Q1 2024 Sterling Bancorp Inc Earnings Call

Participants

Thomas O'brien; Chairman of the Board, President, Chief Executive Officer; Sterling Bancorp Inc

Ross Haberman; Analyst; RLH Investments, LLC

Anthony Polini; Analyst; American Capital Partners,LLC

Presentation

Operator

Morning, David Kwon. Thank you for joining us today to discuss Sterling Bancorp's financial results for the first quarter ended March 31, 2024. 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 in the banking industry generally that involve risks and uncertainties. For a complete discussion of forward looking statements and factors that could cause actual results to differ from those statements. The company encourages to refer to it as you see filings, especially those on Forms 8-K , 10-Q and 10-K and the press release issued in conjunction with this conference call, which applies to any forward-looking statements made on this 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 in the press release available on our website contains the financial and other quant and David quantitative information to be discussed today as well as the reconciliation the GAAP to non-GAAP measures.
At this time, I'd like to turn the call over to Tom O'Brien. Tom?

Thomas O'brien

Great. Thank you and good morning to those on the call, and welcome to the First Quarter '24 earnings call. So one but first, what I do is kind of update you on some internal changes here at the bank. We have promoted Christine Meredith to be our Chief Operating Officer, and she had been our Chief Risk Officer. Additionally, Christine was appointed to the Board of the bank and the holding company replacing Lyell Wahlberg who stepped down and done replacing Christine as the Chief Risk Officer, Alenia Willis has been promoted to that role. And I would tell you both of these individuals are quite qualified to take on these more demanding roles.
As far as the first quarter goes, there's really not a lot to add to the press release, um, you know, for all intents and purposes, it was a breakeven quarter driven in large part by the what I'll go through in a minute, but some months, some legal expenses towards the tail end of these OCC investigations.
The bullet points in the press release really, at least in my perspective, provide good insight into all the meaningful highlights of last week. The OCC completed its investigation, which has been focused in the past year or so on the conduct of former Sterling executives. Consent orders were issued to a former CEO. and to our controlling shareholder. Prior to this announcement, the OCC had issued consent orders to three former senior executives of Sterling. In each case, there was a civil money penalty assessed and lifetime industry bands from participating in the affairs of any federally insured depository, along with other prohibitions and for anybody that needed.
The reminder, banking is a business of trust and integrity and character, and there should be no room in our industry for self-dealing or failing to do even the basics of our jobs. The Department of Justice has yet to speak and as I've said many times on these calls, we have very little visibility into their timing. And we do believe that the legal costs for selected eligible former employees who cooperated in the investigations are essentially over. There may be some future costs related to any action by the Department of Justice requiring interviews or witnesses from these individuals. But we believe those will likely be immaterial. Strategically, we continue to operate deliberately to protect book value of liquidity and credit. There's enormous uncertainty in the capital markets today. Commercial real estate remains under a cloud in many parts of the U.S., especially in major cities. Additionally, rent-regulated multifamily in the metro New York area has been extremely weak, and that is likely to continue. I feel the actions that we took here at Sterling early on in my tenure to build the allowance and exit very high risk commercial real estate in nonperformers. It served us very well in both cases, we exited those credits at very attractive prices and done today, our metrics are quite strong and our risk profile quite modest. The overall economy has remained impressively resilient, but I do expect within banking, there will be a few more shoes to drop. And I'd suggest at this point, prudence dictates strong reserves and clear-eyed risk evaluations. We work day-to-day on the strategies that we have outlined in our prior 10-Q's and 10-K's that we've talked about in prior earnings calls. It is a very, as I mentioned earlier, a very uncertain market but some I believe we operate at least at that level from a position of relative strength and transparency. There's not a lot of complexity in the bank anymore. Very easy to have to understand who we are what we are. And as I've mentioned a few minutes ago, the the risk profile, in my opinion, any house is really quite quite modest on margins remain under some pressure. We think that's likely to continue. We do have a, I think, a $50 million home loan bank advance that will mature, I think, in late May early June, middle of May Milliman.
Okay. And that's at a relatively low rate, just under 2%, if I recall correctly from. So that leaves and dependent on what happens with interest rates in our markets. And as we price our liabilities hum, there certainly may be some additional pressures on margins of some kind of hard, I think to view where interest rates are going given what the Fed has said recently versus what the expectations were kind of at the beginning beginning of the quarter on inflation remains stubbornly high, especially in euro and what would be called kind of daily consumables, groceries, energy. And that is finding its way throughout the economic forecast. And I think probably will continue to put some discipline into the Fed in terms of any lowering of rates and them. And if they do, I think the discussion we had had generally about rates coming down three or so times in 2024 is probably not going to materialize. And if it does, it certainly won't be that many instances, but maybe maybe one or two. But it is as I said very uncertain and hard to do hard to read at this point, but the inflation doesn't force their hand on the more restrictive side. Everything else is kind of fairly quiet to be honest, I think probably if there are a couple of questions, it's just easier to move into those. So operator, if you can open the floor to questions, we will now begin the question and answer session.

