Q1 2022 Sterling Bancorp Inc Earnings Call

Good afternoon, everyone. Thank you for joining us today to discuss Sterling Bancorp's financial results for the first quarter ended March 31 2022.

Joining us today from Sterling's management team are Tom O'brien, Chairman, CEO , and President and Karen not Chief Financial Officer, and Treasurer, 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 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.

And 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.

Great. Thanks, very much and good afternoon, everyone welcome to our first quarter call. As you saw this morning, we announced earnings of $5 3 million or 10 cents a share you know there was kind of a typical.

You know noise within the quarter that you've seen in the last four or five quarters anyhow, but the you know the trends continue to be in.

In the right direction and I think we're you know we're feeling better about that.

Margin got a nice boost as.

Rates moved up a little bit and.

Well, we continue to shed some high cost funding.

So that's.

Big surprise for.

So no big change from where it was a year ago. So what you know three all three were up.

I think last year at one point, where like in the high 250. So that's a good improvement in what we were hoping for with the with higher rates.

We did have a recovery in the loan loss provision basically improved quite a credit quality continues to drive that capital continues to be quite strong.

Loans and deposits.

Moving more towards where we.

We want them to in terms of the deposits to you know more transactions lower cost deposits.

Less of the heavy reliance on Cds that the bank had historically had.

And loans and the.

Advantaged portfolio, but also in the commercial portfolio commit continue to pay down.

So the you know I'd say the concern I expressed then 2021, especially with respect to the.

Commercial portfolio and the credit risk inherent in that has been significantly.

Reduced in the last several quarters are predominantly by the the.

Great work in our credit Department and buy.

By the sale of $62 million or what were the toughest loans in there the <unk>.

Single room occupancy.

Hmm.

Hotel loans, I guess I'd call them and in San Francisco So.

And that was at least in my view, a very successful sale and done.

Done quickly and efficiently.

You know the nonperforming loans now are down to $46 million.

And as.

As I mentioned in my quote in the press release.

Now 16, or so million of that.

<unk> advantage loans that are.

You know at some point in the coming years likely to be restored to.

Performing status.

So again, you know I think we're all feeling a little bit better about them.

The credit risk and in a lot of that you know the market and.

Especially in residential real estate for some of the construction projects we've had has.

You know frankly bailed out a couple of deals that were pretty thin.

So you know, we'll take that help where we can get it and as I mentioned, just a minute ago the sale.

A quarter.

Quarter also saw some continued and I think pretty significant improvements N.

A lot of the regulatory milestones that.

We had set out last year, most notably I think most of the.

The regulatory items.

<unk> moved into a.

Position, where we've got to just show sustained performance and competency, but we've you.

You know accomplish the the foundational work of our addressing the you know the multiple issues that were in.

And the formal agreement and which we've been working on pretty dramatically over the last six months.

So that is good I also mentioned in the report that you know we've begun some.

The preliminary conversations with the.

Regulatory enforcement side and with the Doj criminal side Theres not much more I can say about that other than that we.

You know well continue to move that as much as we can.

And a expeditious manner.

Our conversations to date have really just been kind of laying the groundwork for what the issues are.

Hum.

How long they went on what the magnitude was.

And you know, there's really no economics that I can speak to other than.

What is in the 10-K and what will be in the 10-Q.

But I'm hopeful by the time, we have the third quarter call that.

It will be a lot more definitive on on where we all stand and as I've mentioned I think several times in the past.

There's kind of two competing interests in this.

[noise] 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 identified the issues and the individuals.

Who.

Created the problem and who you know led the bank down the wrong path.

And and that has been dramatic.

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 well know is that this went on for a fairly long period of time and the volumes were fairly substantial.

So those are you know I guess, what I call the competing interests.

And we'll have conversations about those in the in the weeks ahead, but that's kind of what I I see at the moment.

You know the rest of you know the story within the bank getting you know things like asset quality.

And margin and all that are just going the way we had hoped.

You know the continued increase in rates well you know.

Likely have a you know a further beneficial impact on us. Although we'll you know I guess as most banks will get some.

Some you know Oh.

A write down on the securities portfolio with them.

As rates move higher, but we're investing in a relatively short term manner. So it really isn't going to be dramatic and gets recovered.

With the maturities so no.

Not a big concern there.

You should also note we added.

Two new directors.

At the bank and or at the holding company I'm, sorry, not at the bank and at the bank that will be subject to the the OCC as a non objection, which we should have hopefully an.

Well they have up to 90 days in.

It's not that long, but they they are seated on the bank board now and they will be.

