Sterling Bancorp - Q2 2023

Transcript

Operator (participant)

Good morning, everyone. Thank you for joining us today to discuss Sterling Bancorp's financial results for the second quarter ended June 30, 2023. Joining us today from Sterling's management team are Tom O'Brien, Chairman, CEO, and President, and Walter Bertke, Controller. Tom will discuss the first quarter 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. In particular, forward-looking statements may be made on this conference call regarding to the economy and financial markets, government investigations, credit quality, the regulatory scheme governing the company's industry, competition in the company's industry, interest rates, the company's liquidity, the company's business, and the company's governance.

Any forward-looking statements made during this conference call are based primarily on the company's current expectations and projections about future events and trends that the company believes may affect its business, financial condition, results of operations, prospects, business strategy, and financial needs. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors, as well as examples of forward-looking statements, are discussed in the company's SEC filings, which are available on the company's website. These are not exhaustive. New risks and uncertainties emerge from time to time, and it is not possible for the company to predict all risks and uncertainties that could have an impact on the forward-looking statements made during this conference call. The company disclaims any obligation to update any forward-looking statements made during this 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 the reconciliation of the GAAP to non-GAAP measures. At this time, I'd like to turn the floor over to Tom O'Brien. Tom?

Tom O'Brien (Chairman, President, and CEO)

Thanks very much, Jamie. Good morning, everyone. Hope you're all enjoying the summer months. We released our second quarter earnings today, as you saw, we announced a profit of $0.05 a share, probably adjusted down to $0.03 in an operating level. The bullet points in the press release, I think, really tell the story of what's kept us busy during this second quarter. Obviously, the NIM got a lot of pressure, due in large measure to the interest cost of the sub debt, a little over 11%. I think the impact of this cost was more acute in both the first and second quarter as overall rates kind of plateaued and debt ratcheted higher.

We were anxious to get that redeemed and we'll have a little bit of impact in the third quarter on that for about two weeks of cost, and that'll be the end of it. The bank remains highly liquid, obviously very well capitalized. Through the company's efforts and all the work involved in the various investigations, kind of the costs and outcomes of those different investigations. I think we're at the point now where we can actually begin to make some strategic-type plans for the institution. That's been not available to us the last couple of years, primarily because we had to focus on the ever-present investigations from the different government agencies.

Really precluded us from doing much of anything strategically other than getting out of the very deep penalty box we were in. I think, you know, prospectively, the opportunity for us is certainly clearer now. I do think this quarter mostly represents the final chapter of the company's turnaround. I think particularly the, you know, the outside expense load that we've been carrying will begin to moderate, and the benefit from all of the different actions we've taken over the last few years will begin to bear some fruit as our financial performance becomes more predictable. We will continue to fully cooperate with the DOJ and the OCC in their ongoing investigations into individuals' conduct.

Again, that's the Sterling Bank and Sterling Bancorp are through that process, and we're in the final stages of settling out the DOJ settlement that was approved by the court just recently. For those who might be interested, there will be a special master appointed by the court within the next few weeks, and that special master will then determine the process for shareholders who are eligible submitting their claims. Eligible shareholders would be non-insider shareholders, and those who purchased the stock in the period between the IPO and late 2019. That process will become explained by the special master once that's established.

we will, you know, we're prepared to fund that as soon as that is required. I would add, you know, kind of generally, though, that the cost to repair Sterling, obviously no secret, but it's been an enormous drain on our shareholders. The consequences of bad decisions and bad behaviors is something I've dealt with and witnessed my entire career. I guess the only thing I can say is there's just no upside to short-term thinking in this business. Things that continue to happen time and time again, but the price you pay is so outside the benefit that you might receive. but as I mentioned, we, you know, we'll continue to cooperate with the agencies as they pursue their other investigations.

I think from the bank's perspective and the company's perspective, we're pretty well looking at all this stuff in the rearview mirror. The Walter is on the call with me. He's our controller. I just Walter, if you could just kind of give a little bit of color on the impact of the net interest margin in the quarter and the impact of the sub debt, and what you might expect would be the, you know, the impact going forward from redeeming the sub debt.

Walter Bertke (Controller)

Sure, Tom. This quarter, our margin of 2.64% declined 29 basis points quarter-over-quarter, as Tom had mentioned. It was largely due to the increasing cost of our deposit base. As we look at the impact of the sub debt, we redeemed it mid-July. We will have 2 weeks of the expense in the third quarter. The sub debt and then the impact on short-term cash would be a margin compression that we calculated of approximately 23 basis point impact in the second quarter that won't continue into the future.

Tom O'Brien (Chairman, President, and CEO)

Yeah. Good, thank you. The, you know, the level of interest rates right now and the competition for bank deposits, that's kind of a funny turnaround from, you know, a year or so ago. I think the outcome of the failures in March continue to reverberate in the industry. You know, I suspect there'll be a continued high premium on liquidity and some, you know, some careful review of tangible common equity and the impact of AOCI in the industry's financial statements and more particularly on the impact of held-to-maturity securities. Obviously, as I've mentioned, like, many times, we carry no held-to-maturity. Our available-for-sale securities are, you know, generally relatively, you know, shorter term.

Nonetheless, there, you know, there is market exposure there, but nothing of unusual consequence. With that, probably best to take questions because I always kind of hear what's on people's minds and learn more about what everybody's thinking. Jamie, if you want to open it up for questions, I'm ready to go.

Operator (participant)

Ladies and gentlemen, at this time, we will begin the question-and-answer session. If you'd like to ask a question, please press star and one. To withdraw yourselves from the question queue, you may press star and two. If you are using a speakerphone, we do ask that you please pick up your handsets prior to pressing the numbers to ensure the best sound quality. Once again, that is star and then one to join the question queue. We'll pause momentarily to assemble the roster. Once again, if you would like to ask a question, please press star and one. Gentlemen, at this time, I'm showing no questions. I'd like to turn the floor back over to you, Mr. O'Brien, for any closing remarks.

Tom O'Brien (Chairman, President, and CEO)

Okay. Thank you. I suspect the summertime has kept several of our normal questioners either busy. Yesterday, obviously, we had two announcements in the banking industry with one in Virginia and obviously PacWest deal out in California. You know, that may be some sense that give us some sense that the capital markets are kind of becoming unfrozen and more friendly to transactions and conversations among banks. I think that's certainly welcome news. The, you know, the balance of the process in the capital markets will be determined over the, you know, the next few weeks and months.

As I said, I think there's probably some reason for good optimism in terms of, you know, valuations and opportunity, you know, throughout the industry. With that, I certainly hope everybody enjoys the August period as we kind of get into the second half of the summer, and we'll look forward to the opportunity to be together on the third quarter conference call in October. Thanks very much.

Operator (participant)

Ladies and gentlemen, with that, we'll be concluding today's conference call and presentation. Thank you for joining. You may now disconnect your lines.