Sterling Bancorp, Inc. - FORM 10-Q

Attached files

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EX-31.2 - EX-31.2 - Sterling Bancorp, Inc.	a18-19055_1ex31d2.htm
EX-32.2 - EX-32.2 - Sterling Bancorp, Inc.	a18-19055_1ex32d2.htm
EX-32.1 - EX-32.1 - Sterling Bancorp, Inc.	a18-19055_1ex32d1.htm
EX-31.1 - EX-31.1 - Sterling Bancorp, Inc.	a18-19055_1ex31d1.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-38290

Sterling Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Michigan		38-3163775
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		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)

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 x No o

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 x No o

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 o

Accelerated filer o

Non-accelerated filer x

Smaller reporting company x

Emerging growth company x

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. x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of November 13, 2018, there were 53,012,283 shares of the Registrant’s Common Stock outstanding.

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STERLING BANCORP, INC.

FORM 10-Q

INDEX

PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017	2
	Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017	3
	Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017	4
	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended September 30, 2018 and 2017	5
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017	6
	Notes to the Condensed Consolidated Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	53
Item 4.	Controls and Procedures	54

PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	55
Item 1A.	Risk Factors	55
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 6.	Exhibits	56
Exhibit Index		56
SIGNATURES		57

Table of Contents

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Sterling Bancorp, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

(dollars in thousands)

	September 30,		December 31,
	2018		2017

Assets
Cash and due from banks	$	48,879	$	40,147
Investment securities	142,749		126,848
Mortgage loans held for sale	113,805		112,866
Loans, net of allowance for loan losses of $20,765 and $18,457	2,796,150		2,594,357
Accrued interest receivable	13,087		11,493
Mortgage servicing rights, net	9,411		6,496
Leasehold improvements and equipment, net	9,040		7,043
Federal Home Loan Bank stock, at cost	22,950		22,950
Cash surrender value of bank-owned life insurance	31,146		30,680
Deferred tax asset, net	7,002		6,847
Other assets	2,744		2,231
Total assets	$	3,196,963	$	2,961,958

Liabilities and Shareholders’ Equity
Liabilities:
Noninterest-bearing deposits	$	79,432	$	73,682
Interest-bearing deposits	2,332,639		2,171,428
Total deposits	2,412,071		2,245,110
Federal Home Loan Bank borrowings	335,000		338,000
Subordinated notes, net	64,993		64,889
Accrued expenses and other liabilities	65,456		40,661
Total liabilities	2,877,520		2,688,660

Shareholders’ equity:
Preferred stock, authorized 10,000,000 shares; no shares issued and outstanding	-		-
Common stock, voting, no par value, authorized 500,000,000 shares; issued and outstanding
53,012,283 and 52,963,308 shares at September 30, 2018 and December 31, 2017, respectively	111,238		111,238
Additional paid-in capital	12,604		12,416
Retained earnings	195,649		149,816
Accumulated other comprehensive loss	(48)		(172)
Total shareholders’ equity	319,443		273,298
Total liabilities and shareholders’ equity	$	3,196,963	$	2,961,958

See accompanying notes to condensed consolidated financial statements.

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Sterling Bancorp, Inc.

Condensed Consolidated Statements of Income (Unaudited)

(dollars in thousands, except per share amounts)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Interest income
Interest and fees on loans	$	40,772	$	32,373	$	115,752	$	88,116
Interest and dividends on investment securities	958		502		2,619		1,302
Other interest	166		55		399		103
Total interest income	41,896		32,930		118,770		89,521

Interest expense
Interest on deposits	8,628		4,375		22,396		11,686
Interest on Federal Home Loan Bank borrowings	1,297		1,344		3,464		3,044
Interest on subordinated notes	1,173		1,067		3,516		2,883
Total interest expense	11,098		6,786		29,376		17,613

Net interest income	30,798		26,144		89,394		71,908
Provision for loan losses	423		900		2,184		2,100
Net interest income after provision for loan losses	30,375		25,244		87,210		69,808

Non-interest income
Service charges and fees	100		65		266		202
Investment management and advisory fees	445		595		1,568		1,736
Gain (loss) on sale of investment securities	-		-		(3)		73
Gain (loss) on sale of mortgage loans held for sale	129		(191)		222		(174)
Gain on sale of portfolio loans	2,876		4,568		11,885		8,987
Unrealized losses on equity securities	(31)		-		(125)		-
Income on cash surrender value of bank-owned life insurance	299		294		889		877
Other income	415		173		1,321		559
Total non-interest income	4,233		5,504		16,023		12,260

Non-interest expense
Salaries and employee benefits	6,973		6,211		20,851		16,898
Occupancy and equipment	1,760		1,549		4,916		4,354
Professional fees	898		344		2,344		1,008
Advertising and marketing	470		233		1,170		655
FDIC assessments	186		335		1,203		841
Data processing	311		281		894		767
Other	1,933		1,382		5,277		4,295
Total non-interest expense	12,531		10,335		36,655		28,818

Income before income taxes	22,077		20,413		66,578		53,250
Income tax expense	6,336		8,321		19,106		21,804
Net income	$	15,741	$	12,092	$	47,472	$	31,446

Income per share, basic and diluted	$	0.30	$	0.27	$	0.90	$	0.69

Weighted average common shares outstanding:
Basic	52,963,308		45,271,000		52,963,308		45,271,000
Diluted	52,966,593		45,271,000		52,965,089		45,271,000

See accompanying notes to condensed consolidated financial statements.

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Sterling Bancorp, Inc.

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(dollars in thousands)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017

Net income	$	15,741	$	12,092	$	47,472	$	31,446
Other comprehensive income, net of tax:
Unrealized gains on investment securities, arising during the period, net of tax effect of $5, $51, $19, and $30, respectively	19		95		72		56
Reclassification adjustment for (gains) losses included in net income of $ -, $ -, $3, and $(73), respectively, included in gain (loss) on sale of investment securities, net of tax effect of $ -, $ -, $(1), and $26, respectively	-		-		2		(47)
Total other comprehensive income	19		95		74		9
Comprehensive income	$	15,760	$	12,187	$	47,546	$	31,455

See accompanying notes to condensed consolidated financial statements.

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Sterling Bancorp, Inc.

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

(dollars in thousands, except per share amounts)

											Accumulated
							Additional				Other		Total
	Voting Common Stock			Nonvoting Common Stock			Paid-in		Retained		Comprehensive		Shareholders’
	Shares	Amount		Shares	Amount		Capital		Earnings		Loss		Equity
Balance at January 1, 2017	40,199,000	$	22,863	5,072,000	$	2,885	$	15,118	$	121,446	$	(40)	$	162,272
Net income	-	-		-	-		-		10,416		-		10,416
Capital contributions from controlling member of merged entity (Note 1)	-	-		-	-		218		-		-		218
Other comprehensive loss	-	-		-	-		-		-		(29)		(29)
Dividends distributed ($0.04 per share)	-	-		-	-		-		(1,767)		-		(1,767)
Balance at March 31, 2017	40,199,000	22,863		5,072,000	2,885		15,336		130,095		(69)		171,110
Net income	-	-		-	-		-		8,938		-		8,938
Distribution recorded to members of merged entity (Note 1)	-	-		-	-		(2,920)		-		-		(2,920)
Other comprehensive loss	-	-		-	-		-		-		(57)		(57)
Dividends distributed ($0.06 per share)	-	-		-	-		-		(2,662)		-		(2,662)
Balance at June 30, 2017	40,199,000	22,863		5,072,000	2,885		12,416		136,371		(126)		174,409
Net income	-	-		-	-		-		12,092		-		12,092
Other comprehensive income	-	-		-	-		-		-		95		95
Dividends distributed ($0.04 per share)	-	-		-	-		-		(2,124)		-		(2,124)
Balance at September 30, 2017	40,199,000	$	22,863	5,072,000	$	2,885	$	12,416	$	146,339	$	(31)	$	184,472

Balance at January 1, 2018	52,963,308	$	111,238	-	$	-	$	12,416	$	149,816	$	(172)	273,298
Cumulative effect adjustment, reclassification of unrealized losses on equity securities (Note 3)	-	-		-	-		-		(50)		50		-
Net income	-	-		-	-		-		15,749		-		15,749
Stock-based compensation	-	-		-	-		9		-		-		9
Other comprehensive loss	-	-		-	-		-		-		(13)		(13)
Restricted stock awards	39,655	-		-	-		-		-		-		-
Dividends distributed ($0.01 per share)	-	-		-	-		-		(531)		-		(531)
Balance at March 31, 2018	53,002,963	111,238		-	-		12,425		164,984		(135)		288,512
Net income	-	-		-	-		-		15,982		-		15,982
Stock-based compensation	-	-		-	-		76		-		-		76
Other comprehensive income	-	-		-	-		-		-		68		68
Dividends distributed ($0.01 per share)	-	-		-	-		-		(528)		-		(528)
Balance at June 30, 2018	53,002,963	111,238		-	-		12,501		180,438		(67)		304,110
Net income	-	-		-	-		-		15,741		-		15,741
Stock-based compensation	-	-		-	-		103		-		-		103
Other comprehensive income	-	-		-	-		-		-		19		19
Restricted stock awards	9,320	-		-	-		-		-		-		-
Dividends distributed ($0.01 per share)	-	-		-	-		-		(530)		-		(530)
Balance at September 30, 2018	53,012,283	$	111,238	-	$	-	$	12,604	$	195,649	$	(48)	$	319,443

See accompanying notes to condensed consolidated financial statements.

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Sterling Bancorp, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(dollars in thousands)

	Nine Months Ended September 30,
	2018		2017
Cash Flows From Operating Activities
Net income	$	47,472	$	31,446
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	2,184		2,100
Deferred income taxes	(174)		(123)
(Gain) loss on sale of investment securities	3		(73)
Unrealized losses on equity securities	125		-
Amortization (accretion), net on investment securities	(514)		173
Depreciation and amortization on leasehold improvements and equipment	959		880
Amortization of intangible asset	338		338
Origination, premium paid and purchase of loans, net of principal payments, mortgage loans held for sale	(29,565)		(87,008)
Proceeds from sale of mortgage loans held for sale	27,623		89,600
(Gain) loss on sale of mortgage loans held for sale	(222)		174
Gain on sale of portfolio loans	(11,885)		(8,987)
Increase in cash surrender value of bank-owned life insurance	(466)		(490)
Amortization, net of valuation allowance adjustments, of servicing assets	1,375		1,209
Stock-based compensation	188		-
Other	104		82
Change in operating assets and liabilities:
Accrued interest receivable	(1,594)		(1,946)
Other assets	(851)		(239)
Accrued expenses and other liabilities	24,795		23,805
Net cash provided by operating activities	59,895		50,941

Cash Flows From Investing Activities
Investment securities:
Maturities and principal receipts	57,891		63,954
Sales	2,778		66,949
Purchases	(76,091)		(165,328)
Purchases of investment securities, restricted stock	-		(4,590)
Loans originated, net of repayments	(547,298)		(684,209)
Proceeds from the sale of portfolio loans	352,141		271,728
Purchase of leasehold improvements and equipment	(2,956)		(1,732)
Net cash used in investing activities	(213,535)		(453,228)

Cash Flows From Financing Activities
Net increase in deposits	166,961		484,317
Proceeds from advances from Federal Home Loan Bank	4,275,000		4,023,000
Repayments of advances from Federal Home Loan Bank	(4,278,000)		(4,080,000)
Net change in line of credit with Federal Home Loan Bank	-		(16,915)
Proceeds from issuance of subordinated notes	-		15,611
Payment of debt issuance costs	-		(191)
Payment of offering costs	-		(213)
Capital contributions from controlling member of merged entity	-		218
Distribution to members of merged entity	-		(2,920)
Dividends paid to shareholders	(1,589)		(6,553)
Net cash provided by financing activities	162,372		416,354
Net change in cash and due from banks	8,732		14,067
Cash and due from banks at beginning of period	40,147		22,124
Cash and due from banks at end of period	$	48,879	$	36,191

Supplemental cash flows information
Cash paid:
Interest	$	23,568	$	16,053
Income taxes	18,500		19,300
Noncash investing and financing activities:
Transfers of residential real estate loans to mortgage loans held for sale	382,531		32,565
Transfers of residential real estate loans from mortgage loans held for sale	39,210		-

See accompanying notes to condensed consolidated financial statements.

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in thousands, except per share amounts)

Note 1—Nature of Operations and Basis of Presentation

Nature of Operations

Sterling Bancorp, Inc. (the “Company”) is a unitary thrift holding company that was incorporated in 1989 and the parent company to its wholly owned subsidiary, Sterling Bank and Trust, F.S.B. (the “Bank”). The Company’s business is conducted through the Bank which was formed in 1984. The Bank originates construction, residential and commercial real estate loans, commercial lines of credit, and other consumer loans and receives deposits from its customers located primarily in California and Michigan. The Bank operates through a network of 29 branches: one branch at its headquarters in Michigan, 25 branches located in San Francisco and Los Angeles, California, two branches located in New York, New York, and one branch located in the greater Seattle, Washington market. Additionally, the Bank’s operations include a registered investment advisory business with assets held under management of $304 million at September 30, 2018.

The Company is headquartered in Southfield, Michigan and its operations are in the financial services industry. Management evaluates the performance of its business based on one reportable segment, community banking.

The Company is subject to regulation, examination and supervision by the Board of Governors of the Federal Reserve (“Federal Reserve”). The Bank is a federally chartered stock savings bank which 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.

