due, including nonaccrual loans but excluding loan forbearances related to the COVID-19 pandemic, totaled $74.8 million at June 30, 2021, compared to $86.5 million at December 31, 2020.
Our net income increased $0.6 million from net income of $2.9 million for the three months ended June 30, 2020 to net income of $3.5 million for the three months ended June 30, 2021. The increase was primarily attributable to a $1.8 million recovery for loan losses in the current period compared to a $4.3 million provision for loan losses in the second quarter of 2020. This increase was partially offset by a $3.5 million decrease in net interest income and a $1.6 million decrease in non-interest income. Our net interest margin decreased from 3.08% for the three months ended June 30, 2020 to 2.70% for the three months ended June 30, 2021 due primarily to a decline in the average balance of our loan portfolio, as well as a shift in the balance sheet mix and the impact of the current low interest rate environment.
Details of the changes in the various components of net income are discussed below.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP and with general practices within the financial services industry. Application of these principles requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under current circumstances. These assumptions form the basis for our judgments about the carrying values of assets and liabilities that are not readily available from independent, objective sources. We evaluate our estimates on an ongoing basis. Use of alternative assumptions may have resulted in significantly different estimates. Actual results may differ from these estimates.
During the six months ended June 30, 2021, there were no significant changes to our accounting policies that we believe are critical to an understanding of our financial condition and results of operations. Our critical accounting policies are disclosed in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s 2020 Form 10-K.
Financial Condition
The Company’s total assets were $3.42 billion at June 30, 2021 compared to $3.91 billion at December 31, 2020. Total loans, net of allowance for loan losses, decreased $146.5 million, or 6%, to $2.29 billion at June 30, 2021 from $2.43 billion at December 31, 2020. The investment securities portfolio decreased $109.0 million, or 36%, to $196.0 million at June 30, 2021 from $305.0 million at December 31, 2020. Total deposits, including $73.4 million deposits held for sale, decreased $488.7 million, or 16%, to $2.61 billion at June 30, 2021. Borrowings, excluding the Notes, remain unchanged at $318.0 million at June 30, 2021 compared to December 30, 2020.
Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.
(Dollars in thousands)
Real estate:
83
81
Total real estate
2,356,555
100
2,500,065
Allowance for loan losses
The following table sets forth our fixed and adjustable-rate loans in our loan portfolio at June 30, 2021:
Fixed
Adjustable
(In thousands)
22,567
1,926,325
103,113
160,165
125,680
2,232,846
The table set forth below contains the repricing dates of adjustable rate loans included within our loan portfolio as of June 30, 2021:
Lines of Credit
Amounts to adjust in:
6 months or less
500,457
8,339
655,152
More than 6 months through 12 months
526,007
17,649
543,656
More than 12 months through 24 months
329,714
39,982
369,696
More than 24 months through 36 months
195,523
19,759
215,282
More than 36 months through 60 months
316,558
74,436
390,994
More than 60 months
58,066
Fixed to Maturity
At June 30, 2021, $304.0 million, or 13.6%, of our adjustable interest rate loans were at their interest rate floor.
Asset Quality
Nonperforming Assets. Nonperforming assets include nonaccrual loans, loans that are 90 or more days past due or more and still accruing interest, troubled debt restructurings, nonaccrual loans held for sale and other loan collateral acquired through foreclosures and repossessions. At June 30, 2021 and December 31, 2020, we had $44 thousand and $46 thousand, respectively, of accruing loans that were past due 90 days or more. For nonaccrual loans, interest previously accrued but not collected is reversed and charged against income at the time a loan is placed on nonaccrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Troubled debt restructurings are modified loans in which a borrower demonstrated financial difficulties and for which a concession has been granted. However, not all troubled debt restructurings are placed on nonaccrual status. At June 30, 2021 and December 31, 2020, we had troubled debt restructurings totaling $25.2 million and $28.3 million, respectively. Troubled debt restructurings on nonaccrual status at such dates totaled $22.2 million and $20.1 million, respectively, and are included in the nonaccrual loan categories in the following table. See Note 5—Loans—Troubled Debt Restructurings to our condensed consolidated financial statements for additional information about our troubled debt restructurings.
The following table sets forth information regarding our nonperforming assets at the dates indicated. In addition to the exclusions and presentation conventions described in the footnotes to the table, the categories of nonperforming assets in the following table do not include COVID-19-related loan forbearances that may be excluded from troubled debt restructurings under the CARES Act.
At June 30,
At December 31,
Nonaccrual loans (1):
27,871
20,729
19,092
19,965
Total nonaccrual loans (2)
Other real estate owned
167
Loans past due 90 days or more and still accruing interest
Other troubled debt restructurings(3)
2,940
8,246
Nonaccrual loans held for sale(4)
14,867
Total nonperforming assets
92,617
114,258
Total nonaccrual loans to total loans(2)
3.17
3.45
Total nonperforming assets to total assets
2.71
2.92
As of June 30, 2021, nonperforming assets totaled $92.6 million, reflecting a decrease of $21.6 million from $114.3 million as of December 31, 2020. This decrease is attributable primarily to nonaccrual construction loans, which totaled $27.8 million as of June 30, 2021, reflecting a decrease of $14.1 million from $41.9 million as of December 31, 2020. Nonaccrual residential real estate loans totaled $27.9 million at June 30, 2021 compared to $20.7 million at December 31, 2020. The increase in nonaccrual residential real estate loans is attributable to 21 loans totaling $16.4 million becoming 90 days or more past due, which was partially offset by 16 loans totaling $9.3 million returning to current status or being repaid in full.
The decrease in nonaccrual construction loans is attributable primarily to three construction loans totaling $7.5 million which were paid in full and five construction loans totaling $11.3 million returning to accrual status upon conversion to commercial real estate bridge loans to allow time for the borrower to sell the project. The decrease was partially offset by the addition of one construction loan of $4.1 million to nonaccrual status.
The total amount of additional interest income on nonaccrual loans that would have been recognized for the three and six months ended June 30, 2021 if interest on all such loans had been recorded based upon original contract terms was approximately $1.1 million and $2.3 million, respectively. The total amount of interest income received during the three and six months ended June 30, 2021 on nonaccrual loans was $0.7 million and $1.6 million, respectively.
