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spk03: 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 31st, 2022. Joining us today from Sterling's management team are Tom O'Brien, Chairman, CEO, and President, and Karen Nott, 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 over to Tom O'Brien. Tom.
spk02: Good morning. Thanks, Joe. Welcome again to another quarterly call for Sterling Bank. We're happy to have those of you on the call that could join us. The quarter, you know, not an awful lot of note going on to spend a lot of time on. We had a small loss in the quarter that came out to zero per share, but... As I mentioned in the press release, a lot of the issues that have dogged the bank for the last two years continue to be present in a lot of our financial results. So we'll kind of go through those highlights a little bit here and then take some questions. But, you know, as I said, the loss was $200,000.25. For the year, we made $4 million. The margin at $3.09 in the quarter, obviously better than it was earlier in the year. I think higher rates have helped us on the liquidity return side and with the adjustable rate nature of most of the bank's loans. The subordinated debt at the holding company level is a depressant on the a consolidated margin to the tune of probably a drag of 25 or so basis points. We can't do much to address the subordinated debt until we finish with the governmental investigation. So we'll unfortunately just have to tolerate that as we go along. We did buy some loans during the quarter, not a huge amount, but $31 million. And Karen will 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. You know, asset quality also continues to be pretty good. And I should note, too, that, you know, we continue to have a low loss ratio on the legacy advantage loans, notwithstanding all of their room. There are other issues that have been the source of the investigations and the internal control issues that existed at the bank previously. We tried to keep the balance sheet fairly stable, maintain a high capital ratio just to 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 as I said 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 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 continue to cooperate completely. I was hoping to have a little more to say at this point in time, but I don't. And I can't say that there's anything in the way of hints or direction. um you know guidance that they might give us that would help um you know help you understand where it's going we just as i said we have no visibility into that other than that you know we'll get an expression of appreciation for the cooperation and the information we continue to provide um we do think collectively that it's going to be resolved um or at least the beginnings of a resolution sometime this quarter. But again, it's very hard to predict and they don't necessarily hold to my timeline by any stretch of the imagination. But we certainly have a strong sense of urgency on pushing that forward and do everything I can to respond quickly and completely to any questions. And as I said, we just, you know, make the case known that we 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, you know, with that, the, you know, the bank itself, you know, we continue to, you know, just I guess I'd say watch the time evaporate here. We're trying to find opportunities where we can to maintain the margin and control costs, but it's obviously a challenge. Fortunately, as you know from the last quarter call, we're done with the OCC issues and we've you know, completed all that, signed the consent order, and paid the fine. So, and I would say, you know, in terms of all of the agencies that have taken an interest in the bank, we continue to provide, you know, transparency and cooperation wherever it's needed. So, that part, you should have no concerns with respect to that. You know, and I guess, you know, just going back to the the DOJ should try to understand, too, that this was a multi-year problem. And, you know, as the frauds were uncovered early in 2020 and continuing, it was a multi-year. It wasn't an incident. It wasn't, you know, a single person who misbehaved. It was, you know, much more substantial than that, as you all know, and there's just an awful lot of records to look at and understand and ask questions about. 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 it. So, Karen, if you would.
spk05: 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 professional fee number, $5.9 million, you know, consists both of legal expenses and other professional fees to help us become compliant with all the stuff that's going on. So I guess if we look at that number and try to normalize it, probably two-thirds of it is due to these investigations, and then the other third is more normal stuff of being a public company and just general operations. Same thing in the salary and benefits line, $8.9 million. That's not a bad run rate for the bank, although, again, we have a lot of – people there for 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 recapture 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 pool of high-balance conforming or jumbo residential loans. In terms of CECL, which I'm sure is on everyone's mind, you know, we've worked through most of that process and really now that we are, need to be thought controls, you know, validated by our internal and external auditors and then we'll be prepared to implement that and, you know, as required. Tom noted the non-performing assets, you know, they were down slightly quarter over quarter at $38.3 million. And just to remind everyone, similar to prior quarters, over half of that are loans that are paying. A lot of them are current even, and we just want to see 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 reduction. We were able to stabilize deposits, but as you can see in the NIM, it came at a little bit of a price as the deposit book increased. Tom? Okay.
spk02: I'll probably just add a couple of comments here in terms of more general industry commentary, but with the increase in rates and the flow of deposits, you know, I think we're back to a period where deposits and liquidity have a relatively high value or, you know, not so long ago in 2022, the industry was flush with deposits. But higher rates, we've seen more and more institutions experience price pressures. As I noted in my quote in the press release, consumers have had suppression in their interest rates earned with the ultra-low rates for a couple of years. Obviously, some pent-up demand for yield, and certainly several banks that I follow had significant increases in their cost of funds. I think we've helped reasonably well. As I said, the subordinated debt is a real thorn in our side in terms of the cost structure there, but it's something we have to deal with. And I guess speaking of dealing with things, I think, you know, the benefits of the de-risking that we did during the course of 22 will continue to show its wisdom as we get into 23. The pressure on commercial real estate and, you know, anything in the way of, you know, construction income producing property type credit. We had, you know, a very significant exposure in the time I joined the bank in some, you know, 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 have been no delinquencies, no foreclosures, really a very clean credit book there and a handful of criticized loans, but nothing too serious there, and I think we get out of those at really very attractive prices. And our credit department worked with several, especially on the construction side, and got our exposure there down to much more manageable levels and much better properties than were there at the beginning. And if you recall, the total bank criticized and classified portfolio not so long ago was over $200 million. So I think, as I said, I feel when I initially arrived at the bank, I was very concerned from the credit perspective on the commercial exposure that we had. I think the The improving market earlier in late 21 and early 22 lifted some boats, and 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. So we'll take some questions now, and I'm happy to hear what's on your mind.