Initial Public Offering

In November 2017, the Company completed its initial public offering whereby it issued and sold 7,692,308 shares of common stock at a public offering price of $12.00 per share. The Company received net proceeds of $85.5 million after deducting underwriting discounts and commissions of $5.5 million and other offering expenses of $1.3 million. The Company continues to use the proceeds to support the Bank’s growth initiatives.

Basis of Presentation

The condensed consolidated balance sheet as of September 30, 2018, and the condensed consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the three and nine months ended September 30, 2018 and 2017 are unaudited. The unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and reflect, in the opinion of management, all normal and recurring adjustments, considered 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 nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ended December 31, 2018 or for any future annual or interim period. The consolidated balance sheet at December 31, 2017 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, 2017.

Adjustments to Prior Interim Periods

In the second quarter of 2018, the Company corrected the classification of commitment fees, net of direct loan origination costs, earned on construction loans and other lines of credit to commercial customers in its condensed consolidated statements of income to the financial statement caption, interest and fees on loans, within interest income, which were previously reported in service charges and fees, within non-interest income. The Company has made the correction to conform with accounting principles generally accepted in the United States of America (“U.S. GAAP”). As a result, prior period financial statements included herein have been adjusted from the amounts previously reported.

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

(dollars in thousands, except per share amounts)

The amount of the adjustment to decrease service charges and fees, and increase interest and fees on loans was $648 and $1,510 for the three and nine months ended September 30, 2017, respectively. There was no change to the reported net income or income per share, basic and diluted, as previously reported as a result of this immaterial correction. Management has evaluated the materiality of these corrections on its previously filed financial statements from a quantitative and qualitative perspective, and has concluded that these corrections were not material to the prior periods.

Merger of Quantum Fund, LLC

On April 24, 2017, the Bank acquired all the outstanding equity interests of Quantum Fund, LLC, an entity controlled by the Company’s principal shareholder who owned, directly and indirectly, 80% of the members’ interests with the remaining 20% members’ interest held by a member of the Board of Directors of the Company and Bank, for $2.9 million in cash. Such amount has been reflected as a distribution to the members in the consolidated statements of changes in shareholders’ equity. The entity operated a registered investment advisory business with assets held under management of approximately $425 million at the time of merger.

In 2017, the Bank recorded the assets and liabilities transferred at their carrying amounts, consisting primarily of a customer-related intangible asset, in the accounts of the entity transferred. Prior to 2017, the consolidated financial statements have been retrospectively adjusted to include the results of the Company and its wholly-owned subsidiary, and the entity under common control on a combined basis, since the entities were under common control.

Note 2—Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements have been prepared in conformity with U.S. GAAP. The consolidated financial statements include the results of the Company and its wholly-owned subsidiary, and an entity under common control that was merged with the Company in April 2017 (Note 1). All significant intercompany accounts and transactions have been eliminated in the consolidation.

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Fair Value Measurements

The Bank utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The determination of fair values of financial instruments often requires the use of estimates. In cases where quoted market values in an active market are not readily available, the Bank uses present value techniques and other valuation methods, as disclosed in Note 11, to estimate the fair value of its financial instruments. These valuation methods require considerable judgment and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used.

Investment securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Bank may be required to record other assets and liabilities at fair value on a nonrecurring basis, such as impaired loans, other real estate owned, nonmarketable equity securities and certain other assets and liabilities. These nonrecurring fair value adjustments generally involve write-downs of individual assets or application of lower of amortized cost or fair value accounting.

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

(dollars in thousands, except per share amounts)

Concentration of Credit Risk

The Company’s loan portfolio consists primarily of residential real estate loans which are collateralized by real estate. At September 30, 2018 and December 31, 2017, residential real estate loans accounted for 83% and 82%, 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 September 30, 2018 and December 31, 2017, approximately 95% of the loan portfolio was originated in California.

Investment Securities

Investment securities includes available for sale debt securities and equity securities.

Debt Securities

Debt securities are classified as either available for sale or held to maturity. Management determines the classification of the debt securities when they are purchased.

Debt securities available for sale are stated at fair value, with unrealized gains and losses excluded from income and shown as a separate component of shareholders’ equity in accumulated other comprehensive income, net of tax. Held to maturity securities are carried at amortized cost when management has the positive intent and ability to hold them to maturity. The amortized cost of debt securities classified as held to maturity or available for sale is adjusted for amortization of premiums and accretion of discounts over the contractual life of the investment security using the effective interest method or, in the case of mortgage-backed securities, over the estimated life of the investment security using the effective yield method.

Interest income includes amortization or accretion of purchase premium or discount. Gains and losses on sales are recorded on the settlement date and determined using the specific identification method.

Management evaluates debt securities for other-than-temporary impairment at least on a quarterly basis and more frequently when economic or market conditions warrant such an evaluation. In determining other-than-temporary impairment for debt securities, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether a decline is other-than-temporary involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time. A charge is recognized against income for all or a portion of the impairment if the loss is determined to be other than temporary.

If the Bank intends to sell the debt security or it is more likely than not that the Bank will be required to sell the debt security prior to the recovery of its amortized cost basis, the debt security is written down to fair value, and the full amount of any impairment charge is recorded as a loss in the condensed consolidated statements of income. If the Bank does not intend to sell the debt security and it is more likely than not that the Bank will not be required to sell the debt security prior to recovery of its amortized cost basis, only the current period credit loss of any impairment of a debt security is recognized in the condensed consolidated statements of income, with the remaining impairment recorded in other comprehensive income.

Equity Securities

Beginning January 1, 2018, equity securities with readily determinable fair values are stated at fair value with unrealized and realized gains and losses reported in income. Those equity securities without readily determinable fair values are recorded at cost, less any impairments, adjusted for subsequent observable price changes in orderly transactions for an identical or similar investment of the same issuer. Any changes in the carrying value of the equity investments are recognized in income. Refer to Note 3, Investment Securities.

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

(dollars in thousands, except per share amounts)

For periods prior to January 1, 2018, equity securities were classified as available for sale and stated at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive income, net of tax.

The Company performs a qualitative assessment each reporting period to identify impairment of equity securities without readily determinable fair values. When a qualitative assessment indicates that an impairment exists, the Company determines the fair value of the investment and if the fair value is less than the investment’s carrying value, an impairment loss is recorded equal to the difference between the fair value and the carrying amount of the investment in income.

Federal Home Loan Bank Stock

The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest additional amounts. The FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. The FHLB stock does not have a readily determinable fair value and no quoted market value as the ownership is restricted to member institutions. Also, the FHLB stock is pledged as collateral on FHLB borrowings. Cash and stock dividends are reported as income in interest and dividends on investment securities in the condensed consolidated statements of income. Cash dividends received amounted $257 and $194 for the three months ended September 30, 2018 and 2017, respectively, and $888 and $583 for the nine months ended September 30, 2018 and 2017, respectively.

Revenue from Contracts with Customers

On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers and all subsequent amendments to the ASU (collectively, “ASC 606”), which establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts to provide goods or services to its customers. The core principle of ASC 606 requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

The Company adopted ASC 606 using the modified retrospective method applied to all contracts not completed as of the adoption date. The adoption of ASC 606 did not result in a change in the accounting for any of the in-scope revenue streams; as such no cumulative effect adjustment was recorded at adoption. The majority of the Company’s revenues are from interest income and other sources, including loans and investment securities, as well as fees related to mortgage servicing activities, that are not within the scope of ASC 606 and are instead subject to other accounting guidance. The Company’s services that are within the scope of ASC 606 are recorded within non-interest income which includes investment management and advisory fees, service charges on deposit accounts, interchange income and other service charges and fees. Descriptions of these activities that are within the scope of ASC 606, which are presented in the condensed consolidated statements of income as components of non-interest income, are as follows:

Service charges on deposit accounts: The Bank earns fees from its deposit customers for transaction-based, account maintenance and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Bank fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Bank satisfies the performance obligations. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposit accounts are withdrawn from the customer’s account balance.

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

(dollars in thousands, except per share amounts)

Investment management and advisory fees: The Bank enters into contracts with certain customers to provide asset management services that will continue indefinitely unless terminated in writing by either party to the contract. The Bank receives a quarterly management fee, payable in advance, based on the customer’s assets held under management at the beginning of the period. These fees are earned over time as the Bank provides the contracted services and are assessed based on a tiered rate applied to the market value of assets held under management. The Bank does not earn performance-based incentives.

Interchange fees: The Bank earns interchange fees from debit cardholder transactions conducted through the MasterCard payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Such interchange activity is shown on a net basis through non-interest income — other income.

Other service charges and fees: Other charges and fees includes revenue generated from wire transfers, lockboxes, and bank issuance of checks. Such fees are recognized at the point in time the customer requests the service and the service has been rendered.

The following table presents the Company’s sources of non-interest income for the three and nine months ended September 30, 2018 and 2017 that are within the scope of ASC 606:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Non-Interest Income:
Service charges on deposit accounts*	$	60	$	46	$	164	$	126
Investment management and advisory fees	445		595		1,568		1,736
Interchange fees*	28		32		80		88
Other service charges and fees*	15		10		35		22
Not within the scope of ASC 606	3,685		4,821		14,176		10,288
Total non-interest income	$	4,233	$	5,504	$	16,023	$	12,260

* Included in service charges and fees, and other income in the condensed consolidated statements of income

Contract Balances

The Bank’s noninterest revenue streams are largely based on transactional activity or month-end revenue accruals such as investment management and advisory fees based on the customer’s assets held under management at the beginning of the period. Consideration is often received immediately or shortly thereafter, and the Bank satisfies its performance obligation and recognizes revenue over time. At September 30, 2018 and December 31, 2017, the Bank had a contract asset balance of $34 and $91, respectively, which was recorded in other assets in the condensed consolidated balance sheets.

Stock-based compensation

Compensation cost is recognized for stock options and restricted stock awards issued to employees and non-employee members of the Company’s Board of Directors, based on the fair value of these awards at the date of grant. The fair value of stock options is estimated using a Black-Scholes option pricing model and the fair value of restricted stock awards is based on the market price of the Company’s common stock at the date of grant reduced by the present value of dividends per share expected to be paid during the period the shares are not vested.

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

(dollars in thousands, except per share amounts)

Compensation cost is recorded over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recorded on a straight-line basis over the requisite service period of the entire award. The Company’s accounting policy is to record forfeitures in the period that they occur.

Income per Share, Basic and Diluted

Basic income per share represents net income divided by the weighted average number of common shares outstanding during the period. Diluted income per share represents net income divided by the weighted average number of common shares outstanding during the period, plus the effect of outstanding potentially dilutive common shares.

Recently Issued Accounting Guidance

In August 2018, the Financial Accounting Standards Board (FASB) issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements for fair value measurements as follows: (1) removes the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, and the reporting entity’s policy for timing of transfers between levels; (2) removes the requirement to disclose the valuation processes for Level 3 fair value measurements; (3) clarifies that the measurement uncertainty disclosure for recurring Level 3 fair value measurements is to communicate information about the uncertainty in measurement as of the reporting date; (4) requires disclosure of the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and (5) requires disclosure of the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU No. 2018-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. An entity is permitted to early adopt the provisions that remove or modify disclosures upon issuance of this ASU and delay adoption of the additional disclosures until the effective date. The Company is currently evaluating this ASU and does not expect the adoption of the ASU to have a significant impact on its current fair value measurement disclosures.

In June 2016, the Financial Accounting Standards Board (FASB) issued 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. ASU No. 2016-13 is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2019. The Company has formed a cross-functional implementation team consisting of individuals from credit, finance and information systems. A project plan has been developed and the implementation team is working on identifying and researching key interpretive issues and is in the process of reviewing existing credit models to identify areas where new impairment models may be required. The Company expects to recognize a cumulative effect adjustment to the opening balance of retained earnings as of the beginning of the first reporting period in which ASU No. 2016-13 is effective. The Company has not yet determined the magnitude of any such one-time adjustment or the overall impact of ASU No. 2016-13 on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) which require lessees to recognize the following for all leases, except for short-term leases, at the commencement date: (1) a lease liability which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessor accounting is largely unchanged. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, which provides corrections or clarification on narrow aspects of Topic 842. Also, in July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides entities with another transition method for adopting the new leasing guidance. As originally issued, ASC 842

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

(dollars in thousands, except per share amounts)

requires entities to use a modified retrospective transition approach to apply the new guidance as of the beginning of the earliest period presented in the financial statements in the period adopted. The optional transition method allows entities to apply the new guidance at the adoption date by recording a cumulative-effect adjustment to the opening balance of retained earnings, and not to restate the comparative periods presented. ASU No. 2016-02 will also require expanded disclosures. ASU No. 2016-02 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2018.

The Company is continuing to assess the impact of ASU No. 2016-02 on its financial condition and results of operations. Although, the Company plans to use the optional transition method and record a cumulative-effect adjustment to the opening balance of retained earnings on January 1, 2019. In addition, the Company expects to elect to apply the package of practical expedients upon transition, which includes no reassessment of whether existing contracts are or contain leases as well as no reassessment of lease classification for existing leases. Also, any initial direct costs for any leases that exist prior to adoption will be retained. The Company will record a right-of-use asset and a lease liability on its consolidated balance sheet for the leases of its facilities in place upon adoption and expects this ASU will not significantly impact its operating results.

