Q4 2022 Sterling Bancorp Inc Earnings Call

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 31 2022.

Joining us today from Sterling's management team are Tom O'brien, Chairman, CEO , and President, Karen Chief Financial Officer and Treasurer.

Tom will discuss the fourth 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 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 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 Tom O'brien Tom.

Good morning, Thanks, Joe.

Welcome again to our another quarterly.

Paul first Sterling bank or I'm happy to have.

Those of you on the call that could join us.

The quarter, you know not an awful lot of no.

Going on to.

Spend a lot of time on we had a small loss in the quarter, but K.

Came out of it.

Zero per share but.

As I mentioned in the press.

Press release, a lot of the.

Issues that a dog the bank for the last two years.

To be present and.

A lot of our room financial results I will kind of.

Go through those.

Highlights a little bit here and then.

Take some questions.

But as I said the loss was $200000 a quarter.

For the year, we made $4 million.

The you know the margin.

At $3 nine in the quarter.

Obviously better than it was earlier in the year I think higher rates have helped us on the liquidity return side, what's the adjustable rate nature of most of the banks loans.

The subordinated debt at the holding company level.

As a.

Present on the go.

The consolidated margin to the tune them.

Probably a drag of 25 or so basis points.

Hmm.

We can't do much to address the.

Subordinated debt until we finish with the governmental investigation so well.

Unfortunately, just have to tolerate that up as we go along.

We did buy some loans during the quarter, not a huge amount, but $31 million.

And.

Carol kind of go through the interest expense breakdown, but you know 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 you know.

Continue to have a.

Low loss ratio on the <unk>.

Legacy advantage loans, notwithstanding all of their work.

There are other.

Issues that have.

And the source of.

The investigations on the inter.

Internal control issues that existed at the bank previously.

No. We've kept the tried to keep the balance sheet, you know fairly stable maintain a high capital ratio just too.

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.

Suddenly 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.

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 we continue to cooperate completely.

I was hoping to have a little more.

Let's say at this point in time.

But.

Oh, I don't and.

Can't say that there's anything.

And the way of.

Hence or direction or.

Guidance that they might give us that would help.

You know.

To help you understand where it's going we just as I said, we have no visibility into that.

Other than that we will get a.

As an expression of appreciation for the.

The cooperation and the information we continue to provide.

Hum.

We do think collectively that it's.

Going to be resolved.

Or at least the beginnings of a resolution.

Sometime this quarter, but it's again, it's very hard to predict them.

They don't they don't necessarily hold to my timeline by any stretch of imagination, but we.

We.

Certainly have a strong sense of urgency on pushing that forward and do everything I can to.

To respond quickly and completely 20 questions.

And so I thought we just.

You know make the case known that.

We'd 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.

You know the bank itself.

We continue to.

You know just.

I guess I'd say you know what the the time evaporate here, we're trying to.

Thanks.

Opportunities, where we can too.

Maintain the margin and control costs.

But it's and you know, it's obviously a challenge.

And Unfortunately, you know as you know from the last quarter call, we're done with the OCC issues and.

We've completed.

Completed all that sign the consent order and pay the fine.

So.

And I would say in terms of all of the agencies that have taken a uninterested in the bank we continue to provide.

Transparency and cooperation wherever it's needed.

So that part.

You should have no no concerns with respect to that.

You know and I guess, just going back to the.

The Doj is just too.

Sure.

Try to understand too that this was a.

Multi year.

Problem.

And you know as the frauds that were uncovered.

Early in 2020 and continuing.

It was a multiyear and it wasn't an incident it wasn't.

A single person who.

It's behaved it was.

A much more substantial than that issue as you all know and.

There's just an awful.

Awful lot of records to look at and understand.

Ask questions.

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 Okay. If you would.

Yeah.

Sure. So I guess you know 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 professionals. The number of $5 9 million. You know consists both of them legal expenses and other professional fees to help us become.

Become compliant with all the stuff that's going on you know so I guess you know if we look at that number and try to normalize it you know.

Probably two thirds of it is due to these investigations and then you know the other third is more normal stop of being a public company and just general operations.

Same thing in the salary and benefits line, you know $8 9 million.

No that's not a bad run rate for the bank, although again, we have a lot of them.

There for you know BSA work other work that a bank of our size might not normally have.

In terms of the allowance we didn't have a big recap sure. 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.

The pool of high balance.

And farming, our jumbo residential loans in terms of the seesaw, which I'm sure everyone is on everyone's mind you know we've worked through most of that process and really now that we are needs any thoughts.

Well control you know validated by our internal external auditors and then we'll be prepared to.

To implement that and you know as required.

Tom noted the nonperforming assets you know they were down slightly quarter over quarter, and you know at $38 3 million and just to remind everyone similar to prior quarters, you know over half of that are loans that are paying.

Hey, a lot of them are current event and we just want to see you know six 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 million dollar reduction we were able to stabilize deposits, but as you can see in the name it came at a little bit of a price.

As the deposit book are increased.

Okay.

So.

I'll, probably just add a couple of comments here in terms of.

[noise] more general industry commentary, but.

The increase in rates and the.

Hello, a deposit.

