Q3 2023 Sterling Bancorp Inc (Southfield MI) Earnings Call

Good morning, everyone. Thank you for joining us today to discuss Sterling Bancorp's financial results for the third quarter ended September 30th 2023.

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

Tom will discuss the third 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 conditions of Sterling Bancorp that involve risks and uncertainties in.

In particular forward looking statements may be made on this conference call regarding the economy and financial markets.

Investigations credit quality, the regulatory scheme Gaffney, the company's industry competition and the company's industry interest rates, the company's liquidity, the company's business and the 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 S. E C 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.

These 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.

Please note this call is being recorded.

At this time I'd like to turn the call over to Tom O'brien Tom.

Thank you good morning, everyone welcome to our third quarter earnings call.

I'll run through some of the highlights as I see them here.

And then we'll take some questions.

Generally I would say the quarter was.

Relatively quiet we had.

Accomplish the redemption of the subordinated debt in mid July.

Finished up.

The settlement with the Department of Justice and also in July.

So those accomplishments.

Kind of over and done.

<unk> had a very very modest profit of $300000.

Margin flattish at 262, I think it's still.

Seen both here and you know in the industry pressures from.

Higher interest rates and competition on deposit accounts and.

Yes.

Doesn't show any signs of letting up in the immediate future. So.

Trying to be careful in terms of liability pricing and balances.

It's a difficult time.

High interest rates after an extended period of.

Ultra low interest rates and high inflation combined.

Probably not seen since.

Probably since I started in banking, which was 100 years ago.

So.

We're navigating that.

At the bank.

And the industry in general.

We had a recovery in the quarter as we've had the last few in the.

The allowance for credit losses.

The ratios maintain basically the same at 2.42%.

I would also.

I would tell you that deposits have been relatively flat the balance sheet was relatively flat to except for the.

Payment.

One out of the company to redeem the subordinated debt.

And the settlement with the <unk>.

Justice Department that is in the form of a REIT.

Turn to.

Shareholders. So thats combined was about.

$90 million.

In the quarter, but other than that things were relatively flat here.

Yes.

Uh huh.

Credit levels.

<unk> to be about the same.

And our capital remains very strong our liquidity is strong as I said credit I think is pretty strong.

I'd say.

It's a very uncertain time, just in terms of whats.

Available for us to to do we're trying to preserve our capital.

We're trying to maintain the strengths that we have.

We have been.

Finally with respect to <unk>.

Addressing and disposing of a lot of the.

Non accrual and.

Low grade loans that the bank had especially on the commercial side.

As I mentioned in the press release.

I think you know.

In selected markets, but I'd say predominantly coastal markets.

There continues to be an awful lot of pressure in the.

Office and hospitality space.

And.

And I think more in the northeast.

Youre going to see problems.

Emerging with.

Multifamily property loans, just based on higher cap rates interest rates.

If you are lucky flat.

Rents in revenues and expenses like taxes and oil going up so I.

Just anticipate.

That area is going to have.

A fair amount of pressure.

In the time ahead.

And.

Again, I think thats, probably just highlights the timeliness of our <unk>.

Disposition of.

<unk>.

If you remember the totals now, but well over $100 million declines.

Both on the commercial and the.

Second quarter on the residential side that we're just.

Long term debt wake forest.

And other than that.

It's relatively quiet here at Sterling.

Even as we get into the fourth quarter.

It doesn't seem like an awful lot to changing I think as I said the pressures.

Okay.

Have been brought to bear.

Mostly in terms of liability.

Pricing and.

What the.

The fed may or may not do in terms of.

Increased interest rates I think my own sense is that they will.

Yeah, a little cautious and patient but.

The bias is still towards.

Another.

One or two increases.

Until there is a sense that inflation is more under control.

And.

It remains stubbornly high.

High inflation.

Very difficult.

Wrote to navigate.

And most all industries, but certainly in financial services.

So what's that.

So not not an awful lot to spend.

Hi, I'm talking about here, so operator, probably best to take some questions.

We will now begin the question and answer session.

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 two.

