Q1 2023 Sterling Bancorp Inc. (Southfield MI) Earnings Call

Yes.

Good morning, everyone and thank you for joining us today to discuss Sterling Bancorp's financial results for the first quarter ended March 31 2023.

Joining us today from Sterling 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 future performance and financial condition.

Sterling Bancorp that involve risks and uncertainties.

Various factors could cause actual results to materially to be materially different from any future results 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 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 floor over to Tom O'brien Huh.

Great. Thank you.

Good morning, everyone I am.

And San Francisco This week, so at eight a M here and.

And our Apis on.

Corner of Montgomery in California.

I guess first I'll start off and say what the.

First Republic resolution that's been another.

Momentous weekend for.

Bankers and investors.

Government agencies.

I would say there is a meaningful cause for concern here.

Which I think we'd all like to see addressed.

More proactively by bankers.

Bankers.

Especially risk managers.

Regulatory supervisory teams.

And.

I would also say the fundamental construct of the FDIC.

Just these three failures basically in the last.

Four weeks of course.

The deposit insurance fund.

Between $40 $50 billion.

The.

When we are going.

It looks more like the early 18, hundreds with the first and second bank of the United States.

And.

Yes.

Concentrates.

Our resources.

Basic economic control and and very very few hands. So I'd I'd argue it's just not good for certainly not good for banking in general.

And ultimately not good for our consumers so.

Let's hope that some senior heads prevail here and.

Control.

The risk taking.

And.

Banks It may look like these three.

And.

And also.

The regulatory process becomes.

Much more forward looking instead of backward looking.

So.

That's my Soapbox comment.

Do feel it's fundamentally impacting the.

The future of what has always been the envy of the global banking system and that is the system in the U S.

So with that more specifically at Sterling.

Kind of go through a few high points I'm going to ask Karen.

To.

Give us a little better detail on Cecil.

But anyhow, so basically kind of a breakeven quarter again, I'm a little bit of growth in.

Tangible book value.

Mostly from some improvement in the Mark to market on the held for sale of Securities.

Margin had a little bit of compression.

<unk>.

A fair part of the margin.

<unk> is occupied by the cost of our sub debt.

And.

You know I think at the beginning of the year I set out basically tree.

Objectives to do and in.

And the order in which I can do them and they were basically to settled with the Doj, which we've done.

Once that was done that was allowed to address the.

Longer term.

Delinquent seriously delinquent advantage loans and.

We are doing that now and then the next thing I have to tackle is the.

The sub debt.

Very expensive and probably.

Hello, Karen can correct me, but something like 12 basis points on our margin.

Current rates.

And obviously rates go up another 25, one or two times that'll.

Continue to impact us.

Okay.

Expenses still you know relatively high not unexpected as you know the settlement process in the legal space with the Doj was.

Time consuming and expensive.

R R.

Our goal of protecting book value was.

So it remains in place we haven't financed.

Much of this through capital of which was always certainly Michael.

Our leverage ratio.

<unk> remains very strong.

Any calculation.

Deposits.

Just under $2 billion.

And as we note in the press release there was at.

At the time of the first two collapses.

We had a little bit of.

Repositioning accounts, mostly in and around the.

Deposit insurance level.

And we also had some accounts come into the bank.

But as I've just the other day I Corp, 25, or so million dollars ahead of where we were.

The day before the collapse of the silicon.

Silicon Valley.

We keep all of our debt securities available for sale.

I've never use held to maturity.

Don't like it.

Kind of too much camouflage I think from a transparency perspective.

And then.

Almost simultaneously with the conclusion of the Doj settlement.

We started looking at the.

A sale process for the nano.

Nonaccrual and seriously delinquent residential loans so.

We hired a independent advisor and got.

Several bids and.

A very competitive process, which was nice to see.

And I think we should.

Had that sale concluded hopefully late may.

And then as you all know of course, we had the Doj settlement.

