Executive Summary

Q1 2024 was essentially breakeven with net loss of $(0.2)M or $(0.00) diluted EPS as higher deposit costs and elevated professional fees offset stable net interest income; NIM held flat at 2.52% while efficiency ratio rose to 101.7% from 83.8% in Q4 .
Legal overhang eased: OCC concluded its investigation with consent orders against former executives and controlling shareholder; management expects the bulk of advanced legal fee reimbursements to be behind them, implying a tailwind to expenses from Q2 onward .
Balance sheet remains conservative with leverage ratio 14.10% at HoldCo (13.58% at bank), ACL/loans of 2.24%, and low NPAs (0.39% of assets); loans declined 3% QoQ to $1.30B as the bank continues to prioritize liquidity and credit quality .
Near-term margin pressure risk: a $50M FHLB advance at just under 2% matures mid‑May and will be repaid; ~$200M of loans reprice quarterly “up a couple hundred bps,” but management expects rising deposit costs to more than offset asset repricing, keeping NIM under pressure near term .
Potential stock catalysts: confirmation that legal costs abate post‑OCC actions, progress on strategic alternatives/business model transition, and deposit mix improvements; conversely, stickier deposit betas or a slower rate-cut path could pressure earnings .

What Went Well and What Went Wrong

What Went Well
- Regulatory resolution progress: “OCC completed its investigation” with consent orders against former parties; management believes “we’re done” with most reimbursable third‑party legal expenses, reducing a key non‑core cost drag going forward .
- Asset quality solid: nonperforming loans $9.3M (0.71% of loans) with management stating these are “100% residential,” roughly half current and paying, and “probably no loss content”; NCOs were 0.00% in Q1 .
- Capital and liquidity strong: leverage ratio 14.10% (HoldCo), cash and due from banks up 12% QoQ to $646.2M, and securities remain short duration/liquid .
What Went Wrong
- Profitability soft: essentially breakeven EPS $(0.00) and an efficiency ratio >100% as professional fees rose due to the absence of prior quarter insurance reimbursement and remaining third‑party legal cost reimbursements .
- Margin headwinds persist: deposit costs rose 21 bps QoQ, keeping NIM flat at 2.52% despite higher asset yields; management anticipates deposit pricing to “overwrite” asset repricing in the near term .
- Deposit mix: non‑interest‑bearing deposits fell 7% QoQ to $32.7M; customers migrated balances from MM/Savings into time deposits (tenors up to ~13 months) to lock rates, raising funding cost sensitivity .

Financial Results

Metric	Q1 2023	Q4 2023	Q1 2024
Net Interest Income ($M)	$17.676	$15.105	$14.934
Non‑Interest Income ($M)	$0.278	$0.213	$0.199
Total Net Revenue ($M) = NII + Non‑Interest	$17.954	$15.318	$15.133
Provision for (Recovery of) Credit Losses ($M)	$0.674	$(4.357)	$0.041
Non‑Interest Expense ($M)	$17.837	$12.830	$15.392
Net Income (Loss) ($M)	$(0.503)	$5.063	$(0.197)
Diluted EPS ($)	$(0.01)	$0.10	$(0.00)
Net Interest Margin (%)	2.93%	2.52%	2.52%
Efficiency Ratio (%)	99.35%	83.76%	101.71%
Cost of Avg Interest‑Bearing Liabilities (%)	2.36%	3.47%	3.66%

Notes: No S&P Global consensus estimates were available via our connection for Q1 2024, so estimate comparisons are not shown.

Segment/Balance Mix (Loans)

Loan Composition ($M)	Mar 31, 2023	Dec 31, 2023	Mar 31, 2024
Residential Real Estate	$1,289.6	$1,085.8	$1,040.5
Commercial Real Estate	$224.8	$237.0	$244.5
Construction	$36.3	$10.4	$4.9
Commercial & Industrial	$1.4	$15.8	$13.3
Total Loans HFI	$1,552.0	$1,349.0	$1,303.3
ACL ($M)	$38.6	$29.4	$29.3
ACL / Loans (%)	2.48%	2.18%	2.24%

Deposits

Deposit Composition ($M)	Mar 31, 2023	Dec 31, 2023	Mar 31, 2024
Non‑Interest‑Bearing	$46.5	$35.2	$32.7
Money Market/Savings/NOW	$958.2	$1,095.5	$1,072.2
Time Deposits	$917.2	$873.2	$901.0
Total Deposits	$1,921.8	$2,004.0	$2,005.9

Asset Quality & Capital

KPI	Mar 31, 2023	Dec 31, 2023	Mar 31, 2024
Nonperforming Loans ($M)	$0.034	$9.0	$9.3
NPLs / Loans (%)	— (sold nonaccrual HFS)	0.66%	0.71%
NPAs / Assets (%)	1.09%	0.37%	0.39%
Net Charge‑offs to Avg Loans (%)	0.39%	0.00%	0.00%
Leverage Ratio (Company)	13.49%	13.95%	14.10%
Shareholders’ Equity ($M)	$315.5	$327.7	$327.3

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Guidance metrics (revenue, NIM, OpEx, tax rate, segment)	2024	None issued	None issued; qualitative commentary on continued NIM pressure and fading legal costs	Maintained: No formal guidance

Note: The press release and call did not provide quantitative guidance; management reiterated caution on margin trajectory and indicated legal/professional fees should normalize as OCC matters concluded .

