Sterling Bancorp - Q1 2022

Transcript

Speaker 0

Good afternoon, everyone. Thank you for joining us today to discuss Sterling Bancorp's financial results for the Q1 ended March 31, 2022. Joining us today from Sterling's management team are Tom O'Brien, Chairman, CEO and President and Karen Knott, Chief Financial Officer and Treasurer. Tom will discuss the Q1 results and then we'll open the call to your questions. Before we begin, I'd like to remind you that this conference call contains forward looking statements with respect to the future performance and financial condition of Sterling Bancorp that involve risks and uncertainties.

Various factors could cause actual results to be materially different from any future results expressed or implied by such forward looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward looking statements made during the call. Additionally, management may refer to non GAAP measures, which are intended to supplement, but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today, as well as a reconciliation of the GAAP to non GAAP measures.

At this time, I'd like to turn the call over to Tom O'Brien. Tom?

Speaker 1

Great. Thanks very much and good afternoon everyone. Welcome to our Q1 call. As you saw this morning, we announced earnings of $5,300,000 or $0.10 a share. There was kind of the typical noise within the quarter that you've seen in the last 4 or 5 quarters anyhow.

But the trends continue to be in the right direction and I think we're feeling better about that. The margin Got a nice boost as rates moved up a little bit and we continue to shed some high cost funding. So that's big surprise for us and a big change from where it was a year ago. So at 303, we're I think last year at one point we were like in the high 250s. So it's a good improvement in what we were hoping for with higher rates.

We did have a recovery in the loan loss provision. Basically, improved Credit quality continues to drive that. Capital continues to be quite strong. Loans and deposits moving more towards where we want them to in terms of the deposits to more transaction lower cost deposits, less of the heavy reliance on CDs that the bank had historically had and loans in the advantaged portfolio, but also in the commercial portfolio continue to pay down. So the I'd say the concern I expressed in 2021, especially with respect to the commercial portfolio and the credit risk inherent in that has been significantly reduced in the last several quarters, predominantly by the great work in our credit department and by the sale of $62,000,000 of what were the toughest loans in there, the single room occupancy, hotel loans, I guess I'd call them in San Francisco.

So and that was at least in my view a very successful sale and done quickly and efficiently. The non performing loans now are down to $46,000,000 and as I mentioned in my quote in the press release, dollars 16 or so 1,000,000 of that includes advantage loans that are at some point in the coming year likely to be restored to performing status. So Again, I think we're all feeling a little bit better about the credit risk and a lot of that the market in especially in residential real estate for some of the construction projects we've had has frankly bailed out a couple of deals that were pretty thin. We'll take that help where we can get it. And as I mentioned just a minute ago, the sale.

The quarter also saw some continued and I think pretty significant improvements in a lot of the regulatory milestones that we had set out last year. Most notably, I think most of the regulatory items are moved into a position where we've got to just show sustained performance and competency, but we've accomplished the foundational work of addressing the multiple issues that were in the formal agreement and which we've been working on pretty dramatically over the last 6 months. So that is good. I also mentioned in the report that we've begun some preliminary conversations with the regulatory enforcement side and with the DOJ criminal side. There's not much more I can say about that other than that we will continue to move that as much as we can in an expeditious manner.

Our conversations to date have really just Kind of laying the groundwork for what the issues are, how long they went on, what the magnitude was. And there's really no economics that I can speak to other than what is in the 10 ks and what will be in the 10 Q. But I'm hopeful by the time we have the Q3 call that we'll be a lot more definitive on where we all stand. And as I've mentioned, I think several times in the past, there's kind of 2 competing interests in this conversation as it respects Sterling institutionally. One is that we have provided an enormous amount of effort and work and expense to remediate the issues, but also to investigate and identify the issues and the individuals who created the problem and who led the bank down the wrong path.

And that has been dramatic and I think anybody's estimation. We've provided full cooperation and I think that will certainly work in our favor. And the negative as you all know is that this went on for a fairly long period of time and the volumes were fairly substantial. So those are, I guess, what I call the competing interests. And we'll have conversations about those in the weeks ahead.

But that's kind of what I see at the moment. The rest of the story within the bank, again, things like asset quality and margin and all that are just going the way we had hoped, the continued increase in rates will likely have a further beneficial impact on us, although we'll I guess as most banks will get some write down on the securities portfolio as rates move higher, but we're invested in a relatively short term manner. So it really isn't going dramatic and gets recovered with maturities. So not a big concern there. You should also note we added 2 new directors at the bank and or at the holding company, I'm sorry, not And at the bank that will be subject to the OCC's non objection, which we should have hopefully in Well, they have up to 90 days and hope it's not that long, but they are seated on the bank board now and they will the up for election at the shareholder meeting, which is upcoming in a couple of weeks.

