STERLING BANCORP, INC. (SOUTHFIELD, MI)
The following management's discussion and analysis of financial condition and
results of operations ("MD&A") should be read in conjunction with the unaudited
condensed consolidated financial statements, related notes, and other financial
information appearing elsewhere in this Quarterly Report on Form 10-Q and the
consolidated financial statements and related notes included in our 2021 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 theSEC , 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 endedMarch 31, 2022 , see the risk factors set forth under "Item 1A. Risk Factors" in our 2021 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 2021 Form 10-K, as well as under this "Part I,
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations."
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Risks Related to the Advantage Loan Program
? The results of the Internal Review of our Advantage Loan Program and related
matters
? The results of investigations of us by the OCC, the DOJ, the
governmental agencies
? The costs of legal proceedings, including settlements and judgments
? The effects of the permanent discontinuation of our Advantage Loan Program
? Compliance with the OCC Agreement and BSA /AML laws and regulations generally
Potential future losses in connection with representations and warranties we
? have made with respect to residential real estate loans that we have sold into
the secondary market
Risks Related to the COVID-19 Pandemic
? The economic impact, and governmental and regulatory actions to mitigate the
impact, of the disruptions created by the COVID-19 pandemic
? The effects of the economic disruptions resulting from the COVID-19 pandemic on
our loan portfolio
Risks Related to the Economy and Financial Markets
? The effects of fiscal and monetary policies and regulations of the federal
government and the
? Changes in the state of the general economy and the financial markets and their
effects on the demand for our loan services
? The effects of fiscal challenges facing the
? Macroeconomic and geopolitical challenges and uncertainties affecting the
stability of regions and countries around the globe
Risks Related to Credit
The credit risks of lending activities, including changes in the levels of
? delinquencies and nonperforming assets and changes in the financial performance
and/or economic condition of our borrowers
? Our concentration in residential real estate loans
? The geographic concentration of our loans and operations in
? The potential insufficiency of our allowance for loan losses to cover losses in
our loan portfolio
Risks Related to Our Highly Regulated Industry
The extensive laws and regulations affecting the financial services industry,
the continued effects of the Dodd-Frank Wall Street Reform and Consumer
? Protection Act (the "Dodd-Frank Act") and related rulemaking, changes in
banking, securities and tax laws and regulations and their application by our
regulators and the Community Reinvestment Act and fair lending laws
? Failure to comply with banking laws and regulations
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? Enforcement priorities of the federal bank regulatory agencies
Risks Related to Competition
? Strong competition within our market areas or with respect to our products and
pricing
? Our reputation as a community bank and the effects of continued negative
publicity
? Our ability to keep pace with technological change and introduce new products
and services
? Consumers deciding not to use banks to complete their financial transactions
Risks Related to Interest Rates
? Negative impacts of future changes in interest rates
? Uncertainty relating to the determination and discontinuation of the
Interbank Offered Rate ("LIBOR")
Risks Related to Liquidity
? Our ability to ensure we have adequate liquidity
? Our ability to obtain external financing on favorable terms, or at all, in the
future
? The quality of our real estate loans and our ability to sell our loans to the
secondary market
Other Risks Related to Our Business
? The recent significant transition in our senior management and our ability to
attract and retain key employees and other qualified personnel
Our operational, technological and organizational infrastructure, including the
? effectiveness of our enterprise risk management framework at mitigating risk
and loss to us
Operational risks from a high volume of financial transactions and increased
? reliance on technology, including risk of loss related to cybersecurity or
privacy breaches and the increased frequency and sophistication of cyberattacks
? The ability of customers and counterparties to provide accurate and complete
information and the soundness of third parties on which we rely
? Our employees' adherence to our internal policies and procedures
? The effects of natural disasters on us and our
adequacy of our business continuity and disaster recovery plans
? Environmental, social and governance matters and their effects on our
reputation and the market price of our securities
? Climate change and related legislative and regulatory initiatives
? Adverse conditions internationally and their effects on our customers
? Fluctuations in securities markets, including changes to the valuation of our
securities portfolio
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? The value of our mortgage servicing rights
The reliance of our critical accounting policies and estimates, including for
? the allowance for loan losses, on analytical and forecasting techniques and
models
Other economic, competitive, governmental, regulatory and technological factors
? affecting our operations, pricing, products and services and the other risks
described elsewhere herein or in the documents incorporated by reference herein
and our other filings with the
Risks Related to Governance Matters
? The Seligman family's ability to influence our operations and control the
outcome of matters submitted for shareholder approval
? Our ability to pay dividends
The foregoing risk factors should not be construed as an exhaustive list and should be read in conjunction with the cautionary statements that are included under "Cautionary Note Regarding Forward-Looking Statements" above, under "Item 1A. Risk Factors" in our 2021 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 inSouthfield, Michigan and our primary business is the operation of our wholly owned subsidiary,Sterling Bank . ThroughSterling 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
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 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 by theSEC , all of which are related to the Advantage Loan Program and, with respect to the DOJ and theSEC , the related disclosures of that program in the Company's federal securities law filings. 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. 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 incurred significant legal, consulting and other third-party expenses during the first quarter of 2022, as it has over the past two years, in connection with the Internal Review; the OCC, DOJ andSEC investigations; compliance with the OCC Agreement; defending litigation related to the Advantage Loan Program and reimbursing current and former officers and directors for 36
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their out pocket legal costs in connection with the government investigations. For additional information regarding these matters, see "Part II, Item 1. Legal Proceedings" and "Part II, Item 1A. Risk Factors."
