Sterling Bancorp - Q2 2024
July 24, 2024
Executive Summary
- Q2 2024 delivered modest profitability: net income $1.316M and diluted EPS $0.03, with NIM at 2.44% and non-interest expense down to $14.9M.
- Balance sheet stable: deposits $2.013B, loans net $1.237B; ACL 2.18% of loans; NPLs rose to $12.2M (0.51% of assets) from $9.3M in Q1, largely seasoned residential exposures.
- Structural clean-up progressed: repaid the $50M FHLB advance in May; DOJ investigations relating to the former Advantage Loan Program closed, implying lower forward legal/professional burden.
- No formal quantitative guidance; management remains focused on protecting book value, liquidity, and disciplined credit while cautiously growing commercial real estate.
- Potential stock reaction catalysts: closure of DOJ investigations (reduced overhang), continued expense discipline, and any evidence of margin stabilization as deposit costs plateau.
What Went Well and What Went Wrong
What Went Well
- Expense control improved: non‑interest expense fell to $14.9M (−3% q/q), aided by staff reductions and rollback of legal/professional costs as DOJ closed investigations.
- Asset sensitivity helped yields: loan yields rose 18 bps q/q and securities yields rose 43 bps, partially offsetting higher deposit costs.
- Capital and liquidity strong: shareholders’ equity $328.9M; leverage ratios 14.26% (consolidated) and 13.80% (bank); cash and liquid assets substantial.
- Quote: “Credit quality remains strong as do our capital ratios… Deposit levels remain essentially flat… we are seeing some growth in our commercial portfolio” — CEO Thomas O’Brien.
What Went Wrong
- Margin pressure persisted: NIM fell to 2.44% from 2.52% as deposit rates increased 22 bps q/q, lifting interest expense by $1.3M.
- Nonperforming loans rose to $12.2M and 0.51% of assets (from $9.3M and 0.39%), mainly residential slow pays; still well collateralized but a headwind optics-wise.
- Net interest income dipped to $14.4M (−4% q/q; −11% y/y) on lower average loan balances despite higher yields.
- Analyst concern: pace of deposit repricing vs asset repricing may keep NIM under pressure near term.
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 30th, 2024. 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 second 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 and the banking industry, generally, that involves risks and uncertainties.
For a complete discussion of forward-looking statements and factors that could cause actual results to differ from those two statements, the company encourages all participants to refer to its SEC filings, especially those on Forms 8-K, 10-Q, 10-K, and the press release issued in conjunction with this conference call, which applies to any forward-looking statements made on this call. 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 directly comparable GAAP measures. The press release available on our website contains the financial and other quantitative information to be discussed today, as well as 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, CEO, and President)
Okay, thank you. Good morning, everyone. Welcome to our second quarter earnings call. I'll start basically by saying the second quarter was the continuation of what we have seen in recent quarters. We are operating essentially at a break-even level, plus or minus a few pennies each quarter. Our capital and liquidity continue to remain strong. Notable during this quarter was the final maturity of our last wholesale funding. The $50 million Federal Home Loan Bank advance was called during the quarter, and that brings to an end what were various forms of wholesale funding that we had on the balance sheet here some years ago, but including, you know, brokered listing deposits, these kind of advances, and some above-market CDs that peaked at over $1 billion a few years ago.
So now we essentially are looking at core deposit funding in the bank with nothing wholesale and nothing out of the ordinary course of what you would expect to see in a bank deposit portfolio. Expenses are finally peaking and trending in the right direction. The result basically of some cost-cutting that we did in the beginning of the year, and then additionally, the reduction in fees and expenses related to all the different investigations that have been going on here since 2019. As we noted in the press release, it appears that we are done with all of the investigations and the costs related thereto since the Department of Justice notified us during the quarter that their investigation is now closed.
The time invested and the money spent by the company over the last four years to complete these investigations has been painful, as you all know. Unfortunately, in our system of justice, the price paid for the activities of individuals is all too often visited upon the companies, and we have paid dearly. But more importantly, we continue to focus our efforts on the strategy that we have outlined over the last several quarters. Our strategies and objectives remain the same. We have, you know, looked at a variety of alternatives. We continue to do that and try to find ways to position the bank to be able to to grow and prosper in the periods ahead.