Note 3—Investment Securities

Debt Securities

The following tables summarize the amortized cost and fair value of debt securities available for sale at September 30, 2018 and December 31, 2017 and the corresponding amounts of gross unrealized gains and losses:

	September 30, 2018
	Amortized		Gross Unrealized					Fair
	Cost		Gain		Loss			Value
Available for sale:
U.S. Treasury securities	$	136,764	$	—	$	(118	)	$	136,646
Collateralized mortgage obligations	1,633		64		—			1,697
Collateralized debt obligations	309		—		(6		)	303
Total	$	138,706	$	64	$	(124	)	$	138,646

	December 31, 2017
	Amortized		Gross Unrealized					Fair
	Cost		Gain		Loss			Value
Available for sale:
U.S. Treasury securities	$	120,216	$	—	$	(174	)	$	120,042
Collateralized mortgage obligations	1,953		55		—			2,008
Collateralized debt obligations	606		—		(35		)	571
Total	$	122,775	$	55	$	(209	)	$	122,621

The Company held no securities of any single issuer, other than debt securities issued by the U.S. government, government agency and government-sponsored enterprises, which were in excess of 10% of shareholders’ equity as of September 30, 2018 and December 31, 2017.

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

(dollars in thousands, except per share amounts)

Information pertaining to sales of debt securities available for sale is as follows:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2018		2017			2018			2017
Proceeds	$	—	$	51,236		$	2,778		$	66,949

Gross realized gains	$	—	$	40		$	—		$	114
Gross realized losses	—		(40		)	(3		)	(41		)
Total net realized gains (losses)	$	—	$	—		$	(3	)	$	73

The amortized cost and fair value of debt securities available for sale issued by U.S. Treasury at September 30, 2018 are shown by contractual maturity. Collateralized mortgage obligations and collateralized debt obligations are disclosed separately in the table below as the expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized Cost		Fair Value
U.S. Treasury securities
Due less than one year	$	136,764	$	136,646
Collateralized mortgage obligations	1,633		1,697
Collateralized debt obligations	309		303
Total	$	138,706	$	138,646

The table summarizes debt securities available for sale, at fair value, with unrealized losses at September 30, 2018 and December 31, 2017 aggregated by major security type and length of time the individual securities have been in a continuous unrealized loss position, as follows:

	September 30, 2018
	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. Treasury securities	$	136,646	$	(118	)	$	—	$	—		$	136,646	$	(118	)
Collateralized debt obligations	—		—			303		(6		)	303		(6		)
Total	$	136,646	$	(118	)	$	303	$	(6	)	$	136,949	$	(124	)

	December 31, 2017
	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. Treasury securities	$	120,042	$	(174	)	$	—	$	—		$	120,042	$	(174	)
Collateralized debt obligations	—		—			571		(35		)	571		(35		)
Total	$	120,042	$	(174	)	$	571	$	(35	)	$	120,613	$	(209	)

At September 30, 2018, the Company’s debt securities portfolio consisted of 9 debt securities, with 7 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; thus, the impairment was determined to be temporary. All interest and dividends are considered taxable.

The Company holds a collateralized debt obligation with a carrying value of $303 and $571 at September 30, 2018 and December 31, 2017, respectively. The security was rated high quality at inception, but it was subsequently rated by Moody’s as B1, which is defined as “extremely speculative.” The issuers of the security are primarily banks. The Company 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 security remained classified as available for sale and represented $6 and $35 of the unrealized losses reported at September 30, 2018 and December 31, 2017, respectively.

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

(dollars in thousands, except per share amounts)

Equity Securities

Equity securities consist of an investment in a qualified community reinvestment act investment fund, which is a publicly-traded mutual fund and an investment in Pacific Coast Banker’s Bank, a thinly traded, restricted stock. At September 30, 2018 and December 31, 2017, equity securities totaled $4,103 and $4,227, respectively. Prior to January 1, 2018, equity securities were stated at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive income, net of tax.

On January 1, 2018, the Company adopted ASU No. 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”) and early adopted ASU No. 2018-03, Technical Corrections and Improvements to Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2018-03”). ASU No. 2016-01 requires equity investments, except those investments accounted for under the equity method of accounting, to be measured at fair value with changes in fair value recognized in net income. Also, for equity investments without readily determinable fair values, ASU No. 2016-01 provides a new measurement alternative. ASU No. 2016-01 requires a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption to reclassify the cumulative change in fair value of equity securities previously recognized in accumulated other comprehensive income. ASU No. 2018-03 clarifies certain aspects of the guidance in ASU No. 2016-01 primarily pertaining to the measurement alternative for equity securities without readily determinable fair values.

On January 1, 2018, the Company recorded a cumulative-effect adjustment to decrease retained earnings by $50 with offsetting adjustment to accumulated other comprehensive loss. Beginning January 1, 2018, equity securities with readily determinable fair values are stated at fair value with realized and unrealized gains and losses reported in income.

At September 30, 2018 and December 31, 2017, equity securities with readily determinable fair values were $3,857 and $3,981, respectively. The following is a summary of unrealized and realized gains and losses recognized in the condensed consolidated statements of income during the three and nine months ended September 30, 2018:

	Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018
Net losses recorded during the period on equity securities	$	31	$	125
Less: net losses recorded during the period on equity securities sold during the period	—		—
Unrealized losses recorded during the period on equity securities held at the reporting date	$	31	$	125

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. The investment was reported at $246 at each of September 30, 2018 and December 31, 2017.

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

(dollars in thousands, except per share amounts)

Note 4—Loans

Major categories of loans were as follows:

	September 30,			December 31,
	2018			2017
Construction loans	$	177,734		$	192,319
Residential real estate loans, mortgage	2,341,989			2,132,641
Commercial real estate loans, mortgage	252,782			247,076
Commercial and industrial loans, lines of credit	44,375			40,749
Other consumer loans	35			29
Total loans	2,816,915			2,612,814
Less: allowance for loan losses	(20,765		)	(18,457		)
Loans, net	$	2,796,150		$	2,594,357

Loans with carrying values of $964.3 million and $968.4 million were pledged as collateral on FHLB borrowings at September 30, 2018 and December 31, 2017, respectively.

The table presents the activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2018 and 2017:

Three Months Ended September 30, 2018	Construction		Residential Real Estate		Commercial Real Estate		Commercial Lines of Credit		Other Consumer		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	3,211	$	12,675	$	2,595	$	787	$	1	$	1,031	$	20,300
Provision for loan losses	110		28		—		181		—		104		423
Charge offs	—		—		—		—		—		—		—
Recoveries	5		6		31		—		—		—		42
Total ending balance	$	3,326	$	12,709	$	2,626	$	968	$	1	$	1,135	$	20,765

Nine Months Ended September 30, 2018	Construction		Residential Real Estate		Commercial Real Estate		Commercial Lines of Credit		Other Consumer		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	2,218	$	12,279	$	2,040	$	469	$	1	$	1,450	$	18,457
Provision for loan losses	1,095		421		484		499		—		(315)		2,184
Charge offs	—		(4)		—		—		—		—		(4)
Recoveries	13		13		102		—		—		—		128
Total ending balance	$	3,326	$	12,709	$	2,626	$	968	$	1	$	1,135	$	20,765

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

(dollars in thousands, except per share amounts)

Three Months Ended September 30, 2017	Construction			Residential Real Estate		Commercial Real Estate		Commercial Lines of Credit		Other Consumer		Unallocated			Total
Allowance for loan losses:
Beginning balance	$	1,168		$	12,472	$	1,247	$	385	$	2	$	972		$	16,246
Provision for loan losses	(244		)	1,102		12		66		—		(36		)	900
Charge offs	—			—		—		—		—		—			—
Recoveries	1			4		38		—		—		—			43
Total ending balance	$	925		$	13,578	$	1,297	$	451	$	2	$	936		$	17,189

Nine Months Ended September 30, 2017	Construction		Residential Real Estate		Commercial Real Estate		Commercial Lines of Credit		Other Consumer			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	679	$	11,863	$	915	$	373	$	2		$	990		$	14,822
Provision for loan losses	141		1,672		264		78		(1		)	(54		)	2,100
Charge offs	—		—		—		—		—			—			—
Recoveries	105		43		118		—		1			—			267
Total ending balance	$	925	$	13,578	$	1,297	$	451	$	2		$	936		$	17,189

The following tables present the balance in the allowance for loan losses and the recorded investment by portfolio segment and based on impairment method as of September 30, 2018 and December 31, 2017:

September 30, 2018	Construction		Residential Real Estate		Commercial Real Estate		Commercial Lines of Credit		Other Consumer		Unallocated		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	78	$	45	$	30	$	198	$	—	$	—	$	351
Collectively evaluated for impairment	3,248		12,664		2,596		770		1		1,135		20,414
Total ending allowance balance	$	3,326	$	12,709	$	2,626	$	968	$	1	$	1,135	$	20,765
Loans:
Loans individually evaluated for impairment	$	7,155	$	120	$	3,809	$	420	$	—	$	—	$	11,504
Loans collectively evaluated for impairment	170,579		2,341,869		248,973		43,955		35		—		2,805,411
Total ending loans balance	$	177,734	$	2,341,989	$	252,782	$	44,375	$	35	$	—	$	2,816,915

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

(dollars in thousands, except per share amounts)

December 31, 2017	Construction		Residential Real Estate		Commercial Real Estate		Commercial Lines of Credit		Other Consumer		Unallocated		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	37	$	19	$	98	$	—	$	—	$	154
Collectively evaluated for impairment	2,218		12,242		2,021		371		1		1,450		18,303
Total ending allowance balance	$	2,218	$	12,279	$	2,040	$	469	$	1	$	1,450	$	18,457
Loans:
Loans individually evaluated for impairment	$	—	$	122	$	2,804	$	343	$	—	$	—	$	3,269
Loans collectively evaluated for impairment	192,319		2,132,519		244,272		40,406		29		—		2,609,545
Total ending loans balance	$	192,319	$	2,132,641	$	247,076	$	40,749	$	29	$	—	$	2,612,814

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

	At September 30, 2018						At December 31, 2017
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses
With no related allowance for loan losses recorded:
Construction	$	4,496	$	4,494	$	—	$	—	$	—	$	—
Commercial real estate:
Retail	1,385		1,193		—		1,431		1,247		—
Apartments	1,093		1,088		—		—		—		—
Commercial lines of credit, private banking	—		—		—		147		147		—
Subtotal	6,974		6,775		—		1,578		1,394		—
With an allowance for loan losses recorded:
Residential real estate, first mortgage	120		120		45		122		122		37
Construction	2,661		2,661		78		—		—		—
Commercial real estate, offices	1,539		1,528		30		1,567		1,557		19
Commercial lines of credit:
Private banking	320		320		98		196		196		98
C&I lending	100		100		100		—		—		—
Subtotal	4,740		4,729		351		1,885		1,875		154
Total	$	11,714	$	11,504	$	351	$	3,463	$	3,269	$	154

The unpaid principal balance is not reduced for partial charge offs. The recorded investment excludes accrued interest receivable on loans which was not significant.

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

(dollars in thousands, except per share amounts)

	Three Months Ended
	September 30, 2018						September 30, 2017
	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
With no related allowance for loan losses recorded:
Construction	$	4,732	$	97	$	48	$	—	$	—	$	—
Commercial real estate:
Retail	1,202		16		11		1,273		17		16
Gas stations	—		—		—		4		—		—
Apartments	1,091		12		8		—		—		—
Commercial lines of credit, private banking	—		—		—		150		2		2
Subtotal	7,025		125		67		1,427		19		18
With an allowance for loan losses recorded:
Residential real estate, first mortgage	121		1		1		123		1		1
Construction	2,661		55		37		—		—		—
Commercial real estate, offices	1,532		24		15		1,568		21		21
Commercial lines of credit:
Private banking	325		3		2		205		3		3
C&I lending	100		1		1		—		—		—
Subtotal	4,739		84		56		1,896		25		25
Total	$	11,764	$	209	$	123	$	3,323	$	44	$	43

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

(dollars in thousands, except per share amounts)

	Nine Months Ended
	September 30, 2018						September 30, 2017
	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
With no related allowance for loan losses recorded:
Construction	$	2,996	$	196	$	147	$	—	$	—	$	—
Commercial real estate:
Retail	1,220		48		43		1,287		50		50
Apartments	725		24		20		—		—		—
Commercial lines of credit, private banking	—		—		—		151		6		6
Subtotal	4,941		268		210		1,438		56		56
With an allowance for loan losses recorded:
Residential real estate, first mortgage	121		4		3		122		4		6
Construction	1,774		107		89		—		—		—
Commercial real estate, offices	1,541		67		59		1,581		60		59
Commercial lines of credit:
Private banking	331		14		13		208		10		10
C&I lending	67		3		3		—		—		—
Subtotal	3,834		195		167		1,911		74		75
Total	$	8,775	$	463	$	377	$	3,349	$	130	$	131

Also presented in the above table is the average recorded investment of the impaired loans and the related amount of interest recognized during the time within the period that the impaired loans were impaired. When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual status, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the total principal of an impaired loan is not in doubt and the loan is on nonaccrual status, contractual interest is credited to interest income when received under the cash basis method. The average balances are calculated based on the month-end balances of the loans for the period reported.

