Sterling Bancorp - Q4 2022

Transcript

Speaker 0

Morning, everyone. Thank you for joining us today to discuss Sterling Bancorp's financial results for the Q4 full year ended December 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 Q4 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 two 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 or non GAAP measures which are intended to supplement, but not substitute for the most directly comparable GAAP measures. The press release available 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 call over to Tom O'Brien. Tom?

Speaker 1

Good morning. Thanks, Joe. Welcome again to another quarterly call for Sterling Bank. We're happy to have Those of you on the call that could join us. The quarter, not an awful lot Note going on to spend a lot of time on we had a small loss in the quarter that came out to 0 per share, but as I mentioned in the press release, a lot of the Issues that have dogged the bank for the last two years continue to be present in A lot of our financial results.

So we'll kind of go through those highlights a little bit here and then Take some questions. But as I said, the loss was $200,000 a quarter. For the year, we made 4,000,000 The margin at 309 in the quarter, obviously better than it was earlier in the year. I think higher rates have helped us on the liquidity return side and with the adjustable rate nature of most of the bank's loans. The subordinated debt at the holding company level is a depressant on The consolidated margin to the tune of probably a drag of 25 or so basis points.

We can't do much to address the subordinated debt until we finish with the governmental investigation. So we'll Unfortunately, just have to tolerate that as we go along. We did buy some loans during the quarter, not a Huge amount of $31,000,000 And Carol kind of go through the interest expense Breakdown, but you'll see we still carry a pretty significant expense relative to these investigations. Asset quality also continues to be pretty good. And I should note too that we continue to have a Low loss ratio on the legacy advantage loans notwithstanding all of their other Issues that have been the source of the investigations and the internal control issues that existed at the bank Previously.

We've kept the tried to keep the balance sheet fairly stable, Maintain a high capital ratio just to protect the company and its shareholders As we deal with these uncertainties, I'm sure the big question on everybody's mind is going to be Where we are with the Department of Justice and as I said in the quote there, we don't have a lot of visibility into it. We continue to cooperate. It would appear to us that the Investigation focus at their end is heavily on individuals. And I think with respect to the bank, we believe they have all the information they need. And As I said, we continue to cooperate completely.

I was hoping to have a little more to say at this point in time, But I don't. And I can't say that there's anything in the way of Hence or direction or Guidance that they might give us that would help you understand where it's going. We just as I said, we have no visibility into that Other than that, we'll get an expression of appreciation for the cooperation and the information we continue to provide. We do think collectively that it's going to be resolved They released the beginnings of a resolution sometime this quarter, but it's again, it's very hard to predict They don't necessarily hold to my timeline by any stretch of the imagination. But we Certainly have a strong sense of urgency on pushing that forward and do everything I can to Respond quickly and completely to any questions.

And as I said, we just Make the case known that we need and would like resolution as quickly as possible. And hopefully we get it, but I can't I just can't predict at this point. So with that, The bank itself, we continue to just I guess I'd say watch The time evaporate here, we're trying to find opportunities where we can Maintain the margin and control costs, but it's obviously a challenge. Fortunately, as you know from the last quarter call, we're done with the OCC issues and We've completed all that, signed the consent order and paid the fine. So

Speaker 2

And

Speaker 1

I would say in terms of all of the agencies that have taken an interest in the bank, we continue to provide Transparency and cooperation wherever it's needed. So that part you should have No concerns with respect to that. And I guess just going back to the DOJ is to Try to understand too that this was a multi year problem And as the frauds were uncovered early in 2020 and continuing, It was a multi year. It wasn't an incident. It wasn't a single person who Must behave, it was much more substantial than that as you all know.

And there's just an Awful lot of records to look at and understand and ask questions about. I'm going to ask Karen to just go through a couple of highlights on the Financial condition and then I'll get back on. So Karen, if you would.