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

The first question today comes from Ross Haberman with R. L. H investments. Please go ahead.

Morning, Tom how are you.

Fine how are you.

Could you address some of the expenses this quarter.

What do you think is the one time.

And and.

You referred to I guess some of your coverage of some of the people.

And your insurance, which is run out could you just sort of touch upon that and can we continue to see this level or we're just there's some a bunch of bills came in this quarter I don't know what you know similar stuff coming in next quarter, just given the overall sense of.

Expense level and could we see them coming down over the next quarter or two from the level this coming quarter. Thank you.

Yes sure Ross.

<unk>.

Costs in the quarter for Indemnified individuals'.

Was 1 million seven and.

And then I would say some of the cost of the bank itself incurred.

Related matters was probably a couple of hundred thousand sorry.

Let's say $2 million in.

And legal expenses.

As I mentioned in the release and as you noted it's for individuals.

Who are either.

Witnesses or.

Individuals' with facts that the government is interested in learning about.

Obviously, they are represented by counsel and.

We are obligated to pay their expenses and this is Ben.

Going on.

Pretty much since I've been here, although this quarter was.

Unusually high and it reflects I think what we could safely say is.

The coming culmination of.

Some.

Efforts on behalf of the government with respect to individuals.

Uh huh.

We are.

Indemnifying people, who we are obligated to as I mentioned.

And.

And obviously, we're not indemnifying any individuals.

Behavior and conduct is.

Subject to our resisting those claims.

The insurance the D&O insurance for the company.

We did exhausted during this quarter.

I think we're expecting a.

Payment from the insurer.

And the next couple of weeks of somewhere between three and $4 million.

But that'll be the last of it.

I don't expect that the.

Future quarters will have this kind of <unk>.

Spence for individuals.

Primarily because of the intensity of the government inquiries, but it's a little hard for us to project that but just based on the volume of people.

That were <unk>.

Interviewed.

That's kind of our current expectation.

Just two further questions the three or 4 million do you pick that up as income when that comes in when those checks come in does reimbursement checks come in.

Yeah.

And and and if theres any adverse.

Oh, I got adverse opinion or or adverse claim against any of those individuals' is is that your liability.

Or do you buy them.

No.

And you don't know.

If most of those you know that.

I guess inquiry against them is is are we in the ninth inning with that stuff with them with before.

Hmm.

So I guess when you're dealing with the government ever go [laughter] I forgot that.

If I look at a crystal ball.

Well, obviously, the civil and the criminal part of it so alright civil part of it which is the OCC I would.

My guess is were.

Eight or nine.

And with the criminal part and the Doj I just.

I, just don't have a lot of visibility into that.

Other than kind of reading tea leaves with inquiries, we get but.

I think thats more likely going to.

In 2024.

I guess I'd say first.

Half of the year.

Okay and just one final question one final question lets say.

Great.

At existing levels for the next year yeah.

Got you wrong, they don't raise them more they just keep them at these high levels through the next year, how does that scenario effect your.

But your margin or your spread and when will it bottom out with us in Europe.

Yeah.

I think.

Think theres still some pressure to come in.

The current quarter and maybe the quarter after.

But then we have some.

We have some roll off in loans that get reinvested at higher rates, we have some.

Roll off in securities that get reinvested at higher rates.

But I would say there is still there's still some potential downward pressure.

A scenario where rates stay.

Pretty much as they are.

Okay. Thank you best of luck, Thanks, a lot.

Thanks, Ralph take care.

As a reminder, if you wish to ask a question. Please press Star then one to be joined into the question queue. That's Star then one to ask a question.

We have no further questions at this time.

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

Okay. Thank you. Thank you all for participating and.

Hope you're enjoying the <unk>.

And the nice weather wherever you are.

But the.

Next opportunity we have to be together will be for the year end call in.

In January and I will look forward to spending time with you that so thank you all and <unk>.

Nice rest of your day.

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

Okay.

[music].

Thank.

Unknown Attendee: Good morning, everyone. Thank you for joining us today to discuss Sterling Bancorp's financial results for the third quarter ended September 30th, 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 third quarter results, and then we'll open the call to your questions.

