Sterling Bancorp Reports Third Quarter 2022 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 unaudited financial results for the third quarter ended September 30, 2022.

Third Quarter 2022 Highlights

• Net income of $1.2 million, or $0.02 per diluted share
• Net interest margin of 3.19%
• Non-interest expense of $21.6 million
• Provision (recovery) for loan losses of $(4.4) million; ratio of allowance for loan losses to total loans held for investment of 2.70%
• Shareholders’ equity of $329.6 million
• Bank capital ratios continue to be in excess of minimum ratios required to be considered “well-capitalized” with a leverage ratio of 15.88%, a total risk-based capital ratio of 26.60% and a common equity tier one ratio of 25.33%
• The Company’s consolidated leverage ratio of 14.13%, total risk-based capital ratio of 26.32% and common equity tier one ratio of 22.53% continue to exceed minimum regulatory capital requirements
• Total deposits of $2.0 billion
• Total gross loans of $1.7 billion
• Nonperforming assets decline to $42.2 million; classified and criticized loans decline to $81.3 million
• Completed sale of high risk commercial real estate loans with unpaid principal balances of $21.9 million
• Advantage Loan Program loans with unpaid principal balances of $35.2 million repurchased
• Consent Order with OCC entered on September 27, 2022
• June 2019 Formal Agreement with OCC terminated
• Shareholder derivative action settlement approved by court

The Company reported net income of $1.2 million, or $0.02 per diluted share, for the quarter ended September 30, 2022, compared to net loss of $(2.2) million, or $(0.04) per diluted share, for the quarter ended June 30, 2022.

During the third quarter, the Bank entered into a Consent Order (the “Consent Order”) with the Office of the Comptroller of the Currency (the “OCC”), resolving the OCC’s formal investigation relating to the Bank’s former residential loan product, marketed as the Advantage Loan Program, and related matters. Under the Consent Order, the Bank has paid a civil money penalty of $6.0 million. The civil money penalty was applied against the Company’s previously accrued liability for contingent losses. The Consent Order represents a full and final settlement of the OCC’s investigation with respect to the Bank.

In addition, the settlement of the shareholder derivative action received final court approval during the third quarter. The full amount of the attorneys’ fees and expenses due under the settlement was paid by the Company’s insurance carriers under applicable insurance policies subsequent to September 30, 2022.

“Once more this quarter there are a lot of moving parts in our results, but the main headline is continued and significant improvements in virtually all phases of the Company’s operations. Most importantly, as recently disclosed, Sterling and the OCC entered into a Consent Order wherein the Bank agreed to a $6.0 million civil money penalty. In that context and in recognition of the successful work in addressing the many regulatory issues and violations facing the Bank, the Formal Agreement from 2019 was lifted. These represent major milestones for the Bank and are the product of our aggressive approach to remediation and compliance.

“In our financial results, the very uncomfortable level of classified assets and nonperforming loans from two years ago have now been reduced to much more modest and manageable levels. We sold the last remaining bucket of high risk commercial real estate loans to remove that uncertainty and successfully worked out several more. Our margins have again improved with higher market interest rates however the cost of funding liabilities, notably our variable rate subordinated notes have likewise increased.

“We remain under the investigation of the DOJ and SEC. As I have stated previously, we have very little visibility into their decision making timetable. This remains a significant uncertainty and we continue to impress upon the importance of timely resolution,” said Thomas M. O’Brien, Chairman, President and Chief Executive Officer.

Balance Sheet

Total Assets – Total assets of $2.4 billion at September 30, 2022 decreased $55.9 million, or 2%, from $2.5 billion at June 30, 2022.

Cash and due from banks increased $67.2 million, or 24%, to $352.4 million at September 30, 2022 compared to $285.2 million at June 30, 2022. Investment securities, which we consider part of our liquid assets, decreased $29.1 million, or 8%, to $353.2 million at September 30, 2022 compared to $382.3 million at June 30, 2022.

Total gross loans held for investment of $1.7 billion at September 30, 2022 declined $96.5 million, or 5%, from $1.8 billion at June 30, 2022 as loan payoffs and loan sales exceeded originations and loan repurchases during the third quarter.