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COVID-19-Related Forbearances. Under the CARES Act, COVID-19-related loan forbearances may be excluded from treatment as a troubled debt restructuring if such forbearance meets certain criteria. Further, in response to the COVID-19 pandemic, we have offered forbearance under the CARES Act to customers facing COVID-19-related financial difficulties. The principal balance of loans modified due to the economic effects of the COVID-19 pandemic and still in forbearance declined during 2021 from peak levels in 2020. Total loans in COVID-19-related forbearances decreased from $15.8 million, or 0.63% of total loans held for investment, at December 31, 2020 to $11.8 million, or 0.50% of total loans held for investment, at June 30, 2021. Subsequent to June 30, 2021, applications for the forbearance program continued to decrease and the Bank terminated the forbearance program, effective July 31, 2021. The following table sets forth such loans in forbearance at the dates indicated.
5,842
10,729
5,933
5,056
Total loans in forbearance
11,775
15,785
Loans in forbearance to total loans held for investment
0.50
0.63
Delinquent Loans. The following tables set forth our loan delinquencies, including nonaccrual loans but excluding loan forbearances related to the COVID-19 pandemic, by type and amount at the dates indicated.
90 Days
or More
16,910
27,915
38,181
14,658
20,775
7,901
4,845
Total delinquent loans
Total loans 90 days or more past due, including nonaccrual loans but excluding loan forbearances related to the COVID-19 pandemic, decreased $11.7 million, or 13%, from $86.5 million at December 31, 2020 to $74.8 million at June 30, 2021. This decrease was primarily attributable to our construction loan portfolio.
Classified Loans. We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The four risk categories utilized are Pass, Special Mention, Substandard and Doubtful. Loans in the Pass category are considered to be of satisfactory quality, while the remaining three categories indicate varying levels of credit risk. See Note 5—Loans—Credit Quality to our condensed consolidated financial statements for additional information about our risk categories.
Loans classified as Special Mention, Substandard and Doubtful were as follows:
Special Mention
221,050
198,151
48
Total Special Mention, Substandard and Doubtful loans increased $22.9 million to $221.1 million, or 9.4% of total loans, at June 30, 2021, from $198.2 million, or 7.9% of total loans, at December 31, 2020. The increase was primarily attributable to $16.2 million increase in Substandard loans due to the downgrade of four commercial real estate loans totaling $29.5 million, of which two of such loans are secured by SROs and have an aggregate principal balance of $7.3 million, 21 residential real estate loans totaling $16.1 million and three construction loans totaling $11.2 million. These downgrades were offset, in part, by $26.9 million of loans paid in full, $12.4 million of loans being upgraded upon returning to current status and $2.0 million of principal paydown.
Impaired Loans. A loan is considered impaired when, based on current information and events, it is probable that Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. If a loan is impaired, a portion of the allowance for loan losses is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral or operations of collateral. See Note 5—Loans to our condensed consolidated financial statements for tables presenting additional data regarding the allowance for loan losses and impaired loans.
At June 30, 2021 and December 31, 2020, we had 22 and 31 impaired loans with recorded investments of $53.2 million and $74.0 million, respectively. Total impaired loans decreased $20.8 million, or 28%, primarily attributable to $17.4 million of impaired loans that were paid in full and $11.3 million of impaired loans that returned to accrual status. This decrease was partially offset by two construction loans, totaling $7.6 million, being added to impaired status.
Allowance for Loan Losses
The allowance for loan losses is maintained at levels considered adequate by management to provide for probable loan losses inherent in the loan portfolio as of the condensed consolidated balance sheet reporting dates. The allowance for loan losses is based on management’s assessment of various factors affecting the loan portfolio, including portfolio composition, delinquent and nonaccrual loans, national and local business conditions, loss experience, and an overall evaluation of the quality of the underlying collateral. In addition, certain qualitative components within our allowance for loan losses methodology have taken on increased significance as a result of the economic impact of the COVID-19 pandemic. These qualitative components include increased unemployment, commercial property vacancy rates, uncertainty in property values and deterioration in the overall macro-economic environment.
49
The following table sets forth activity in the allowance for loan losses for the periods indicated.
Allowance for loan losses at beginning of period
Charge offs:
Total charge offs
Recoveries:
Total recoveries
Net recoveries
Allowance for loan losses at end of period
Nonperforming loans and troubled debt restructurings at end of period
77,750
77,277
Total loans at end of period
2,764,155
Average loans during period
2,393,084
2,827,131
2,429,857
2,848,923
Allowance for loan losses to nonperforming loans and troubled debt restructurings at the end of period
Allowance for loan losses to total loans at end of period
3.00
1.70
Net recoveries to average loans outstanding during the period
(0.03)
The following tables set forth the allowance for loan losses allocated by loan category at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance for loan losses to absorb losses in other categories.
Percent of
Loans in
Each
Category to
Total Loans
50
The allowance for loan losses as a percentage of loans was 3.00% and 2.89% as of June 30, 2021 and December 31, 2020, respectively. Our total allowance for loan losses decreased by $1.7 million, or 2%, to $70.7 million during the six months ended June 30, 2021, from $72.4 million at December 31, 2020. The $1.7 million decrease to our allowance for loan losses was primarily attributable to a $8.3 million reduction in required allowance for loan losses due to a decrease in the aggregate balance of Pass rated loans as a result of loan portfolio runoff, despite the repurchase of residential real estate loans and new originations during the six months ended June 30, 2021. Partially offsetting the decrease in our allowance for loan losses was a $6.6 million increase in required allowance for loan loss reflecting a $22.9 million net increase in Special Mention, Substandard and Doubtful loans during the six months ended June 30, 2021.
Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and our results of operations could be adversely affected if circumstances differ substantially from the assumptions used in determining the allowance for loan losses. Furthermore, while we believe we have established our allowance for loan losses in conformity with U.S. GAAP, there can be no assurance that regulators, in reviewing our loan portfolio, will not require us to increase our allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.
Investment Securities Portfolio
The following table sets forth the amortized cost and estimated fair value of our debt securities available-for-sale portfolio at the dates indicated.
We decreased the size of our available-for-sale debt securities portfolio (on an amortized-cost basis) by $109.0 million, or 36%, from December 31, 2020 to $190.0 million at June 30, 2021, reflecting the maturity of $65.0 million in Treasury notes and the paydown of the mortgage-backed securities and collateralized mortgage obligations portfolio.
