Sterling Bancorp Reports Fourth Quarter and Full Year 2023 Financial Results

Sterling Bancorp, Inc. (NASDAQ:SBT) ("Sterling" or the "Company"), the holding company of Sterling Bank and Trust, F.S.B. (the "Bank"), today reported its financial results for the quarter and year ended December 31, 2023.

Fourth Quarter and Year-End 2023 Highlights

• Fourth quarter net income of $5.1 million, or $0.10 per diluted share; full year net income of $7.4 million, or $0.15 per diluted share
• Fourth quarter net interest margin of 2.52%; full year net interest margin of 2.68%
• Fourth quarter provision for (recovery of) credit losses of $(4.4) million; full year provision for (recovery of) credit losses of $(8.5) million
• Nonperforming assets of $9.0 million, or 0.37% of total assets
• Ratio of allowance for credit losses to total loans of 2.18%
• Total gross loans of $1.3 billion
• Fourth quarter non-interest expense of $12.8 million; full year non-interest expense of $65.7 million
• Total deposits of $2.0 billion
• Shareholders' equity of $327.7 million
• Company's consolidated and Bank's leverage ratio of 13.95% and 13.38%, respectively

The Company reported net income of $5.1 million, or $0.10 per diluted share, for the quarter ended December 31, 2023, compared to net income of $0.3 million, or $0.01 per diluted share, for the quarter ended September 30, 2023. For the year ended December 31, 2023, net income was $7.4 million, or $0.15 per diluted share, compared to a net loss of $(14.2) million, or $(0.28) per diluted share, for the year ended December 31, 2022.

Thomas M. O'Brien, Chairman, President, and Chief Executive Officer commented:

"Sterling's fourth quarter reflects continuing improvement in our expense management as the government investigations directed at Sterling have been resolved. However, we continued to bear expenses from certain indemnified individuals who are responding to government inquiries. In the fourth quarter, those expenses were approximately $0.7 million, which was more than offset by the receipt of $3.8 million of insurance reimbursements for certain prior invoices. Our directors and officers insurance covering these matters was ultimately exhausted with these payments, and we do not expect any future defense costs to be covered by insurance. We will also continue to bear modest legal, compliance and administrative costs related to our commitments under the Plea Agreement with the DOJ. Our loan portfolio declined throughout the year as we have not introduced new lending products, yet we generally maintained our total assets by increasing our short-term liquid assets at rates above our funding costs. Resulting net income for the quarter and the year further enhanced our strong capital position.

Going forward, we believe the impact of the elevated interest rate environment, particularly on deposit prices, will not likely improve in the near-term, although the pace of the rise in deposit costs has slowed. We continually evaluate our strategic position and alternatives, and currently believe that prevailing economic conditions and the lack of a robust capital market for community banks create significant limitations on pursuing a new strategic direction. Accordingly, we have elected to be patient and wait for market conditions to improve before pursuing new strategies. This approach could also create opportunities for potential strategic combinations. In the meantime, we believe we have positioned Sterling well to protect our strengths, namely: strong capital, strong liquidity and solid credit quality."

Balance Sheet

Total Assets – Total assets were $2.4 billion at December 31, 2023, a decrease of $30.7 million, or 1%, from September 30, 2023 and a decrease of $28.7 million, or 1%, from December 31, 2022.

Cash and due from banks increased $14.3 million, or 3%, to $578.0 million at December 31, 2023 compared to $563.6 million at September 30, 2023 and increased $198.2 million, or 52%, from $379.8 million at December 31, 2022. Debt securities, all of which are available for sale, increased $20.9 million, or 5%, to $419.2 million at December 31, 2023 compared to $398.3 million at September 30, 2023 and increased $75.7 million, or 22%, from $343.6 million at December 31, 2022.

Total gross loans held for investment of $1.3 billion at December 31, 2023 declined $68.2 million, or 5%, from September 30, 2023 and declined $309.9 million, or 19%, from $1.7 billion at December 31, 2022.