Total Deposits – Total deposits of $2.0 billion at September 30, 2022 remained relatively consistent showing a slight decline from June 30, 2022. Money market, savings and NOW deposits decreased $128.9 million, or 10%, from June 30, 2022, which was partially offset by an increase in time deposits of $88.0 million, or 13%. Noninterest-bearing deposits decreased $12.3 million, or 15%, to $70.1 million at September 30, 2022 compared to $82.4 million at June 30, 2022.

Capital – Total shareholders’ equity decreased $5.7 million, or 2%, to $329.6 million at September 30, 2022 compared to $335.3 million at June 30, 2022. The decline in shareholders’ equity is primarily due to an increase in accumulated other comprehensive loss of $7.2 million due to increased unrealized losses on our investment securities portfolio. These unrealized losses on our investment portfolio are primarily attributable to changes in market value due to the current rising interest rate environment and are not realized in our consolidated statement of operations since the Bank has both the intent and ability to hold these investment securities until maturity or the price recovers.

The Bank exceeded all regulatory capital requirements required to be considered “well-capitalized” at September 30, 2022, and the Company exceeded all applicable minimum regulatory capital requirements as of such date, as summarized in the following tables:

Asset Quality and Provision (Recovery) for Loan Losses – Nonperforming assets at September 30, 2022 totaled $42.2 million, or 1.72% of total assets, compared to $55.0 million, or 2.20% of total assets, at June 30, 2022. Nonperforming assets at September 30, 2022 included $35.9 million of nonperforming loans held for investment, $3.7 million of nonaccrual loans held for sale and $2.6 million of troubled debt restructurings. Nonperforming assets at June 30, 2022 included $48.4 million of nonperforming loans held for investment, $4.0 million of nonaccrual loans held for sale and $2.6 million of troubled debt restructurings. The decrease in nonperforming assets is largely due to a $7.1 million decrease in nonperforming residential mortgages and a $5.8 million decrease in nonperforming construction loans. Gross loans held for investment delinquent 30 days or more decreased during the third quarter of 2022 to $60.0 million, or 3.57% of gross loans held for investment, from $72.4 million, or 4.07% of gross loans held for investment, at June 30, 2022. Classified and criticized loans held for investment decreased $23.8 million, or 23%, from $105.1 million at June 30, 2022 to $81.3 million at September 30, 2022, largely due to the sale of higher risk commercial real estate loans during the third quarter.

Reflecting the overall improvement in asset quality, a recovery for loan losses of $4.4 million was recorded for the third quarter of 2022 compared to a recovery for loan losses of $1.1 million for the second quarter of 2022. The allowance for loan losses decreased $6.4 million, or 12%, to $45.4 million at September 30, 2022, or 2.70% of total loans held for investment, from $51.8 million, or 2.91% of total loans held for investment, at June 30, 2022.

Net charge offs during the third quarter of 2022 were $2.0 million compared to net recoveries of $(0.4) million in the second quarter of 2022. Net charge offs in the third quarter of 2022 included $4.1 million in write-downs of our recorded investment in higher risk commercial real estate loans held in our portfolio with an unpaid principal balance of $21.9 million, which were subsequently sold for cash proceeds of $17.8 million during the quarter.

“As noted earlier, asset quality metrics continue to improve. Our delinquent loans at this time are entirely residential loans and we have no commercial delinquencies or nonaccruals,” said Mr. O’Brien.

Results of Operations

Net Interest Income and Net Interest Margin – Net interest income of $19.5 million for the third quarter of 2022 was relatively unchanged from the second quarter of 2022. Although net interest income was relatively unchanged, both interest income on interest-earning assets and interest expense on interest-bearing liabilities increased in the third quarter when compared to the prior quarter due primarily from the effects of an increasing interest rate environment. The impact of the increase in interest rates was offset by a decline in both average interest-earning assets and average interest-bearing liabilities of $192.7 million and $213.1 million, respectively. The decrease in average interest-earning assets was primarily due to a decline in the average balance of our loan portfolio of $112.4 million, or 6%, from $1.8 billion in the second quarter of 2022 to $1.7 billion in the third quarter of 2022. The decline in average interest-bearing liabilities was primarily driven by the decrease in average interest-bearing deposits of $153.0 million in the third quarter of 2022 from $2.0 billion in the second quarter of 2022.