Overview of Quarterly Performance
During the three months endedMarch 31, 2022 , we continued our return to profitability that started in 2021, while also completing several undertakings. Notably, inFebruary 2022 , we sold substantially all of our commercial real estate loans held for sale to a third-party purchaser for cash proceeds of$49.6 million . These loans were secured primarily by SRO properties. The sale of this pool of loans contributed to the improvement of our credit metrics. Nonperforming assets atMarch 31, 2022 totaled$54.1 million , or 1.93% of total assets, compared to$83.3 million , or 2.90% of total assets, atDecember 31, 2021 . Total gross loans delinquent 30 days or more decreased during the first quarter of 2022 to$81.4 million , or 4.3% of total gross loans, from$118.8 million , or 5.7% of total gross loans, atDecember 31, 2021 . Net income was$5.3 million for the quarter endedMarch 31, 2022 compared to$2.3 million for the quarter endedMarch 31, 2021 . This was partially driven by our improved credit metrics, which helped to result in a recovery for loan losses for the quarter. Our net interest margin continued to improve, though our loan portfolio continued to decline which reduced our net interest income compared to the first quarter of 2021. Net income also benefitted from a reduction in non-interest expense, as our outside professional fees have declined as we have completed certain significant regulatory related projects. We continued to experience significant repayments in our loan portfolio in excess of our loan originations contributing to our excess liquidity. We continued to manage our excess liquidity and used a portion of that liquidity to allow higher cost deposits to run off. This resulted in the continued overall decline of our balance sheet, with total assets declining from$2.9 billion atDecember 31, 2021 to$2.8 billion atMarch 31, 2022 . We also used some of the excess liquidity to increase our investment securities. InJanuary 2022 , we entered into the Settlement with the purported shareholder who brought the derivative action against us. As part of the Settlement, we agreed to adopt and implement substantial corporate governance reforms (the "Corporate Governance Enhancements"), and pay attorneys' fees and expenses in exchange for the release of all defendants from all alleged claims therein. Reimbursement of the plaintiff attorneys' fees and expenses of$0.65 million due under the Settlement will be paid by our insurance carriers under applicable insurance policies. A loss recovery receivable of$0.65 million was recorded in the fourth quarter of 2021, in the amount of the liability for the total of the attorneys' fees and expenses also recorded in the fourth quarter of 2021. The Settlement remains subject to final court approval and other customary conditions. For additional information, see "Part II, Item 1. Legal Proceedings." Our regulatory capital ratios remained well above the levels required to be considered well capitalized for regulatory purposes with a Common Equity Tier 1 ratio for the Company of 19.72% and a ratio of Tier 1 Capital to adjusted tangible assets of 12.23%. The foregoing ratios reflect the Bank's determination, after consultation with the OCC, that a risk weighting of 100% should be applied to Advantage Loan Program loans, commencing with the first quarter of 2022.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance withU.S. GAAP and with general practices within the financial services industry. Application of these principles requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under current circumstances. These assumptions form the basis for our judgments about the carrying values of assets and liabilities that are not readily available from independent, objective sources. We evaluate our estimates on an ongoing basis. Use of alternative assumptions may have resulted in significantly different estimates. Actual results may differ from these estimates. During the three months endedMarch 31, 2022 , there were no significant changes to our accounting policies that we believe are critical to an understanding of our financial condition and results of operations, which critical accounting policies are disclosed in our "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Company's 2021 Form 10-K. 37 Table of Contents Financial Condition
The Company's total assets were$2.8 billion atMarch 31, 2022 compared to$2.9 billion atDecember 31, 2021 . Total loans, net of allowance for loan losses, decreased to$1.8 billion compared to$2.0 billion atDecember 31, 2021 . During the three months endedMarch 31, 2022 , the Company originated loans held for investment, consisting of residential real estate loans of$36.4 million , commercial real estate loans of$22.6 million , and residential real estate loans held for sale of$1.8 million . The investment securities portfolio increased$50.5 million , or 16%, to$364.4 million atMarch 31, 2022 from$313.9 million atDecember 31, 2021 , which is attributable to purchases of additional investments, primarily treasury securities, totaling$73.6 million , partially offset by maturing investments, totaling$12.4 million . Total deposits decreased$61.6 million , or 3%, to$2.2 billion atMarch 31, 2022 . FHLB borrowings remained unchanged at$150.0 million fromDecember 31, 2021 toMarch 31, 2022 .
Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.
At March 31, 2022 At December 31, 2021
Amount % Amount %
(Dollars in thousands)
Real estate:
Residential real estate $ 1,580,759 84 % $ 1,704,231 85 %
Commercial real estate 219,767 12 % 201,240 10 %
Construction 73,778 4 % 106,759 5 %
Total real estate 1,874,304 100 % 2,012,230 100 %
Commercial lines of credit 334 - % 363 - %
Other consumer 3 - % 221 - %
Total loans 1,874,641 100 % 2,012,814 100 %
Less: allowance for loan losses (52,455) (56,548)
Loans, net $ 1,822,186 $ 1,956,266 The following table sets forth our fixed and adjustable-rate loans in our loan
portfolio at
Fixed Adjustable Total
(In thousands)
Real estate:
Residential real estate $ 19,696 $ 1,561,063 $ 1,580,759
Commercial real estate 89,992 129,775 219,767
Construction - 73,778 73,778
Commercial lines of credit 118 216 334
Other consumer 3 - 3
Total $ 109,809 $ 1,764,832 $ 1,874,641
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The table set forth below contains the repricing dates of adjustable-rate loans
included within our loan portfolio as of
Residential Commercial Commercial Other
March 31, 2022 Real Estate Real Estate Construction Lines of Credit Consumer Total
(In thousands)
Amounts to adjust in:
6 months or less $ 528,338 $ 10,057 $ 73,778 $ 216 $ - $ 612,389
After 6 months through 12
months 437,885 9,355 - - - 447,240
After 12 months through 24
months 143,490 7,054 - - - 150,544
After 24 months through 36
months 146,469 68,247 - - - 214,716
After 36 months through 60
months 228,217 35,062 - - - 263,279
After 60 months 76,664 - - - - 76,664
Fixed to maturity 19,696 89,992 - 118 3 109,809
Total $ 1,580,759 $ 219,767 $ 73,778 $ 334 $ 3 $ 1,874,641 AtMarch 31, 2022 , we have adjustable-rate loans totaling$1.2 billion , or 64%, in our loan portfolio, that are LIBOR- indexed currently and will reprice to an interest rate based on LIBOR. AtMarch 31, 2022 ,$ 190.6 million , or 11%, of our adjustable interest rate loans were at their interest rate floor. See "Part I, Item 3. Quantitative and Qualitative Disclosures about Market Risk" relating to the discontinuance of LIBOR and the expected conversion of our LIBOR-based loans to the Secured Overnight Financing Rate ("SOFR") based rates.