At June 30, 2021 and December 31, 2020, we had no investments in a single company or entity, other than the U.S. government and government agency securities, with an aggregate book value in excess of 10% of our total shareholders’ equity.
We review the debt securities portfolio on a quarterly basis to determine the cause, magnitude and duration of declines in the fair value of each security. In estimating other-than-temporary impairment, we consider many factors including: (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions and (4) whether we have the intent to sell the security or more likely than not will be required to sell the security before its anticipated recovery. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recorded through income as an impairment. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: (1) other-than-temporary impairment related to credit loss, which must be recognized in the condensed consolidated statements of operations and (2) other-than-temporary impairment related to other factors, which is recognized in other comprehensive income (loss). The credit loss is measured as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. The assessment of whether any other-than- temporary decline exists may involve a high degree of subjectivity and judgment and is based on the information available to management at a point in time. We evaluate debt securities for other-than-temporary impairment at least on a quarterly basis and more frequently when economic or market conditions warrant such an evaluation.
At June 30, 2021, gross unrealized losses on debt securities totaled $286 thousand. We do not consider the debt securities to be other-than-temporarily impaired at June 30, 2021, since (i) the decline in fair value of the debt securities is attributable to changes in interest rates and illiquidity, not credit quality, (ii) we do not have the intent to sell the debt securities and (iii) it is likely that we will not be required to sell the debt securities before their anticipated recovery.
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. Equity securities totaled $5.3 million and $5.4 million at June 30, 2021 and December 31, 2020, respectively.
Deposits
Deposits are the primary source of funding for the Company. We regularly review the need to adjust our deposit offering rates on various deposit products in order to maintain a stable liquidity profile and a competitive cost of funds.
Total deposits were $2.61 billion at June 30, 2021, a decrease of $488.7 million, or 16%, compared to $3.10 billion at December 31, 2020, reflecting our decision to begin to reduce our significant liquidity position through planned deposit runoff. The decrease was primarily attributable to a $454.6 million decrease in time deposits, a $32.2 million decrease in money market, savings and NOW accounts, and a $1.8 million decrease in noninterest bearing demand deposits. Brokered deposits totaled $35.0 million at June 30, 2021, compared to $42.8 million at December 31, 2020. We continue to focus on core deposits, which we define as all deposits except for time deposits greater than $250 thousand and brokered deposits. Core deposits totaled $2.27 billion at June 30, 2021, or 87% of total deposits at that date, compared to $2.62 billion, or 85% of total deposits at December 31, 2020.
On March 19, 2021, the Bank entered into an agreement to sell the Bank’s Bellevue, Washington branch office. This transaction was completed on July 23, 2021 and included the transfer of $65.4 million in total deposits at a premium of $1.4 million, representing 2.1% of the total balance of deposits transferred. The actual amount of deposits transferred was based on their balances as of the transaction closing date. The total balance of the deposit accounts located at the branch at June 30, 2021 was $73.4 million, consisting of $51.8 million money market, savings and NOW accounts, $20.7 million time deposits and $0.9 million noninterest bearing demand deposits.
Borrowings
In addition to deposits, we use short-term borrowings, such as FHLB advances and an FHLB overdraft credit line, as sources of funds to meet the daily liquidity needs of our customers. Our short-term FHLB advances consist primarily of advances of funds for one- or two-week periods.
At June 30, 2021 and December 31, 2020, outstanding FHLB borrowings totaled $318.0 million, and there were no amounts outstanding on lines of credit with other banks. In addition, $65.0 million in principal amount of our Notes remained outstanding as of June 30, 2021 and December 31, 2020.
At June 30, 2021, we had the ability to borrow an additional $103.2 million from the FHLB, which included an available line of credit of $50.0 million. In addition, we obtained a standby letter of credit of $7.5 million which provides credit support for certain of our obligations related to our commitment to repurchase certain pools of Advantage Loan Program loans. We also had available credit lines with other banks totaling $80.0 million.
Shareholders’ Equity
Total shareholders’ equity was $327.0 million at June 30, 2021, an increase of $7.5 million, or 2%, from December 31, 2020. The increase was primarily the result of net income of $5.8 million. In May 2021, we issued and sold 300,000 shares of common stock to our chief executive officer pursuant to the terms of the stock purchase agreement entered into with our chief executive officer at the time of his employment for total cash proceeds of $1.4 million.
During the six months ended June 30, 2020, we repurchased 10,912 shares of our common stock at a total cost of $82 thousand pursuant to a share repurchase program.
52
Results of Operations for the Three and Six Months Ended June 30, 2021 and 2020
General. Net income was $3.5 million for the three months ended June 30, 2021, compared to $2.9 million for the same period in 2020, an increase of $0.6 million. The increase in net income for the three months ended June 30, 2021 was primarily attributable to a decrease in provision (recovery) for loan losses, which was partially offset by a decrease in net interest income, a decrease in non-interest income primarily due to a decrease in the gain on sale of mortgage loans held for sale and a decrease in net servicing income.
We had net income of $5.8 million for the six months ended June 30, 2021, compared to a net loss of $1.2 million for the same period in 2020, an increase of $6.9 million. The increase in net income for the six months ended June 30, 2021 was primarily attributable to a decrease in the provision (recovery) for loan losses, which was partially offset by a decrease in net interest income and an increase in non-interest expense. The increase in non-interest expense was due primarily to an increase in professional fees and salaries and employee benefits. Return on average assets was 0.31% and (0.07)% for the six months ended June 30, 2021 and 2020, respectively. Return on average shareholders' equity was 3.56% and (0.69)% for the six months ended June 30, 2021 and 2020, respectively. The dividend payout ratio was 0.0% and (42.91)% for the six months ended June 30, 2021 and 2020, respectively. Total average shareholders' equity to total average assets was 8.79% and 9.82% for the six months ended June 30, 2021 and 2020, respectively.
Average Balance Sheet and Related Yields and Rates. The following table presents average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the three and six months ended June 30, 2021 and 2020. 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.