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of September 30, 2018 and December 31, 2017:

	September 30, 2018				December 31, 2017
	Nonaccrual		Loans Past Due Over 90 Days Still Accruing		Nonaccrual		Loans Past Due Over 90 Days Still Accruing
Residential real estate:
Residential first mortgage	$	214	$	77	$	573	$	131
Commercial real estate:
Retail	65		—		79		—
Total	$	279	$	77	$	652	$	131

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

(dollars in thousands, except per share amounts)

The following tables present the aging of the recorded investment in past due loans as of September 30, 2018 and December 31, 2017 by class of loans:

September 30, 2018	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 89 Days Past Due		Total Past Due		Loans Not Past Due		Total
Construction	$	—	$	—	$	—	$	—	$	177,734	$	177,734
Residential real estate:
Residential first mortgage	906		300		291		1,497		2,320,770		2,322,267
Residential second mortgage	—		295		—		295		19,427		19,722
Commercial real estate:
Retail	—		—		65		65		10,062		10,127
Apartments	—		—		—		—		64,994		64,994
Offices	—		—		—		—		26,528		26,528
Hotel	—		—		—		—		105,470		105,470
Industrial	—		—		—		—		14,823		14,823
Gas stations	—		—		—		—		988		988
Other	—		—		—		—		29,852		29,852
Commercial lines of credit:
Private banking	—		—		—		—		24,839		24,839
C&I lending	—		—		—		—		19,536		19,536
Other consumer loans	—		—		—		—		35		35
Total	$	906	$	595	$	356	$	1,857	$	2,815,058	$	2,816,915

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

(dollars in thousands, except per share amounts)

December 31, 2017	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 89 Days Past Due		Total Past Due		Loans Not Past Due		Total
Construction	$	—	$	—	$	—	$	—	$	192,319	$	192,319
Residential real estate:
Residential first mortgage	8,902		392		704		9,998		2,105,142		2,115,140
Residential second mortgage	107		—		—		107		17,394		17,501
Commercial real estate:
Retail	—		—		79		79		10,530		10,609
Apartments	—		—		—		—		59,582		59,582
Offices	—		—		—		—		26,571		26,571
Hotel	—		—		—		—		103,195		103,195
Industrial	—		—		—		—		15,907		15,907
Gas stations	—		—		—		—		1,067		1,067
Other	—		—		—		—		30,145		30,145
Commercial lines of credit:
Private banking	—		—		—		—		22,898		22,898
C&I lending	—		—		—		—		17,851		17,851
Other consumer loans	—		—		—		—		29		29
Total	$	9,009	$	392	$	783	$	10,184	$	2,602,630	$	2,612,814

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential real estate and consumer loan classes, 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.

Troubled Debt Restructurings

At September 30, 2018 and December 31, 2017, the balance of outstanding loans identified as troubled debt restructurings was $5,744 and $3,073, respectively. The Company has an allowance for loan losses of $261 and $56 on these loans at September 30, 2018 and December 31, 2017, respectively. There were no loans identified as troubled debt restructurings that subsequently defaulted.

The terms of certain loans have been modified as troubled debt restructurings by the Company. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; extension of the amortization period of the loan; change in loan payments to interest only for a defined period for the loan; or a permanent reduction of the recorded investment in the loan. During the three and nine months ended September 30, 2018, the Company modified the terms of a construction loan and a commercial and industrial loan by providing for an extension of the maturity dates by 7 months at the contract’s existing rate of interest, which is lower than the current market rate for new debt with similar risk. The total outstanding recorded investment was $2,761 at the time of modification. The modification did not result in an increase of the allowance for loan losses or charge offs. During the three and nine months ended September 30, 2017, the Company did not modify any loans as a troubled debt restructuring.

The terms of certain other loans have been modified during the three and nine months ended September 30, 2018 and 2017 that did not meet the definition of a troubled debt restructuring. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment. These other loans that were modified were not considered significant.

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

(dollars in thousands, except per share amounts)

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 monthly. 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 debt. 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 September 30, 2018 and December 31, 2017, the risk rating of loans by class of loans was as follows:

September 30, 2018	Pass		Special Mention		Substandard		Doubtful		Total
Construction	$	158,972	$	9,636	$	9,126	$	—	$	177,734
Residential real estate:
Residential first mortgage	2,321,998		—		105		164		2,322,267
Residential second mortgage	19,722		—		—		—		19,722
Commercial real estate:
Retail	8,934		—		1,193		—		10,127
Apartments	63,906		—		1,088		—		64,994
Offices	26,528		—		—		—		26,528
Hotel	105,470		—		—		—		105,470
Industrial	14,823		—		—		—		14,823
Gas stations	988		—		—		—		988
Other	28,808		—		1,044		—		29,852
Commercial lines of credit:
Private banking	24,661		—		178		—		24,839
C&I lending	14,632		3,951		953		—		19,536
Other consumer loans	35		—		—		—		35
Total	$	2,789,477	$	13,587	$	13,687	$	164	$	2,816,915

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

(dollars in thousands, except per share amounts)

December 31, 2017	Pass		Special Mention		Substandard		Doubtful		Total
Construction	$	177,241	$	11,670	$	3,408	$	—	$	192,319
Residential real estate:
Residential first mortgage	2,114,511		—		109		520		2,115,140
Residential second mortgage	17,501		—		—		—		17,501
Commercial real estate:
Retail	9,363		1,167		79		—		10,609
Apartments	58,472		1,110		—		—		59,582
Offices	26,571		—		—		—		26,571
Hotel	103,195		—		—		—		103,195
Industrial	15,907		—		—		—		15,907
Gas stations	1,067		—		—		—		1,067
Other	24,741		4,733		671		—		30,145
Commercial lines of credit:
Private banking	22,702		—		196		—		22,898
C&I lending	17,851		—		—		—		17,851
Other consumer loans	29		—		—		—		29
Total	$	2,589,151	$	18,680	$	4,463	$	520	$	2,612,814

The Bank sold pools of residential real estate mortgages for $82.4 million and $148.6 million during the three months ended September 30, 2018 and 2017, respectively, and $352.1 million and $271.7 million during the nine months ended September 30, 2018 and 2017, respectively, to third-party investors. The transactions resulted in full derecognition of the mortgages (i.e. transferred assets) from the condensed consolidated balance sheets and recognition of gain on sale of portfolio loans of $2.9 million and $4.6 million for the three months ended September 30, 2018 and 2017, respectively, and $11.9 million and $9.0 million for the nine months ended September 30, 2018 and 2017, respectively. After the sales, the Bank’s only continuing involvement in the transferred assets is to act as servicer or subservicer of the mortgages.

Note 5—Mortgage Servicing Rights

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 September 30, 2018 and December 31, 2017 are as follows:

	September 30, 2018		December 31, 2017
Residential real estate mortgage loan portfolios serviced for:
FNMA	$	82,477	$	73,039
FHLB	91,372		92,697
Private investors	631,016		442,984

Custodial escrow balances maintained with these serviced loans were $16,566 and $11,944 at September 30, 2018 and December 31, 2017, respectively.

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

(dollars in thousands, except per share amounts)

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Mortgage servicing rights:
Beginning of period	$	9,313		$	5,299		$	6,706		$	4,454
Additions	703			1,703			4,290			3,250
Amortization	(580		)	(369		)	(1,560		)	(1,071		)
End of period	9,436			6,633			9,436			6,633

Valuation allowance at beginning of period	18			120			210			40
Additions (recoveries)	7			58			(185		)	138
Valuation allowance at end of period	25			178			25			178

Mortgage servicing rights, net	$	9,411		$	6,455		$	9,411		$	6,455

Mortgage servicing assets were $9,411 and $6,496 at September 30, 2018 and December 31, 2017, respectively. Servicing fee income, net of amortization of servicing rights and changes in the valuation allowance, was $291 and $70 for the three months ended September 30, 2018 and 2017, respectively, and $1,001 and $191 for the nine months ended September 30, 2018 and 2017, respectively, and were included in other non-interest income in the condensed consolidated statements of income.

The fair value of mortgage servicing rights was $10,929 and $7,086 at September 30, 2018 and December 31, 2017, 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 September 30, 2018 was determined using discount rates ranging from 9.5% to 12.0%, prepayment speeds ranging from 6.8% to 33.4%, depending on the stratification of the specific right, and a weighted average default rate of 0.2%. The fair value at December 31, 2017 was determined using discount rates ranging from 9.5% to 12.0%, prepayment speeds ranging from 6.8% to 36.0%, depending on the stratification of the specific right, and a weighted average default rate of 0.2%.

Note 6—Deposits

Time deposits, included in interest-bearing deposits, were $795,437 and $663,472 at September 30, 2018 and December 31, 2017, respectively. Time deposits includes brokered deposits of $33,750 and $156,084 at September 30, 2018 and December 31, 2017, respectively.

Time deposits that meet or exceed the FDIC insurance limit of $250 were $186,165 and $129,101 at September 30, 2018 and December 31, 2017, respectively.

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

(dollars in thousands, except per share amounts)

Note 7—Federal Home Loan Bank Borrowings

Federal Home Loan Bank borrowings at September 30, 2018 and December 31, 2017 consist of the following:

	September 30, 2018		Interest Rates	December 31, 2017		Interest Rates
Short-term fixed rate advances	$	138,000	2.24%	$	148,000	1.47% - 1.56%
Short-term adjustable rate advances	7,000		2.54%*	—
Total short-term FHLB advances	145,000			148,000
Long-term fixed rate advances	190,000		0.98%-1.18%	190,000		0.98% - 1.18%
Total FHLB advances	$	335,000		$	338,000

* At period end.

FHLB Advances

The short-term fixed rate advances consist of a single advance due within one week. The long-term fixed rate advances have maturity dates ranging from July 2019 to October 2026. 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 September 30, 2018, advances totaling $157,000 were callable by the FHLB as follows: $67,000 in September 2021 and $90,000 in October 2021. At September 30, 2018, the Bank had additional borrowing capacity of $285 million from the FHLB.

FHLB Overdraft Line of Credit

The Bank has established an overdraft line of credit agreement with the FHLB providing maximum borrowings of $50,000. The average amount outstanding was $4,246 and $13,837 during the nine months ended September 30, 2018 and 2017, respectively. At September 30, 2018 and December 31, 2017, there were no outstanding borrowings under this agreement. Borrowings accrue interest based on a variable rate based on the FHLB’s overnight cost of funds rate, which was 2.54% and 1.67% at September 30, 2018 and December 31, 2017, respectively. The agreement had a one-year term and was renewed in October 2018 on substantially the same terms until October 2019.

The FHLB advances and the overdraft line of credit are collateralized by pledged loans totaling $964.3 million at September 30, 2018.

Other Borrowings

The Company had available credit lines with other banks totaling $70 million. There were no amounts outstanding under these credit lines at September 30, 2018 and December 31, 2017.

Note 8—Subordinated Notes, net

The subordinated notes were as follows:

	September 30, 2018			December 31, 2017
7.0% fixed to floating rate subordinated notes	$	65,000		$	65,000
Unamortized note premium	547			588
Unamortized debt issuance costs	(554		)	(699		)
Total	$	64,993		$	64,889

During the period April through September 2016, the Company issued subordinated notes to accredited investors in the aggregate principal amount of $50 million. Issuance costs of $729 were netted against the proceeds.

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

(dollars in thousands, except per share amounts)

In August 2017, the Company issued an additional $15 million in aggregate principal amount of subordinated notes to accredited investors. The terms of the subordinated note purchase agreements were substantially identical to the subordinated notes that were previously issued in 2016 (collectively, “Notes”), except that the first interest payment on the subordinated notes included accrued interest from April 15, 2017. The Company recorded a premium of $611 and debt issuance costs of $191 upon issuance of the notes.

The Notes bear interest at 7% per annum, payable semi-annually on April 15 and October 15 in arrears, through April 2021 after which the Notes will have a variable interest rate of the three-month LIBOR rate plus a margin of 5.82%. Premiums and debt issuance costs are amortized over the contractual term of the Notes into interest expense using the effective interest method. Interest expense on these Notes was $1,173 and $1,067 for the three months ended September 30, 2018 and 2017, respectively, and $3,516 and $2,883 for the nine months ended September 30, 2018 and 2017, respectively. The Notes mature in April 2026.

On or after April 14, 2021, the Company may redeem the Notes, in whole or in part, at an amount equal to 100% of the outstanding principal amount being redeemed plus accrued interest, in a principal amount with integral multiples of $1. The Notes are not redeemable by the Company prior to April 14, 2021 except in the event of (i) the Notes no longer qualify as Tier 2 Capital, (ii) the interest on the Notes is determined by law to be not deductible for Federal Income Tax reporting or (iii) the Company is considered an investment company pursuant to the Investment Company Act of 1940. The Notes are not subject to redemption by the noteholder.

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 1 capital of the Bank and 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 in Note 13, Regulatory Capital Requirements.

Note 9—Stock-based Compensation

The Board of Directors established a 2017 Omnibus Equity Incentive Plan (“Plan”) which was approved by the shareholders in October 2017. The Plan provides for the grant of up to 4,237,100 shares of common stock for stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards for issuance to employees, consultants and Board of Directors of the Company. The stock-based awards are issued at no less than the market price on the date the awards are granted.

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. The stock option awards generally vest in installments of 50% in each of the third and fourth year after the date of grant and 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.

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

(dollars in thousands, except per share amounts)

On March 21, 2018, the Board of Directors approved the issuance of options to purchase 92,625 shares of common stock with an exercise price of $13.73 to certain key employees which are accounted for as equity awards. These options to purchase shares of common stock had a weighted average grant-date fair value of $4.56 per option. The grant-date fair value of each stock option award was estimated using the Black-Scholes option pricing model that uses the assumptions set forth in the following table:

Exercise price of options	$13.73
Risk-free interest rate	2.80	%
Expected term (in years)	6.75
Expected stock price volatility	23.70	%
Dividend yield	.29	%

A summary of the Company’s stock option activity as of and for the nine months ended September 30, 2018 is as follows:

	Number of Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
				(Years)
Outstanding at January 1, 2018	—	$	—	—	$	—
Granted	92,625	13.73
Exercised	—	—
Forfeited/expired	—	—
Outstanding at September 30, 2018	92,625	$	13.73	9.47	$	—

The Company recorded share-based compensation expense associated with stock options of $27 and $56 for the three and nine months ended September 30, 2018, respectively. At September 30, 2018, there was $366 of total unrecognized compensation cost related to nonvested stock options granted under the Plan. The cost is expected to be recognized over a weighted-average period of 3.47 years. No options are exercisable at September 30, 2018.