Asset Quality
Nonperforming Assets. Nonperforming assets include nonaccrual loans, loans that are 90 or more days past due and still accruing interest, troubled debt restructurings and nonaccrual loans held for sale. AtMarch 31, 2022 andDecember 31, 2021 , we had$38 thousand and$39 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. AtMarch 31, 2022 andDecember 31, 2021 , we had troubled debt restructurings totaling$8.7 million and$18.4 million , respectively. Troubled debt restructurings on nonaccrual status at such dates totaled$6.0 million and$15.8 million , respectively, and are included in the nonaccrual loan categories in the following table. See Note 4-Loans-Troubled Debt Restructurings to our condensed consolidated financial statements for additional information about our troubled debt restructurings. 39 Table of Contents The following table sets forth information regarding our nonperforming assets at the dates indicated. At March 31, At December 31, 2022 2021 (Dollars in thousands) Nonaccrual loans(1): Residential real estate$ 38,300 $ 45,675 Commercial real estate - 4,441 Construction 5,891 12,499 Total nonaccrual loans(2) 44,191 62,615 Loans past due 90 days or more and still accruing interest 38 39 Other troubled debt restructurings(3) 2,662 2,664 Nonaccrual loans held for sale 7,249 18,026 Total nonperforming assets$ 54,140 $ 83,344 Total loans$ 1,874,641 $ 2,012,814 Total assets$ 2,809,129 $ 2,876,830 Total nonaccrual loans to total loans(2) 2.36 % 3.11 % Total nonperforming assets to total assets 1.93 % 2.90 %
(1) Loans are classified as held for investment and are presented before the
allowance for loan losses.
Total nonaccrual loans exclude nonaccrual loans held for sale but include
troubled debt restructurings on nonaccrual status. If nonaccrual loans held (2) for sale are included, the ratio of total nonaccrual loans to total gross
loans would be 2.73% and 3.88% at
respectively.
(3) Other troubled debt restructurings exclude those loans presented above as
nonaccrual or past due 90 days or more and still accruing interest.
As of March 31, 2022 , nonperforming assets totaled $54.1 million , reflecting a
decrease of $29.2 million from $83.3 million as of December 31, 2021 . This
decrease is primarily attributable to the decline in nonaccrual loans and
nonaccrual loans held for sale. Our ratio of nonaccrual loans to total loans
decreased from 3.11% at December 31, 2021 to 2.36% at March 31, 2022 . This
decrease is primarily due to nonaccrual loans being paid in full, and to a
lesser extent loans returning to accrual status.
Nonaccrual loans totaled $44.2 million at March 31, 2022 , reflecting a decrease
of $18.4 million , from a balance of $62.6 million at December 31, 2021 .
Nonaccrual residential real estate loans totaled $38.3 million at March 31,
2022 , reflecting a decrease of $7.4 million from $45.7 million at December 31,
2021 . The decrease in nonaccrual residential real estate loans occurred
primarily as a result of four loans totaling $3.6 million that were paid in full
and eight loans totaling $5.6 million that returned to accrual status, which was
partially offset by six loans totaling $2.7 million that were added to
nonaccrual status. The remaining nonaccrual commercial real estate loan at
December 31, 2021 , was subsequently paid in full during the first quarter of
2022. Nonaccrual construction loans totaled $5.9 million at March 31, 2022 ,
reflecting a decrease of $6.6 million from $12.5 million at December 31, 2021 .
The decrease in nonaccrual construction loans occurred primarily as a result of
two construction loans totaling $6.6 million that were paid in full.
Nonaccrual loans held for sale totaled $7.2 million at March 31, 2022 ,
reflecting a decrease of $10.8 million , from $18.0 million at December 31, 2021 .
The decrease in nonaccrual loans held for sale primarily is due to the sale of
four commercial real estate loans totaling $9.4 million and three residential
real estate loans totaling $1.3 million that were paid in full. The four
commercial real estate loans were sold as part of the larger sale of commercial
real estate loans to a third-party purchaser in February 2022 .
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Delinquent Loans. The following tables set forth our loan delinquencies, including nonaccrual loans, by type and amount at the dates indicated.
March 31, 2022 December 31, 2021
30 - 59 60 - 89 90 Days 30 - 59 60 - 89 90 Days
Days Days or More Days Days or More
Past Due Past Due Past Due Past Due Past Due Past Due
(In thousands)
Residential real estate $ 19,577 $ 6,725 $ 38,338 $ 24,151 $ 3,425 $ 45,714
Commercial real estate 3,610 - - - - 4,441
Construction - - 5,891 10,500 - 12,499
Total delinquent loans $ 23,187 $ 6,725 $ 44,229 $ 34,651 $ 3,425 $ 62,654 Total loans 90 days or more past due, including nonaccrual loans, decreased from$62.7 million atDecember 31, 2021 to$44.2 million atMarch 31, 2022 . This decrease was primarily attributable to loans that were paid in full totaling$15.5 million and loans moved from delinquent status to current totaling$5.6 million , which was partially offset by the addition of delinquent loans totaling$2.7 million during the current period. Classified Loans. We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The four risk categories utilized are Pass, Special Mention, Substandard and Doubtful. Loans in the Pass category are considered to be of satisfactory quality, while the remaining three categories indicate varying levels of credit risk. See Note 4-Loans-Credit Quality to our condensed consolidated financial statements for additional information about our risk categories.
