Sterling Bancorp - Q4 2023
January 24, 2024
Transcript
Operator (participant)
Good morning, everyone. Thank you for joining us today to discuss Sterling Bancorp's financial results for the fourth quarter and full year ended December 31st, 2023. 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 fourth quarter and year-end results, and then we'll open the call up 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 risk and uncertainties. In particular, forward-looking statements may be made on this conference call regarding the economy and financial markets, government investigations, credit quality and regulatory regime governing the company's industry, competition in the company's industry, interest rates and company's liquidity, the company's business and 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 call over to Tom O'Brien. Tom?
Tom O'Brien (Chairman, CEO, and President)
Thank you. Good morning, everyone. That intro may be longer than my remarks here, so we'll see how this goes. But, anyhow, I'm joined in the boardroom here in Southfield, Michigan, by Karen Knott, our CFO, and Chris Meredith, our Chief Risk Officer, and Liz Keogh, our General Counsel. And we're going to run through the fourth quarter and year-end 2023 financial results. And I'll just hit the highlights. I assume everybody's looked at the press release, but, you know, for the quarter, we reported net income of $0.10 for the year, $0.15.
Quarter is mostly driven by the recovery on D&O insurance that I think we referenced in the third quarter call as being expected in the fourth quarter, and then an allowance reversal, you know, driven by the you know, strong credit metrics for the bank and reduced loan portfolio and you know, our general process and assessment. But the allowance continues to remain at about 2.25%, roughly?
Karen Knott (EVP, CFO, and Treasurer)
2.18%?
Tom O'Brien (Chairman, CEO, and President)
2.18%. Okay. So still very healthy relative to the loan portfolio. But again, you know, the quarter and the year, as it has been the last few years, you know, pretty noisy at the top line.
But beneath that, you know, things here as we got into the fourth quarter and then the end of the year and now into January, things are relatively quiet here. Can't say there's a lot going on. I think the big issue prospectively remains, you know, what happens with interest rates and NIM compression. You know, I would say at this point, we're, you know, reasonably looking at kind of flattish change in margins. But the risk is always the cost of funds and the, you know, the underlying interest rates in the general market and the economy. As I mentioned earlier, credit is benign. The allowance, of course, remains, you know, strong on a dollar and percentage basis. As you noticed, I assume the expenses are moderating considerably.
I think, you know, third-party legal expenses are showing decline and, I think, you know, as we get into this quarter, that decline should continue to accelerate, and we should be, I think, near the end of the bulk of those in the next few weeks. Our own legal costs are likewise moderating considerably. Again, as we put all the issues with the regulators and the Justice Department behind the company and the bank, and those costs have, you know, continued to moderate. And again, we still see more of that in 2024. Although we do have some modest costs related to the ongoing compliance and reporting that we do with the Justice Department, but that really shouldn't move the needle anywhere.
We also put in some expense cuts for the coming year. We believe that'll help us mitigate the uncertain period that we find ourselves in. The economy, the general market, the kind of malaise that we're seeing in the capital markets, you know, continues to put pressure on our margin and our ability to maintain profitability. But I would say that's, you know, that's the most difficult part about, you know, what we deal with going forward, is just getting a real sense on, you know, what the markets are going to do and what the opportunities for us are. You know, in hindsight, I would say 2023 was a fairly amazing year, given that all that was accomplished. I think, you know, the idea that Sterling Bank is here today is probably the best news.
That future was most assuredly not guaranteed a few years ago. But at this point, you know, we have the opportunity to look forward and to continue to work hard on the strategic visions, you know, in these markets, as I noted. Our focus in, you know, at least the short run here for the next couple of quarters, is really on, you know, maintaining our tangible book value, our liquidity, and our, very moderate risk, credit risk profile. And, we believe that, those items, those three items are probably, you know, among the most valuable components that the institution has. And, so we're not inclined to, to risk any of those.
And we'll just kind of see what the next couple of quarters have in store for us as an institution and just for the industry in general. On the, you know, regulatory side, things are, you know, very quiet, and our relationship continues to be very transparent with our regulators. I think the business side remains, you know, very, very modest. We haven't stopped lending by any means, but, you know, we are being very careful in what we do and where we do it. And again, the runoff in the Advantage Loan portfolio is always going to be very hard to keep up with. So at some point, you know, those pay off next to nothing.
They've been more than cut in half in my tenure at the bank. But there's still, I don't know, $600 million?
Karen Knott (EVP, CFO, and Treasurer)
Yeah, $630 million.
Tom O'Brien (Chairman, CEO, and President)
$630 million. So, well, well below half of what it was, when I joined the bank, probably almost a third, 2/3 lower. So, you know, that's our plan with those basically, is just to let them continue to run off. They behave and perform relatively well, and we haven't had, you know, any, any concerns with the performance of the loans, notwithstanding the issues that we had over the last, several years with the, with the underwriting and the, and the bad actors that, created the, the problems for the bank. So, as I said, you know, my comments are probably about the same as the intro on the call.
Not an awful lot that I can think to add to the conversation, other than we continue to keep our eyes open and and work hard, and we'll see what the questions are now. So, operator, you can open the line up for questions?
Operator (participant)
We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then one. At this time, we will pause momentarily to assemble our roster. The first question comes from Ross Haberman with RLH Investments. Please go ahead.