Restricted Stock Awards

The value of a restricted stock award is based on the market value of the Company’s common stock at the date of grant reduced by the present value of dividends per share expected to be paid during the period the shares are not vested.

On March 21, 2018, the Board of Directors approved the issuance of 39,655 restricted stock awards to certain key employees and non-employee directors. The restricted stock awards of 33,100 issued to key employees vest in installments of 50% in each of the third and fourth year after the date of grant. The 6,555 restricted stock awards issued to non-employee directors vest on the first anniversary of the grant date. On July 17, 2018, the Board of Directors approved an additional issuance of 9,320 restricted stock awards to non-employee directors that vest on the first anniversary of the grant date. The weighted average grant-date fair value of the restricted stock awards is $13.55. Upon a change in control, as defined in the Plan, the outstanding restricted stock awards will immediately vest.

The fair value of the award is recorded as compensation expense on a straight-line basis over the vesting period. The Company recorded share-based compensation expense associated with restricted stock awards of $76 and $132 for the three and nine months ended September 30, 2018, respectively. At September 30, 2018, there was $531 of total unrecognized compensation cost related to the nonvested stock granted under the Plan. The cost is expected to be recognized over a weighted-average period of 2.73 years.

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

(dollars in thousands, except per share amounts)

Note 10— Income Per Share

Basic income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted income per common share further includes any common shares available to be issued upon the exercise of outstanding stock options and restricted stock awards if such inclusions would be dilutive. The Company determines the potentially dilutive common shares using the treasury stock method. The following table presents the computation of income per share, basic and diluted:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Numerator:
Net income	$	15,741	$	12,092	$	47,472	$	31,446

Denominator:
Weighted average common shares outstanding, basic	52,963,308		45,271,000		52,963,308		45,271,000
Weighted average effect of potentially dilutive common shares:
Stock options	—		—		—		—
Restricted stock	3,285		—		1,781		—
Weighted average common shares outstanding, diluted	52,966,593		45,271,000		52,965,089		45,271,000
Income per share:
Basic	$	0.30	$	0.27	$	0.90	$	0.69
Diluted	$	0.30	$	0.27	$	0.90	$	0.69

The effect of 92,625 options to purchase shares of common stock were excluded in computing diluted income per common share for the three and nine months ended September 30, 2018, as the inclusion would be antidilutive.

In September 2017, the Board of Directors approved a 1,000 for one stock split to be effected as a stock dividend on the Company’s common stock. The stock split was effected on September 11, 2017. All share and per share amounts have been retroactively adjusted to reflect the stock split for the three and nine months ended September 30, 2017.

Note 11—Fair Values of Financial Instruments

The Company’s 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 principal 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.

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

(dollars in thousands, except per share amounts)

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate the fair value of investment securities and impaired loans:

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 model. Rating agency and industry research reports as well as defaults and deferrals on individual investment securities are reviewed and incorporated into the calculations.

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 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.

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 September 30, 2018 and December 31, 2017:

			Fair Value Measurements at September 30, 2018
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets
Available for sale debt securities:
U.S. Treasury securities	$	136,646	$	136,646	$	—	$	—
Collateralized mortgage obligations	1,697		—		1,697		—
Collateralized debt obligations	303		—		—		303
Equity securities	3,857		3,857		—		—

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

(dollars in thousands, except per share amounts)

			Fair Value Measurements at December 31, 2017
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets
Available for sale debt securities:
U.S. Treasury securities	$	120,042	$	120,042	$	—	$	—
Collateralized mortgage obligations	2,008		—		2,008		—
Collateralized debt obligations	571		—		—		571
Equity securities	4,227		3,981		—		246		*

* The Company has elected to account for its investment in a thinly traded, restricted stock with a carrying value of $246 using the measurement alternative for equity securities without a readily determinable fair value therefore, the investment is excluded from the fair value measurement disclosures at September 30, 2018.

There were no transfers between Level 1 and Level 2 during the nine month periods ending September 30, 2018 or 2017.

The table below presents a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at September 30, 2018 and December 31, 2017:

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Investment Securities
	September 30, 2018					December 31, 2017
	Collateralized Debt Obligations			Equity Securities		Collateralized Debt Obligations			Equity Securities
Balance of recurring Level 3 assets at January 1	$	571		$	—	$	585		$	529
Total gains or losses (realized/unrealized):
Included in income-realized	—			—		—			—
Included in other comprehensive income (loss)	28			—		(10		)	—
Principal maturities/settlements	(296		)	—		(4		)	(283		)
Sales	—			—		—			—
Transfers in and/or out of Level 3	—			—		—			—
Balance of recurring Level 3 assets at end of period	$	303		$	—	$	571		$	246

Unrealized losses on Level 3 investments for collateralized debt obligations was $6 at September 30, 2018. In addition to the amounts included in income for the nine months ended September 30, 2018 as presented in the table above, the Company also recorded interest income on collateralized debt obligations of $13. Unrealized losses on Level 3 investments for collateralized debt obligations and equity securities at December 31, 2017 were $35 and $0, respectively. In addition to the amounts included in income for the year ended December 31, 2017 as presented in the table above, the Company also recorded interest income on collateralized debt obligations of $21 and dividend income on equity securities of $15.

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

(dollars in thousands, except per share amounts)

The fair value of collateralized debt obligations is determined by calculating discounted cash flows using LIBOR curves plus spreads that adjust for loss severities, volatility, credit risk and optionality. When available, broker quotes are used to validate the internal model. Rating agency and industry research reports as well as assumptions about specific-issuer defaults and deferrals are reviewed and incorporated into the calculations. Assumptions are reviewed on a quarterly basis as specific-issuer deferral and defaults that occurred are compared to those that were projected and ongoing assumptions are adjusted in accordance with the level of unexpected deferrals and defaults that occurred.

The following table presents quantitative information about recurring Level 3 fair value measurements at September 30, 2018 and December 31, 2017:

	Fair Value		Valuation Technique	Unobservable Inputs
September 30, 2018
Collateralized debt obligations	$	303	Discounted cash flow	Collateral default rate	0	%
				Recovery probability	0	%
December 31, 2017
Collateralized debt obligations	$	571	Discounted cash flow	Collateral default rate	0	%
				Recovery probability	15	%

The significant unobservable inputs used on the fair value measurement of the Company’s collateralized debt obligations are probabilities of specific-issuer defaults and specific-issuer recovery assumptions. Significant increases in specific-issuer default assumptions or decreases in specific-issuer recovery assumptions would result in a significantly lower fair value measurement. Conversely, decreases in specific-issuer default assumptions or increases in specific-issuer recovery assumptions would result in a significantly higher fair value measurement.

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 which were still held in the condensed consolidated balance sheet at September 30, 2018, the following table provides the level of valuation assumptions used to determine each adjustment and the related carrying value:

	Fair Value Measurements at September 30, 2018
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans, construction	$	2,583	$	—	$	—	$	2,583

At September 30, 2018, impaired loans had a loan amount of $2,761 with a valuation allowance of $178, resulting in a decrease to the provision for loan losses of $(27) for the three months ended September 30, 2018 and an increase to provision for loan losses of $178 for the nine months ended September 30, 2018.

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

(dollars in thousands, except per share amounts)

As discussed previously, the fair values of collateral dependent impaired loans carried at fair value are determined by third-party appraisals. Management adjusts these appraised values based on the age of the appraisal and the type of the property. The following table presents quantitative information about Level 3 fair value measurements for the financial instruments measured at fair value on a nonrecurring basis at September 30, 2018:

	Fair Value		Valuation Technique	Unobservable Inputs
Impaired loans, construction	$	2,583	Sales comparison approach	Management discount for property type and recent market volatility	10	%

Fair Value of Financial Instruments

With the adoption of ASU No. 2016-01, as discussed in Note 3, the Company is required to calculate fair value of its financial instruments for disclosure purposes based on an exit price notion. The Company is not required to revise its prior-period disclosures of fair value for those financial instruments that may have been calculated using the entry price notion, which was acceptable prior to January 1, 2018. Therefore, the prior-period fair values disclosed may not be determined in a manner consistent with the current-period fair values disclosed because of a change in methodology.

The carrying amounts and estimated fair values of financial instruments not carried at fair value at September 30, 2018 and December 31, 2017, are as follows:

	Fair Value Measurements at September 30, 2018
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets
Cash and due from banks	$	48,879	$	48,879	$	48,879	$	—	$	—
Mortgage loans held for sale	113,805		116,839		—		116,839		—
Loans, net	2,793,567		2,878,717		—		—		2,878,717

Financial Liabilities
Time deposits	795,437		794,186		—		794,186		—
Federal Home Loan Bank borrowings	335,000		324,185		—		324,185		—
Subordinated notes, net	64,993		66,625		—		66,625		—

	Fair Value Measurements at December 31, 2017
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets
Cash and due from banks	$	40,147	$	40,147	$	40,147	$	—	$	—
Mortgage loans held for sale	112,866		115,619		—		115,619		—
Loans, net	2,594,357		2,635,986		—		—		2,635,986

Financial Liabilities
Time deposits	663,472		660,380		—		660,380		—
Federal Home Loan Bank borrowings	338,000		330,004		—		330,004		—
Subordinated notes, net	64,889		67,485		—		67,485		—

Note 12—Income Taxes

The Tax Cut and Jobs Act (the “Tax Act”) enacted in December 2017 reduced the federal corporate income tax rate from 35% to 21%, effective January 1, 2018. Due to the change in tax rate, the Company was required to remeasure its deferred tax assets and liabilities, including the deferred tax balance attributable to items of pretax comprehensive income (loss), based on the rates at which they are expected to reverse in the future. The effect of the Tax Act of $3.3 million was recorded in deferred income tax expense in the fourth quarter and year ended December 31, 2017 which related entirely to the remeasurement of the net deferred tax asset.

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

(dollars in thousands, except per share amounts)

The Company has implemented the new corporate tax rate as of January 1, 2018. The reconciliation of the U.S. federal statutory tax rate to the Company’s effective tax rate is as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
U.S. federal statutory rate	21.0	%	35.0	%	21.0	%	35.0	%
Effect of:
State taxes, net of federal benefit	7.8	%	6.1	%	7.8	%	6.0	%
Loss incurred by pass-through entity	—		—		—		0.2	%
Income on cash surrender value of bank-owned life insurance	(0.2)	%	(0.3)	%	(0.2)	%	(0.3)	%
Effective tax rate	28.6	%	40.8	%	28.6	%	40.9	%

Note 13—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 can 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 the consolidated financial statements.

The final rules implementing Basel III became effective on January 1, 2015 with full compliance with all requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Under the Basel III rules, the Company must hold a capital conservation buffer over the adequately capitalized risk-based capital ratios. The capital conservation buffer is being phased in from 0.0% for 2015 to 2.50% by 2019. The capital conservation buffer is 1.875% for 2018. The net unrealized gain or loss on investment securities is not included in regulatory capital. Management believes that as of September 30, 2018, the Company and the Bank meet all regulatory capital requirements to which they are subject. Management also expects that the Company and the Bank will be fully compliant with all requirements being phased in by January 1, 2019.

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. The minimum requirements, excluding significantly undercapitalized and critically undercapitalized categories, are as follows:

	Capital Weighted Assets				Tier 1 Capital to Average		Common Tier 1
	Total		Tier 1		Assets		(CET1)
Well Capitalized	10.0	%	8.0	%	5.0	%	6.5	%
Adequately Capitalized	8.0	%	6.0	%	4.0	%	4.5	%
Undercapitalized	6.0	%	4.0	%	3.0	%	3.0	%

At September 30, 2018, the most recent regulatory notifications categorized the Bank as well capitalized. There have been no conditions or events since these notifications that management believes would have changed the Bank’s category.

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

(dollars in thousands, except per share amounts)

At September 30, 2018 and December 31, 2017, the Bank exceeded all capital requirements to be categorized as well capitalized and the Company exceeded the capital adequacy requirements as presented below. The Company and the Bank’s actual and minimum required capital amounts and ratios, with such regulatory minimums not including the capital conservation buffer, at September 30, 2018 and December 31, 2017 are as follows:

	Actual				For Capital Adequacy Purposes				To be Well Capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2018
Total adjusted capital to risk-weighted assets
Consolidated	$	404,686	21.00	%	$	154,130	8.00	%	N/A		N/A
Bank	308,063		15.99		154,128		8.00		$	192,660	10.00	%
Tier 1 (core) capital to risk-weighted assets
Consolidated	318,927		16.55		115,598		6.00		N/A		N/A
Bank	287,298		14.91		115,596		6.00		154,128		8.00
Common Tier 1 (CET1)
Consolidated	318,927		16.55		86,698		4.50		N/A		N/A
Bank	287,298		14.91		86,697		4.50		125,229		6.50
Tier 1 (core) capital to adjusted tangible assets
Consolidated	318,927		10.04		127,081		4.00		N/A		N/A
Bank	287,298		9.04		127,080		4.00		158,850		5.00

	Actual				For Capital Adequacy Purposes				To be Well Capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
December 31, 2017
Total adjusted capital to risk-weighted assets
Consolidated	$	365,078	20.28	%	$	140,447	8.00	%	N/A		N/A
Bank	259,165		14.76		140,447		8.00		$	175,559	10.00	%
Tier 1 (core) capital to risk-weighted assets
Consolidated	272,732		15.53		105,336		6.00		N/A		N/A
Bank	240,708		13.71		105,336		6.00		140,447		8.00
Common Tier 1 (CET1)
Consolidated	272,732		15.53		79,002		4.50		N/A		N/A
Bank	240,708		13.71		79,002		4.50		114,114		6.50
Tier 1 (core) capital to adjusted tangible assets
Consolidated	272,732		9.83		110,949		4.00		N/A		N/A
Bank	240,708		8.68		110,949		4.00		138,687		5.00

Dividend Restrictions

As noted above, banking regulations require the Bank to maintain certain capital levels and may limit the dividends paid by the bank to the holding company or by the holding company to its shareholders. The Company’s principal source of funds for dividend payments is dividends received from the Bank and banking regulations limit the dividends that may be paid. 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. At September 30, 2018, $160 million of consolidated retained earnings were available to pay dividends to the Company’s shareholders.