And I'll just A note with respect to the shareholder meeting, there are several governance improvements items on there that I recommend everybody. They are things we would, in the normal course, consider to be contemporary good governance measures and actions. Several of those are related to the derivative settlement and We'll move things like the annual election of directors. And as you also know previously, like last year around this time. We had already established a separate risk committee and an ethics and compliance committee and Things that, at least in my view, the institution was in need of to meet today's governance expectations of our investors.

So that's I think enough for me to say on this. As always, it's probably easier just to take questions and hear what's on your mind. So operator, if you can open it up for questions, I'll be happy to answer and what I can't, Karen can pick

Speaker 0

The first question comes from Nick Cucharale with Piper Sandler. Please go ahead.

Speaker 2

So I wanted to start with expenses. Certainly relates to the difficulty in predicting a close of the outstanding issues. But as it stands today, can you update us on your expectations for professional fees and the broader expense base?

Speaker 1

Well, I'll speak kind of generically and then maybe Karen can get into some specifics. But Generically, it's expected that as these major issues get unwound that and what are predominantly legal and consulting fees at this point. Those specific items should diminish. The Additional or the kind of the unknown cost that we would face Would be to the extent that qualified former employees, and I emphasize qualified, will be entitled to some indemnification of legal expenses as they are and I just say that it's certainly not everybody, but there are some people who have Had some experience and some knowledge that will be of interest in the individual part of the prosecutions. So to the extent they're qualified, we'll honor those and it's a little hard to take a guess as to what they'll be, but that could Continue for, I don't know, a couple of quarters or longer.

It's a little hard to predict. My expectation is that things will start to move pretty quickly over the course of the next few months. And Karen, just specifically like in the quarter, what were the extraordinary expenses related to the Advantage loan program and the investigations?

Speaker 3

So I would say they've been running pretty typical. Legal was about the same amount it's Than in the past just shy of $3,000,000 but we did see a decline in other professional fees of about $1,300,000 and that With the resolution of some of those regulatory matters that you spoke of earlier.

Speaker 1

Yes, Nick, they're kind of doing what I referred to last year. As I said, I think they'll drift down late 'twenty one and early 'twenty two and the real benefit will start to come when the resolutions are finalized.

Speaker 2

Okay, that's helpful. Have you started to see a slowing of pay downs in the loan book? I mean, relatedly, it's always tough to forecast, but Are you expecting a lower rate of decline this year relative to 2021 in the loan book?

Speaker 1

Well, we haven't seen it yet. And to some of the decline, obviously, is encouraged on our part, riskier and I'll speak to the commercial side first, riskier deals that were able to get refinanced elsewhere. We continue to be happy to see those go because we're just not set up and not qualified or competent in many respects And that's not a rate sensitive thing right yet, or at least it hasn't been. And then on the loans we sold, obviously, that was a big bucket. On the advantage loan side, which is the bulk of our residential, In my experience at the bank, it has been reasonably consistent quarter to quarter.

Some of that is due to the nature in which the loans were originated. They were very high down payment loans. And so that's why the absolute credit performance has done pretty darn good. It was the I think as everybody knows the compliance issues and the AML issues that drove the big issues there. But they continue in my view to pay down pretty quickly.

And frankly, given what they are, I'm pretty happy with that. We do model them, but over the if you look at the models over the next several years, they Continue to drop pretty dramatically. Okay. Just one example, I can give you Nick by the way. So when I joined the bank, the loans that were sold in the market and serviced by us were something like 750,000,000 and now they're down to, I think, about $160 ish or so, which includes some loans that we bought back, obviously.

But the risk we had on the sold loan portfolio is just down dramatically.

Speaker 2

Yes. In that same vein, can you share with us any scheduled advantage repurchases and when you might be able to recapture the remainder of that mortgage repurchase liability?

Speaker 1

It's a little hard to guess because they were all securitized. So we had dates, which I think One of them was already passed and we didn't get the loans back. And I think the next one was initially beginning in July. But again they were securitized and if they break the securities, Which is what we anticipated, then we would have the commitment, I guess, you'd call it, to buy the loans back, although we haven't had any further discussions on at least the first call. Is that right, Karen, Mike, on track there?

Speaker 3

Yes, that's correct. They're just with the movement in the market in the Q1, they're just trying to figure out what to do with the rest of the loans. So It's a little bit less certain than it was prior.

Speaker 2

Okay. Can you remind us how much is left in that allowance at March 31?

Speaker 3

Sure. There's $2,700,000 left in that allowance.

Speaker 2

Okay. And then just lastly, can you help us think about the excess liquidity? Should we expect to see some incremental securities purchases in the coming quarters to utilize the large cash position?