No I think we're back to a period where depart.

And liquidity.

A relatively high value work.

Not so long ago in 2020 to.

The industry was flushed with deposits.

And but you know higher rates we've seen.

More and more institutions.

Experience price pressures.

So as I noted in my quote in the press release.

Consumers have had.

I had a suppression in.

Uh-huh their interest rates earned.

With the the ultra low rates for a for a couple of years, so that obviously, some pent up demand for yield.

And.

Oh sure.

Certainly several banks that I follow and.

Significant increases in their cost of funds.

I think we've held reasonably well as I said that you know the.

The subordinated debt is a real throttle on our side in terms of the cost structure.

Structure, there, but that's something we have to deal with and I got speaking up dealing with things I think.

The benefits of the Derisking that we get during the course of 'twenty two.

Ooh.

We will continue to show its its wisdom as we get into 'twenty three.

Pressure on.

Commercial real estate and you know anything in the way of you know construction income producing property type.

Credit we had a you know a very significant exposure.

Hmm.

At the time I joined the bank in some what I would characterize as pretty high risk.

Credit.

We tackled that.

Pretty aggressively.

And.

For the last several quarters in terms of the commercial book.

There've been no delinquency.

Delinquencies no.

Foreclosures.

They are very clean.

Book, There and.

And a handful of.

Criticized loans, but nothing.

Nothing too serious there and I think we got out of those.

That's really very attractive prices and.

Our credit Department work with several on especially on the construction side and.

And got our exposure there have gone to a much more manageable levels and much.

Better properties than where they're at the beginning and I can recall the.

You know the total bank criticized and classified portfolio not so long ago was.

Over $200 million, so I think so.

That said I feel.

When I initially arrived at the bank I was.

Very concerned from a credit perspective on the commercial.

Exposure that we had I think the.

The improving market earlier.

In 'twenty late 'twenty, one early 'twenty two lifted some boats and we.

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.

Well take some questions now and I'm happy to hear what's on your mind.

We will now begin the question and answer session.

Ask a question you May press Star then one on your telephone keypad.

If youre using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two.

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

And our first question here, it's going to come from Ben <unk> from <unk>. Please go ahead.

Good morning, everyone.

Hi, Ben.

Uh huh.

Quick question more so for Karen on the ERP expense.

Kind of a breakdown some professional fees like you said was.

About two thirds was the ongoing investigation and then there was some in the regular salaries for BSI Square I was wondering if you could kind of clarify a little more so the professional fees. It seems like that will fall off rather precipitously once the Doj is completed but rather the BSA.

<unk> also done I was curious cannot weighing down and then go ahead.

Yeah, I mean, I think you know for a bank of our size right. We have a pretty hefty BSA Department. However, we still do have you know a large bulk of those advantage loans on our system. So well I think eventually that will wane down you know, it's going to take some time.

Hum.

For that to happen right as long as we still have does that book of business on our balance sheet.

Can you.

Quantify.

Or are you kind of thought.

They don't want to know like at the level. So does it say for like how much of the BSA, where it could potentially run off to get like a true core core number.

Yeah.

I'd be hesitant to say at this time I haven't I'm prepared to answer for that so you know I can tell you. There's you know 40 are roughly people in our BSA Department. Currently so it gives you a sense you know on a two and a half billion dollar bank what that looks like.

Sure Yeah, so that's quite a bit.

Then.

Whoever wants to fill the time worker when you think about interest in liquidity today, I know, Tom you referenced deposits or more value and then I think I think this fourth quarter currently really prove that but when you think about it a lot of the banks in the industry had been struggling because they need to find a fund the loan growth.

Whereas you guys are kind of shrinking them, but still.

Just kind of curious on your appetite for.

The CD and money market type expensive deposits relative to their kind of youre still in shrink mode on the balance sheet, just kind of curious on how you are you kind of studying the market are you, taking given where the market takes usually don't lose clients or just your approach to the overall funding costs.

Yeah, I can handle that so.

Weird.

Les I think the last two quarters I'd say, we've pretty much.

You know 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 <unk> that the bank had.

Utilized historically.

And you know to fund the the advantage loan growth at the bank had the so the goal right now is pretty much status quo and.

In and around the market.

We're not chasing anything.

I'd say pretty much in and around the market rates.

They're out there.

The you know the challenge is that the.

Bank hits.

Historically operated as.

An old line thrift.

And so.

Didn't really have a demand deposit book.

And you know obviously, you know no no corporate accounts or.

Business Dda's things like that so the.

The bank was pretty much a money market or C D deposit gear out there.

We have.

Over the last I'd say six months.

And then.

<unk> developed and then we started marketing a.

Demand product then you know on a relative basis, starting with zero.

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 at a period where.

Liquidity certainly has more value.

Wholesale funding is.

Expenses.

And.

And I guess the other thing you've seen in the industry is.

Pretty significant.

T C E ammunition from the.

Higher rates on.

Who what where in some cases relatively long duration securities at lower rates. So.

Yes.

Those are the things that I've noticed.

I don't think a huge issue here, but we've obviously experienced.

Some of that but our duration.

Little over two years.