As of and for the
Three Months Ended June 30 ,
Yield/
Rate
Interest-earning assets
Loans(1)
Residential real estate and other consumer
1,960,561
23,794
4.85
2,329,695
29,789
5.11
1,983,211
48,390
4.88
2,366,335
61,801
5.22
258,310
3,444
5.33
275,046
3,635
5.29
257,465
6,627
5.15
268,069
7,181
5.36
171,921
2,788
6.49
204,689
3,749
7.33
185,201
6,200
6.70
196,628
7,408
7.54
2,292
8.38
17,701
7.41
3,980
151
17,891
636
7.11
5.03
5.31
5.05
Securities, includes restricted stock(2)
270,809
0.57
226,497
1.83
291,772
0.53
200,649
2.06
Other interest-earning assets
837,866
0.11
459,222
923,854
313,128
0.37
Total interest-earning assets
3,501,759
3.51
3,512,850
4.41
3,645,483
3.44
3,362,700
4.74
Noninterest-earning assets
7,373
13,842
6,935
11,673
42,921
58,008
42,945
66,239
3,552,053
3,584,700
3,695,363
3,440,612
Interest-bearing liabilities
Money Market, Savings and NOW
1,344,949
807
0.24
1,215,610
2,258
0.75
1,363,566
1,742
0.26
1,236,443
5,565
0.91
1,346,059
4,429
1.32
1,463,806
7,318
2.01
1,468,382
10,196
1.40
1,318,750
14,375
2.20
Total interest-bearing deposits
2,691,008
0.78
2,679,416
1.43
2,831,948
0.85
2,555,193
1.57
FHLB borrowings
1.05
329,002
318,006
298,235
1.13
65,385
6.15
65,235
7.22
65,372
6.68
65,214
Total borrowings
383,385
1.91
394,237
2,055
383,378
3,870
363,449
4,042
2.21
Total interest-bearing liabilities
3,074,393
0.92
3,073,653
1.52
3,215,326
0.99
2,918,642
1.66
Noninterest-bearing liabilities
Demand deposits
60,319
69,962
59,874
72,918
Other liabilities
90,174
106,564
95,220
111,192
Shareholders’ equity
327,167
334,521
324,943
337,860
Net interest income and spread
2.59
2.89
2.45
3.08
Net interest margin
2.70
2.57
3.31
53
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 year’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.
June 30, 2021 vs. 2020
Net
Increase (Decrease)
Increase
due to
(Decrease)
Volume
Change in interest income:
Loans
(4,538)
(1,457)
(5,995)
(9,538)
(3,873)
(13,411)
(221)
(191)
(278)
(276)
(554)
(600)
(361)
(961)
(414)
(794)
(1,208)
(280)
(495)
(485)
(5,645)
(1,782)
(7,427)
(10,725)
(4,933)
(15,658)
Securities, includes restricted stock
63
(715)
(652)
242
(1,538)
(1,296)
103
(17)
324
(409)
(85)
Total change in interest income
(5,479)
(2,514)
(7,993)
(10,159)
(6,880)
(17,039)
Change in interest expense:
Money Markets, Savings and NOW
78
(1,529)
(1,451)
162
(3,985)
(3,823)
(550)
(2,339)
(2,889)
1,039
(5,218)
(4,179)
(472)
(3,868)
(4,340)
1,201
(9,203)
(8,002)
(29)
(30)
(107)
(2)
(175)
(173)
(170)
Total change in interest expense
(4,044)
(4,543)
1,311
(9,485)
(8,174)
Change in net interest income
(4,980)
1,530
(3,450)
(11,470)
2,605
(8,865)
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 $23.6 million for the three months ended June 30, 2021, a decrease of $3.5 million, or 13%, from the same period in 2020.
Interest income was $30.7 million for the three months ended June 30, 2021, a decrease of $8.0 million, or 21%, from the same period in 2020. The decrease in interest income was primarily due to a change in asset mix, as the size of our loan portfolio decreased with the reduction in loan originations and excess cash flows from loan repayments invested in short-term, low yielding liquid assets. Our average yield on interest-earning assets decreased 90 basis points to 3.51% for the three months ended June 30, 2021, from the same period in 2020, reflecting the change in asset mix.
Our average balance of loans decreased $434.0 million, or 15%, to $2.39 billion for the three months ended June 30, 2021, as net principal payments exceeded new loan production. Our average yield on loans decreased 28 basis points to 5.03% for the three months ended June 30, 2021. The yield on our loan portfolio decreased primarily due to our variable rate loans resetting at lower interest rates in the current low interest rate environment and the origination of new loans at lower interest rates.
The impact of the decline in interest income was partially offset by the decline in interest expense. Interest expense was $7.1 million for the three months ended June 30, 2021, a decrease of $4.5 million, or 39%, from the same period in 2020. The decrease was primarily due to the decline in interest rates reflecting the lower interest rate environment. Our average rate paid on interest-bearing liabilities decreased 60 basis points to 0.92% for the three months ended June 30, 2021.
54
Our average balance of interest-bearing deposits increased $11.6 million to $2.69 billion for the three months ended June 30, 2021. Our average rate paid on interest-bearing deposits decreased 65 basis points to 0.78% for the three months ended June 30, 2021 from the same period in 2020. The rates on interest-bearing deposits were lower than in the second quarter of 2020 in response to changes in market rates.
Net interest income was $46.8 million for the six months ended June 30, 2021, a decrease of $8.9 million, or 16%, from the same period in 2020.
Interest income was $62.6 million for the six months ended June 30, 2021, a decrease of $17.0 million, or 21%, from the same period in 2020. The decrease in interest income was primarily due to a change in asset mix and to a decline in yield. Our average yield on interest-earning assets decreased 130 basis points to 3.44% for the six months ended June 30, 2021.
Our average balance of loans decreased $419.1 million, or 15%, to $2.43 billion for the six months ended June 30, 2021, as net principal payments exceeded new loan production. Our average yield on loans decreased 36 basis points to 5.05% for the six months ended June 30, 2021. The yield on our loan portfolio decreased primarily due to our variable rate loans resetting at lower rates in the lower interest rate environment and new loans originating at lower interest rates than the loans that were repaid in full.
Interest expense was $15.8 million for the six months ended June 30, 2021, a decrease of $8.2 million, or 34%, from the same period in 2020. The decrease was due primarily to a decline in interest rates. Our average rate paid on interest-bearing liabilities decreased 67 basis points to 0.99% for the six months ended June 30, 2021, which was partially offset by an increase in the average balance of interest-bearing liabilities.