Loans held for investment classified as Special Mention, Substandard and Doubtful were as follows at the dates indicated:
March 31, December 31,
2022 2021
(In thousands)
Special Mention:
Commercial real estate $ 18,969 $ 10,524
Construction 3,751 17,226
Commercial lines of credit - 11
Total Special Mention 22,720 27,761
Substandard:
Residential real estate 38,107 45,485
Commercial real estate 13,002 21,393
Construction 16,153 16,348
Total Substandard 67,262 83,226
Doubtful:
Residential real estate 231 233
Construction - 5,931
Total Doubtful 231 6,164
Total $ 90,213 $ 117,151
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Total Special Mention, Substandard and Doubtful loans held for investment, were$90.2 million , or 5% of total loans held for investment, atMarch 31, 2022 , compared to$117.2 million , or 6% of total loans held for investment, atDecember 31, 2021 . All of the three loan classifications, noted above, decreased fromDecember 31, 2021 . The decrease of$5.0 million in Special Mention loans held for investment was primarily attributable to the upgrade of seven loans totaling$9.6 million , two loans that were paid in full totaling$9.0 million , which were partially offset by three loans that were downgraded totaling$3.9 million , three loans that were upgraded from Substandard totaling$3.8 million , and the issuance of two bridge loans to pay in full a construction loan totaling$5.9 million . The decrease of$16.0 million in Substandard loans held for investment was primarily attributable to seven loans that were paid in full totaling$14.6 million and 12 loans that were upgraded totaling$9.5 million , which were partially offset by one construction loan upgraded from Doubtful totaling$5.9 million and six loans downgraded totaling$2.7 million . Total Special Mention, Substandard and Doubtful loans held for sale decreased by$50.9 million fromDecember 31, 2021 toMarch 31, 2022 , primarily attributable to the sale of all of the commercial real estate loans held for sale inFebruary 2022 as well as loan payoffs. AtMarch 31, 2022 , there were 12 Substandard residential real estate loans held for sale totaling$7.2 million . AtDecember 31, 2021 , there were 15 Substandard residential real estate loans held for sale totaling$8.7 million , nine Special Mention commercial real estate loans held for sale totaling$16.2 million and 12 Substandard commercial real estate loans held for sale totaling$33.2 million . Total Special Mention, Substandard and Doubtful loans held for investment and held for sale totaled$97.5 million atMarch 31, 2022 , compared to$175.3 million atDecember 31, 2021 . Total Special Mention, Substandard and Doubtful loans held for investment and held for sale decreased by$77.8 million fromDecember 31, 2021 toMarch 31, 2022 due to the changes discussed above. Impaired Loans. A loan is considered impaired when, based on current information and events, it is probable that the 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 4-Loans to our condensed consolidated financial statements for tables presenting additional data regarding the allowance for loan losses and impaired loans. AtMarch 31, 2022 andDecember 31, 2021 , we had seven and ten impaired loans with recorded investments of$8.8 million and$19.9 million , respectively. Total impaired loans decreased$11.1 million , or 56%, fromDecember 31, 2021 toMarch 31, 2022 , primarily attributable to two construction loans that were paid in full totaling$6.6 million and one commercial real estate loan that was paid in full totaling$4.4 million . 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 quantitative and qualitative factors affecting the loan portfolio, including portfolio composition, net charge-offs, delinquent and nonaccrual loans, foreclosures, Bank-specific factors (e.g., staff experience, underwriting guidelines etc.), national and local business conditions, historical loss experience, an overall evaluation of the quality of the underlying collateral and other external factors. Certain qualitative components within our allowance for loan losses methodology took on increased significance in prior periods, and to a lesser extent in the most recent period, as a result of the economic impact of the COVID-19 pandemic. These qualitative components include unemployment, commercial property vacancy rates, uncertainty in property values and deterioration in the overall macro-economic environment. 42
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The following table sets forth activity in our allowance for loan losses for the
periods indicated.
Commercial
Residential Commercial Lines of Other
Three Months Ended March 31, 2022 Real Estate Real Estate Construction Credit Consumer Total
(Dollars in thousands)
Allowance for loan losses:
Beginning balance $ 32,202 $ 12,608 $ 11,730 $ 8 $ - $ 56,548
Provision (recovery) for loan
losses (2,481) 1,096 (2,902) (2) - (4,289)
Recoveries 190 5 1 - - 196
Total ending balance $ 29,911 $ 13,709 $
8,829 $ 6 $ -
95,123 $ 350 $ 64 $ 2,003,209
Total recoveries to average gross
loans during period 0.01 % - % - % - % - % 0.01 %
Commercial
Residential Commercial Lines of Other
Three Months Ended March 31, 2021 Real Estate Real Estate Construction Credit Consumer Total
(Dollars in thousands)
Allowance for loan losses:
Beginning balance $ 32,366 $ 21,942 $ 17,988 $ 91 $ - $ 72,387
Provision (recovery) for loan
losses 486 805 (2,023) (5) - (737)
Recoveries 204 16 1 - - 221
Total ending balance $ 33,056 $ 22,763 $
15,966 $ 86 $ -
198,628
0.01 % 0.01 % - % - % - % 0.01 %
Our total allowance for loan losses decreased by $4.1 million , or 7%, from $56.5
million at December 31, 2021 , primarily due to our overall reduction in our loan
portfolio that has resulted from the decline in our loan production as a result
of the discontinuation of the Advantage Loan Program and the absence of new loan
products, as well as improvement in the credit quality of our loan portfolio
during the first quarter of 2022. Recoveries during the three months ended March
31, 2022 and 2021 were $0.2 million .
Our allowance for loan losses as a percentage of our loan portfolio was 2.80%
and 2.81% as of March 31, 2022 and December 31, 2021 , respectively. In addition,
our allowance for loan losses as a percentage of nonaccrual loans was 119% and
90% as of March 31, 2022 and December 31, 2021 , respectively. This increase is
primarily attributable to our significant decline in nonaccrual loans. See
"Results of Operations-Provision (Recovery) for Loan Losses" for additional
information about our provision (recovery) for loan losses.
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The following table sets forth the allowance for loan losses allocated by loan
category at the dates indicated. The allowance for loan losses allocated to each
category is not necessarily indicative of future losses in any particular
category and does not restrict the use of the allowance for loan losses to
absorb losses in other categories.