The net interest margin of 3.19% for the third quarter of 2022 increased compared to 2.95% for the second quarter of 2022. The rise in our net interest margin in the third quarter of 2022 reflects an increase in the average yield on interest-earning assets of 59 basis points while the average cost of interest-bearing liabilities increased 43 basis points.

Non-Interest Income – Non-interest income for the third quarter of 2022 decreased $0.4 million to $(0.4) million from the second quarter of 2022. The decrease is partially attributable to the net servicing loss incurred with the write-off of $0.5 million in mortgage servicing rights related to the repurchase of Advantage Loan Program loans during the third quarter compared to a write-off of $0.4 million in the second quarter related to the repurchase of Advantage Loan Program loans. Additionally, income earned on the cash surrender value of bank-owned life insurance (“BOLI”) decreased $0.2 million in the third quarter due to the surrender of certain BOLI policies in the second quarter of 2022.

Non-Interest Expense – Non-interest expense of $21.6 million for the third quarter of 2022 increased $2.1 million, or 11%, from $19.5 million for the second quarter of 2022. The increase is primarily due to an increase in salaries and employee benefits expense of $3.8 million, or 68%. The second quarter of 2022 included a reduction in salaries and employee benefits expense of $4.0 million primarily related to the reversal of associated liabilities upon surrender of a large split-dollar life program and a few smaller BOLI policies. The second quarter of 2022 also reflected an increase in salaries and employee benefits expense of $0.4 million for separation costs paid to terminated mortgage origination employees. Additionally, we experienced a reduction in salaries and benefits expense in the third quarter of 2022 of $0.9 million as a result of the outsourcing of our residential lending service for mortgage loan production which occurred in the second quarter of 2022.

Additionally, other non-interest expense in the second quarter of 2022 includes $1.3 million in additional taxes related to the surrender of the split-dollar life program and certain BOLI policies. Other non-interest expenses for the third quarter of 2022 included a $1.6 million loss to record the fair value discount on $35.2 million of Advantage Loan Program loans repurchased in the third quarter of 2022, compared to $0.7 million fair value discount on $30.4 million of Advantage Loan Program loans repurchased second quarter of 2022. Non-interest expense for the third quarter of 2022 also decreased $1.3 million in professional fees from the second quarter of 2022 primarily made up of direct and third-party legal expenses related to the government investigations.

Income Tax Expense – Income tax expense was $0.7 million for the third quarter of 2022 compared to $3.3 million in the prior quarter on income before income taxes of $1.9 million and $1.1 million, respectively. This decrease is largely related to the surrender of certain split-dollar and BOLI policies during the second quarter, which resulted in the life-to-date increase in the cash surrender value of the policies of $13.1 million being treated as taxable income that was previously nontaxable.

Mr. O’Brien commented, “Profitability remains heavily constrained by fluctuating legal and consultant expenses related to the investigations and ultimate resolution of the ill-fated Advantage Loan Program. We believe that such expenses will begin to moderate in 2023 but the timing and magnitude remain inexorably linked to the conclusion of the DOJ investigation and ultimate settlement.”

Conference Call and Webcast

Management will host a conference call on Monday, October 31, 2022 at 11:00 a.m. Eastern Time to discuss the Company’s unaudited financial results for the quarter ended September 30, 2022. 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 November 7, 2022 by dialing (877) 344-7529, using conference ID number 1874009.

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 to the residential and commercial markets, 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” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, regarding the Company’s plans, expectations, thoughts, beliefs, estimates, goals and outlook for the future that are intended to be covered by the protections provided under the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “attribute,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “goal,” “target,” “outlook,” “aim,” “would” and “annualized,” or the negative versions of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and they are based on current expectations, estimates and projections about our industry, management's beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. 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” and “Risk Factors” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2022, 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. 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.