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

(dollars in thousands, except per share amounts)

The Qualified Thrift Lender (“QTL”) test requires that a minimum of 65% of assets be maintained in housing-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.

Note 14—Related Party Transactions

As disclosed in Note 1, the Company purchased an entity owned 80% by its principal shareholder and 20% by a member of the Board of Directors of the Company and Bank. At the time of the purchase in April 2017, the Director was and will continue as the Chief Executive Officer (“CEO”) of the purchased entity. For the nine months ended September 30, 2017, the consolidated statements of income include compensation-related expenses of $125 for the Director’s services as CEO of this purchased entity.

From time to time, the Company makes charitable contributions to a foundation which certain members of the Board of Directors of the Company and Bank, and whom are also related to the Company’s principal shareholders, serve as trustees of the foundation. The Company paid $225 to the foundation during the three months ended September 30, 2018 and 2017, and $675 during the nine months ended September 30, 2018 and 2017.

The Bank leases certain storage and office space from entities owned by the Company’s principal shareholders. Amounts paid under such leases totaled $15 and $16 during the three months ended September 30, 2018 and 2017, respectively, and $49 and $35 during the nine months ended September 30, 2018 and 2017, respectively.

The Bank provides monthly data processing and programming services to entities controlled by the Company’s principal shareholders. Aggregate fees received amounted to $33 and $27 during the three months ended September 30, 2018 and 2017, respectively, and $87 and $75 during the nine months ended September 30, 2018 and 2017, respectively.

Note 15—Commitments and Contingencies

Legal Proceedings

The Company and its subsidiaries may be subject to legal actions and claims arising from contracts or other matters from time to time in the ordinary course of business. Management is not aware of any pending or threatened litigation where the ultimate disposition or resolution could have a material adverse effect on its financial position, results of operations or liquidity.

Lease Commitments

The Company leases its corporate headquarters and branch offices through noncancelable operating leases with terms that range from years 2019 to 2029, with renewal options thereafter. Rent expense was $1,080 and $903 for the three months ended September 30, 2018 and 2017, respectively, and $2,949 and $2,603 for the nine months ended September 30, 2018 and 2017, respectively.

Financial Instruments with Off-Balance Sheet Risk

The Bank is a party to financial instruments with off-balance 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 consolidated financial statements.

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STERLING BANCORP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued

(dollars in thousands, except per share amounts)

Unfunded Commitments to Extend Credit

A commitment to extend credit, such as a loan commitment, credit line and overdraft protection, is a legally binding agreement to lend funds to a customer, usually at a stated interest rate and for a specific purpose. Such commitments have fixed expiration dates and generally require a fee. The extension of a commitment gives rise to credit risk. The actual liquidity requirements or credit risk that the 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 September 30, 2018, outstanding commitments to make loans consisted of fixed rate loans of $15,042 with interest rates ranging from 4.00% to 7.50% and maturities ranging from 10 years to 30 years and variable rate loans of $276,746 with varying interest rates (ranging from 3.875% to 7.625% at September 30, 2018) and maturities ranging from 1 to 30 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 September 30, 2018 and December 31, 2017:

	September 30, 2018		December 31, 2017
Commitments to make loans	$	291,788	$	268,401
Unused lines of credit	170,380		157,234
Standby letters of credit	70		70

Note 16—Subsequent Events

Sale of Mortgage Loans

In September 2018, the Company committed to sell a portfolio of residential real estate loans to third-party investors. In November 2018, the Company received net proceeds of $43.5 million and recorded a gain of $1.6 million on the sale of residential real estate loans. Servicing of the loan portfolio sold was retained by the Company.

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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 Annual Report on Form 10-K for the year ended December 31, 2017, which was filed on March 28, 2018 with the U.S. Securities and Exchange Commission (“SEC”).

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. 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,” “annualized” and “outlook,” 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 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.

The forward-looking statements in this report should be read in conjunction with other cautionary statements that are included in the items set forth under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such 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 each 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.

Overview

We are a unitary thrift holding company headquartered in Southfield, Michigan with our primary branch operations in San Francisco and Los Angeles, California. Through our wholly owned bank subsidiary, Sterling Bank and Trust, F.S.B., a qualified thrift lender, we offer a broad range of loan products to the residential and commercial markets, as well as retail and business banking services.

Since 2013, we have experienced significant growth while maintaining stable margins and solid asset quality. We have made significant investments over the last several years in staffing and upgrading technology and system security. In April 2018, we opened a new branch in New York City and expanded our presence in Southern California with a new branch in Chino Hills. In July 2018, we converted an existing loan production office in the greater Seattle market into a branch, and in September 2018, we relocated a branch in New York City to a more prominent location. We plan to open an additional branch in the Koreatown area of Los Angeles by the end of 2018. As of September 30, 2018, the Company had total consolidated assets of $3.20 billion, total consolidated deposits of $2.41 billion and total consolidated shareholders’ equity of $319 million.

For the three months ended September 30, 2018, we originated loans of $419 million, a 15% decrease over the same period in 2017, which included $354 million in residential mortgage loans, $22 million in commercial real estate loans, $38 million in construction loans and $5 million in commercial and industrial loans. For the nine months ended September 30, 2018, we originated loans of $1,261 million, an 8% increase over the same period in 2017, which included $1,069 million in residential mortgage loans, $47 million in commercial real estate loans, $122 million in construction loans and $23 million in commercial and industrial loans. Also, for the three months and nine months ended September 30, 2018, we sold pools of residential real estate mortgages for $82.4 million and $352.1 million, respectively, to third-party investors. We continue to focus on the residential mortgage market, construction, and commercial real estate lending.

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Net income for the three months ended September 30, 2018 was $15.7 million, or $0.30 per diluted share as compared to $12.1 million, or $0.27 per diluted share for the comparable period in 2017. Net income for the nine months ended September 30, 2018 was $47.5 million, or $0.90 per diluted share as compared to $31.4 million, or $0.69 per diluted share for the comparable period in 2017.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. GAAP and with general practices within the financial services industry. Application of these principles requires management to make estimates and assumptions that affect the amounts reported in the 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 nine months ended September 30, 2018, there were no significant changes to our critical accounting policies and estimates, which are disclosed in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Discussion and Analysis of Financial Condition

The following sets forth a discussion and analysis of our financial condition as of the dates presented below.

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

	At September 30, 2018						At December 31, 2017
	Amount				%		Amount			%
	(Dollars in thousands)
Real Estate:
Residential real estate	$		2,341,989		83	%	$	2,132,641		82	%
Commercial real estate	252,782				9	%	247,076			9	%
Construction	177,734				6	%	192,319			7	%
Total real estate	2,772,505				98	%	2,572,036			98	%
Commercial and industrial, lines of credit	44,375				2	%	40,749			2	%
Other consumer	35				—	%	29			—	%
Total loans	2,816,915				100	%	2,612,814			100	%
Allowance for loan losses	(20,765			)			(18,457		)
Loans, net	$	2,796,150					$	2,594,357

The following table sets forth our fixed and adjustable-rate loans in our loan portfolio at September 30, 2018:

	Fixed		Adjustable		Total
	(In thousands)
Real Estate:
Residential real estate	$	12,820	$	2,329,169	$	2,341,989
Commercial real estate	27,947		224,835		252,782
Construction			177,734		177,734
Commercial and industrial, lines of credit	1,213		43,162		44,375
Other consumer	35		—		35
Total loans	$	42,015	$	2,774,900	$	2,816,915

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As part of the Bank’s strategy to prevent attrition, we selectively negotiate with eligible borrowers prior to the time of repricing to extend the fixed period by generally 3 or 5 years. We attempt to secure a newly negotiated rate at a premium over competitive market rates for like term loans but which may be lower than the contractual reset rate which would otherwise apply. The table set forth below contains the repricing dates of adjustable rate loans included within our loan portfolio as of September 30, 2018:

September 30, 2018	1 - 4 Family Residential		Commercial Real Estate		Construction		Commercial		Consumer		Total
	(In thousands)
Amounts to adjust in:
6 months or less	$	481,382	$	11,900	$	177,734	$	43,162	$	—	$	714,178
More than 6 months through 12 months	485,179		21,965		—		—		—		507,144
More than 12 months through 24 months	266,436		37,192		—		—		—		303,628
More than 24 months through 36 months	618,819		48,198		—		—		—		667,017
More than 36 months through 60 months	410,056		89,444		—		—		—		499,500
More than 60 months	67,297		16,136		—		—		—		83,433
Fixed to maturity	12,820		27,947		—		1,213		35		42,015
Total	$	2,341,989	$	252,782	$	177,734	$	44,375	$	35	$	2,816,915

At September 30, 2018, $209 million, or 7.5%, of our adjustable interest rate loans were at their interest rate floor.

Delinquent Loans. The following tables set forth our loan delinquencies, including nonaccrual loans, by type and amount at the dates indicated.

	September 30, 2018						December 31, 2017
	30 - 59 Days Past Due		60 – 89 Days Past Due		90 Days or More Past Due		30 - 59 Days Past Due		60 – 89 Days Past Due		90 Days or More Past Due
	(In thousands)
Residential real estate	$	906	$	300	$	291	$	9,009	$	392	$	704
Commercial real estate	—		295		65		—		—		79
Construction	—		—		—		—		—		—
Commercial and industrial, lines of credit	—		—		—		—		—		—
Other consumer	—		—		—		—		—		—
Total delinquent loans	$	906	$	595	$	356	$	9,009	$	392	$	783

Nonperforming Assets

Nonperforming assets include loans that are 90 or more days past due or on nonaccrual status, including troubled debt restructurings and other loan collateral acquired through foreclosure and repossession. Loans 90 days or greater past due may remain on an accrual basis if adequately collateralized and in the process of collection. At September 30, 2018 and December 31, 2017, we had $77 thousand and $131 thousand, respectively, of accruing loans past due 90 days, which consisted primarily of government guaranteed loans. 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 demonstrates financial difficulties and for which a concession has been granted. At September 30, 2018 and December 31, 2017, we had a troubled debt restructuring loan in nonaccrual with a balance of $65 thousand and $79 thousand, respectively. The total outstanding recorded investment of troubled debt

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restructurings increased to $5.7 million at September 30, 2018 from $3.1 million at December 31, 2017, as the Company modified the terms of a construction loan and a commercial and industrial loan by providing for an extension of the maturity dates to provide the borrower more time to complete the project and sell the property. The loan is accruing interest and is considered current.

The following table sets forth information regarding our nonperforming assets at the dates indicated.

	At September 30, 2018			At December 31, 2017
	(Dollars in thousands)
Nonaccrual loans (1):
Residential real estate	$	214		$	573
Commercial real estate	65			79
Construction	—			—
Commercial and industrial, lines of credit	—			—
Other consumer	—			—
Total nonaccrual loans	279			652
Loans past due 90 days and still accruing	77			131
Troubled debt restructurings (2)	5,679			2,994
Total nonperforming assets	$	6,035		$	3,777
Total loans	$	2,816,915		$	2,612,814
Total assets	$	3,196,963		$	2,961,958
Total nonaccrual loans to total loans	0.01		%	0.02		%
Total nonperforming assets to total assets	0.19		%	0.13		%

(1) Loans are presented before the allowance for loan losses.

(2) Troubled debt restructurings exclude those loans presented above as nonaccrual or past due 90 days and still accruing.

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 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 and loss experience and an overall evaluation of the quality of the underlying collateral.

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(Dollars in thousands)
Allowance at beginning of period	$	20,300		$	16,246		$	18,457		$	14,822
Provision for loan losses	423			900			2,184			2,100
Charge offs:
Residential real estate	—			—			(4		)	—
Commercial real estate	—			—			—			—
Construction	—			—			—			—
Commercial and industrial, lines of credit	—			—			—			—
Other consumer	—			—			—			—
Total charge offs	—			—			(4		)	—
Recoveries:
Residential real estate	6			4			13			43
Commercial real estate	31			38			102			118
Construction	5			1			13			105
Commercial and industrial, lines of credit	—			—			—			—
Other consumer	—			—			—			1
Total recoveries	42			43			128			267
Allowance at end of period	$	20,765		$	17,189		$	20,765		$	17,189
Nonperforming loans and troubled debt restructurings at end of period	$	6,035		$	3,912		$	6,035		$	3,912
Total loans outstanding at end of period	$	2,816,915		$	2,383,382		$	2,816,915		$	2,383,382
Average loans outstanding during period	$	2,923,584		$	2,387,709		$	2,829,749		$	2,179,552
Allowance for loan losses to nonperforming loans and troubled debt restructurings	344		%	439		%	344		%	439		%
Allowance for loan losses to total loans at end of period	0.74		%	0.72		%	0.74		%	0.72		%
Net recoveries to average loans outstanding during the period	—		%	—		%	—		%	(0.01		)%

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Allocation of Allowance for Loan Losses. The following tables set forth the allowance for loan losses allocated by loan category. 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 to absorb losses in other categories.