Our average balance of interest-bearing deposits increased $276.8 million, or 11%, to $2.83 billion for the six months ended June 30, 2021, during which time our average rate paid on interest-bearing deposits decreased 72 basis points to 0.85%. The rates on interest-bearing deposits were lower than in the same period in 2020 in response to changes in market rates.
Net Interest Margin and Interest Rate Spread. Net interest margin was 2.70% for the three months ended June 30, 2021, down 38 basis points from 3.08% for the same period in 2020. The interest rate spread was 2.59% for the three months ended June 30, 2021, down 30 basis points from 2.89% for the same period in 2020.
Net interest margin was 2.57% for the six months ended June 30, 2021, down 74 basis points from 3.31% for the same period in 2020. The interest rate spread was 2.45% for the six months ended June 30, 2021, down 63 basis points from 3.08% for the same period in 2020.
Our net interest margin and interest rate spread were negatively impacted during the three and six months ended June 30, 2021 primarily due to lower yields in our loan portfolios and reduction in size of our loan portfolio, as we continue to manage our risk profile, which were partially offset by lower rates paid on our interest-bearing deposits, which was a reflection of the low interest rate environment experienced during 2020, which continued in the first half of 2021. A discussion of the effects of changing interest rates on net interest income is set forth in “Part I, Item 3. Quantitative and Qualitative Disclosures About Market Risk” in this report.
Provision (recovery) for Loan Losses. We recorded a recovery for loan losses of $1.8 million during the three months ended June 30, 2021, compared to a provision for loan losses of $4.3 million for the three months ended June 30, 2020. The recovery for loan losses was primarily attributable to a net decline in our loan balances during the quarter, partially offset by an increase in required allowance for loan losses reflecting a $22.9 million net increase in Special Mention, Substandard and Doubtful loans.
We recorded a recovery for loan losses of $2.5 million for the six months ended June 30, 2021, compared to a provision for loan losses of $25.2 million for the six months ended June 30, 2020. The recovery for loan losses for the six-month period of 2021 was primarily attributable to net declines in our loan balances as a result of portfolio runoff, despite the repurchases of residential real estate loans and new originations during the period, partially offset by an increase in the allowance for loan losses reflecting a $22.9 million increase in Special Mention, Substandard and Doubtful loans. The provision for loan losses for the six-month period of 2020 was attributable in part to certain qualitative components within our allowance for loan losses methodology that took on increased significance as a result of the economic impact of the COVID-19 pandemic on our loan portfolios.
The allowance for loan losses was $70.7 million, or 3.00% of total loans at June 30, 2021, compared to $72.4 million, or 2.89% of total loans, at December 31, 2020.
Non-interest Income. Non-interest income information is as follows:
Change
Percent
(100)
(681)
(91)
(552)
(54)
(65)
(198)
(161)
(701)
(339)
(220)
(20)
(10)
(270)
(580)
(1,592)
(120)
(1,668)
(90)
Non-interest income of $(0.3) million for the three months ended June 30, 2021 decreased $1.6 million compared to the same period of 2020. Non-interest income of $0.2 million for the six months ended June 30, 2021 decreased $1.7 million compared to the same period of 2020. The decrease in non-interest income in the three and six months ended June 30, 2021 were primarily attributable to an increase in net servicing loss, a decrease in gain on sale of mortgage loans held for sale due to fewer loans being sold into the secondary market for the period, and the absence of investment management and advisory fees due to the sale of substantially all of the assets of Quantum Capital Management in December 2020. Net servicing loss increased due to larger pools of Advantage Loan Program loans being repurchased, resulting in higher amortization of mortgage servicing rights, and a decrease in net servicing fee income due to lower volume of loans serviced, partially offset by valuation allowance recovery of mortgage servicing rights during the first half of 2021.
Non-interest Expense. Non-interest expense information is as follows:
1,342
2,437
119
(2,547)
(31)
2,896
260
960
N/M
Net provision (recovery) for mortgage repurchase liability
(537)
(690)
1,249
77
1,174
(103)
6,996
N/M - not meaningful
Non-interest expense of $19.9 million for the three months ended June 30, 2021 decreased $0.1 million compared to the same period of 2020. Non-interest expense of $41.3 million for the six months ended June 30, 2021 increased $7.0 million compared to the same period of 2020. The increase in non-interest expense for the six months ended June 30, 2021 was primarily attributable to professional fees and salaries and employee benefits expense and other expense. Professional fees remained elevated during the first six months of 2021 as we continue to incur legal and consulting expenses related to our efforts to achieve compliance with the OCC Agreement, our ongoing enhancements to our regulatory compliance framework (including our internal controls over financial reporting) and the ongoing government investigations and litigation. We expect to continue to incur such expenses during the pendency of these matters, though we expect gradual reductions in our professional fees incurred starting as early as the second half of 2021 as matters are resolved such as the class action lawsuit, which will be offset in part in the near term due to our cooperation with
the recently commenced SEC investigation. Salaries and employee benefits increased as the Company experienced a significant transition of senior management in 2020, and we continue to add qualified personnel in key areas as needed. Other expense includes a $1.0 million accrual for certain calculation errors during the years 2009 to 2020 that were identified during the preparation for our core IT system conversion. Professional fees for the three months ended June 30, 2021 was partially offset by a reimbursement of $2.4 million that was received from our insurance carriers.
Income Tax Expense
We recorded income tax expense of $1.7 million for the three months ended June 30, 2021, compared to $1.2 million for the same period in 2020. Our effective tax rate was 33.5% and 28.8% for the three months ended June 30, 2021 and 2020, respectively. The increase in our effective tax rate reflects additional non-deductible compensation-related expenses incurred in the 2021 period.
We recorded income tax expense of $2.5 million for the six months ended June 30, 2021, compared to an income tax benefit of $0.7 million for the same period in 2020. Our effective tax rate was 30.1% and 38.5% for the six months ended June 30, 2021 and 2020, respectively.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations when they come due. Our primary sources of funds consist of deposit inflows, loan repayments and FHLB borrowings. 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 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. Excess liquid assets are generally invested in interest-earning deposits and short-term securities.