Question and Answer Session

Operator

To ask a question. You may press star then one on your telephone keypad. 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. Finally, we will pause momentarily to assemble our roster.
Our first question comes from Ross Haberman with ROH. investments. Please go ahead.

Ross Haberman

Good morning, Tom, how are you?

Thomas O'brien

Well, what, Ross, how are you?

Ross Haberman

I have just have a couple of very brief numbers questions on Finn to add. Did I understand it on the expense side going forward and that they'll begin to tail off a bit from compared to this March quarter? Or will I think you said you spent over over $3 million in the quarter. Is that going to be continuing for another couple of quarters quarters at that rate.

Thomas O'brien

Now, I think we're as I mentioned, I think we're done with that. A lot of that was the finality of the OCC's investigations and the time required for certain of our people to be on advanced legal expenses for but the with the consent orders last week, as we understand it from the OCC is done with their investigation. So I think that and keep in mind also in the prior quarter, there was a of an insurance reimbursement on some of those legal expenses. So a little bit distorted quarter to quarter but done. And as I mentioned, we might we might have some expenses at some point in the future when the Department of Justice takes actions to the extent they may want some of these people to interview or appears witnesses, but we don't think that will be a significant. So I pay I think we're finally done with with all of that.

Ross Haberman

Were there any other sort of less recurring items in the quarter, but besides the the L elevator professional fees.

Not too much in the salary and benefit line, we had a reversal of a former executive deferred compensation on. So there was a credit in there of about $360,000 for that, but we also had some term at the beginning of the year. So next quarter, I will reap the benefit of that. So it should even itself out around the number that you see there.

Ross Haberman

And in terms of loans, which are our maturities or repricing. I know you talked about this the federal home loan borrowings, which are probably going to reprice up when they mature, but then why would you or how does that how your loan repricing over the next couple of quarters? And I hopefully offset some of that that increase potentially in increased cost.

Thomas O'brien

For first, we'll pay off the home loan bank advance. We're not going to renew it. And I think liability costs will determine the direction of margin as more than repricing of assets and I don't have any clear.

We have about $200 million of loans that reprice every quarter and they will reprice up now a couple of hundred basis points likely, but as Tom mentioned, I still think that'll be on overridden by the increasing on deposit costs.

Thomas O'brien

And these are these are these are the these are something which are, I guess, rolling over from what from like 2.5% or 3% up to 4%, 4.5% or 5%. Is that IT or Oracle or I thought you said in prior quarters we run through most of that repricing. And we were probably the top of the ninth inning in terms of that repricing up of those cities.
But for now, it's kind of just I think some of it is just with the regular money market type accounts where they're looking at a variable rate there and some as opposed to CDs. And then it just depends on the interest rate environment with CDs and where they're coming off and where they're from being renewed. But I don't know that I ever said anything about that being in the ninth inning, but we've certainly been through a lot of they go, you know, as they mature, I mean, they tend to be relatively new short to intermediate term that we know we don't have it out three to five year type CDs.
So if you say one year or 18 months being the longer ones than they do come up periodically and they tend to reprice. We tried a price in the middle of the market. But given the liquidity pressures that a lot of banks, the competition has been pretty steep. So I think in, as current said, I think the likelihood is that come on the two factors on both sides of the balance sheet. We'll kind of fight each other and in the short run deposits reprice faster.
And then as such, and depending on where interest rates go up could be pluses or minuses as we do with our liquidity, we kind of do get the benefit of some of our rates being higher at this point. I think the and the negative, as we've kind of discussed throughout my Tigers, Sterling was always in our funded, more thrift like and we didn't have a lot of transactional demand deposits or lower cost deposits. So we've been trying to build that come from virtually nothing to more moderate the total cost of funds. But that is yes, that's a work in progress, but we've had some good success.

Ross Haberman

And just one last question. I know you have plenty of equity or capital with the stock trading below $5, would you ever consider buying back shares or are you in a blackout period with that possibility or.

Thomas O'brien

There's there's compelling reasons to do buybacks. Obviously, some there are strategic reasons why we shouldn't or can't.

Ross Haberman

Okay.

Thomas O'brien

I'll leave it at that.

Ross Haberman

Okay. Thank you for the time. I greatly appreciate it.

Thomas O'brien

Yes, anytime therapy.