At March 31, 2022 At December 31, 2021
Percent of Percent of
Loans in Loans in
Each Each
Allowance Category to Allowance Category to
for Loan Total for Loan Total
Losses Loans Losses Loans
(Dollars in thousands)
Residential real estate $ 29,911 84 % $ 32,202 85 %
Commercial real estate 13,709 12 % 12,608 10 %
Construction 8,829 4 % 11,730 5 %
Commercial lines of credit 6 - % 8 - %
Other consumer - - % - - %
Total $ 52,455 100 % $ 56,548 100 %
Nonaccrual loans(1) $ 44,191 $ 62,615 Nonperforming loans and troubled debt restructurings(2)$ 46,891 $ 65,318 Total loans$ 1,874,641 $ 2,012,814 Allowance for loan losses to nonaccrual loans(1) 119 % 90 % Allowance for loan losses to total loans 2.80 % 2.81 %
(1)Nonaccrual loans exclude nonaccrual loans held for sale but include troubled debt restructurings on nonaccrual status.
(2)Nonperforming loans and troubled debt restructurings exclude nonaccrual loans and troubled debt restructurings in loans held for sale.
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 withU.S. GAAP, there can be no assurance that regulators, in reviewing our loan portfolio, will not require us to increase our allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.
Investment Securities Portfolio
The following table sets forth the amortized cost and estimated fair value of our available-for-sale debt securities portfolio at the dates indicated.
At March 31, At December 31,
2022 2021
Amortized Fair Amortized Fair
Cost Value Cost Value
(In thousands)
46,422 44,044 49,739 49,437
Collateralized mortgage obligations 153,584 147,484 137,662
136,849
Collateralized debt obligations 210 204 211
203
Total $ 371,097 $ 359,375 $ 309,903 $ 308,657
We increased the size of our available-for-sale debt securities portfolio (on an
amortized-cost basis) by $61.2 million , or 19.7%, from December 31, 2021 to
$371.1 million at March 31, 2022 , with the purchase of $73.6 million in
investment securities, primarily treasury securities, during the first quarter
of 2022. The purchase of investment securities is consistent with the
utilization of our excess liquidity.
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We review the debt securities portfolio on a quarterly basis to determine the cause, magnitude and duration of declines in the fair value of each security. In estimating other-than-temporary impairment, we consider many factors including: (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions and (4) whether we have the intent to sell the security or more likely than not will be required to sell the security before its anticipated recovery. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recorded through income as an impairment. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: (1) other-than-temporary impairment related to credit loss, which must be recognized in the condensed consolidated statements of income and (2) other-than-temporary impairment related to other factors, which is recognized in other comprehensive 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. AtMarch 31, 2022 , gross unrealized losses on debt securities totaled$12.1 million . We do not consider the debt securities to be other-than-temporarily impaired atMarch 31, 2022 , since (i) the decline in fair value of the debt securities is attributable to changes in market value due to the current rising interest rate environment, not credit quality, (ii) we do not have the intent to sell the debt securities and (iii) it is likely that we will not be required to sell the debt securities before their anticipated recovery. 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. AtMarch 31, 2022 andDecember 31, 2021 , equity securities totaled$5.0 million and$5.2 million , 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$2.2 billion as ofMarch 31, 2022 , a decrease of$61.6 million , or 3%, compared to$2.3 billion atDecember 31, 2021 . Our time deposits decreased by$76.0 million , or 9%, due to our strategy to reduce time deposits by repricing time deposits at less competitive rates. Our money market, savings and NOW accounts increased by$13.3 million , or 1%, and our noninterest-bearing demand deposits were relatively unchanged, each fromDecember 31, 2021 . Time deposits included brokered deposits of$20.1 million atDecember 31, 2021 . We had no brokered deposits atMarch 31, 2022 . We continue to focus on core deposits, which we define as all deposits except for time deposits greater than$0.25 million and brokered deposits. Core deposits totaled$2.0 billion , or 90% of total deposits, atMarch 31, 2022 compared to$2.0 billion , or 88% of total deposits, atDecember 31, 2021 .
Borrowings
In addition to deposits, we generally 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. Any short-term FHLB advances would consist primarily of advances of funds for one- or two-week periods.
AtMarch 31, 2022 andDecember 31, 2021 , outstanding FHLB borrowings totaled$150.0 million and there were no amounts outstanding on lines of credit with other banks. In addition,$65.0 million in principal amount of our Subordinated Notes, dueApril 15, 2026 , remained outstanding as ofMarch 31, 2022 andDecember 31, 2021 . 45 Table of Contents AtMarch 31, 2022 , we had the ability to borrow an additional$343.5 million from the FHLB, which included an available line of credit of$20.0 million . In addition, we have standby letters of credit, totaling$11.5 million , which provide credit support for certain of our obligations related to our commitments to repurchase certain pools of Advantage Loan Program loans. We also had available credit lines with other banks totaling$80.0 million .
Shareholders' Equity
Total shareholders' equity was$341.4 million atMarch 31, 2022 , compared to$343.6 million atDecember 31, 2021 . The decline in shareholders' equity is attributable to accumulated other comprehensive loss due to unrealized losses on our investment securities portfolio, which is primarily the result of changes in market value due to the current rising interest rate environment. These changes do not necessarily impact our realized returns since the Bank has both the intent and ability to hold these investment securities until maturity or the price recovers. Results of Operations
Three Months Ended
General. Net income was
46
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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 months ended
March 31, 2022 and 2021. 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
March 31, 2022 March 31, 2021
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
(Dollars in thousands)
Interest-earning assets
Loans(1)
Residential real estate and
other consumer $ 1,660,692 $ 18,278 4.40 % $ 2,006,112 $ 24,596 4.90 %
Commercial real estate 247,044 3,436 5.56 % 256,610 3,183 4.96 %
Construction 95,123 2,149 9.04 % 198,628 3,412 6.87 %
Commercial lines of credit 350 5 5.71 % 5,687 103 7.24 %
Total loans 2,003,209 23,868 4.77 % 2,467,037 31,294 5.07 %
Securities, includes restricted
stock(2) 350,150 835 0.95 % 312,969 390 0.50 %
Other interest-earning assets 452,651 215 0.19 % 1,017,642 263 0.10 %
Total interest-earning assets 2,806,010 24,918 3.55 % 3,797,648 31,947 3.36 %
Noninterest-earning assets
Cash and due from banks 4,016 7,806
Other assets 43,322 42,969
Total assets $ 2,853,348 $ 3,848,423
Interest-bearing liabilities
Money market, savings and NOW $ 1,310,848 $ 707 0.22 % $ 1,382,390 $ 935 0.27 %
Time deposits(3) 861,785 1,623 0.76 % 1,615,949 5,767 1.45 %
Total interest-bearing deposits 2,172,633 2,330 0.43% 2,998,339 6,702 0.91 % FHLB borrowings 150,000 352 0.94 % 318,013 838 1.05 % Subordinated notes, net 65,337 964 5.90 % 65,358 1,180 7.22 % Total borrowings 215,337 1,316 2.44 % 383,371 2,018 2.11 % Total interest-bearing liabilities 2,387,970 3,646 0.62 % 3,381,710 8,720 1.05 % Noninterest-bearing liabilities Demand deposits(4) 64,119 66,103 Other liabilities(3)(4) 55,479 76,603 Shareholders' equity 345,780 324,007 Total liabilities and shareholders' equity$ 2,853,348 $ 3,848,423 Net interest income and spread(2)$ 21,272 2.93 %$ 23,227 2.31 % Net interest margin(2) 3.03 % 2.45 %
(1) Nonaccrual loans are included in the respective average loan balances.
