Sterling Bancorp, Inc. (NASDAQ:SBT) - Navigating Uncertain Times with Prudence and Transparency

Published on September 24, 2024 | Ticker: SBT

Sterling Bancorp, Inc. (NASDAQ:SBT) is a unitary thrift holding company headquartered in Southfield, Michigan, with its primary business operations conducted through its wholly-owned subsidiary, Sterling Bank and Trust, F.S.B. The company has a long history in the banking industry, having been formed in 1984, and has since grown to operate a network of 27 branches, primarily located in the San Francisco and Los Angeles, California metropolitan areas.

Financials

The company's financial performance in the first quarter of 2024 was essentially break-even, with a net loss of $197,000. This result was largely driven by the continued impact of the higher interest rate environment, which has exerted pressure on the company's net interest margin as deposit costs have increased faster than the yields on its interest-earning assets. Additionally, the company incurred significant legal expenses related to the ongoing governmental investigations into certain former executives, which have been a persistent challenge for the organization.

Credit Quality and Liquidity

Despite these headwinds, Sterling Bancorp's credit quality and liquidity position remain robust. The company's nonperforming assets stood at $9.3 million, or 0.39% of total assets, at the end of the first quarter of 2024, a slight increase from $9.0 million, or 0.37% of total assets, at the end of 2023. The company's allowance for credit losses was $29.3 million, or 2.24% of total loans held for investment, at the end of the first quarter of 2024, compared to $29.4 million, or 2.18% of total loans held for investment, at the end of 2023.

Loan Portfolio

The company's loan portfolio is primarily composed of residential real estate loans, which accounted for 80% of total gross loans at the end of the first quarter of 2024. The company's commercial loan portfolio, which includes commercial real estate, construction, and commercial and industrial loans, accounted for the remaining 20% of the loan portfolio. The company's geographic concentration remains high, with approximately 79% of its loan portfolio based in California, primarily in the San Francisco and Los Angeles metropolitan areas.

Net Interest Income and Margin

Sterling Bancorp's net interest income for the first quarter of 2024 was $14.9 million, a decrease of 16% from $17.7 million in the first quarter of 2023. This decline was primarily driven by the significant increase in the company's deposit costs, which outpaced the increase in the yields earned on its interest-earning assets. The company's net interest margin for the first quarter of 2024 was 2.52%, down from 2.93% in the first quarter of 2023.

Non-Interest Income and Expense

The company's non-interest income for the first quarter of 2024 was $199,000, a decrease of 28% from $278,000 in the first quarter of 2023. This decrease was primarily due to a decline in the fair value of the company's equity securities during the quarter.

Non-interest expense for the first quarter of 2024 was $15.4 million, a decrease of 14% from $17.8 million in the first quarter of 2023. This decrease was primarily driven by reductions in salaries and employee benefits and professional fees, partially offset by the exhaustion of the company's directors and officers insurance coverage, which has resulted in the company continuing to incur significant legal expenses related to the ongoing governmental investigations.

Capital Position

The company's capital position remains strong, with the Tier 1 leverage capital ratios of both the company and the bank exceeding the well-capitalized requirements under the CBLR framework as of the end of the first quarter of 2024. The company's Tier 1 leverage capital ratio was 14.10% at the parent company level and 13.58% at the bank level, both well above the 9% requirement to be considered well-capitalized.

Outlook

Looking ahead, the company's management team has emphasized the need for prudence and transparency in navigating the current uncertain market environment. The company continues to focus on protecting its book value and liquidity, while also exploring potential strategic alternatives that may include the incorporation of new banking products and services. The company's management team has expressed concerns about the potential for further challenges in the commercial real estate sector, particularly in major metropolitan areas, and has indicated that the company will maintain a cautious approach to risk management.

Conclusion

Despite the headwinds faced by the company, its strong credit quality, ample liquidity, and well-capitalized position provide a solid foundation for weathering the current market conditions. As the company continues to navigate the evolving landscape, investors will be closely watching for any updates on the company's strategic initiatives and its ability to adapt to the changing market dynamics.

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