Our most liquid assets are cash and due from banks, interest-bearing time deposits with other banks and debt securities classified as available for sale. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At June 30, 2021 and December 31, 2020, cash and due from banks totaled $774.5 million and $998.5 million, respectively; interest-bearing time deposits with other banks totaled $0.8 million and $7.0 million, respectively; and debt securities available for sale, which provide additional sources of liquidity, totaled $190.7 million and $299.6 million, respectively.
At June 30, 2021 and December 31, 2020, outstanding FHLB borrowings totaled $318.0 million, and there were no amounts outstanding on lines of credit with other banks.
At June 30, 2021, we had the ability to borrow an additional $103.2 million from the FHLB, including an available line of credit of $50.0 million. In addition, we obtained a standby letter of credit of $7.5 million which provides credit support for certain of our obligations related to our commitment to repurchase certain pools of Advantage Loan Program loans. We also had available credit lines with other banks totaling $80 million.
We have no material commitments or demands that are likely to affect our liquidity other than as set forth below. We believe that our existing liquidity combined with our borrowing capacity with the FHLB and our bank lines of credit, as well as the ability to obtain additional funds through brokered deposits, would allow us to manage any unexpected increase in loan demand or any unforeseen financial demand or commitment.
To avoid the uncertainty of audits and inquiries by third-party investors in the Advantage Loan Program loans, beginning at the end of the second quarter of 2020, the Company commenced making offers to each of those investors to repurchase 100% of sold Advantage Loan Program loans. For the six months ended June 30, 2021, the Company has repurchased Advantage Loan Program loans with a total outstanding principal balance of $167.8 million. In addition, we entered into an agreement with these investors to repurchase additional pools through July 2023. The aggregate principal balance of the loans in these pools at June 30, 2021 was $93.8 million. Should additional secondary market investors accept our offers to repurchase Advantage Loan Program loans with respect to a substantial portion of such outstanding loans, the cash required to fund these repurchases will substantially reduce our liquidity. At June 30, 2021, the unpaid principal balance of the previously sold Advantage Loan Program loans that would be subject to repurchase by us if 100% of our offers were accepted totaled $190.1 million, which includes loans that we have committed to repurchase.
57
At June 30, 2021, we had $90.0 million in loan commitments outstanding and $24 thousand in standby letters of credit. At December 31, 2020, we had $181.0 million in loan commitments outstanding, and $24 thousand in standby letters of credit.
As of June 30, 2021, time deposits due within one year were $0.88 billion, or 34% of total deposits. Total time deposits at June 30, 2021 were $1.192 billion, or 46% of total deposits. As of December 31, 2020, time deposits due within one year were $1.26 billion, or 41% of total deposits. Total time deposits at December 31, 2020 were $1.65 billion, or 53% of total deposits. On March 19, 2021, the Bank entered into an agreement to sell the Bank’s Bellevue, Washington branch office. The sale included the transfer of all deposit accounts located at the branch, which had a total balance of $73.4 million at June 30, 2021. This transaction was completed on July 23, 2021 and was funded through our excess liquidity.
Our primary investing activities are the origination of loans and to a lesser extent, the purchase of investment securities. During the six months ended June 30, 2021, we originated $92.6 million of loans and did not purchase any investment securities. During the six months ended June 30, 2020, we originated $268.6 million of loans and purchased $246.7 million of investment securities. Cash flows provided by loan payoffs totaled $429.0 million and $311.4 million during the six months ended June 30, 2021 and 2020, respectively.
Financing activities consist primarily of activity in deposit accounts. We experienced a net decrease in total deposits of $488.7 million for the six months ended June 30, 2021, from $3.10 billion at December 31, 2020. We generate deposits from local businesses and individuals through customer referrals and other relationships and through our retail presence. We utilize borrowings and brokered deposits to supplement funding needs and manage our liquidity position.
The Company is a separate and distinct legal entity from the Bank, and, on a parent company-only basis, the Company’s primary source of funding is dividends received from the Bank. Banking regulations limit the dividends that may be paid by the Bank. Approval by regulatory authorities is required if 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 the Bank would not be at least adequately capitalized following the distribution. Banking regulations also limit the ability of the Bank to pay dividends under other circumstances, including if the Bank is subject to a formal agreement with the OCC, or other supervisory enforcement action. At June 30, 2021, the Bank is required to obtain the prior approval of the OCC in order to pay any dividends to the Company due to the existence of the OCC Agreement. 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.
In recent years, the Company’s primary funding needs on a parent company-only basis have consisted of dividends to shareholders, interest expense on subordinated debt and stock repurchases. At June 30, 2021, the Company had $65.0 million in principal amount of Notes outstanding that are due April 15, 2026 but may be redeemed by us, in whole or in part, on or after April 14, 2021. Interest expense on the Notes was $2.2 million and $2.4 million for the six months ended June 30, 2021 and 2020, respectively. The Notes had an interest rate of 7% per annum, payable semi-annually on April 15 and October 15 in arrears, through April 2021, after which the Notes converted to a variable interest rate of the three-month LIBOR rate plus a margin of 5.82% (6.0% at June 30, 2021). The Company’s ability to pay cash dividends is restricted by the terms of the Notes as well as applicable provisions of Michigan law and the rules and regulations of the OCC and the FRB. Under the terms of the Notes, as long as the Notes are outstanding, the Company is permitted to pay dividends if, prior to such dividends, the Bank is considered well capitalized under applicable regulatory capital requirements. 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.
As long as we do not elect the community bank leverage ratio, federal regulations will continue to require the Company and the Bank to meet several regulatory capital 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 monthly basis including our needs for additional capital and ability to pay cash dividends. At June 30, 2021 and December 31, 2020, the Company and the Bank met all regulatory capital requirements to which they are subject, and the Bank was considered well capitalized for regulatory prompt corrective action purposes.
The following tables present our capital ratios as of the indicated dates for the Company (on a consolidated basis) and Sterling Bank.