	At September 30, 2018			At December 31, 2017
	Allowance for Loan Losses		Percent of Loans in Each Category to Total Loans	Allowance for Loan Losses		Percent of Loans in Each Category to Total Loans
	(Dollars in thousands)
Residential real estate	$	12,709	83%	$	12,279	82%
Commercial real estate	2,626		9%	2,040		9%
Construction	3,326		6%	2,218		7%
Commercial and industrial, lines of credit	968		2%	469		2%
Other consumer	1		—%	1		—%
Unallocated	1,135		N/A	1,450		N/A
Total	$	20,765	100%	$	18,457	100%

The allowance for loan losses as a percentage of loans was 0.74% and 0.71% as of September 30, 2018 and December 31, 2017, respectively.

The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased or decreased by the provision for loan losses and decreased by charge offs less recoveries. Loan losses are charged against the allowance for loan losses when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for loan losses. Management estimates the allowance for loan losses balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance for loan losses may be made for specific loans, but the entire allowance for loan losses is available for any loan that, in management’s judgment, should be charged off.

The allowance for loan losses consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers all other loans and is based on historical loss experience adjusted for general economic conditions and other qualitative factors by portfolio segment. The historical loss experience is determined by portfolio segment, discussed below, and is based on the actual loss history experienced over the most recent three years. This actual loss experience is supplemented with economic and other factors based on the risks present for each portfolio segment. These economic and other risk factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.

A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Loans, for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings, as defined below, and classified as impaired.

Factors considered by us in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. We determine the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The measurement of an impaired loan is based on (i) the present value of expected future cash flows discounted at the loan’s effective interest rate, (ii) the loan’s observable market price or (iii) the fair value of the collateral if the loan is collateral dependent.

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Construction loans, commercial real estate loans and commercial and industrial lines of credit are individually evaluated for impairment. 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. Large groups of smaller balance homogeneous loans, such as other consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, are not separately identified for impairment disclosures.

At September 30, 2018 and December 31, 2017, we had impaired loans of $11.5 million and $3.3 million, respectively. The increase in impaired loans during the nine months ended September 30, 2018 was primarily due to the addition of three construction loans, totaling $7.2 million and a commercial real estate loan of $1.1 million. The increase in impaired loan balance was partially offset by paydowns. Our impaired loans are considered in management’s assessment of the overall adequacy of the allowance for loan losses.

Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For loans that are considered troubled debt restructurings that subsequently go into default, the Company determines the amount to reserve in accordance with the accounting policy for the allowance for loan losses on loans individually identified as impaired.

Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Other consumer loans are typically charged off no later than 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. A loan is moved to nonaccrual status in accordance with our loan policy, typically after 90 days of non-payment.

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

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 making the determinations. 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 as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.

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Investment Securities Portfolio

The following table sets forth the amortized cost and estimated fair value of our available-for-sale debt securities at the dates indicated.

	At September 30, 2018				At December 31, 2017
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
U.S. Treasury securities	$	136,764	$	136,646	$	120,216	$	120,042
Collateralized mortgage obligations	1,633		1,697		1,953		2,008
Collateralized debt obligations	309		303		606		571
Total	$	138,706	$	138,646	$	122,775	$	122,621

At September 30, 2018 and December 31, 2017, we had no investments in a single company or entity, other than government and government agency securities, with an aggregate book value in excess of 10% of our 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 recognized as impairment through earnings. 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 consolidated statements of income and (2) other-than-temporary impairment related to other factors, which is recognized in other comprehensive income. The credit loss is defined 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 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 September 30, 2018, unrealized losses on debt securities totaled $124 thousand. We do not consider the debt securities to be other-than-temporarily impaired at September 30, 2018, since (i) the decline in fair value 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.

The Company’s 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 Pacific Coast Banker’s Bank, a thinly traded, restricted stock. At September 30, 2018 and December 31, 2017, equity securities totaled $4.1 million and $4.2 million, respectively.

Deposits

Total deposits were $2.41 billion as of September 30, 2018, an increase of $167 million, or 7% from December 31, 2017. The increase was primarily a result of strong growth in our retail time deposit products, partially offset by a decrease of our balance in brokered deposits. Retail time deposits totaled $762 million at September 30, 2018, up from $507 million at December 31, 2017. Brokered deposits totaled $34 million at September 30, 2018, down from $156 million at December 31, 2017. We continue to focus on the acquisition and expansion of core deposit relationships, which we define as all deposits except for time deposits greater than $250 thousand and brokered deposits. Core deposits totaled $2.22 billion at September 30, 2018, or 92% of total deposits at that date.

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Borrowings

At September 30, 2018, we had the ability to borrow a total of $670 million from the Federal Home Loan Bank, including an available line of credit of $50 million. We also had available credit lines with additional banks totaling $70 million. At September 30, 2018, outstanding FHLB borrowings totaled $335 million, and there were no amounts outstanding on lines of credit held by other banks. In addition, between April and September 2016, we issued $50 million in aggregate principal amount of our Fixed to Floating Subordinated Notes due April 15, 2026 (the “Subordinated Notes”), and an additional $15 million in August 2017. All of the Subordinated Notes remain outstanding as of September 30, 2018.

In addition to deposits, we use short-term borrowings, such as FHLB advances and a FHLB overdraft credit line, as a source of funds to meet the daily liquidity needs of our customers and fund growth in earning assets. Our short-term FHLB advances consists primarily of advances of funds made for one-to-two-week periods.

Average Balance Sheet and Related Yields and Rates

The following tables present average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the three and nine months ended September 30, 2018 and 2017. 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										As of and for the Nine Months Ended
	September 30, 2018					September 30, 2017					September 30, 2018					September 30, 2017
	Average Balance		Interest		Average Yield/ Rate	Average Balance		Interest		Average Yield/ Rate	Average Balance		Interest		Average Yield/ Rate	Average Balance		Interest		Average Yield/ Rate
	(Dollars in thousands)										(Dollars in thousands)
Interest earning assets
Loans	$	2,923,584	$	40,772	5.58%	$	2,387,709	$	32,373	5.42%	$	2,829,749	$	115,752	5.45%	$	2,179,552	$	88,116	5.39%
Securities includes restricted stock	165,636		958		2.31%	116,400		502		1.73%	155,586		2,619		2.24%	107,437		1,302		1.62%
Other interest earning assets	27,604		166		2.41%	17,224		55		1.28%	25,599		399		2.08%	12,852		103		1.07%
Total interest earning assets	3,116,824		41,896		5.38%	2,521,333		32,930		5.22%	3,010,934		$	118,770	5.26%	2,299,841		89,521		5.19%
Noninterest earning assets
Cash and due from banks	11,580					10,507					11,418					9,454
Other assets	48,533					47,999					48,296					46,456
Total average assets	$	3,176,937				$	2,579,839				$	3,070,648				$	2,355,751
Interest-bearing liabilities
Savings, NOW, Money Markets	$	1,539,304	$	5,181	1.34%	$	1,382,084	$	3,109	0.89%	$	1,526,935	$	13,783	1.21%	$	1,296,311	$	8,331	0.86%
Time deposits	796,197		3,447		1.72%	433,345		1,266		1.16%	739,626		8,613		1.56%	413,446		3,355		1.08%
Total deposits	2,335,501		8,628		1.47%	1,815,429		4,375		0.96%	2,266,561		22,396		1.32%	1,709,757		11,686		0.91%
FHLB borrowings	324,795		1,297		1.56%	412,796		1,344		1.27%	312,140		3,464		1.46%	318,407		3,044		1.28%
Subordinated notes, net	64,970		1,173		7.22%	57,462		1,067		7.43%	64,935		3,516		7.22%	52,095		2,883		7.38%
Total borrowings	389,765		2,470		2.48%	470,258		2,411		2.01%	377,075		6,980		2.44%	370,502		5,927		2.13%
Total interest-bearing liabilities	2,725,266		11,098		1.62%	2,285,687		6,786		1.18%	$	2,643,636	29,376		1.49%	2,080,259		17,613		1.13%
Noninterest-bearing liabilities:
Demand deposits	75,429					70,206					73,106					63,476
Other liabilities	62,545					43,471					54,536					38,123
Total noninterest-bearing liabilities	137,974					113,677					127,642					101,599
Shareholders’ equity	313,697					180,475					299,370					173,893
Total average liabilities and shareholders’ equity	$	3,176,937				$	2,579,839				$	3,070,648				$	2,355,751
Net interest income and spread			$	30,798	3.76%			$	26,144	4.04%			$	89,394	3.77%			$	71,908	4.06%
Net interest margin					3.95%					4.15%					3.96%					4.17%

(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 equivalent adjustments.

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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.

	Three Months Ended September 30, 2018 vs. 2017									Nine Months Ended September 30, 2018 vs. 2017
	Increase (Decrease) due to						Total Increase			Increase (Decrease) due to						Total Increase
	Volume			Rate			(Decrease)			Volume			Rate			(Decrease)
	(In thousands)
Change in interest income:
Loans	$	7,450		$	949		$	8,399		$	26,585		$	1,051		$	27,636
Securities includes restricted stock	252			204			456			705			612			1,317
Other interest earning assets	45			66			111			152			144			296
Total change in interest income	7,747			1,219			8,966			27,442			1,807			29,249
Change in interest expense:
Saving/Now/Money Markets	386			1,686			2,072			1,665			3,787			5,452
Time deposits	1,384			797			2,181			3,389			1,869			5,258
Total deposits	1,770			2,483			4,253			5,054			5,656			10,710
FHLB borrowings	(287		)	240			(47		)	(61		)	481			420
Subordinated notes, net	136			(30		)	106			695			(62		)	633
Total change in interest expense	1,619			2,693			4,312			5,688			6,075			11,763
Change in net interest income	$	6,128		$	(1,474	)	$	4,654		$	21,754		$	(4,268	)	$	17,486

Results of Operations

General

Net income increased $3.6 million, or 30%, to $15.7 million for the three months ended September 30, 2018 from the comparable 2017 period. The increase was driven by a $4.7 million increase in net interest income, a $2.0 million decrease in income tax expense and a $0.5 million decrease in provision for loan losses, partially offset by a $2.2 million increase in non-interest expenses and a $1.3 million decrease in non-interest income.

Net income increased $16.0 million, or 51%, to $47.5 million for the nine months ended September 30, 2018 from the comparable 2017 period. This increase was primarily the result of a $17.5 million increase in net interest income, a $3.8 million increase in non-interest income and a $2.7 million decrease in income tax expense, partially offset by a $7.8 million increase in non-interest expenses.

Interest Income

Interest income increased $9.0 million, or 27%, to $41.9 million for the three months ended September 30, 2018 from the comparable 2017 period, primarily due to an increase in loans. The average balance of loans increased by $536 million, or 22% to $2.92 billion for the three months ended September 30, 2018 from the same period in 2017. The average yield on loans increased 16 basis points to 5.58% for the three months ended September 30, 2018 from 5.42% for the same period in 2017.

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Interest income increased $29.2 million, or 33%, to $118.8 million for the nine months ended September 30, 2018 from the comparable 2017 period, primarily due to an increase in loans. The average balance of loans increased by $650 million, or 30% to $2.83 billion for the nine months ended September 30, 2018 from the same period in 2017. The average yield on loans increased 6 basis points to 5.45% for the nine months ended September 30, 2018 from 5.39% for the same period in 2017.

Interest Expense

Interest expense increased $4.3 million, or 64%, to $11.1 million for the three months ended September 30, 2018 from the same period in 2017. Our average balance of interest-bearing deposits increased $520 million, or 29%, to $2.34 billion for the three months ended September 30, 2018 from the same period in 2017. Also, the average rate we paid on interest-bearing deposits increased 51 basis points to 1.47% for the three months ended September 30, 2018 from 0.96% for the three months ended September 30, 2017. Our average balance of borrowings decreased $80.5 million as a result of funds available from deposit growth. The average rate we paid on such outstanding borrowings increased 47 basis points to 2.48% for the three months ended September 30, 2018 from 2.01% for the same period in 2017.

Interest expense increased $11.8 million, or 67%, to $29.4 million for the nine months ended September 30, 2018 from the same period in 2017. Our average balance of interest-bearing deposits increased $557 million, or 33%, to $2.27 billion for the nine months ended September 30, 2018 from the same period in 2017. Also, the average rate we paid on interest-bearing deposits increased 41 basis points to 1.32% for the nine months ended September 30, 2018 from 0.91% for the same period in 2017. Our average balance of borrowings increased $6.6 million. The average rate we paid on such outstanding borrowings increased 31 basis points to 2.44% for the nine months ended September 30, 2018 from 2.13% for the same period in 2017.

Net Interest Income

Net interest income increased $4.7 million, or 18%, to $30.8 million for the three months ended September 30, 2018 from the 2017 comparable period primarily due to average earning assets increasing $595 million partially offset by an increase of average interest-bearing liabilities of $440 million and a 20 basis point decrease in our net interest margin to 3.95%.

Our net interest rate spread decreased by 28 basis points to 3.76% for the three months ended September 30, 2018 from 4.04% for the three months ended September 30, 2017. The average yield we earned on interest earning assets increased by 16 basis points to 5.38% and the average rate we paid on interest-bearing liabilities increased by 44 basis points to 1.62%.

Net interest income increased $17.5 million, or 24%, to $89.4 million for the nine months ended September 30, 2018 from the 2017 comparable period primarily due to average earning assets increasing $711 million partially offset by an increase in average interest-bearing liabilities of $563 million and a 21 basis point decrease in our net interest margin to 3.96%.

Our net interest rate spread decreased by 29 basis points to 3.77% for the nine months ended September 30, 2018 from 4.06% for the comparable period in 2017. The average yield we earned on interest earning assets increased by 7 basis points to 5.26% and the average rate we paid on interest-bearing liabilities increased by 36 basis points to 1.49%.