Speaker 2

Sure. So I guess, I was just going to talk a little bit about the non interest expense for the quarter. We did see a reduction of 13% Even though we still continue to see elevated professional fees. So that professional fee number, dollars 5,900,000 consists both of Legal expenses and other professional fees to help us become compliant with all the stuff that's going So I guess if we look at that number and try to normalize it, probably 2 thirds of it is Due to these investigations and then the other third is more normal stuff of being a public company and just general operations. Same thing in the salary and benefits line, dollars 8,900,000 that's Not a bad run rate for the bank, although again, we have a lot of people there for BSA work, other work that a bank Our size might not normally have.

In terms of the allowance, we didn't have a big recapture this month. There wasn't a huge reduction in the loan book as it had been in prior quarters. And as Tom noted, we did purchase a pool of High balance, conforming or jumbo residential loans. In terms of CECL, which I'm sure is on everyone's Mine, we've worked through most of that process and really now that we are need to be Control validated by our internal and external auditors and then we'll be prepared to implement that and as required. Tom noted the non performing assets, they were down slightly quarter over quarter and At $38,300,000 and just to remind everyone, similar to prior quarters, over half of that are loans that are Paying, a lot of them are current even and we just want to see 6 months of consistent payments before we go ahead and upgrade those and put them back on accrual Status.

The balance sheet was relatively stable, month over month or quarter over quarter, just A $3,000,000 reduction. We were able to stabilize deposits, but as you can see in the NIM, it came at a little bit of a price As the deposit book increased. Tom?

Speaker 1

Okay. So I'll probably just add a couple of comments here in terms of More general industry commentary, but with the increase in rates and the Flow of deposits, I think we're back to a period where deposits and liquidity Have a relatively high value or not so long ago in 2022, the industry was flush with deposits And but higher rates, we've seen more and more institutions experience Price pressures as I noted in my quote in the press release, consumers have been had suppression in Their interest rates earned with the ultra low rates a couple of years, so that obviously some pent up demand for yield and certainly several banks that I follow And significant increases in their cost of funds. I think we've helped reasonably well as So the subordinated debt is a real thrown on our side in terms of the cost structure there, It's something we have to deal with. And I guess speaking of dealing with things, I think the benefits of the Derisking that we did during the course of 2022 will continue to show its wisdom as we get into 2023. The pressure on commercial real estate and anything in the way of Construction income producing property type credit.

We had a very significant exposure And at the time I joined the bank and some what I would characterize is pretty high risk Credit. We tackled that pretty aggressively. And for the last several quarters in terms of the commercial book, there have been no Delinquencies, no foreclosures, really a very clean credit book there and And a handful of criticized loans, but nothing too serious there. And I think we get out of those at Really very attractive prices. And our credit department worked with several on the especially on the construction side And got our exposure there down to much more manageable levels and much better properties Then we're there at the beginning.

And if you recall the total bank criticized and classified portfolio not so long ago was Over $200,000,000 So I think as I said, I feel when I initially arrived at the bank, I was Very concerned from the credit perspective on the commercial exposure that we had. I think The improving market earlier in late 2021 and early 2022 lifted some boats and We took advantage of that and got out. And so the concerns I expressed back then are I think pretty well satisfied at this point. So, we'll take some questions now and happy to hear what's on your mind.

Speaker 0

We will now begin the question and answer session. At this time, we will pause just momentarily to assemble our roster. And our first question here is going to come from Ben Gurion from Hovde. Please go ahead.

Speaker 3

Hi, good morning everyone.

Speaker 4

Hi Ben.

Speaker 3

Just had a quick question more so for Karen on the expense kind of the breakdown. So professional fees like you said was About 2 thirds was the ongoing investigation and then there was some in the regular salaries for BSA. I was wondering if you could kind of clarify a little more. So the professional fees seems like that will fall off Rather precipitously once the DOJ is completed, but now that the BSA is also done, I was curious, can that weighing down? And then go ahead.