Earnings Call Themes & Trends

Topic	Previous Mentions (Q3 2023 and Q4 2023)	Current Period (Q1 2024)	Trend
Regulatory/legal overhang	Q3: D&O insurance exhausted; ongoing costs for indemnified individuals; DOJ plea for Company/Bank resolved; restitution paid . Q4: Insurance reimbursements received ($3.8M); Company matters resolved; still bearing costs for certain individuals; insurance now exhausted .	OCC completed investigations; consent orders against former CEO/controlling shareholder; expect remaining advanced legal costs largely done; DOJ actions against individuals still possible but not material to bank .	Improving; expense drag fading, residual DOJ witness-related costs possible but immaterial.
Margin/Deposit costs	Q3: NIM 2.62%; deposit rates up 50 bps QoQ; pressure expected near term . Q4: NIM 2.52%; deposit rates rose 26 bps; pace of deposit cost increases slowed .	NIM 2.52% flat; deposit cost up 21 bps QoQ; ~$50M sub‑2% FHLB advance matures mid‑May and will be repaid; ~$200M loans reprice quarterly but deposit costs likely overwrite asset yield gains .	Persistent pressure; modest worsening possible as low‑rate funding rolls off.
Credit quality/Reserves	Q3: Recovery of credit losses; ACL/loans 2.42%; NPAs 0.25% . Q4: Recovery of $(4.4)M; ACL 2.18%; NPAs 0.37% .	Provision $0.041M; ACL/loans 2.24%; NPAs 0.39%; management comfortable with higher reserve stance; “optically ~1.5% right level” for industry, but SBT staying higher near term .	Stable/Conservative; reserve release possible later if conditions hold.
Strategy/Business model	Q3: Exploring strategic options; covered savings association election; potential CA build‑out; repositioning would take time/cost . Q4: Evaluate alternatives; patient on strategy given market; potential strategic combinations .	Continues to prioritize protecting capital/liquidity; acknowledges challenge of building new lending verticals from monoline past; not inclined to invest heavily near term given returns/compliance costs .	Waiting for better conditions; strategic optionality retained.
Capital allocation	Q3/Q4: Capital strong; redeemed $65M sub notes in Q3 .	Buybacks: “compelling reasons,” but “strategic reasons why we shouldn’t or can’t”; leverage ratios ~14% .	Neutral; optionality constrained by strategic considerations.

Management Commentary

“For all intents and purposes, it was a breakeven quarter… driven in large part by… legal expenses towards the tail end of these OCC investigations.”
“Last week, the OCC completed its investigation… consent orders were issued to a former CEO and to our controlling shareholder.”
“Margins remain under some pressure… we have a $50 million… FHLB advance… at just under 2%… [maturing] middle of May… [there] may be some additional pressures on margins.”
“We have about $200 million of loans that reprice every quarter… up a couple of hundred basis points… but… [it] will be overwritten by the increasing deposit costs.” — CFO Karen Knott
Reserves: “If you’re not at 1%, you’re kidding yourself… I’d say… 1.5% is probably the right level for the vast bulk of the industry. We do keep ours higher… there’s probably room [to move lower]… over the next few quarters.”

Q&A Highlights

Expenses/Legal: Management believes elevated professional fees tied to OCC matters have largely ended; any future DOJ‑related witness/interview costs for certain individuals should be immaterial .
Asset/liability repricing: ~$200M of loans reprice quarterly, but higher deposit costs and competition likely offset asset yield uplift; FHLB advance will be repaid, not rolled .
Buybacks: Acknowledged buyback appeal with shares sub‑$5, but cited strategic constraints preventing action at this time .
Nonaccruals: ~$9M NAs are all residential; about half are current payers; management expects minimal loss content and resolution over coming quarters; CA foreclosure process moves relatively quickly .

Estimates Context

We attempted to pull S&P Global consensus for Q1 2024 EPS and revenue; consensus data for SBT was unavailable via our integration during this review. Therefore, no estimate comparisons or beat/miss determinations are shown.

Key Takeaways for Investors

Expense tailwind likely from Q2: with OCC matters concluded and insurance reimbursements behind them, professional fees should normalize, aiding the efficiency ratio from Q2 onward barring DOJ‑related immaterial items .
Margin watch: repayment of a sub‑2% $50M FHLB advance and continued deposit repricing could weigh on NIM until rate relief or deposit betas slow; monitor cost of interest‑bearing liabilities (3.66% in Q1, +19 bps YoY, +19 bps QoQ) .
Credit/capital provide downside protection: ACL/loans 2.24%, NPAs 0.39%, leverage ~14% underpin stability; potential reserve releases later in 2024 if benign credit persists could support earnings prints .
Strategic optionality intact but timing uncertain: management remains cautious on deploying capital into new lending verticals given returns/compliance costs; strategic combinations remain a possibility if market conditions improve .
Trading setup: Reduced legal uncertainty and expense normalization are positives; near‑term prints likely hinge on funding costs and deposit mix (continued migration to CDs vs growth in non‑interest bearing balances) .
Balance sheet shrinkage likely continues near term as the bank prioritizes liquidity/credit quality over growth; expect modest declines in residential balances and stability/improvement in CRE credit metrics .

Citations

Q1 2024 press release/8‑K and financial tables:
Q1 2024 earnings call transcript (management quotes/Q&A):
Prior quarter press releases for trend: Q4 2023 ; Q3 2023

Sterling Bancorp, Inc. (SBT)·Q1 2024 Earnings Summary