Gotcha, Okay, and then last quarter it was more of a clarification.

So you have 9 million.

It's still a reserve for legal or the investigation on guard for not going to be exactly nine because that's just not how it works, but it's assuming that it's under it's a balance sheet adjustment.

Over on the E M asking if it doesn't it won't flow through the income statement correct.

Okay, well close with the bank.

No no I'm sorry.

It won't flow through whether you are over reserved or under reserved and that change will not have a tax adjustment because what I'm really getting at.

No there's no tax adjustment cause fines and penalties are not deductible. So that's just gross and net are the same.

Whatever whatever comfortably I mean nine is the most I can get in there. So that's that's why.

But.

I don't I don't know.

More than that.

Gotcha Okay.

Appreciate the color I'll follow up later this afternoon after I have anything else.

Sure.

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

Our next question here will come from Ross Haberman with R. L. H investments. Please go ahead.

Good morning, Tom Tom how are you I, just my implying well I wanted to follow up with that last question about the reserve.

How do you work your C. So.

Given you have this possible pending liability with the government.

Sort of make that seasonal adjustment as of the first quarter.

Oh, I guess because of seasonal looks at like is historical.

Defaults or delinquencies in and you have sort of.

Who the Hell knows what the number is going to end up being but how do you do it plus.

He's a real foot realistically.

Adjusted net adds this quarter.

Got it.

Well he saw when fully implemented as you know just a debit or credit to the.

The equity the equity account.

I think it's probably safe to say we.

They have no significant concerns.

What the effect of the impact I mean, obviously it has nothing to do with the reserve we have for them.

Oh.

The remaining reserve, we have for penalties and.

And the allowance that we have as you know we think.

Appropriate and.

Probably.

You know.

I think I can say plus or minus.

Fairly insignificant amount so I don't think we'd expect anything.

Significant out of the seasonal full implementation.

Okay.

And just a follow up question about the margin.

Every bankers sort of coming in and saying Hey, you know.

Deposits are ratcheting up much quicker than we ever.

Good.

If we do see another 50 or 75 basis points over the next six to nine months.

How do you see that affecting your margins and your spread given how quickly everything else all the deposits.

Jumped up.

You know in the last couple of quarters.

Yeah, well, it's you know it's funny, because you probably watched a lot of the same banks that I do but you know for all of US you know obviously the increases were fast and furious and.

There was you know the typical lag and liability repricing, but.

The magnitude was greater.

So.

You know a lot of Oh, a lot of institutions.

Felt that more than others I honestly I think you know in our case Ross the.

We had been building liquidity is king.

Painful as it was in 'twenty, one and 'twenty two.

For obviously, a variety of reasons that are unique to sterling.

But in any case liquidity that build.

And and we've reduced credit risk so.

I think there's at least some dividend for us.

Being proactive at this point in time.

You know another.

Couple of increases.

Our liability costs will gallop, along the way everybody else is do I guess, but we have a very.

Heavily arm weighted.

Loan portfolio and.

You know between primary and secondary liquidity on the balance sheet.

So I don't know Karen you can correct me if I'm off here, but it's about 1 billion five.

Out of two and a half.

<unk>.

The advantage loan portfolio I think when I joined the bank was about.

Oh God I think a little over 2 billion, it's around 800 million now.

So that you know that.

Different states, but it continues to pay down.

But the bulk of those have been.

Were originated as adjustables, we haven't we have looked at to Ross I should also mentioned we've done some.

Content, we continue to do some analysis with respect to you know.

Payment shocks.

We haven't seen them.

Any significant credit issues on the <unk>.

Especially on the residential side with them you know higher rates as alone suggest we haven't we haven't written an advantage loans since.

I'm gonna stay around the third quarter of 2019, so they're you know, they're all pretty well seasoned.

And obviously the AR.

The equity levels.

Even if the markets get back some or you know.

Three very significant so that they continue to.

A credit perspective, you know behave the same way.

And.

And you know and everyone that pays off as one less we have to deal with.

Long answer sorry.

Okay, No no I I I.

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 multibillion 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, 120th they come in and they say I could get four plus the markets or for something on a two year or what are you going to do for me are you adjusting those guy.

Immediately on to what to what level.

Well Fortunately, we had several of those when I joined the bank.

And.

I view those as.

I guess, you know higher maintenance costs right I mean, it's.

Hum.

And so.

Several cases.

We've.

Nurture those down too.

More modest levels.

Okay.

I don't even know I can't tell you the largest.

That we have now, but they're all pretty manageable if theres no one that.

Is.

Would be noticeable to our 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.

You know retail deposit gathering system.

But there were several before.

Okay.

Oh.

I think that's about it okay. Thank you very much slope right now, let's see how things develop over the next months and quarters I suppose.

Hopefully my great. Thanks, Chris.

Thank you Brian .

Okay.

Sure.

Yeah.

Again to join the queue Press Star then one if you have a question.

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

Okay, just quickly obviously I'm happy 2023 to everybody and.

Thank you for joining us.

And earlier.

I can assure you we spend a.

Significant.

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.

First quarter 'twenty three our.

Earnings call in April .

April .

Have a good day. Thank you.

The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.