Which.

Is it has to go through the court system to get approved and I think that'll probably be done.

In mid July .

But the the elements are all there and the court has to approve it.

Which we expect a shouldn't are.

Present any obstacles.

So you.

We've continued to do the.

The job of fixing the bank and.

I think we've virtually accomplished.

95% of.

What was the original goal when.

When I started with the bank and we.

Developed all the action plans and remedial plans for the.

Fixing of what at that time was a.

Our big issue I can I can also say one of the biggest concerns I had when I joined the bank wasn't liquidity.

Given the.

Loans that were.

So previously to outside investors and the risks with that the reliance on.

Broker deposits at home loan bank advances and things like that or in the hundreds of millions.

But I think.

Addressing that the way, we did turned out to be.

Oh.

Good in what turned out to be a.

Liquidity important period right here now I can't say.

Or any of us basically anticipated that but it does.

It does validate the concerns that are you know, we and management had.

At that time in 'twenty mid 2020 about them.

Illiquid nature, and the high loan to deposit ratio and the AR and the institution.

So that's.

That's kind of my thought on where things are.

I think we're going to see more regulation, obviously, but as I said earlier I just hope it's.

Well thought out and that we don't keep coming up with solutions to.

To address yesterday's problems I mean, they just have to be more forward looking and understand that the market that exists today and the ability of all of us basically to move our money around it.

Click on our phone.

And.

You know the the.

The lines of the 19 thirties can't be the model for solving.

Bank issues today, I mean, you're always going to have banks that get in trouble again.

The other business.

And whether it's a local economy or.

They had management.

You know things will happen, but it shouldnt be so.

Unsettled period, and you know really should pass without.

The kind of.

Crises, we've had since.

Early March.

So I'm going to ask Karen to spend.

A minute or two on Cecil.

And.

And of course during the Q&A weekend, where she can answer any questions on that.

So Karen if you don't mind.

Sure. So as required we adopted Cecil on January 1st there was a half a million dollar increase to retained earnings as a result of that adoption and that was primarily driven by the short term nature of our construction portfolio. So you know you you reserve for.

That until maturity all of our construction portfolio is slated to mature in 2023, and so we were based on this logic a little bit over reserved in that area. Some of that was.

Allocated to our residential and commercial real estate portfolios, which did increase with the adoption due to the longer term nature of those portfolios.

We also established a small reserve for unfunded commitments as required by the guidance.

We moved that forward them to the first quarter than we did see our overall allowance declined primarily as a result of the transfer of the residential delinquency and non accrual loans to held for sale are we took that charge off and.

Reduce the allowance for the residential portfolio, but we did see an increase in commercial real estate and that's primarily a result of economic forecasts around the commercial real estate book and you know now and not what you're not seeing in the industry in general some concerns there and so we did take them more of a.

Provision on that portfolio.

Okay.

Yeah.

Okay. Thank you operator, we can take some questions now.

Ladies and gentlemen at this time well begin the question and answer session. If you'd like to ask a question. Please press star and then one using a touch tone telephone.

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Our first question today comes from Ben Garlinger from Hockey Group. Please go ahead with your question.

Good morning.

Hi, Ben.

I'm just kind of.

Somewhat random so I'll just jump around a little bit I'm, sorry for the 41 million.

It seems like it took a pretty decent haircut on price.

The assumption there I was curious what is the yield on those.

Oh, I'd be guessing a little bit I would say.

Mid fives, Karen does that sound fair.

Yeah, I would say that's fair you know a lot of that.

As long as our non accruals so we're not a.

Booking anything on our <unk>.

Income statement for the bulk of that but I haven't a happens about is reasonable.

Got it.

An assumption based on the.

The likelihood and then also from there.

Yes.

The investor yield the investor yield I would.

If you do with it.

You know kind of a.

Lower mid eighties pricing.

Probably comes up to.

11.