Speaker 2

I mean, I think for a bank of our size, right, we have a pretty hefty BSA Hartman, however, we still do have a large book of those advantage loans on our system. So Well, I think eventually that will weigh in down. It's going to take some time for that to happen, right, as long as we still have So that book of business on our balance sheet.

Speaker 1

Can you

Speaker 3

Quantify or are you not at the you don't want to like at the level, so does it say like how much of the BSA where it could potentially run off Do you like a true core, core number?

Speaker 2

Yes. I'd be hesitant to say At this time, I haven't prepared an answer for that. So I can tell you there's 40 or roughly people in our BSA department currently, so it gives you a sense on a $2,500,000,000 bank what that looks like.

Speaker 3

Sure. Yes, that's quite a bit. And then whoever wants to feel that Tom will hear. When you think about just the liquidity today, know, Tom, you referenced deposits have more value. And I think this Q4 earnings really proved that.

But When you think about it, a lot of the banks in the industry have been struggling because they need to find or fund the loan growth. You guys are kind of shrinking a bit still. I was just kind of curious on your appetite for the CD and money market type expense of deposits relative to your kind of you're still in shrink mode on the balance sheet. Just kind of curious on Are you kind of setting the market? Are you taking giving what the market takes you so you don't lose clients?

Or just your approach to the overall funding costs?

Speaker 1

Yes, I can handle that, Ben. So we're I think last 2 quarters, I'd say, we pretty much Kept the balance sheet flat and that's pretty much our goal here. We had to run off a large group of Higher than market rate CDs that the bank had utilized historically And to fund the advantage loan growth that the bank had. So the goal right now is pretty much status quo and In and around the market, we're not chasing anything, but I would say pretty much in and around the market rates That are out there. The challenge is that the bank Historically operated as an old line thrift and So didn't really have a demand deposit book and obviously No corporate accounts or business, DBAs, things like that.

The bank was pretty much a money marketer CD deposit carrier. We have Over the last, I'd say, 6 months, Ben developed and then we started marketing a Demand product and on a relative basis starting with 0, we've had some pretty good success with that. But there's a long way to go. But as I said, I do think we're in a period where Liquidity certainly has more value. Wholesale funding is very expensive.

And I guess the other thing you've seen in the industry is pretty significant TCE diminution from the higher rates on what were in some cases Relatively long duration securities at lower rates. So those are the things But I've noticed. I don't think a huge issue here, but we've obviously experienced some of that, but our duration is A little over 2 years.

Speaker 3

Got you. That was good. And then lastly, it was more of a clarification. So you have $9,000,000 still reserved for legal or the investigations. Odds are it's not going to be exactly $9,000,000 because How life works, but it's assuming that it's under the balance sheet adjustment or over or under I.

E. I'm asking That doesn't it won't flow through the income statement, correct?

Speaker 1

It won't close the bank?

Speaker 3

No, no, sorry. It won't flow through whether you over reserved or under reserved the net change will not have a tax adjustment is what I'm really getting at.

Speaker 1

No, there's no tax adjustment because fines and penalties are not deductible. So that's just gross and net are the same. Okay. Whatever company. I mean, 9 is the most I can get in there.

So

Speaker 4

That's why

Speaker 1

it's 9. Fair enough. But I don't know more than that.

Speaker 3

Got you. Okay. I appreciate the color. I'll follow-up later this afternoon if I have anything else. Thanks.

Speaker 1

Yes, sure.

Speaker 0

Our next question here will come from Ross Haberman with RLH Investments. Please go ahead.

Speaker 4

Good morning, Tom. Tom, how are you? I am fine. I want to follow-up with that last Question about the reserve. How do you work your CECL, given you have this possible pending liability with the government To sort of make that CECL adjustment as of the Q1, I guess, because the CECL looks at like historical Defaults or delinquencies and you have sort of this who the hell knows what the number is going to end up being.

But how do you do How can you realistically make the CECL adjustment as of the Q1?