Total Deposits – Total deposits were $2.0 billion at December 31, 2023, a decrease of $36.7 million, or 2%, from September 30, 2023 and an increase of $49.9 million, or 3%, from December 31, 2022.

Money market, savings and NOW deposits of $1.1 billion decreased $32.2 million, or 3%, from September 30, 2023 and increased $56.3 million, or 5%, compared to December 31, 2022. Time deposits of $873.2 million at December 31, 2023 increased $1.1 million compared to September 30, 2023 and increased $11.5 million, or 1%, compared to December 31, 2022. Noninterest-bearing deposits of $35.2 million decreased $5.5 million, or 14%, compared to September 30, 2023 and decreased $17.8 million, or 34%, compared to December 31, 2022. We did not have any brokered deposits at December 31, 2023, September 30, 2023, or December 31, 2022. The ratio of total estimated uninsured deposits to total deposits was 21.5%, 21.4% and 20.6% at December 31, 2023, September 30, 2023 and December 31, 2022, respectively. Our current strategy is to continue to offer market interest rates on our deposit products to maintain our existing customer base and our liquidity position.

Borrowings – Federal Home Loan Bank borrowings were $50 million at December 31, 2023, which were unchanged from September 30, 2023 and December 31, 2022. In the third quarter of 2023, the Company redeemed all of its subordinated notes with an aggregate outstanding principal balance of $65.0 million at a redemption price equal to 100% of the outstanding principal amount plus accrued interest.

Capital – Total shareholders' equity was $327.7 million at December 31, 2023 compared to $316.1 million at September 30, 2023 and $312.6 million at December 31, 2022. The increase in shareholders' equity since September 30, 2023 is primarily attributable to a $5.8 million reduction in the unrealized loss on our investment securities portfolio included in accumulated other comprehensive loss as a result of lower market yields of U.S. Treasury securities with longer maturities during the fourth quarter of 2023, along with net income of $5.1 million for the fourth quarter.

At December 31, 2023, the Company's consolidated and the Bank's leverage ratio were 13.95% and 13.38%, respectively. The Company and the Bank elected to opt into the Community Bank Leverage Ratio framework, effective January 1, 2023. As such, each of the Company and the Bank is required to maintain a Tier 1 leverage ratio of greater than 9.0% to be considered to have satisfied the minimum regulatory capital requirements as well as the capital ratio requirements to be considered well capitalized for regulatory purposes.

Asset Quality and Recovery of Credit Losses – A recovery of credit losses of $(4.4) million was recorded for the fourth quarter of 2023 compared to a recovery of credit losses of $(1.9) million for the third quarter of 2023. The recovery of credit losses during the fourth quarter primarily reflects general improvement in our economic forecast as well as the decline in our loan portfolio from the prior period. The allowance for credit losses was $29.4 million, $34.3 million and $45.5 million, or 2.18%, 2.42% and 2.74% of total loans held for investment, at December 31. 2023, September 30, 2023 and December 31, 2022, respectively.

Recoveries during the fourth and third quarter of 2023 were $64 thousand and $1 thousand, respectively, with no charge offs in either quarter.

Nonperforming assets at December 31, 2023 totaled $9.0 million, or 0.37% of total assets, compared to $6.2 million, or 0.25% of total assets, at September 30, 2023, primarily due to an increase of $3.9 million in nonaccrual residential real estate loans, partially offset by the extension of a $1.1 million construction loan in the fourth quarter which was over 90 days past its maturity at September 30, 2023. Nonperforming assets at December 31, 2023 declined by $29.3 million, or 77%, from December 31, 2022 mainly due to the sale of nonperforming and chronically delinquent residential real estate loans in the second quarter of 2023.