Operator

Again, if you have a question, please press star then one.
Our next question comes from Anthony Petrone with American Capital Partners. Please go ahead.

Anthony Polini

And Tom Baker, are you haven't heard from you in a while.

Thomas O'brien

I have been on the webcast mostly, you know how tough would stuff when you get operational.

Anthony Polini

And you do such a great job, Bill, I hope you're almost done. I wish you got the New York Community gave you do probably a better job and get a hell of a lot more money.
But we've been a big fan of yours. One little your kind Meineke. I mean, the story is all here. You know, it's just a question of when certain things fall into place that are actually largely out of your control at this point. But as far as the DOJ legal costs, yes, the ex any more expenses, I guess from the regulatory side are we're talking about baskets of $100,000 potentially. Is that that what we're looking at.

Thomas O'brien

But it's really hard to predict, but it really depends on what action the DOJ takes and whether it's a fight to the finish or everybody kind of agrees to settle out. And then there's no further effort. But the extent of what we might see and I'm inclined are presented with would be legal costs for a small handful of people who could potentially be called as either witnesses or you know, for information hearings and with the with the prosecutors, I don't know when or if that will happen, I'm hard to predict the cost.
But as I said in the scheme of things, it certainly wouldn't be material UK underwriting, no penalties, they would pay them. Not bank is nothing nothing for us because it does not involve the company or the bank. And it's just for individuals who we advanced our legal fees for who work employed at the time who are aware of and witnesses to certain conduct and behaviors.

Anthony Polini

I really only had one other area. And that's really why you kind of missed our number. And I understand the conservative attitude until you have capital, but you also have one could argue excess reserves. And if you took $6 million out of your reserves, you'd still have a bound our reserve to loan ratio above 175. Is it just a question of when is it a timing issue. I was surprised there wasn't a $1 million, $1.5 million release this quarter.

Thomas O'brien

Yes, I mean, we have a in our fairly conservative model. I probably should take out the word fairly for good reason, I think. Oh, well, yes, we can look around the industry. You see kind of all sorts of reserve levels and my own opinion, if you're not at 1%, you're kidding yourself and you're your investors have been, I'd say just optically 1.5 is probably the right level for the vast bulk of the the industry and we do keep it ours higher on again, I don't know how else to hit that. Yes, we could keep it higher. So there's probably room on the credit profile has dramatically improved. But again, we kind of mark that on a very cautious basis and we'll probably continue to do so. But I cannot I guess I wouldn't personally be surprised if it came a little closer to down to the levels you mentioned over the course of the next few quarters.

Anthony Polini

And for me, it just seems logical. It's not that you have a whole lot to do with the extra money right now, either right now, you know, now you're not really growing the balance sheet and your notes doesn't seem to be a time where you need to leverage up, so to speak. So you're sitting on the cash either in equity or in reserves?

Thomas O'brien

Yes. I mean, I I honestly, I think those are our strengths are what makes Sterling attractive today from me, a lot of perspectives. You know, the price of the stock distress have made, but them but a whole bunch of other ones that I looked at discretionary to come in, I think the market's going to have to digest what's going on. And a lot of these are these balance sheets and the them and that's why I said, I know it's silly in my view to trying to defend a very low on allowance today because one way or the other coming out of your stock price. So my advice to most of the banks that are below 1% would be just to bring it up because the market's doing that view anyhow.
And yes, and yes, it is. (multiple speakers) Yes, I'm all takeaways are in bed. Yes, we have the good multifamily loans. We're not seeing as I believe I've been saying that for a couple of years that was 1,000 of that was due to happen. It's just a question of when, but some and that into that market is suspect and you know something even if you are right.

Anthony Polini

It doesn't matter from a stock price standpoint. It doesn't matter now with you or whether you're right or wrong, we went to 40% of book 30% to 40% of work and keep your nose, we allowance low, it doesn't matter.

Thomas O'brien

Yes, but you know, at the end of the day, if you're right and you never needed to take it back, nobody's it's not lost to Trinity, but I would suspect and that particular product, there's a lot of pain to come over the next couple of years.

Anthony Polini

I think you said, you can read a balance sheet strong, right? And I just wish I could see what to do with the money. I mean you can leverage those reserves that take those excess reserves, you can leverage your excess capital. It's just got to find the missing ingredient. I guess the one thing that's missing now is that business plan? What to do because you have. I think the rough and unwanted fundamentals and the balance sheet to grow from here from grow into one is the question.