Speaker 1

Well, CECL when fully implemented is, as you know, just a debit or credit to the The equity. Equity accounts. I think it's probably safe to say we have no significant concerns with the fact of the impact. Mean, obviously, it has nothing to do with the reserve we have for the remaining reserve we have for penalties and the allowance We have this, we think appropriate and probably, I think I can say plus or minus fairly insignificant amounts. I don't think we expect anything significant out of the CECL Full implementation.

Speaker 4

Okay. And just a follow-up question about the margin. Every bank is sort of coming in and saying, hey, deposits are ratcheting up much quicker than we Ever expected, if we do see another 50 or 75 basis points over the next 6 to 9 months, How do you see that affecting your margin and your spread, given how quickly everything else, all the deposits have jumped up Gentle in the last couple of quarters?

Speaker 1

Yes. Well, it's funny because you probably watch a lot of the same banks that I do. But For all of us, obviously the increases were fast and furious and There was the typical lag in liability repricing, but the magnitude was greater. So a lot of institutions felt it more than others. Honestly, I think In our case, Ross, we had been building liquidity as painful as it was in 2021 2022 for obviously a variety of reasons that are unique to Sterling.

But in any case, liquidity that build And we reduced credit risk. So I think there's at least some dividend for us Being proactive at this point in time, the another couple of increases, Our liability costs will gallop along the way everybody else's do I guess, but we have a very Heavily arm weighted loan portfolio and Between primary and secondary liquidity on the balance sheet, it's I don't know Karen, you can correct me if I'm off here, but it's about $1,500,000,000 out of 2.5. The advantage loan portfolio, I think when I joined the bank was about Oh, God, I think a little over $2,000,000,000 it's around $800,000,000 now. So that That's different speed, but it continues to pay down. But the bulk of those have been were originated as adjustables.

We haven't looked at 2 Ross, I should also mention we've done some We continue to do some analysis with respect to payment shocks, but to date we haven't seen Any significant credit issues on the especially on the residential side with Higher rates as the loans adjust. We haven't written an advantage loan since I'm going to say around the 3rd Quarter of 2019, so they're all pretty well seasoned. And obviously, The equity levels, even if the markets give back some are very, very significant, so that they continue to From a credit perspective, behave the same way and everyone that pays off is one less we have to deal with? Long answer, sorry.

Speaker 4

Okay. No, I appreciate that. How are you just specifically, how are you dealing with I don't know if you've got a couple of Large multimillion dollar depositors and when they come in, I don't know what you're paying them on a money market today, I don't know, 110, 120 ish. They come in and they say I can get 4 plus in markets or something on a 2 year, what are you going to do for me? Are you adjusting Those guys immediately end to what level?

Speaker 1

Well, fortunately, we had several of those when I joined the bank. And I view those as, I guess, higher maintenance costs. Right. I mean, And so in several cases, we've nurtured those down More modest levels. Okay.

And I don't even I can't tell you the largest that we have now, but they're all pretty manageable. There's no one that is would be noticeable To anybody just looking at margins, were it to reprice? I mean, they're all pretty much what you'd expect in a California based Retail deposit gathering system, but there were several before.

Speaker 4

Okay. I think that's about it. Okay. Thank you very much. Let's see how things develop over the next months quarters, I suppose.

Speaker 1

Okay. Hopefully, Mike. Thanks for

Speaker 0

And with no remaining questions, this will conclude our question and answer session. I would like to turn the conference back over Tom O'Brien for any closing remarks.

Speaker 1

Okay. Just quickly, obviously, happy 2023 to everybody and Thank you for joining us. As I mentioned earlier, I can assure you we spend significant Time, energy and resources to bring all of the issues with respect to the bank to a close as quickly as possible. We will continue to do that and We look forward to our Q1 'twenty three earnings call in April. So have a good day.

Thank you.

Speaker 4

The conference has now concluded.

Speaker 0

Thank you very much for attending today's presentation. You may now disconnect your