Results of Operations

Net Interest Income and Net Interest Margin – Net interest income for the fourth quarter of 2023 was $15.1 million compared to $16.0 million for the prior quarter of 2023 and $18.5 million for the fourth quarter of 2022. The net interest margin of 2.52% for the fourth quarter of 2023 decreased from the prior quarter's net interest margin of 2.62% and decreased from the net interest margin of 3.09% for the fourth quarter of 2022. The decrease in net interest income during the fourth quarter of 2023 compared to the prior quarter was primarily due to the decline in the average balance of our loan portfolio of $69.4 million, or 5%, during the fourth quarter and a 26 basis point increase in the average rate paid on interest-bearing deposits during the same period, partially offset by a 9 and 39 basis point increase in the average yields on loans and investments, respectively. The decrease in net interest income during the fourth quarter of 2023 compared to the fourth quarter of 2022 was primarily due to a 204 basis point increase in the average rate paid on interest-bearing deposits, partially offset by a 95 basis point increase in the average yield on total interest-earning assets during the same period.

Net interest income for the year ended December 31, 2023 was $65.0 million, a decrease of $13.8 million from the year ended December 31, 2022. The net interest margin of 2.68% for the year ended December 31, 2023 decreased from the prior year's net interest margin of 3.06%. The decrease in net interest income for the year ended December 31, 2023 is primarily attributable to a 216 basis point increase in the average rate paid on interest-bearing deposits, reflecting the effects of the increasing rate environment during 2022 which continued into the first half of 2023. This was partially offset by the impact of a 365 basis point increase in the average yield of other interest-earning assets (primarily cash and cash equivalents) and 136 basis point increase in the average yield on investment securities. Interest income on loans decreased $0.7 million primarily due to the impact of a $315.2 million, or 17%, decline in the average balance of loans, despite a 96 basis point increase in the average yield on loans.

Non-Interest Income – Non-interest income for the fourth quarter of 2023 was $0.2 million compared to $0.4 million for the prior quarter and $0.2 million for the fourth quarter of 2022.

Non-interest income for the year ended December 31, 2023 was $2.8 million, an increase of $1.5 million from $1.3 million for the year ended December 31, 2022. The increase was primarily attributable to a $1.6 million gain on the sale of all loans that were held for sale, comprised primarily of nonperforming and chronically delinquent residential real estate loans, which occurred in the second quarter of 2023.

Non-Interest Expense – Non-interest expense for the fourth quarter of 2023 was $12.8 million, a decrease of $4.9 million, or 28%, compared to $17.7 million for the third quarter of 2023, and a decrease of $24.3 million, or 65%, compared to $37.1 million the fourth quarter of 2022. The decrease compared to the third quarter of 2023 was primarily due to a $5.2 million decrease in professional fees. During the fourth quarter of 2023, we received $3.8 million from our insurance carriers for expenses previously incurred relating to the government investigations which was primarily due to ongoing investigations against selected individuals and our decision to cover legal costs with respect to certain of these individuals. Professional fees also decreased as the Office of Comptroller of the Currency and U.S. Department of Justice (the "DOJ") investigations into the Company and Bank were resolved. We expect to incur future legal expenses relating to ongoing government investigations against selected individuals, which will not be covered by our insurance carriers as the policy limits have been reached.

Non-interest expense for the year ended December 31, 2023 was $65.7 million, a decrease of $31.9 million, or 33%, compared to $97.6 million for the year ended December 31, 2022. The decrease was primarily attributable to an $18.2 million provision for contingent losses recognized during the fourth quarter of 2022 reflecting our revised estimate of the financial impact of the resolution of the DOJ investigation. Professional fees were $13.8 million lower in 2023 compared to 2022 due in part to receiving $5.9 million more in 2023 compared to 2022 in payments from our insurance carriers for expenses previously incurred relating to the government investigations. Professional fees for 2023 also decreased as the government investigations against the Company and Bank were resolved. Other expenses declined $2.4 million, or 24%, in 2023 primarily due to a $2.3 million loss in 2022 to record the fair value discount on $65.6 million of repurchased Advantage Loan Program loans. Salaries and employee benefits expense in the year ended December 31, 2023 increased $2.4 million, or 7%, primarily due to a $4.0 million reversal in the second quarter of 2022 of liabilities upon the surrender of certain split-dollar and company-owned life insurance policies.