Company
Actual at
Well
Adequately
Under
Common Equity Tier 1 (CET 1)
These capital requirements are the result of a final rule implementing recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act. In addition to establishing the minimum regulatory capital requirements, the regulations have established a CCB consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The CCB is designed to absorb losses during periods of economic stress. Banking institutions with a (i) CET1 to risk-weighted assets, (ii) Tier 1 capital to risk-weighted assets or (iii) total capital to risk-weighted assets above the respective minimum but below the minimum plus the CCB will face constraints on dividends, equity repurchases and discretionary bonus payments to executive officers based on the amount of the shortfall. At June 30, 2021 and December 31, 2020, the Company and the Bank held capital in excess of the CCB.
Recently Issued Accounting Guidance
See Note 2 — New Accounting Standards, to our unaudited condensed consolidated financial statements included in “Part I, Item 1. Financial Statements” for a discussion of recently issued accounting guidance and related impact on our financial condition and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General. The principal objective of our asset and liability management function is to evaluate the interest rate risk within the balance sheet and pursue a controlled assumption of interest rate risk while maximizing net income and preserving adequate levels of liquidity and capital. The Asset Liability Committee of our board of directors (“ALCO”) has oversight of our asset and liability management function, which is implemented and managed by our Management Asset Liability Committee. Our Management Asset Liability Committee meets regularly to review, among other things, the sensitivity of our assets and liabilities to product offering rate changes, local and national market conditions and market interest rates. That group also reviews our liquidity, capital, deposit mix, loan mix and investment positions.
We manage our exposure to interest rates primarily by structuring our balance sheet in the ordinary course of business. Our management of interest rate risk is overseen by our board of directors ALCO and implemented by our management ALCO 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 and use various assumptions, including, but not limited to, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment and replacement of asset and liability cash flows.
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 June 30, 2021 and December 31, 2020. The table below demonstrates that for the initial 12-month period after an immediate and parallel rate shock. We are asset sensitive in both rising and falling interest rate environments. The asset sensitivity of our balance sheet increased from December 31, 2020 in the up-rate scenario, primarily as a result of our periodic review of key assumptions pertaining to non-maturity deposit sensitivity.
Estimated
12-Months
Net Interest
Change in Interest Rates (Basis Points)
400
111,352
100,768
300
109,173
99,958
105,532
98,447
102,067
97,172
0
97,464
96,252
–100
93,187
(4)
92,993
(3)
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 adjusted for the value of off-balance sheet contracts. EVE attempts to quantify our economic value using a discounted cash flow methodology. We estimate what our EVE would be as of a specific date. We then calculate what EVE would be as of the same date throughout a series of interest rate scenarios representing immediate and permanent parallel shifts in the yield curve. We currently calculate EVE under the assumptions that interest rates increase 100, 200, 300 and 400 basis points from current market rates, and under the assumption that interest rates decrease 100 basis points from current market rates.
The following table presents, as of June 30, 2021 and December 31, 2020, 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 sensitivity of our balance sheet increased from December 31, 2020 in the up-rate scenario, primarily as a result of our periodic review of key assumptions pertaining to non-maturity deposit sensitivity.
Economic
Value of
509,238
412,393
506,280
420,927
497,623
425,241
485,059
426,110
464,030
420,561
405,658
(13)
350,307
60
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.
ITEM 4. CONTROLS AND PROCEDURES
Background
The Company commenced the Internal Review in 2019. The primary focus of the Internal Review, which has been led by outside legal counsel under the direction of the Special Committee, has involved the origination of residential mortgage loans under the Advantage Loan Program and related matters. During the course of the Internal Review, the Special Committee and management discovered that certain employees had engaged in misconduct in connection with the origination of a significant number of residential mortgage loans under the Advantage Loan Program, and management identified certain material weaknesses in the Company’s internal control over financial reporting, as further described in “Item 9A. Controls and Procedures” of our 2020 Form 10-K.
Limitations on Controls
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in the Company’s reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the specified time periods in the rules and forms of the SEC, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation of the CEO and the CFO, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) promulgated under the Exchange Act) as of June 30, 2021. Based on these evaluations, the CEO and the CFO concluded that the Company’s disclosure controls and procedures were not effective as of June 30, 2021 because of certain material weaknesses in our internal control over financial reporting, as further described in “Item 9A. Controls and Procedures” of our 2020 Form 10-K.
Notwithstanding such material weaknesses in internal control over financial reporting, management has concluded that our condensed consolidated financial statements included in this Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods ended on such dates, in conformity with accounting principles generally accepted in the United States of America.
Changes in Internal Control Over Financial Reporting
Our management is required to evaluate, with the participation of our CEO and our CFO, any changes in internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during each fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Other than the remediation actions disclosed in “Item 9A. Controls and Procedures” of our 2020 Form 10-K, there were no changes in our internal control over financial reporting during the quarter ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As discussed in “Item 9A. Controls and Procedures” of our 2020 Form 10-K, we have undertaken a broad range of remedial procedures to address the material weaknesses in our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as described in “Part II, Item 1A. Risk Factors—Pending government investigations may result in adverse findings, reputational damage, the imposition of sanctions and other negative consequences that could adversely affect our financial condition and future operating results,” we are not aware of any material developments to our pending legal proceedings as disclosed in the Company’s 2020 Form 10-K and Form 10-Q for the quarter ended March 31, 2021, nor are we involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. We believe that such routine legal proceedings, in the aggregate, are immaterial to our financial condition and results of operations.
ITEM 1A. RISK FACTORS
Except as described below, there are no material changes from the risk factors as disclosed in the Company’s 2020 Form 10-K and Form 10-Q for the quarter ended March 31, 2021.
Pending government investigations may result in adverse findings, reputational damage, the imposition of sanctions and other negative consequences that could adversely affect our financial condition and future operating results.