Thomas O'brien

Now that honestly that some have to be that is what we talk about here all the time that it is the unfortunate consequence of having a mono-line business all those years. And when the mono-line turned out to be the legal all of a sudden you have you have no business. And so whatever we do in that context would require a, you know, an investment in systems controls, people on client acquisition and are in our relatively long start-up period. So it becomes Is that kind of a challenge that I don't relish the idea of going to shareholders and saying by the way we're going to spend a fairly large amount of money building a business that we've never done and done in the residential lending businesses. And at least in my view, you know, not proven to tie risk at some. It takes an awful lot of controls and compliance costs and the returns are modest and the multiples in the market are as low as they can't sell. And you know, that's what we struggled. As you know, we struggle with how to kind of reinvent the bank or kind of where to reinvent it yes. And if it was a different market, it would be an easier conversation here.

Anthony Polini

And then I got it now because I don't expect you to go out and buy a private banking team.

Thomas O'brien

Now you're not going to see us do that.

Anthony Polini

Well, you've been doing a great job and I appreciate the time and you're carrying.

Thomas O'brien

Thank you. Ok, good luck.

Operator

Yes. We have a follow-up question from Ross Haberman with RLH Investments. Please go ahead.

Ross Haberman

Tom, just one follow-up question regarding the non-accruals. The $9 million, you think those roll you can resolve those over the next quarter or two or three?

Thomas O'brien

Yes, there they're I think they're 100% residential and roughly half of them are pain and current low.

Ross Haberman

Okay.

Thomas O'brien

But they've been they've been slow pace. And so I think it's safe to say there's there's no big issue. And those are and I'll probably argue there's probably no loss content on that and the ones that are current and paying kind of work their way back into performing over at least six months of a it's steady payments and the others I think we've got maybe two that are in foreclosure. So there is three three that are in foreclosure. But unlike New York, California is not a judicial foreclosure state. So they actually move relatively quickly and our experience has been that we never get to the point of the foreclosure sale that at some point it may be immediately before the sale. The loan satisfies or somebody buys us out or whatever, but come. So that's why I said on commercial portfolio, basically, based on what we did previously is I'm fine. I mean, there's no delinquencies of any significance there and hand it's pretty pristine and the residential, this is what it is, but I'm not I'm not worried about the nine but about.

Ross Haberman

Okay. And anything in the delinquency bucket or the criticized that you that you're losing sleep about?

Thomas O'brien

I'll tell you we had won some old construction loan out in South San Francisco. That wasn't that was like $4 million or $5 million or so. But I would tell you that was one that for the last year or two when I'm out there, I go look at it. And I had a I didn't have a great feeling about it, but the M and it was very slow coming to fruition, but the builders now got, I think, three or four contracts at prices I find I can't believe it, but on four foot. And so it looks like we're fine, but that was that was the one I was concerned about and we had a couple of criticized or classified loans that them, you know, are there for more technical reasons in on one case, but probably one or two cases there's a small shortfall on the debt service coverage, but the dollar amount is not significant and enough type of work. We're pretty cautious and conservative on our run on our risk ratings and then I think, you know, unlike the 1st year or so, I don't think we're getting any big surprises anymore. And frankly, most of the motion, a good part of the legacy loans are around they're either very well seasoned now or they paid off.

Ross Haberman

And just one final technical question. I was looking at the 10 K and I was looking at that note where you show the mark to markets on all the assets and liabilities. You had a very small mark on your loan. There was $5 million or $6 million bucks and generally, if you put much credence into that footnote, when whether you're your banks or any other ones? Or I'm just curious, how do you look at that note for your bank mark and any other one, do you put much credence into it or again, it's a snapshot in time.
No, bank is going to sell their whole loan book in one fell swoop. I was just wondering how you look at that and so that data point.

Thomas O'brien

I would say it's a data point at some. It's a reasonable estimate. You know, in our case, I think from a yield perspective, and that's pretty much how you get there from a performance perspective. So I would say the economics probably supported you now can you execute at that price either way, plus or minus, I don't know. But I think come I think it is a good measure though, of whatever the embedded interest rate risk is if you're looking at mostly adjustables and dumb and low loan to values in the case of residential, owner-occupied, things like that yet that tells you it's like a like a bond portfolio, if it's right, if it's if it's down 20% today, then you know, you've got a lot of duration risk. You don't have to look at them at the individual securities. And if it's in if it's down 7% or something, then it's, you know, it's probably pretty market-sensitive and that's the product of rates gone up as quickly as they did.

Ross Haberman

Okay. Again, again, I appreciate the help. Thank you very much.

Thomas O'brien

Be Well done. Yes, neutral.

Operator

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

Thomas O'brien

Okay. Well, thank you all for joining us. Let's hope spring is here at least in the Midwest and Northeast some overdue and we'll look forward to being with you in July. Thanks again.

Operator

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