Gotcha, Okay fair enough.

And then from there.

Hudson noise, some backdated noise with some income statements expenses, what that resolution and Tom you said that.

Should see court approval on approximately in July .

Any thoughts on kind of the the two Q and then does it fall precipitously post.

Cork or once you've kind of ramped down to getting the three tier I assume <unk> is probably the most normalize just want to be in.

Any thoughts on like what the heck.

Or.

Yeah, I think I mean, just kind of subtracting these things that we've had to address one by one.

The.

You know the.

Settlement process in this quarter back and forth with Doj was.

Just time consuming and expensive debt.

That will drop off to some extent in this quarter because we.

We had a court appearance.

Couple of weeks ago, and then the next one as I mentioned is in.

Mid July .

And.

After that there'll be a process for us too.

Distribute the.

The funds to the.

Non insider victim investors.

But anyhow those cost should step down I think in the second quarter.

We did get in the current quarter, we got some.

Insurance recovery on expenses that we had previously.

Those are hard to predict I mean, all of the negotiations with the insurance companies are.

Well I'll just say the protracted.

Awful lot of detail that has to go with a lot of.

Negotiation. So obviously they have lawyers we have lawyers.

Sure.

There are still some claims we have pending but it's very hard to predict.

When theyre going to be realized but I would say you're right on the third quarter, you will start to see some.

Significant benefit on that.

And you know and unknown.

And hopefully in the fourth quarter.

We're down to.

Minor fractions of what we've had to experience at least in <unk> and.

In my tenure here.

To say, it's been expensive is probably the biggest understatement in.

And the World These days, but.

But it was you know I think I.

Yes, I would argue given the seriousness of the issue is.

And.

The long running nature of it.

And and obviously.

Involvement of.

Very senior people in the institution.

I'd say money well spent in a solution that was.

Was quite appropriate for the circumstances.

Gotcha.

That's one.

What are you seeing much slower in the background now.

So relative to the balance sheet. It seems like you guys are cleaning up more in the balance sheet is getting smaller.

Kind of targeted reserve level or should we expect more of a recapture.

They know what's useful a little hard to say as Karen said, it's you know, it's really focused on the maturity date.

And obviously you know most of what we do.

With the portfolio that remains on the books.

You know is getting shorter and shorter so.

And we're basically run just under 2.5%.

You know by any standard I know that's.

I mean, I can't talk about releases, but I would say that is very robust.

So I'm not.

Not overly concerned about them.

You know the coverage you know with this loan sale well I should say in the quarter.

Once again, we had on the commercial side we had.

Delinquencies zero past due.

Charity.

I mean, it's I.

I would say that's left.

I think five or six months.

And as good as any I've ever seen.

And the residential was always.

Hung up by that.

Group that we mark down this quarter, but I couldn't sell them until we.

Resolved with the Doj so.

That takes care of.

Virtually everything we have at March 31, and you know there will certainly be.

You know migration it sometimes in the future and to them.

Delinquency and non accrual are theirs.

There's a certain inevitability to that but it's at that point it becomes kind of one by one.

Not big buckets, so long way of saying them.

Certainly comfortable with the level of the reserve.

I think it validates the approach that we took back in.

Oh, I guess November December of 2020.

Looking at the risk profile at that time.

And.

I don't.

I guess I can I say I don't envision any more additions.

Unless and until we got into.

Significant originations, which.

Hard to hard to forecast that right now.

Gotcha, and then lastly.

Now that we're done with our maybe have to wait till July but it seems like we're done with everything from a legal perspective is there any appetite for.

Doing something on the capital base, whether it be share repurchases or addressing that sub debt or anything to that.

Well as I mentioned the next <unk>.

First and last issue I have from a.

Yeah.

Financial statement perspective, as a sub debt.

It's I mean, it sticks out obviously by cost and.

There's.

Little if any value to it.

On a capital perspective, we have plenty of liquidity.