Income, if any, on such loans is recognized on a cash basis.
(2) Interest income does not include taxable equivalence adjustments.
(3)(4) Certain prior period amounts have been reclassified to conform with the current period presentation. The Company has (3) reclassified accrued interest on outstanding time deposits from other liabilities to time deposits and (4) reclassified custodial escrow balances maintained with serviced loans from other liabilities to demand deposits in the average consolidated balance sheet at
March 31, 2021 . 47 Table of Contents The following table presents the dollar amount of changes in interest income and interest expense for major components of interest earning assets and interest-bearing liabilities for the periods indicated. The table distinguishes between: (1) changes attributable to volume (changes in volume multiplied by the prior period's rate), (2) changes attributable to rate (change in rate multiplied by the prior period's volume) and (3) total increase (decrease) (the sum of the previous columns). Changes attributable to both volume and rate are allocated ratably between the volume and rate categories. Three Months Ended March 31, 2022 vs. 2021 Increase (Decrease) Net due to Increase Volume Rate (Decrease) ( Dollars in thousands) Change in interest income: Loans Residential real estate and other consumer$ (3,963) $ (2,355) $
(6,318) Commercial real estate (122) 375 253 Construction (2,127) 864 (1,263) Commercial lines of credit (80) (18) (98) Total loans (6,292) (1,134) (7,426)
Securities, includes restricted stock 52 393
445
Other interest-earning assets (195) 147
(48)
Total change in interest income (6,435) (594)
(7,029) Change in interest expense: Money market, savings and NOW (44) (184) (228) Time deposits (2,030) (2,114) (4,144)
Total interest-bearing deposits (2,074) (2,298)
(4,372) FHLB borrowings (402) (84) (486) Subordinated notes, net - (216) (216)
Total change in interest expense (2,476) (2,598)
(5,074) Change in net interest income$ (3,959) $ 2,004 $ (1,955)
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$21.3 million for the three months endedMarch 31, 2022 , a decrease of$1.9 million , or 8%, from$23.2 million for the same period in 2021. Interest income was$24.9 million for the three months endedMarch 31, 2022 , a decrease of$7.0 million , or 22%, from the same period in 2021. The decrease in interest income was primarily due to a decline in the average balance of the loan portfolio of$463.8 million , or 19%, for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . The decrease in our average balance of loans is primarily due to our loan repayments continuing to outpace our loan production in regard to residential real estate loans and our decision to stop actively originating construction loans combined with our successful efforts to obtain repayment of our construction loans. The decline in interest income also reflects a decline in the average yield on our loan portfolio. Our average yield on our loans decreased 30 basis points, to 4.77% for the three months endedMarch 31, 2022 from 5.07% compared to the same period of the prior year. The average yield on our residential real estate and other consumer loans decreased 50 basis points from the three months endedMarch 31, 2021 . Throughout 2021, the one-year LIBOR index remained at historically low levels with it starting to rise in the first quarter of 2022. The interest rates on our residential loan portfolio continued to reprice downward as a result, which included new production originating at much lower rates than the loans that paid off. The average yield on our commercial real estate and construction loan portfolios increased during the three months endedMarch 31, 2022 , primarily due to collection of approximately$1.5 million of interest on nonperforming commercial real estate and construction loans. 48
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The average balance of our investment securities and other interest-earning assets, which generally are lower-yielding and more liquid than our loans, was$802.8 million for three months endedMarch 31, 2022 compared to$1.3 billion for the three months endedMarch 31, 2021 . These assets had an average yield of 52 basis points for the three months endedMarch 31, 2022 , an increase of 32 basis points from the three months endedMarch 31, 2021 . Interest expense was$3.6 million for the three months endedMarch 31, 2022 , a decrease of$5.1 million , or 58%, from the three months endedMarch 31, 2021 . The decrease in interest expense was due in part to a decrease in our average balance of interest-bearing deposits which decreased$825.7 million , or 28%, in the three months endedMarch 31, 2022 from$3.0 billion in the three months endedMarch 31, 2021 . The decrease in interest expense also reflects a decline in the average rate paid on interest-bearing liabilities of 43 basis points, to 0.62% for the three months endedMarch 31, 2022 compared to 1.05% for the three months endedMarch 31, 2021 . The rate paid on money market, savings and NOW accounts have been lower due to the low interest rate environment, and our time deposits have been repricing downward as they renew or are replaced at lower offering rates as part of our strategy to reduce our significant liquidity position. The decrease of$168.0 million in average FHLB borrowings fromMarch 31, 2021 is the result of the Bank's decision to repay$157.0 million in borrowings during the fourth quarter of 2021, before their maturity dates without incurring a prepayment penalty. Net Interest Margin and Interest Rate Spread. Net interest margin was 3.03% for the three months endedMarch 31, 2022 , up 58 basis points from 2.45% for the same period in 2021. The interest rate spread was 2.93% for the three months endedMarch 31, 2022 , up 62 basis points from 2.31% for the same period in 2021. Our net interest margin and interest rate spread were positively impacted for the three months endedMarch 31, 2022 by a significant decline in our lower yielding other interest-earning assets, as well as a reduction in the average rate of our total interest-bearing liabilities. Provision (Recovery) for Loan Losses. Our recovery for loan losses was$4.3 million for the three months endedMarch 31, 2022 , compared to a recovery for loan losses of$0.7 million for the three months endedMarch 31, 2021 . Our recovery for loan losses for the three months endedMarch 31, 2022 is primarily attributable to improvement in the credit quality of our loan portfolio, which includes the effects of a$26.9 million decrease of Special Mention, Substandard and Doubtful loans, as well as a decrease in our total loan portfolio of$138.2 million fromDecember 31, 2021 . Our total allowance for loan losses decreased to$52.5 million , or 2.80% of total loans, atMarch 31, 2022 compared to$71.9 million , or 2.92% of total loans, atMarch 31, 2021 . See "-Asset Quality" and "-Allowance for Loan Losses" for further discussion regarding our classified loans and the credit quality of our loan portfolio.