Provision for Loan Losses

Our provision for loan losses for the three months ended September 30, 2018 was $0.4 million, a decrease of $0.5 million from $0.9 million for the same period in 2017. Our provision for loan losses for the nine months ended September 30, 2018 was $2.18 million, compared to $2.10 million for the same period in 2017. The allowance for loan losses was $20.8 million, or 0.74% of total loans at September 30, 2018, compared to $18.5 million, or 0.71% of total loans at December 31, 2017.

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Non-interest Income

Non-interest income information is as follows:

	Three Months Ended September 30,				Change			Nine Months Ended September 30,				Change
	2018		2017		Amount		Percent	2018		2017		Amount		Percent
	(Dollars in thousands)
Service charges and fees	$	100	$	65	$	35	54%	$	266	$	202	$	64	32%
Investment management and advisory fees	445		595		(150)		(25)%	1,568		1,736		(168)		(10)%
Gain (loss) on sale of investment securities	—		—		—		—	(3)		73		(76)		(104)%
Gain (loss) on sale of mortgage loans held for sale	129		(191)		320		168%	222		(174)		396		228%
Gain on sale of portfolio loans	2,876		4,568		(1,692)		(37)%	11,885		8,987		2,898		32%
Unrealized losses on equity securities	(31)		—		(31)		N/M	(125)		—		(125)		N/M
Income on cash surrender value of bank-owned life insurance	299		294		5		2%	889		877		12		1%
Other income	415		173		242		140%	1,321		559		762		136%
Total non-interest income	$	4,233	$	5,504	$	(1,271)	(23)%	$	16,023	$	12,260	$	3,763	31%

N/M — not meaningful

Non-interest income of $4.2 million for the three months ended September 30, 2018 decreased $1.3 million as compared to the same period of 2017, primarily as the result of decreased gain on sale of portfolio loans due to lower volume of loans sold in the secondary market, which is consistent with our strategy to keep more loans on our balance sheet. Other income increased during the three months due to an increase in net loan servicing income as $805 million of loans were serviced for others at September 30, 2018 compared to $602 million of loans at September 30, 2017.

Non-interest income of $16.0 million for the nine months ended September 30, 2018 increased $3.8 million as compared to the same period of 2017, primarily driven by a $2.9 million increase in the gain on sale of portfolio loans due to higher volume of loans sold in secondary market. Other income also increased during the nine months due to an increase in net loan servicing income as a result of a higher outstanding balance of loans serviced for others.

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Non-interest Expense

Non-interest expense information is as follows:

	Three Months Ended September 30,				Change			Nine Months Ended September 30,				Change
	2018		2017		Amount		Percent	2018		2017		Amount		Percent
	(Dollars in thousands)
Salaries and employee benefits	$	6,973	$	6,211	$	762	12%	$	20,851	$	16,898	$	3,953	23%
Occupancy and equipment	1,760		1,549		211		14%	4,916		4,354		562		13%
Professional fees	898		344		554		161%	2,344		1,008		1,336		133%
Advertising and marketing	470		233		237		102%	1,170		655		515		79%
FDIC assessments	186		335		(149)		(44)%	1,203		841		362		43%
Data processing	311		281		30		11%	894		767		127		17%
Other	1,933		1,382		551		40%	5,277		4,295		982		23%
Total non-interest expense	$	12,531	$	10,335	$	2,196	21%	$	36,655	$	28,818	$	7,837	27%

Non-interest expense of $12.5 million for the three months ended September 30, 2018 increased $2.2 million as compared to the same period of 2017. Salaries and employee benefits increased as a result of additional full-time equivalent employees to support our growth in loans and new branches in our network. The number of full-time equivalent employees increased to 331 at September 30, 2018 from 294 at September 30, 2017. Occupancy and equipment expenses also increased with the expansion of our branch network in the greater Seattle market and New York. Higher professional fees were primarily attributable to increased audit, legal and consultant fees associated with being a public company.

Non-interest expense of $36.7 million for the nine months ended September 30, 2018 increased $7.8 million as compared to the same period of 2017, primarily due to increased salaries and employee benefits with the hiring of additional full-time equivalent employees to support growth in the Company’s operations. Occupancy and equipment expenses increased with the addition of three branches during the nine months ended September 30, 2018. The increase in professional fees was due to higher audit, legal and consultant fees attributable to being a public company.

Income Tax Expense

We recorded income tax expense of $6.3 million for the three months ended September 30, 2018, reflecting an effective tax rate of 28.6%, compared to $8.3 million for the three months ended September 30, 2017, reflecting an effective tax rate of 40.8%. We recorded income tax expense of $19.1 million for the nine months ended September 30, 2018, reflecting an effective tax rate of 28.6%, compared to $21.8 million for the same period of 2017, reflecting an effective tax rate of 40.9%. The decrease in the effective tax rate was primarily due to the reduction in the federal corporate tax rate to 21% that was effective January 1, 2018 as a result of the Tax Cuts and Jobs Act (H.R.1).

Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations when they come due. In addition to the cash received of $85.5 million from our initial public offering which closed in November 2017, our primary sources of funds consist of deposit inflows, loan repayments, FHLB borrowings and proceeds from the sale of portfolio loans. 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 invested generally in interest earning deposits and short-term securities.

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Our most liquid assets are cash and due from banks and U.S. Treasury 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 September 30, 2018 and December 31, 2017, cash and due from banks totaled $48.9 million and $40.1 million, respectively. Debt securities classified as available-for-sale, which provide additional sources of liquidity, totaled $138.6 million at September 30, 2018 and $122.6 million at December 31, 2017.

At September 30, 2018, we had the ability to borrow a total of $670 million from Federal Home Loan Bank including an available line of credit with Federal Home Loan Bank of $50 million. At September 30, 2018, we also had available credit lines with additional banks for $70 million. Outstanding borrowings on September 30, 2018 with the Federal Home Loan Bank totaled $335 million, and there were no amounts outstanding with the aforementioned additional banks.

We have no material commitments or demands that are likely to affect our liquidity other than as set forth below. In the event loan demand were to increase faster than expected, or any unforeseen demand or commitment were to occur, we could access our borrowing capacity with the Federal Home Loan Bank, our bank lines of credit, or obtain additional funds through brokered deposits.

At September 30, 2018, we had $462 million in loan commitments outstanding, and $70 thousand in standby letters of credit. At December 31, 2017, we had $426 million in loan commitments outstanding, and $70 thousand in standby letters of credit.

Time deposits due within one year of September 30, 2018 totaled $568 million, or 24% of total deposits. Total time deposits at September 30, 2018 were $795 million, or 33%, of total deposits. Time deposits due within one year of December 31, 2017 totaled $427 million, or 19% of total deposits. Total time deposits at December 31, 2017 were $663 million, or 30% of total deposits.

Our primary investing activities are the origination of loans and to a lesser extent, the purchase of securities. During the three months ended September 30, 2018 and 2017, we originated $419 million and $491 million of loans, respectively, and purchased $80 million of securities during the three months ended September 2017. During the nine months ended September 30, 2018 and 2017, we originated $1.3 billion and $1.2 billion of loans, respectively, and purchased $76 million and $165 million of securities, respectively.

Financing activities consist primarily of activity in deposit accounts. We experienced net increases in total deposits of $71 million and $303 million for the three months ended September 30, 2018 and 2017, respectively, and net increases in total deposits of $167 million and $484 million for the nine months ended September 30, 2018 and 2017, respectively. We generate deposits from local businesses and individuals through customer referrals and other relationships and through our retail presence. We believe we have a very stable core deposit base evidenced by the average life of our accounts, which we attribute to a high level of customer service and our consistently competitive rates. We expect the high level of liquid accounts to be maintained. We utilize borrowings, brokered deposits, and bulk sales of whole loans to supplement funding needs and manage overall growth.

We also manage liquidity by selling pools of our portfolio loans into the secondary market from time to time. We generated $82 million and $149 million in proceeds from the sale of loans in the three months ended September 30, 2018 and 2017, respectively. We generated $352 million and $272 million in proceeds from the sale of loans in the nine months ended September 30, 2018 and 2017, respectively.

The Company and Bank are subject to various 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 September 30, 2018 and December 31, 2017, each of the Company and Bank exceeded all applicable regulatory capital requirements, and the Bank was considered “well capitalized” under regulatory guidelines. Refer to Note 13 in the Unaudited Condensed Consolidated Financial Statements for additional information.

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The following tables present our capital ratios as of the indicated dates for the Company and Bank.

	Well Capitalized	Adequately Capitalized		Under Capitalized		Company Actual at September 30, 2018		Company Actual at December 31, 2017
Total adjusted capital to risk-weighted assets	N/A	8.00	%	6.00	%	21.00	%	20.28	%
Tier 1 (core) capital to risk-weighted assets	N/A	6.00	%	4.00	%	16.55	%	15.53	%
Common Tier 1 (CET 1)	N/A	4.50	%	3.00	%	16.55	%	15.53	%
Tier 1 (core) capital to adjusted tangible assets	N/A	4.00	%	3.00	%	10.04	%	9.83	%

	Well Capitalized		Adequately Capitalized		Under Capitalized		Bank Actual at September 30, 2018		Bank Actual at December 31, 2017
Total adjusted capital to risk-weighted assets	10.00	%	8.00	%	6.00	%	15.99	%	14.76	%
Tier 1 (core) capital to risk-weighted assets	8.00	%	6.00	%	4.00	%	14.91	%	13.71	%
Common Tier 1 (CET 1)	6.50	%	4.50	%	3.00	%	14.91	%	13.71	%
Tier 1 (core) capital to adjusted tangible assets	5.00	%	4.00	%	3.00	%	9.04	%	8.68	%

Basel III revised the capital adequacy requirements and the Prompt Corrective Action Framework effective January 1, 2015 for the Company. When fully phased in on January 1, 2019, the Basel Rules will require the Company to maintain a 2.5% “capital conservation buffer” on top of the minimum risk-weighted asset ratios. The capital conservation buffer 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 capital conservation buffer will face constraints on dividends, equity repurchases and discretionary bonus payments to executive officers based on the amount of the shortfall. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and increases by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019.

Recently Issued Accounting Guidance

Refer to Note 2, Summary of Significant Accounting Policies, to our unaudited condensed consolidated financial statements included in 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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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 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 rate movements primarily by structuring our balance sheet in the ordinary course of business. 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, 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 twelve-month period beginning on September 30, 2018 and December 31, 2017. The table below demonstrates that for the initial twelve-month period after an immediate and parallel rate shock, we are liability sensitive in a rising interest rate environment.

	At September 30,		At December 31,
	2018		2017
Change in Interest Rates (Basis Points)	Estimated 12-Months Net Interest Income	Change	Estimated 12-Months Net Interest Income	Change
	(Dollars in thousands)
400	96,256	(24.4)%	88,051	(25.0)%
300	105,194	(17.4)%	97,204	(17.2)%
200	114,875	(9.8)%	105,213	(10.4)%
100	121,773	(4.4)%	111,634	(4.9)%
0	127,313		117,408
–100	129,594	1.8%	118,818	1.2%

Our net interest income interest rate sensitivity is affected by the time periods in which our adjustable rate loans reprice. Our adjustable loans reprice in an average of 22 months with 97% repricing within the next five years.

Economic Value of Equity Simulation. We also analyze our sensitivity to changes in interest rates through an economic value of equity (“EVE”) model. EVE represents the present value of the expected cash flows from our assets less the present value of the expected cash flows arising from our liabilities. EVE attempts to quantify our economic value using a discounted cash flow methodology. We estimate what our EVE would be as of a specific date. We then calculate what EVE would be as of the same date throughout a series of interest rate scenarios representing immediate and permanent, parallel shifts in the yield 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.

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The following table presents the estimated changes in EVE of the Bank, calculated on a bank-only basis, which would result from changes in market interest rates over a twelve-month period beginning September 30, 2018 and December 31, 2017.

	At September 30,		At December 31,
	2018		2017
Change in Interest Rates (Basis Points)	Economic Value of Equity	Change	Economic Value of Equity	Change
	(Dollars in thousands)
400	450,781	(10.0)%	373,010	(10.3)%
300	469,419	(6.2)%	399,470	(3.9)%
200	481,286	(3.9)%	415,216	(0.2)%
100	491,009	(1.9)%	421,089	1.3%
0	500,685		415,880
–100	472,467	(5.6)%	381,348	(8.3)%

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

Disclosure Controls and Procedures

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2018. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2018.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There are no material pending legal proceedings, including ordinary routine litigation incidental to the business, to which the Company or one of its subsidiaries is a party.

ITEM 1A. RISK FACTORS

There are no material changes from the risk factors as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The Registration Statement on Form S-1 (File No. 333-221016) for the initial public offering of our common stock was declared effective by the Securities and Exchange Commission on November 16, 2017. There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the Securities and Exchange Commission on November 17, 2017 pursuant to Rule 424(b)(4).

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ITEM 6. EXHIBITS

A list of exhibits to this Form 10-Q is set forth in the Exhibit Index below.

EXHIBIT INDEX

Incorporated by Reference

Exhibit
Number

Exhibit Description

Filed
Herewith

Form

Period
Ending

Exhibit /
Appendix
Number

Filing Date

31.1

Section 302 Certification — Chief Executive Officer

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

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

* This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

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SIGNATURES

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: November 13, 2018		STERLING BANCORP, INC.
		(Registrant)

	By:	/s/ THOMAS LOPP
		Thomas Lopp President Chief Operating Officer Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

Sterling Bancorp, Inc. - FORM 10-Q - November 13, 2018

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