Unknown Attendee: 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 conditions of Sterling Bancorp that involve risks and uncertainties. In particular, forward-looking statements may be made on this conference call regarding the economy and financial markets, government investigations, credit quality, the regulatory scheme governing the company's industry, competition in the company's industry, interest rates, the company's liquidity, the company's business, and the company's governance.

Unknown Attendee: Any forward-looking statement 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 conditions, 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.

Unknown Attendee: 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. These could have an impact on the forward-looking statements made during this conference call.

Unknown Attendee: The company disclaims any obligation to update any forward-looking statements made during this call. Additionally, management may refer to non-GAT measures, which are intended to supplement but not substitute for most directly comparable GAT 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 GAT to non-GAT measures.

Unknown Attendee: Please note, this call is being recorded.

Unknown Attendee: At this time, I'd like to turn the call over to Tom O'Brien. Tom? Thank you.

Tom O'brien: Good morning, everyone. Welcome to our third-quarter earnings call. I'll run through some of the highlights as I see them here, and then we'll take some questions. Just generally, I'd say the quarter was relatively quiet. We had accomplished the redemption of the subordinated debt in mid-July and finished up the settlement with the Department of Justice and also in July. Those accomplishments were kind of over and done. The quarter had a very modest profit of $300,000, margin and flatish at 262.

Tom O'brien: I think we're still seeing both here and in the industry pressures from.., and higher interest rates and competition on deposit accounts, and that doesn't show any sign of letting up in the immediate future, so I think trying to be careful in terms of liability pricing and balances, but it's a difficult time of both high interest rates after an extended period of ultra low interest rates and high inflation combined, probably not seen since, probably since I started banking, which was 100 years ago. So we're navigating that both at the bank and I think in the industry in general.

Tom O'brien: We had a recovery in the quarter as we've had in the last few in the allowance for credit losses, the ratios maintained basically the same at 2.4%, I would also tell you that deposits have been relatively flat, the balance sheet was relatively flat too, except for the payment that went out of the company to redeem the subordinated debt and the settlement with the Justice Department that is in the form of return to certain shareholders, so that combined with about $90 million I think in the quarter, but other than that things were relatively flat here, the credit levels continue to be about the same, our capital remains very strong, our liquidity is strong, credit I think is pretty strong, it's a very uncertain time just in terms of what's available for us to do, we're trying to preserve our capital, we're trying to maintain the strengths that we have, I think we've been timely with respect to addressing and disposing of a lot of the non-accrual and low-grade loans that the bank had, especially on the commercial side. As I mentioned in the press release, I think in selected markets, but I'd say predominantly coastal markets, there continues to be an awful lot of pressure in the office and hospitality space and I think more in the northeast, you're going to see problems emerging with multi-families and family property loans just based on higher cap rates and interest rates, if you're lucky, flat rents and revenues and expenses like taxes and oil going up, so I just anticipate that area is going to have a fair amount of pressure and the time I had, and again I think that's probably just highlights the timeliness of our...

Tom O'brien: Disposition of, I don't even remember the totals now, but well over a hundred million dollars of loans that both on the commercial and then in the second quarter on the residential side that were just, you know, long-term dead weight for us. And other than that, it's relatively quiet here at Sterling. Even as we get into the fourth quarter, it doesn't seem like an awful lot's changing. I think, as I said, the pressures that, you know, have been brought to bear mostly in terms of liability pricing and, you know, what the Fed may or may not do in terms of increased interest rates.

Tom O'brien: I think, you know, my own sense is that they'll be a little cautious in patient, but that, you know, the bias is still towards, you know, another one or two increases until there's a sense that inflation is more under control, and, you know, it remains stubbornly high. And inflation is a very difficult road to navigate in most all industries, but certainly in financial services.

Tom O'brien: So with that, I said not an awful lot to spend time talking about here, so I'll probably just take some questions.

Unknown Attendee: We will now begin the question and answer session. To ask a question, you may press star than one on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys.