Non-interest Income. Non-interest income information is as follows:
Three Months Ended
March 31, Change
2022 2021 Amount Percent
(Dollars in thousands)
Service charges and fees $ 122 $ 159 $ (37) (23) %
Gain on sale of mortgage loans
held for sale 197 398 (201) (51) %
Unrealized losses on equity
securities (236) (90) (146) N/M
Net servicing income (loss) 443 (430) 873 N/M
Income on cash surrender value of
bank-owned life insurance 328 313 15 5 %
Other 557 103 454 N/M
Total non-interest income $ 1,411 $ 453 $ 958 N/M
N/M - not meaningful
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Non-interest income of $1.4 million for the three months ended March 31, 2022
reflected an increase of $1.0 million from the same period in 2021. The increase
in non-interest income is primarily attributable to an increase in net servicing
income of $0.9 million due to lower amortization of mortgage servicing rights,
as there were no Advantage Loan Program loans repurchased during the three
months ended March 31, 2022 and an increase in the weighted average life of the
residential real estate mortgages that we service for others which resulted in a
recovery of a portion of our valuation allowance. See Note 5 - Mortgage
Servicing Rights, net to our condensed consolidated financial statements for
additional information about our mortgage servicing rights. In addition, for the
three months ended March 31, 2022 , other non-interest income included $0.4
million in recoveries of the loan valuation losses previously taken on the
commercial real estate portfolio during the period it was reflected as loans
held for sale.
Non-interest Expense. Non-interest expense information is as follows:
Three Months Ended
March 31, Change
2022 2021 Amount Percent
(Dollars in thousands)
Salaries and employee benefits $ 9,617 $ 7,848 $ 1,769 23 %
Occupancy and equipment 2,142 2,196 (54) (2) %
Professional fees 5,157 8,755 (3,598) (41) %
FDIC assessments 369 719 (350) (49) %
Data processing 805 346 459 N/M
Net recovery for mortgage
repurchase liability (213) (153) (60) (39) %
Other 1,546 1,623 (77) (5) %
Total non-interest expense $ 19,423 $ 21,334 $ (1,911) (9) %
N/M - not meaningful
Non-interest expense of$19.4 million for the three months endedMarch 31, 2022 reflected a decrease of$1.9 million compared to the same period of 2021. This decrease was primarily attributable to a$3.6 million reduction in professional fees incurred due to the completion of significant projects that were required by the OCC Agreement and certain refinements to the Bank's BSA/AML compliance programs being implemented. The decrease was partially offset by a$1.8 million increase in salaries and employee benefits expense. Salaries and employee benefits expense in the three months endedMarch 31, 2022 includes continued hiring of employees in key positions and salary adjustments given to employees to maintain compensation at competitive levels, as well as enhancements made to existing employee benefit plans. Income Tax Expense. We recorded an income tax expense of$2.3 million , or effective tax rate of 30.3%, for the three months endedMarch 31, 2022 , compared to an income tax expense of$0.8 million , or effective tax rate of 24.6%, for the three months endedMarch 31, 2021 . The increase in our effective tax rate reflects additional non-deductible compensation-related expenses incurred in the three months endedMarch 31, 2022 , as well as a higher proportion of our income attributable to states with higher income tax rates.
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 have substantial cash requirements going forward,
as discussed below, which we plan to fund through our total available liquidity,
cash flows from operations and additional liquidity measures, if determined to
be necessary.
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.