So.

Oh, Yeah that is the third.

The third of three items that I wanted to.

The address this year I think.

All of Us in management and the board.

All of our investors kind of understand the.

The drag that that provide so that does lead you back to the you know the idea that.

We can get that done.

Our next coupon date is mid July so.

The calls are on coupon date sort of be July 15th of October 15th et cetera.

So the sooner we can get that done.

The.

The less expense, we'll have to deal with that as a holding company expense, obviously and the.

Again, the cleaner the balance sheet.

Right, but we're not we don't have to thread the needle with like what happens with the corks like we could theoretically do it on the next call day Alright.

We have the liquidity.

You know there is some regulatory process, we have to go through and and all of that so yeah, but in theory sure.

Gotcha, Okay. It sounds good I appreciate all the color.

Once again, if you would like to ask a question. Please press star and then one to withdraw your question you May press star and to get another Star and then wanted to join the question queue.

We will pause momentarily to assemble any additional questioners.

And we do have an additional question from Ross Haberman from our L. H investments. Please go ahead with your question.

Good morning, Tom commentary today.

Ross how are you.

Good.

Bottomed out with the marching here or if they raised rates another.

We can maybe one time over the summer that will continue to.

Put pressure on.

On the margin for most banks.

Well.

It's a little hard to predict because I mean, you probably look at the same banks I go in the.

Each quarter and so the I mean, you saw margin.

Compression almost everywhere some was relatively minor like ours and then you had some that were 80 and 90 basis points.

Okay.

You know.

It's hard to predict but I think you know when you if we've taken the conversation we had on the sub debt and we.

We look at the.

Asset repricing and the liquidity that we have.

We have a reasonably good amount of protection on on.

On higher rates and there is always a little bit of <unk>.

Margin between the.

The rate that we pay our customers and the rate we're earning.

So.

I'd I'd be hard pressed to predict.

Predict a a bottom but I think.

I think we're okay.

Well, then you know a handful of basis points, one way or the other.

Okay.

And.

With that.

With the sub debt I guess Theres no.

There's no active secondary market with that stuff is as you said, it's just an odd each coupon did you have you have the option of buying it back or or how does it yes, it's callable.

It's callable okay.

And and if.

You can call, 100% of it or just a portion of it.

My understanding is we can call some or all of them.

Yeah.

At par.

Yes.

Okay.

Okay.

Let's see let's see how how we're met a ball the the holders are I guess.

Well look with all of them. They don't have a choice of course, but the youre right Youre right at it there was a uh huh.

Certainly does not trade much but I'm I'm aware of one trade several months ago that.

And if it wasn't par it was like 90 998, I mean, okay.

Okay.

And and Youre, saying that clearly would be a help to the margin.

Yeah. So the current coupon is over 11%.

Oh Wow, Okay alright.

Right Okay.

Great.

Significant Oh, yes, okay.

Paul away.

Yes. Thank you. Thank you.

Sure Ross.

Okay.

Okay.

And ladies and gentlemen, with that and showing no additional questions I'd like to turn the floor back over to the management team for any closing comments.

Okay. Thank you I appreciate all of you being on the call today it's.

Always certainly good for.

I used to have the opportunity to explain things to those who haven't.

Interest in our stock and.

Watch the.

Watch the progress as we go along as many times have done this in my career.

It's always it's always a challenge.

You know looking forward, but there does gets to be a time in the process, where you can look back and.

Take a lot.

A lot of comfort and satisfaction from the.

The team you have assembled and the successes we've had as a as a group and.

And dealing with what was a.

Yeah, a very nasty situation.

And I think.

Successfully so so.

Enjoy it we enjoy.

The opportunity to talk about it and we will all look forward to the second quarter call in July so thanks very much.

And ladies and gentlemen, with that we'll conclude today's conference call and presentation. We thank you for joining you may now disconnect your lines.

Okay.