For.

Election at the I'm.

Shareholder meeting, which is upcoming in a couple of weeks and I'll just noticed a note with respect to the shareholder meeting you know there are several of them.

Governance improvements item on the items on there that I am.

You know I recommend everybody. They are you know things we would in the normal course considered to be contemporary good governance.

Measures and actions several of those are related to the derivative settlement.

And.

You know, we'll move things like you know the annual election of directors and.

Ah as you also know previously I can last year around this time, we had already established a separate risk committee and Netflix and compliance Committee and things things that are at least in my view the institution was in need up to them.

To me you know today's.

Governance expectations of our investors.

So.

That's I think enough for me to say on this it's always it's probably easier just to take questions and hear what's on your minds. So.

Operator, if you can open it up for questions I'll be happy to.

Answer than what I cant Karen can pick up.

Yes, Sir we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad. If you were using a speaker phone. 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.

Two.

At this time, we will pause momentarily to assemble our roster.

The first question comes from Nick cause you rarely with Piper Sandler. Please go ahead.

Good afternoon, Tom and Kevin how are you very.

Well, Nick Thanks Neal.

Well thank you.

So I wanted to start with expenses are certainly related 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.

Well.

I'll speak kind of generically and then maybe Karen can get into some specifics but.

You know generically.

It.

Expected that as you know these major issues get unwound that and what are predominantly legal and consulting fees at this point.

Those specific items you know should.

Should diminish the Oh.

Additional or the kind of the unknown.

Hmm.

Costs that we would face.

What date to the extent that.

Qualified former employees and I emphasize qualified.

We'll be entitled to.

Some indemnification of legal expenses as they are questioned.

And I'd, 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.

And the individual part of the prosecution's so.

To the extent, they're qualified you know, we'll honor those and its a little hard to take a guess as to what they'll be but that could.

Continue.

I don't know a couple of quick.

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.

Extra ordinary expenses.

Related to.

The advantage loan program and the investigations.

Yeah.

And so you know I would say they've been running pretty typical legal was about the same amount. It's been in the past just shy of $3 million, but we did see a decline in other professional fees of about $1 3 million and that you know with the resolution of some of those regulatory matters that you spoke of earlier.

Yeah, Nick they're kind of doing what I, you know I referred to last year as I said I think they will drift down late 'twenty one in early 'twenty, two and the real benefit.

We will start to come when the.

The resolutions are finalized.

Okay. That's helpful and have you started to see a slowing of paydowns 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 and the loan book.

Well, we haven't seen it yet.

And you know to some of the decline you know obviously has us encouraged on our part.

Riskier I'll speak to the commercial side first riskier deals that we're able to get refinanced elsewhere.

You know we continue to be happy to see those go because we're just not.

Set up and not you know qualified are competent and in many respects to handle.

Some of the more of them.

That's a term credits that were on the on the books so and.

And that's not a rate sensitive thing right, yet or at least it hasn't been and then.

On the.

Well you know the loans, we sold obviously that was a big a big bucket on the advantage loan side, which is the bulk of our residential.

You know it's in my experience at the bank it has been.

Reasonably consistent quarter to quarter.

Some of that is due to the knee.

Nature in which the loans were originated you.

You know they were.

Very high down payment loans and.

And so that's why the absolute credit performance is done you know pretty darn good.

It was the you know I think as everybody knows of compliance issues and needs.

AML issues that.

What drove the big issues, there, but they they continue in my view to pay down pretty quickly and.

You know frankly.

Given what they are and you know I'm pretty.

Pretty happy with that.

We do we do model them.

But over the you know if you look at the models over the next several years they continue to drop pretty dramatically.

Yeah.

Okay. So 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.

Or something like $750 million.

And.

Now they're down to I think about 160 ish or so which include some loans that we bought back obviously, but you know were there.

The risk we had on the solar loan portfolio, which is just down dramatically.

So yeah.

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

Yeah, it's a little hard to guess because they were all securitized. So we had dates which I think one of them has 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.

Hmm, which is what we anticipated then you know we would have.

The.

Commitment I guess you'd call it the buy the loans back although we haven't had any further discussions on the at least the first call.

That right Karen.

On track there.

Yes, that's correct. They're just you know with the movement in the market in the first quarter or are there just yeah.

Trying to figure out what to do with the rest of the world. So there's a little bit less certain than it was prior.

Okay can you remind us how much is left in that allowance at March 31st.

I'm sure, there's 2.7 million left and that allow it.

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.

I think that's probably a fair assessment.