I think, you know, we've kind of outlined the various strategies that we would consider, and these calls are public filings, are press releases. These tend to be probably a little bit chaotic, given the nature of the market over the last year. But, you know, there does appear to be, as I noted in the press release, some continued thawing in the market and, and some greater regulatory certainty as to what, you know, the future holds for the, for the industry. I think, you know, the formal end of these investigations and as, as an additional matter, helps remove clouds of uncertainty that surrounded the company, in addition to the cost and the time efficiencies... that, you know, should help us going forward.
I think the general direction of both, you know, Sterling and the industry probably will be helped, assuming there's one rate cut this year, maybe as we get into September. There seems to be momentum in that direction, but that, you know, whether it's that meaningful or not in the scheme of things, I think it does help put an end to the speculation as to, you know, will rates, you know, stay at this elevated level, will they go higher, or will they, you know, drift a little bit lower? So, you know, I think the momentum towards lower obviously would be helpful. In terms of our margin, the, and again, as I noted in the press release, you know, the cost of liquidity is relatively high.
You know, loan opportunities, you know, we've seen some growth in commercial real estate, and, you know, the residential continues to pay down pretty aggressively, and I suspect that will continue on a, you know, kind of a similar path of month to month and quarter to quarter. We are not originating any residential loans and have no plans to do so. We will, you know, continue to look at commercial opportunities as they come along.
But again, it's a market for us, in particular, to be cautious in and to be mindful of what our charge is here, and as you know, we continue to state, you know, protect the book value and the integrity of the balance sheet and put us in a position to take advantage of opportunities that may present themselves over the coming months and quarters. So, you know, again, I don't think too much different in the quarters ahead in terms of financial performance. I think, you know, credit conditions stay pretty mild for us. Reserve levels continue to be very healthy. The industry in general, you know, continues to see weakness in office and in some overbuilding areas in multifamily.
And then, of course, in the Metro New York area, the regulated multifamily is experiencing, and probably will continue to experience a considerable degree of pressure as the values there have just been hammered. So with that, probably easiest if I take some questions and see what's on everybody's mind. So, operator?
Operator (participant)
Ladies and gentlemen, at this time, we'll begin the question-and-answer session. To ask a question, you may press star and then one. If you are using a speakerphone, we do ask that you please pick up your handset prior to pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and two. Once again, that is star and then one to join the question queue. We'll pause momentarily to assemble the roster. Our first question today comes from Ross Haberman from RLH Investments. Please go ahead with your question.
Ross Haberman (Moeny Manager)
Good morning, Tom. Tom, how are you?
Tom O'Brien (Chairman, CEO, and President)
I'm doing well. Always good to hear from you.
Ross Haberman (Moeny Manager)
The legal and compliance costs, how much of that was in the $2.1 million for professional fees for the quarter?
Let me start with that.
Tom O'Brien (Chairman, CEO, and President)
Okay, I'm going to ask Karen to answer that.
Karen Knott (CFO and Treasurer)
So in terms of legal fees, there's about $1.3 million. The other professional fees were around $800,000. There wasn't too much noise in terms of the investigation, but there was a couple of $100,000 related to those matters.
Ross Haberman (Moeny Manager)
So that should be going away. So that number should be going down by, should average, what, around $1.5 million a quarter?
Karen Knott (CFO and Treasurer)
Maybe more like $1.8 million or so, at least.
Ross Haberman (Moeny Manager)
Okay.
Karen Knott (CFO and Treasurer)
Through the next couple quarters.
Ross Haberman (Moeny Manager)
Was there any other sort of, I guess, what will be less recurring items besides that couple of $100,000 going forward?
Karen Knott (CFO and Treasurer)
Within that category or just in general?
Ross Haberman (Moeny Manager)
Within the non-interest expense.
Karen Knott (CFO and Treasurer)
There wasn't really too much other noise in the quarter. It was pretty quiet.