Unknown Attendee: If at any time your question has been addressed and you would like to withdraw your question, please press star than two. At this time, we will pause momentarily to assemble the roster.

Ross Haberman: The first question today comes from Ross Haberman with RLH Investments. Please go ahead. Good morning, Tom. How are you? I'm fine. How are you? Could you address some of the expenses this quarter? What do you think is one time, and you refer to, I guess, some of your coverage of some of the people, and your insurance, which has run out. Could you just sort of touch upon that and can we continue to see this level? Or were just just some of a bunch of bills came in this quarter? I don't know what, you know, similar stuff coming in next quarter. Or just give it the overall sense of expense level.

Tom O'brien: And could we see them coming down over the next quarter or two from the level this time of quarter? Thank you. Yeah, sure, Ross. The cost in the quarter for indemnified individuals was a million seven. And then I would say some of the costs at the bank itself incurred on related matters was probably a couple hundred thousand. So, you know, let's say two million dollars in. [inaudible] and Legal Expenses. It is, as I mentioned in the release and as you noted, it's four individuals who are either witnesses or individuals with facts that the government is interested in learning about and obviously they're represented by council and we are obligated to pay their expenses and this has been, you know, going on pretty much since I've been here, although this quarter was unusually high and it reflects, I think, what we could safely say is the coming culmination of some efforts on behalf of the government with respect to individuals.

Tom O'brien: We are, you know, indemnifying people who we are obligated to, as I mentioned, and obviously we're not indemnifying any individual who behavior and conduct is subject to our resisting those claims. The insurance, the DNO insurance for the company, we did exhaust it during this quarter. I think we're expecting a payment from the insurer in the next couple of weeks of somewhere between three and four million dollars, but that will be the last of it.

Tom O'brien: I don't expect that the future quarters will have this kind of expense for individuals primarily because of the intensity of the government inquiries, but it's a little hard for us to project that, but just based on the volume of people that were interviewed, that's kind of our current expectation. Just two further questions, the three or four million, do you pick that up? Is income when that comes in, when those checks come in, those reimbursement checks come in?

Tom O'brien: Yeah, okay, and if there's an adverse, I get adverse opinion or adverse claim against any of those individuals, is that your liability or do you identify them? No. And you don't know if most of those, you know, that, I guess inquiry against them is, are we in the ninth inning with that stuff with them, but before. Or I guess when you deal with the government, you'd have to go. If I look at a crystal ball, you know, obviously this is the civil and the criminal part of it, so I have a civil part of it, which is the OCC, my guess is where, you know, 8th or 9th.

Tom O'brien: And with the criminal part and the DOJ, I just, I just don't have a lot of visibility into that, other than, you know, kind of reading tea leagues with inquiries we're getting, but I think that's more likely going to be in 2024.

Tom O'brien: I'm going to guess and say first half of the year.

Ross Haberman: Okay, I just want one final question. One final question. Let's say rates stay up at existing levels for the next year.

Tom O'brien: You're wrong. They don't raise them more. They just keep them at these high levels for the next year.

Ross Haberman: How does that scenario affect your your margin or your spread and when will it bottom out with that scenario? Thanks. I think I think there's still some pressure to come in, you know, the current quarter and maybe we have some, you know, we have some roll off in loans that get reinvested at higher rates. We have some roll off in securities that get reinvested in higher rates. But I would say there's still, you know, there's still some potential downward pressure in a scenario where rates stay pretty much as they are. Okay, thank you.

Tom O'brien: The best of luck. Thanks a lot. Good. Thanks, Ross. Take care.

Unknown Attendee: As a reminder, if you wish to ask a question, please press star then one to be joined into the question queue. That's star then one to ask a question.

Unknown Attendee: Please know further questions at this time and this concludes our question in the answer session.

Tom O'brien: I would like to turn the conference back over to Tom O'Brien for any closing remarks. Okay. Thank you.

Tom O'brien: Thank you all for participating and hope you're enjoying the tail end of the nice weather wherever you are. But the next opportunity we have to be together will be for the year end call in January and I will look forward to spending time with you then. Thank you all and have a nice rest of your day.

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