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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. AtMarch 31, 2022 andDecember 31, 2021 , cash and due from banks totaled$486.7 million and$411.7 million , respectively; interest-bearing time deposits with other banks totaled$1.2 million ; available-for-sale debt securities, which provide additional sources of liquidity, totaled$359.4 million and$308.7 million , respectively. AtMarch 31, 2022 andDecember 31, 2021 , outstanding FHLB borrowings totaled$150.0 million . There were no amounts outstanding on lines of credit with other banks during the three months endedMarch 31, 2022 and 2021. AtMarch 31, 2022 , we had the ability to borrow an additional$343.5 million from the FHLB, which included an available line of credit of$20 million . In addition, we obtained standby letters of credit totaling$11.5 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 . Although we substantially reduced our excess liquidity during 2021, 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 the previously sold Advantage Loan Program loans. ThroughMarch 31, 2022 , the Company has repurchased pools of Advantage Loan Program loans previously sold with a total outstanding unpaid principal balance of$243.5 million . In addition, pursuant to the existing agreements with such investors, the Company also agreed to repurchase additional pools throughJuly 2023 . The aggregate principal balance of the loans in these pools atMarch 31, 2022 was$66.4 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 reduce our liquidity. AtMarch 31, 2022 , 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$129.0 million , which includes loans that we have committed to repurchase. We are a party to financial instruments in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to make loans and standby letters of credit that are not reflected in our condensed consolidated balance sheets and involve elements of credit and interest rate risk in excess of the amount recorded in the condensed consolidated balance sheets. Our exposure to credit loss is represented by the contractual amount of the instruments. We use the same credit policies in making commitments as we do for on-balance sheet instruments. AtMarch 31, 2022 , we had$59.7 million in loan commitments and unused lines of credit outstanding and$24 thousand in standby letters of credit. AtDecember 31, 2021 , we had$69.4 million in loan commitments and unused lines of credit outstanding and$24 thousand in standby letters of credit. As ofMarch 31, 2022 , time deposits due within one year were$601.5 million , or 27% of total deposits. Total time deposits atMarch 31, 2022 were$815.8 million , or 37% of total deposits. As ofDecember 31, 2021 , time deposits due within one year were$646.6 million , or 29% of total deposits. Total time deposits atDecember 31, 2021 were$891.8 million , or 39% of total deposits. Our primary investing activities are the origination of loans and to a lesser extent, the purchase of investment securities. During the three months endedMarch 31, 2022 , we originated$60.8 million of loans and purchased$73.6 million of investment securities. During the three months endedMarch 31, 2021 , we originated$46.9 million of loans and did not purchase any investment securities. Cash flows provided by loan payoffs totaled$182.0 million and$184.3 million during the three months endedMarch 31, 2022 and 2021, respectively. Financing activities consist primarily of activity in deposit accounts. We experienced a net decrease in total deposits of$61.6 million during the three months endedMarch 31, 2022 , from$2.3 billion atDecember 31, 2021 . We generate deposits from local businesses and individuals through customer referrals and other relationships and through our retail presence. We utilize borrowings and brokered deposits to supplement funding needs and manage our liquidity position. 51 Table of Contents
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. AtMarch 31, 2022 , 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 notes and stock repurchases. AtMarch 31, 2022 , the Company had$65.0 million in principal amount of subordinated notes outstanding that are dueApril 15, 2026 but may be redeemed by us, in whole or in part, on or afterApril 14, 2021 . There have been no redemptions on the subordinated notes. Interest expense on the subordinated notes was$1.0 million and$1.2 million for the three months endedMarch 31, 2022 and 2021, respectively. The subordinated notes had an interest rate of 7% per annum, payable semi-annually onApril 15 andOctober 15 in arrears, throughApril 2021 , after which the subordinated notes converted to a variable interest rate of the three-month LIBOR rate plus a margin of 5.82% (6.06% atMarch 31, 2022 ). In 2017, theUnited Kingdom ("U.K.")Financial Conduct Authority announced that it would no longer compel banks to submit rates for the calculation of LIBOR after 2021, and the administrator of LIBOR has proposed to extend publication of the most commonly usedU.S. dollar LIBOR settings toJune 30, 2023 . Pursuant to recent federal andNew York State legislation, upon the cessation of the publication of the three-month LIBOR rate, the subordinated notes will bear interest at a rate based on the SOFR. The Company's ability to pay cash dividends is restricted by the terms of the subordinated notes as well as applicable provisions ofMichigan law and the rules and regulations of the OCC and the FRB. Under the terms of the subordinated notes, as long as the subordinated notes are outstanding, the Company is permitted to pay dividends, if prior to such dividends, the Bank is considered well capitalized under applicable regulatory capital requirements. In addition, underMichigan 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 theFederal Reserve and the OCC, respectively. We manage our capital to comply with our internal planning targets and regulatory capital standards administered by theFederal Reserve and the OCC. We review capital levels on a quarterly basis including our needs for additional capital and ability to pay cash dividends. The Bank, after consultation with the OCC, determined that a risk-weighting of 100% should be applied to its Advantage Loan Program loans under the risk weighting requirements set forth under the Basel III capital rules for first-lien residential mortgage exposures commencing with the first quarter of 2022. Previously, the Company and the Bank generally applied a 50% risk weight to the Advantage Loan Program loans. The table below presents the Company's and the Bank's regulatory capital amounts and ratios applying the 100% risk weight as ofMarch 31, 2022 for the Company's and Bank's total adjusted capital to risk-weighted assets and Tier 1 (core) capital to risk-weighted assets. Had the Bank applied the 100% risk weight as ofDecember 31, 2021 , the Company's total adjusted capital to risk-weighted assets and Tier 1 (core) capital to risk-weighted assets would have been 21.24% and 17.34%, respectively, and the Bank's total adjusted capital to risk-weighted assets and Tier 1 (core) capital to risk-weighted assets would have been 20.55% and 19.28%, respectively. 52
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AtMarch 31, 2022 andDecember 31, 2021 , the Company and the Bank had 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 the Bank. Company Company Actual at Actual at Well Adequately Under March 31, December 31, Capitalized Capitalized Capitalized 2022 2021 Total adjusted capital to risk-weighted assets N/A 8.00 % 6.00 % 23.21 % 29.02 % Tier 1 (core) capital to risk-weighted assets N/A 6.00 % 4.00 % 19.72 % 24.08 % Common Equity Tier 1 (CET1) N/A 4.50 % 3.00 % 19.72 % 24.08 % Tier 1 (core) capital to adjusted tangible assets (leverage ratio) N/A 4.00 %
3.00 % 12.23 % 11.47 %
Bank Bank
Actual at Actual at
Well Adequately Under March 31, December 31,
Capitalized Capitalized Capitalized 2022 2021
Total adjusted capital to risk-weighted
assets 10.00 % 8.00 % 6.00 % 23.29 % 28.07 %
Tier 1 (core) capital to risk-weighted
assets 8.00 % 6.00 % 4.00 % 22.02 % 26.79 %
Common Equity Tier 1 (CET1) 6.50 % 4.50 % 3.00 % 22.02 % 26.79 %
Tier 1 (core) capital to adjusted
tangible assets (leverage ratio) 5.00 % 4.00 % 3.00 % 13.65 % 12.77 %
These capital requirements are the result of a final rule implementing recommendations of theBasel 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. AtMarch 31, 2022 andDecember 31, 2021 , the Company and the Bank held capital in excess of the CCB.
Recently Issued Accounting Guidance
See Note 2-Summary of Significant Accounting Policies 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.
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