The Bank is currently under formal investigation by the OCC relating primarily to certain aspects of its BSA/AML compliance program as well as the Bank’s credit administration, including its Advantage Loan Program. The Bank also has received grand jury subpoenas from the DOJ beginning in 2020 requesting the production of documents and information in connection with an investigation that appears to be focused on the Bank’s Advantage Loan Program and related issues, including residential lending practices and public disclosures about that program. During 2021, the DOJ charged by criminal information the former managing director of residential lending and senior loan officer of the Bank and two other former loan officers with conspiracy to commit bank and wire fraud in connection with the Advantage Loan Program, and each individual has pled guilty to that charge. The criminal information and plea agreement with respect to the former managing director of residential lending asserts that the individual acted with the knowledge and encouragement of certain former members of senior management. In addition, the Company is responding to a formal investigation initiated by the SEC in the first quarter of 2021. This investigation appears to be focused on accounting, financial reporting and disclosure matters, as well as the Company’s internal controls, related to the Advantage Loan Program. The Company has received document and information requests from the SEC and is fully cooperating with this investigation. The Bank and the Company are fully cooperating with these government investigations. The outcome of the pending government investigations is uncertain. There can be no assurance (i) that we will not incur material losses due to damages, penalties, costs and/or expenses imposed on the Company as a result of such investigations, (ii) that the liability we have established will be sufficient to cover such losses or (iii) that such losses will not materially exceed such liabilities and have a material adverse effect on our future operations, financial condition, growth or results of operations or other aspects of our business. Adverse findings in any of these investigations could also result in additional regulatory scrutiny, constraints on the Bank’s business or other formal enforcement action. Any of those events could have a material adverse effect on our future operations, financial condition, growth or other aspects of our business. In addition, management’s time and resources will be diverted to address the investigations and any related litigation, and we have incurred, and expect to continue to incur, significant legal and other costs and expenses in our defense of the investigations.
Cyberattacks, including those targeting critical infrastructure sectors, have become more frequent and sophisticated.
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. Attacks involving large financial institutions, including 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, and targeted social engineering and email 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. Reports of ransomware incidents specifically have increased by approximately 300% since the start of 2020 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. In addition, cybersecurity risks for financial institutions have evolved as a result the use of new technologies, devices and delivery channels to transmit data and conduct financial transactions, while the ongoing and widespread remote work environment necessitated by the COVID-19 pandemic has subjected institutions to additional cybersecurity vulnerabilities and risks.
Any successful cyberattack or other security breach involving the misappropriation, loss or other unauthorized disclosure of 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 of 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.
Recent actions by the Biden Administration regarding competition in the financial services and technology sectors may adversely impact our business.
On July 9, 2021, President Biden issued an Executive Order on Promoting Competition in the American Economy (the “Executive Order”). Among other initiatives, the Executive Order (i) encourages the federal banking agencies to review their current merger oversight practices under the Bank Holding Company Act of 1956, as amended, and the Bank Merger Act and, within 180 days of the date of the Executive Order, adopt a plan for revitalization of such practices; and (ii) directs the Bureau of Consumer Financial Protection (the “CFPB”) to commence or continue a rulemaking to facilitate the portability of consumer financial transaction data for the purpose of providing consumers with greater flexibility in switching financial institutions and using innovative financial products.
Although the scope and substance of any action by the federal banking agencies in response to the directives set forth in the Executive Order cannot be predicted at this time, the potential for increased regulatory scrutiny of bank mergers and acquisitions may adversely affect the marketplace for such transactions in the near- to medium-term and could result in our acquisitions in future periods being delayed, impeded or restricted in certain respects due to enhanced regulatory review processes. Similarly, although the CFPB has published principles for consumer-authorized financial data sharing and aggregation, we cannot predict the scope, substance or timing of any future CFPB rulemaking regarding the portability of financial transaction data in response to the Executive Order. The impact of any such rulemaking on the conduct of our customers also cannot be predicted. However, the adoption of any such rule could result in increased volatility of consumer accounts and expose the Company to additional operational, strategic, regulatory and compliance risks.
We are subject to environmental, social and governance risks that could adversely affect our reputation and the market price of our securities.
The Company is subject to a variety of risks arising from environmental, social and governance matters or “ESG” matters. ESG matters include climate risk, hiring practices, the diversity of our work force, and racial and social justice issues involving our personnel, customers and third parties with whom we otherwise do business. Risks arising from ESG matters may adversely affect, among other things, our reputation and the market price of our securities.
We may be exposed to negative publicity based on the identity and activities of those to whom we lend and with which we otherwise do business and the public’s view of the approach and performance of our customers and business partners with respect to ESG matters, as well as the public’s perception of our own performance and record. Any such negative publicity could arise from adverse news coverage in traditional media and could also spread through the use of social media platforms. The Company’s relationships and reputation with its existing and prospective customers and third parties with which we do business could be damaged if we were to become the subject of any such negative publicity. 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 securities.
Further, investors have begun to consider the steps taken and resources allocated by financial institutions and other commercial organizations to address ESG matters when making investment and operational decisions. Certain investors are beginning to incorporate the business risks of climate change and the adequacy of companies’ responses to the risks posed by climate change and other ESG matters into their investment theses. These shifts in investing priorities may result in adverse effects on the market price of our securities to the extent that investors determine that the Company has not made sufficient progress on ESG matters.
The leadership of each of the Federal Reserve Board and the U.S. Treasury Department have indicated increased expectations of larger financial institutions to measure, monitor and manage climate related risk as part of their enterprise risk management processes. To the extent these expectations develop into new regulations or supervisory guidance, we would expect to experience increased compliance costs and other compliance-related risks.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Sale under Stock Purchase Agreement
On May 19, 2021, the Company’s Chief Executive Officer, Thomas M. O’Brien, purchased 300,000 shares of common stock for $1.4 million (or $4.50 per share) in cash directly from the Company, pursuant to the Stock Purchase Agreement, dated June 1, 2020, by and among Mr. O’Brien, the Company and the Bank. The sale to Mr. O’Brien is exempt from registration pursuant to Section 4(2) of the Securities Act.
ITEM 6. EXHIBITS
A list of exhibits to this Form 10-Q is set forth in the Exhibit Index below.
Incorporated by Reference
ExhibitNumber
Exhibit Description
FiledHerewith
Form
PeriodEnding
Exhibit /AppendixNumber
Filing Date
31.1
Section 302 Certification — Chief Executive Officer
X
31.2
Section 302 Certification — Chief Financial Officer
32.1*
Section 906 Certification — Chief Executive Officer
32.2*
Section 906 Certification — Chief Financial Officer
101.INS**
Inline XBRL Instance Document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 13, 2021
(Registrant)
By:
/s/ THOMAS M. O’BRIEN
Thomas M. O’BrienChairman and Chief Executive Officer(Principal Executive Officer)
/s/ STEPHEN HUBER
Stephen HuberChief Financial Officer(Principal Financial and Accounting Officer)