Speaker 1

I think that's probably a fair assessment. We're trying to be judicious in that. Obviously, just the Increase in liquidity rates will be beneficial to us because they were virtually nothing for certainly most of my tenure here. And we'll selectively look at some securities if the incremental yield advantage is worth it, but we're not going to make any bets on rates that could come back to bite us substantially. And we continue to look at loan originations and we've done several that have been really attractive, but obviously it's not enough to keep up with the pay downs.

So we'll continue to do that also.

Speaker 0

The next question comes from Ben Gurlinger with Hovde Group. Please go ahead.

Speaker 4

Thanks. Good afternoon, everyone.

Speaker 1

Afternoon, Ben.

Speaker 3

Kind of following on the same vein as next question.

Speaker 4

So if you think about just the expense base overall. Obviously, there's a bit of noise that kind of gets lumped into those few line items. So a different way of kind of asking the question. Let's say Everything is free and clear from the DOJ, the OCC. What would be like a core run rate on expenses?

Speaker 1

I'll kick that to Karen.

Speaker 3

And is that a core what I didn't hear the last part of your question, a core what?

Speaker 4

Yes. Just a run rate on like what would a normalized expense base be?

Speaker 3

Yes, I would say it would probably be down about maybe 20% from where it currently is.

Speaker 4

Got it. Okay. And then kind of switching gears here. When you think about the reserve relative to the overall loans. Obviously, we made a lot of progress by selling the hotel loans and Credit overall is getting better.

And then kind of juxtaposed against that you have loan portfolio Kind of paying down holistically. So when you think reserve relative to portfolio, is it Should we be looking at kind of like dollar for dollar or is it like a percentage basis? I'm just trying to get a sense of like is the reserve to total loans and how to model that in assuming The portfolio continues to kind of shrink.

Speaker 1

Well, yes, I mean, just as the portfolio continues to shrink, I mean, assuming it does, obviously the reserve statistically becomes stronger on a percentage basis. There continues to be, I would call it, heightened risk on the commercial side. And at least let's take the what's in the non accrual on the advantage loan side, kind of remains to be seen how those will play out. So I mean, I think we're at the right level. One of the things I never like to do is keep going back to TAP earnings for additional provisions because you didn't do it right the first time.

I think we are pretty careful in identifying the entire risk profile of the bank's credit portfolio back a year and a half ago or so. And each quarter it will continue to reflect what we believe is the remaining risk, plus or minus. And don't forget at the end of this year, We'll have CECL in place. So I'm guessing by the Q3, we'll have some sense of where that's going also.

Speaker 4

Sure. Okay. That's helpful. I'm going to give you an opportunity to kind of get up on so far So you've been doing this whole banking thing for a couple of years. I mean, just think macro oriented, Not necessarily Sterling specific, is there anything from a macro front from a banking industry that you think is a little out of bounds with maybe potentially pricing recessionary reserve, anything that might be keeping you up from just a banking perspective, not just Sterling that might Not be accounted for, probably speaking, for the whole space.

Speaker 1

I think in the entire space, I mean, what continues to concern me is that Guess I'll take the Fed Chairman's old line about irrational exuberance. That happens On the loan side, especially as rates were down very low, there was a lot of Aggressive lending and kind of esoteric businesses or Very low cap rates, high LTVs. I do think there's going to be a price to pay for that. The other side, it's been difficult for the industry to find bankable assets with the non bank competition and with the and I'll speak just to the community bank space side now, not the majors. But the what I think in many cases is excessive regulation that has made a lot of lending markets unattractive to banks.

I mean, it's for instance, It's really hard to have a good residential lending program, given all of the requirements. And again, I'm not knocking them. It's just that they're there. And to justify the cost, you need to have a very, very healthy origination platform, servicing platform, quality control and compliance. It's all needed, but it's also all very expensive and it kind of pushes banks into parts of the market, the credit markets that ultimately lead to problems.

I I think the so my view has been for many years that the consolidation the pace is ebbs and flows with consolidation, but and I can't speak to the entire country, but for the major regions, the major banking markets, it's going to continue to be very hard to be successful when you're under pick a number, but $8,000,000,000 to $10,000,000,000 You crossed $10,000,000,000 you've got other issues, but I think to be longer term successful and fair to shareholders, you're going to have to be able to spread those costs.

Speaker 4

Got you. No, that's fair.

Speaker 3

Sounds good.

Speaker 1

I think it's a great answer.

Speaker 4

Excuse me, my voice is good. Thank you. Appreciate it. That's everything for me. Thanks.

And that's all it starts for the year.

Speaker 1

Thank you.

Speaker 0

Quarter. This concludes our question and answer session. I would like to turn the conference back over to Tom O'Brien for any closing remarks.

Speaker 1

Well, perfect timing because my voice is going out. But thank you all and delighted to have you here and I look forward to the Q2 call. Have a good day.

Speaker 0

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.