Ross Haberman (President)
Good morning. How are you guys?
Tom O'Brien (Chairman, CEO, and President)
Good, Ross. Good to hear from you.
Ross Haberman (President)
Quick question regarding the NIM or the margin. If we do get a cut or two in March or June, how do you see that affecting the spread of the margin? Thanks.
Tom O'Brien (Chairman, CEO, and President)
I'll ask Karen to comment on that.
Karen Knott (EVP, CFO, and Treasurer)
Yeah, I think that, I think that the margin is gonna stay relatively flat. You know, we've done some work for the, obviously, 2024 projections, and we forecasted a couple of rate cuts, and the margin's pretty resilient, even with those cuts. Our loan portfolio still is repricing upward, even with rate cuts, because of period caps, and the quick rise of rates the last 18 months.
Ross Haberman (President)
Just a quick question to you about the non-performers, the $9 million. Refresh my memory, what's in that? And do you think you'll resolve most of that over the next, I don't know, quarter, two or three, and possibly take any more recoveries over the next quarter, two or three? Thanks.
Tom O'Brien (Chairman, CEO, and President)
The $9 million are 100% residential loans, and I think the bulk of those are in foreclosure, $7 million or so of it.
Karen Knott (EVP, CFO, and Treasurer)
Yeah, there's, you know, there's a couple million that are actually current. We're just waiting for performance to be sustained before we put them back on accrual status. And then the bulk of them are in the foreclosure process. At least the loans in California, everything moves normally through there. So, you know, we're waiting for the redemption periods to expire, and then we'll have the sale. They're all very well collateralized. As you know, those Advantage Loans have low LTVs to begin with, and they're very seasoned at this point.
Tom O'Brien (Chairman, CEO, and President)
And-
Ross Haberman (President)
Yeah, so possibility of any further recoveries like you did this last quarter?
Tom O'Brien (Chairman, CEO, and President)
Well, we hate to project recoveries, but, you know, if you do the math on process with declining loan balances and, no loan losses, you probably can extrapolate some, some benefits to that.
Karen Knott (EVP, CFO, and Treasurer)
Yeah, I mean, provision recovery for sure, and interest recovery, we haven't taken charge-offs on this particular pool that's in non-accrual due to the collateral value.
Tom O'Brien (Chairman, CEO, and President)
Then, Ross, I don't know if you're aware, but California is a not a judicial foreclosure state the way New York was. So in New York, I know we would hang around with loans and foreclosure for a generation. California is, and you know, in many respects, challenging place to do business. But in terms of the foreclosure process, it is, I think, about a 6-9 month round trip. And our experience has been that the loans that go into foreclosure prior to the foreclosure sale get paid off. I don't know that we've had... I won't say none, but virtually none that actually went into owned real estate.
Ross Haberman (President)
Just one final. Could you put a number on what you think your ongoing noninterest expense base is going to be? Is it, even if you add back the professionals you were running, what about $13.7 million, it looks like, for the quarter? Is that a good base to sort of, or using that as a base, let's just say, could you be saving, I don't know, $0.5 million-$1 million as a reduction of that?
Tom O'Brien (Chairman, CEO, and President)
Yeah. No, I see where you're going with that.
Karen Knott (EVP, CFO, and Treasurer)
Yeah, I think that's a little light because, you know, the non-interest expense for the quarter was $12.8, but we had $3.8 of legal recovery in there. So we're probably going to be, you know, a little bit north of $15, I would suspect, in a quarter in non-interest expense.
Ross Haberman (President)
But I think you threw out the idea that you could - you're working on some cost saves.
Tom O'Brien (Chairman, CEO, and President)
Oh, yeah.
Ross Haberman (President)
From that, using the starting point at the $15, for argument's sake.
Tom O'Brien (Chairman, CEO, and President)
I think that pretty much gets us there. I know the, you know, I mean, every quarter for the last three years have been very volatile. But I think, you know, we've kind of always thought that the normalized runway, run rate was between $14 and $15.5 or so, depending on, you know, the first quarter is always higher with Social Security costs and things like that, but-
Ross Haberman (President)
Right.
Tom O'Brien (Chairman, CEO, and President)
I think, you know, as Karen said, I think $15-ish is probably where we are for now.
Ross Haberman (President)
I got it. Okay. Thank you, guys. The best of luck.
Tom O'Brien (Chairman, CEO, and President)
Thanks, Ross.
Operator (participant)
Again, if you have a question, please press star then one. We have no further questions. This concludes our question and answer session. I would like to turn the conference back over to Tom O'Brien for any closing remarks.
Tom O'Brien (Chairman, CEO, and President)
Just quickly, thank you all for joining us today. You know, the analysts who covered us, we had one at Hovde and one at Piper Sandler, and both of those analysts at around the same time went on to other firms. So we have not had the research coverage that we had been used to, but I do believe at some point in the near future, Piper Sandler is going to pick up an analyst with the assignment for Sterling. And I suspect, you know, at some point, you know, in this quarter, anyhow, maybe Hovde will be doing the same process. But just unfortunate I have to deal with that.
But in any case, I do wish you all a very happy New Year, and thank you for participating as always, and we'll see you at the April call. Thanks.
Operator (participant)
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.