Ross Haberman (Moeny Manager)
Okay, so, Tom, I guess... What are you seeing on the, on roll-off, of your loans? If you, if we do see a drop-off in, rates, say, a quarter in September, then another quarter in, say, December, for argument's sake, do you think you'll see some refi or... And will that, will that be, will that help your margin if we do see two quarter rate drops?
Tom O'Brien (Chairman, CEO, and President)
It will. The question I always have in this context is, you know, do we see 0.5-point drop in September-ish to put a bigger statement in terms of the decline in rates or as you mentioned, two 0.25-point drops. But I think that's the magnitude of what we're talking about. I don't see any real change in our prepayment levels because on the residential, because virtually all of them are in the adjustable periods now, so they've, you know, all had the payment changes. And the level of prepayments there, there's some seasonality to it, but generally, it's been maintained at the on a percentage basis, similar levels quarter to quarter during my tenure here. And, you know, the performance really hasn't changed much.
So I don't know that I'd expect to see much greater in the way of prepayments, but prepayments are, you know, pretty significant in that portfolio. On the commercial side, I think it'll really depend more on the availability of credit to see if there's going to be, you know, more banks stepping into the market to provide lower rate opportunities. But I think that might be a little bit slow coming, so I don't expect to see much on that. I do think, you know, lower rates as we reprice liabilities would we begin to help margin, certainly.
Ross Haberman (Moeny Manager)
Any large expenditures expected over the next quarter, two or three, or everything will be basically similar, less, you know, the what was your ongoing legal expenses? Go on.
Karen Knott (CFO and Treasurer)
Yeah, we, our annual merit process, you know, takes effect in the third quarter, but other than that, I, I don't foresee anything.
Tom O'Brien (Chairman, CEO, and President)
Yeah. But nothing, nothing that would be out of the ordinary. I think, you know, over the last couple of years, we were always talking about the kind of the quarterly level run rate for expenses, and I think we generally were saying, you know, $14 million-ish was probably the right level, and we're gradually getting down there. I think, you know... I mean, there's always a couple of $100,000 of things that go, you know, one way or the other. But as a general matter, I don't see anything out of the ordinary here.
Ross Haberman (Moeny Manager)
Just one last question about your asset quality seems pristine. Anything, delinquencies or criticized that's keeping you up at night?
Tom O'Brien (Chairman, CEO, and President)
No. We have, you know, the—I'll go to the commercial stuff. The things that kept me up at night, you know, over the years here were, you know, sold off a while ago. So, you know, generally, our commercial portfolio has been at least for the last several quarters, you know, virtually no delinquencies, or if they are, they're just loans that are matured and going through the renewal or the payoff process. So we really haven't seen anything there. The residential, we, you know, we always tend to see, you know, slow pays and loans that, you know, I think virtually all of our nonaccruals at this point are residential. The vast bulk of them are paying in some fashion or another.
So I think, you know, that'll continue to be a little bit volatile, but on the residential, it's—they're all so well seasoned that even I think there's five that are in foreclosure in residential?
Karen Knott (CFO and Treasurer)
Four. Four.
Tom O'Brien (Chairman, CEO, and President)
Four loans that are in foreclosure. And they'll go, they'll go pretty quickly, but to date, we've not really lost any money on, on a residential, foreclosure. They're, they're kind of few and far between. And the, the equity built up over the years, plus the, you know, the market improvement, 'cause most all of these predate, 2020 in terms of their origination. So they, you know, they've had certainly price appreciation, especially in the West Coast market. So, you know, I, I think we're fine there.
Ross Haberman (Moeny Manager)
Okay. That was most of my questions. Thank you.
Tom O'Brien (Chairman, CEO, and President)
Yeah, anytime. Thank you.
Operator (participant)
Once again, if you would like to ask a question, please press star and one. To withdraw your questions, you may press star and two. And star and then one to join the question queue. And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the floor back over to management for any closing remarks.
Tom O'Brien (Chairman, CEO, and President)
Okay. Well, thank you for participating today. And, Ross, always appreciate your questions. The summer's going by quickly. We will look forward to the third quarter call with you coming up in two short months. And, again, thank you for your interest and your time, and enjoy the balance of the summer. Thank you.
Operator (participant)
Ladies and gentlemen, with that, we'll conclude today's conference call. We thank you for joining-