Income Tax Expense – For the year ended December 31, 2023, the Company recorded income tax expense of $3.1 million, or an effective tax rate of 30%, which differs slightly from our statutory rate of 28% due primarily to non-deductible compensation and other non-deductible expenses. For the year ended December 31, 2022, the Company recorded an income tax expense of $6.6 million on a loss before income taxes of $(7.6) million. Our income tax expense for the year ended December 31, 2022 included $3.6 million in income tax on the increase in the cash surrender value of certain split-dollar and company-owned life insurance policies as a result of the surrender of these policies and the effect of the provision for contingent losses in 2022 being non-deductible.

Conference Call and Webcast

Management will host a conference call on Wednesday, January 24, 2024 at 11:00 a.m. Eastern Time to discuss the Company's unaudited financial results for the quarter and year ended December 31, 2023. The conference call number for U.S. participants is (833) 535-2201 and the conference call number for participants outside the United States is (412) 902-6744. Additionally, interested parties can listen to a live webcast of the call in the "Investor Relations" section of the Company's website at www.sterlingbank.com. An archived version of the webcast will be available in the same location shortly after the live call has ended.

A replay of the conference call may be accessed through January 31, 2024 by U.S callers dialing (877) 344-7529 and international callers dialing (412) 317-0088, using conference ID number 1967279.

About Sterling Bancorp, Inc.

Sterling Bancorp, Inc. is a unitary thrift holding company. Its wholly owned subsidiary, Sterling Bank and Trust, F.S.B., has primary branch operations in San Francisco and Los Angeles, California and New York City. Sterling offers a range of loan products as well as retail and business banking services. Sterling also has an operations center and a branch in Southfield, Michigan. For additional information, please visit the Company's website at http://www.sterlingbank.com.

Forward-Looking Statements

This Press Release contains certain statements that are, or may be deemed to be, "forward-looking statements" regarding the Company's plans, expectations, thoughts, beliefs, estimates, goals and outlook for the future. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance, including any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions. These statements are often, but not always, made through the use of words or phrases such as "may," "might," "should," "could," "believe," "expect," "continue," "will," "estimate," "plan," "anticipate" and "would" or the negative versions of those words or other comparable words or phrases of a future or forward-looking nature, though the absence of these words does not mean a statement is not forward-looking. All statements other than statements of historical facts, including but not limited to statements regarding, the economy and financial markets, government investigations, credit quality, the regulatory scheme governing our industry, competition in our industry, interest rates, our liquidity, our business and our governance, are forward-looking statements. We have based the forward-looking statements in this Press Release primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, prospects, business strategy and financial needs. These forward-looking statements are not historical facts, and they are based on current expectations, estimates and projections about our industry, management's beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. There can be no assurance that future developments will be those that have been anticipated. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. 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. The risks, uncertainties and other factors detailed from time to time in our public filings, including those included in the disclosures under the headings "Cautionary Note Regarding Forward-Looking Statements" in our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2023 and "Risk Factors" in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2023, subsequent periodic reports and future periodic reports, could affect future results and events, causing those results and events to differ materially from those views expressed or implied in the Company's forward-looking statements. These risks are not exhaustive. Other sections of this Press Release and our filings with the Securities and Exchange Commission include additional factors that could adversely impact our business and financial performance. Moreover, we operate in very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Press Release. Should one or more of the foregoing risks materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those projected in, or implied by, such forward-looking statements. Accordingly, you should not place undue reliance on any such forward-looking statements. The Company disclaims any obligation to update, revise, or correct any forward-looking statements based on the occurrence of future events, the receipt of new information or otherwise.