We're trying to be judicious and and.

And that obviously just that.

Increase in.

Liquidity rates will be beneficial to us because they were.

You know virtually nothing for them.

Most of my tenure here and.

You know, we will selectively look at some securities if the incremental yield advantages as worth it but.

You know, we're not going to make any bets on rates.

You know could come back to bite us substantially.

Substantially and you know we continue to look at loan originations and we've done.

You know we've done several that have been really attractive, but obviously, it's not enough to keep up with the pay downs.

But we'll continue to do that so.

Thank you for taking my questions sure.

Again, if you have a question. Please press Star then one.

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

Hey, good afternoon, everyone.

Afternoon Ben.

Kind of following on a spend rate of next question. So do you think about just the expense base overall, obviously, there's a bit of noise, but kind of gets lumped into those few line items.

Different way 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.

I'll kick that to Karen.

Yeah.

Our core what I didn't hear the last part of your question of course, but yeah.

Yeah, just a run rate unlike what would a normalized expense base.

Hum.

Yeah, I would say, we'd probably be down about.

Maybe 20% from where it currently is.

Yeah.

Got it okay.

And then kind of switching gears here when you think about the reserve relative to the.

Overall loans.

Obviously made a lot of progress by selling a 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 preserve relative to.

Portfolio.

Is it should.

Should we be looking at kind of like dollar for dollar or percentage basis, I'm, just trying to get a sense of like the reserve to total loans and how to model that.

And assuming.

It continues to kind of shrink.

Well, yeah, I mean, just as the portfolio continues to shrink I mean, assuming that does obviously the reserve.

Statistically becomes.

Stronger on a percentage basis, you know there continues to be.

You know I would call at heightened risk on the commercial side and.

And at least let's take the.

Whats in the non accrual on the advantage alone side.

You know 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.

You know keep going back to tap our earnings.

For.

You know our additional provisions.

Because you didn't do it right. The first time, so you know we.

You know I think we were pretty careful in identifying the entire risk.

The profile of the <unk>.

<unk> credit portfolio.

So you know year and a half ago or so.

And you know it'll each quarter it'll continue to reflect what we believe is the.

Remaining risk you know.

Plus or minus and then don't forget at the end of this year, we will have them.

We'll have Cecil in place so I'm.

Guessing by the third quarter will have some sense of where that's going also.

Sure. Okay. That's helpful.

Right.

You have an opportunity to kind of get up on my soapbox here, Tom So you've been doing this whole banking big for a couple of years.

Macro oriented.

Not necessarily Sterling specific is there anything on the macro front from a banking industry.

Think it's a little out of bounds, it maybe like pricing or recessionary rest or anything that might be keeping you up problem, just a banking perspective, not just sterling that Mike.

That'd be a counter or broadly speaking for the whole space.

I think you know in the entire space I mean, what continues to concern me is that you know.

I guess I'll take the.

Fed chairman's all line about irrational exuberance that happens you know in the.

On the loan side.

Especially as rates were were down very low.

You know there was a lot of.

Aggressive.

Lending and <unk>.

And kind of.

Esoteric businesses or you know very low cap rates high ltvs.

I do think theres going to be a.

A price to pay for that the other side. It's you know it's been difficult for the industry.

To find bankable assets.

With the.

Nonbank competition and with the.

And I'll speak just to the community bank space side now not the.

Not the majors, but the you know the what I think in many cases is.

Excessive regulation that has made you know a lot of lending markets unattractive to banks I mean, it's for instance, its really hard.

To have a.

You know a good residential lending program, giving all of the.

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.

Thanks into.

Parts of the market the credit markets that are.

Ultimately to problems.

I think the.

So I think you know my my view has been for many years the consolidation is as.

As healthy warranted.

And that it's appropriate.

Hello.

Yeah.

You know the paces ebbs and flows with consolidation but.

You know the pump.

And I can't speak to the entire country, but for the major regions of major banking markets.

It's it's going to continue to be very hard to be successful when you're under.

Pick a number but.

$8 billion to $10 billion.

Cross 10 billion, you've got other issues, but.

I think to be you know longer term successful unfair fair to shareholders.

You're going to have to be able to.

[laughter] excuse me spread those costs.

Got it no that's fair.

Great and losing my voice.

Water.

Thank you.

I appreciate it that's everything for me and a solid start to the year.

Thank you.

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

Perfect timing, because my wife is going up.

But thank you all I'm delighted to have you here and I look forward to the <unk>.

Second quarter call have a good day.

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

Yeah.

[music].