spk03: 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're using a speakerphone, please pick up your handset before pressing the keys. To withdraw a question, please press star, then two. At this time, we will pause just momentarily to assemble our roster. And our first question here is going to come from Ben Gurneer from Hufty. Please go ahead. Hey, good morning, everyone.
spk01: Hi, Ben. Just had a quick question more so for Karen on the expense kind of the breakdown. So professional fees, like you said, was about two-thirds was the ongoing investigation and then there was some in the regular salaries for BSA. I was wondering if you could kind of clarify a little more. So the professional fees seems like that will fall off rather precipitously once the DOJ is completed, but Now that the BSA is also done as cures, can that wane down? And then, go ahead.
spk05: 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 book of those advantage loans on our system. So, while I think eventually that will wane down, you know, it's going to take some time for that to happen, right, as long as we still have that book of business on our balance sheet.
spk01: Can you quantify, or are you not at the, you don't want, like, at the level, does it say, like, how much is the BSA where it could potentially run off to, like, a true core, core number?
spk05: Yeah, I'd be hesitant to say at this time. I haven't prepared an answer for that. So, you know, I can tell you there's, you know, 40 or roughly people in our, you know, BSA department currently. So it gives you a sense, you know, on a $2.5 billion bank what that looks like.
spk01: Sure. Yeah, no, it's quite a bit. And then... whoever wants to feel the time we're hearing, when you think about just the liquidity today, I know Tommy, you referenced deposits of more value. And then I think, I think this fourth quarter has really proved that, but when you think about it, a lot of the banks in the industry have been struggling because they need to find or fund the loan growth, whereas you guys are kind of shrinking a bit still. I was just kind of curious on your appetite for the CD and money market type, the expensive deposits relative to your kind of, you're still in shrink mode on the balance sheet. I was just kind of curious on, are you, are you kind of studying the market or are you giving what the market takes you so you don't lose clients or just your approach to the overall funding costs?
spk02: Yeah, I can handle that, Ben. So we're, we're less, I think the last two quarters, I'd say we pretty much, you know, kept the balance sheet flat and that's, That's pretty much our goal here. We had to run off a large group of higher than market rate CDs that the bank had utilized historically to fund the advantage loan growth that the bank had. So the goal right now is pretty much status quo and in and around the market. We're not chasing anything. I would say pretty much in and around the market rates that are out there. The challenge is that the bank historically operated as an old line thrift and so didn't really have a demand deposit book and obviously no corporate accounts or you know, business DBAs, things like that. So, you know, the bank was pretty much a money marketer CD deposit gear. We have, over the last, I'd say, six months, you know, been developed, and then we started marketing a demand product. And, you know, on a relative basis, starting with zero, we've had some, you know, 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 very expensive. And I guess the other thing you've seen in the industry is pretty significant TCE diminution from the higher rates on what were in some cases relatively long duration securities at lower rates. 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 is a little over two years.
spk01: Gotcha. That's good. Then lastly, it was more of a clarification. So you have $9 million still reserved for legal or the investigations. Odds are it's not going to be exactly nines because that's just not how life works. But it's assuming that it's under, it's a balance sheet adjustment, actually over or under, i.e. I'm asking, it won't flow through the income statement, correct?
spk02: It won't close the bank?
spk01: No, no, sorry. It won't flow through, whether you over-reserved or under-reserved the net change. will not have a tax adjustment is what I'm really getting at.
spk02: No, there's no tax adjustment because fines and penalties are not deductible. So that's just gross and net are the same. Whatever comes to be. I mean, nine is the most I can get in there. So that's why it's nine. But I don't know more than that. Gotcha.
spk01: Okay. I appreciate the call. I'll follow up later this afternoon if I have anything else. Thanks.
spk03: Yeah, sure. Again, if you have a question, please press star, then one. Our next question here will come from Ross Haberman with RLH Investments. Please go ahead.
spk04: Good morning, Tom. Tom, how are you? I am fine. I want to follow up with that last question about the reserve. How do you work your CECL given you have this possible pending liability with the government to sort of make that CECL adjustment as of the first quarter? I guess because the CECL looks like historical defaults or delinquencies, and you have sort of this who the hell knows what the number is going to end up being. But how do you do it? How do you realistically make a CECL adjustment as of the first quarter?
spk02: Well, CECL, when fully implemented, is, as you know, just a debitor credit to the equity accounts. I think it's probably safe to say we have no significant concerns with the effect of the impact. I mean, obviously, it has nothing to do with the reserve we have for the remaining reserve we have for penalties, and the allowance that we have is, you know, we think appropriate and probably, you know, I think I can say plus or minus fairly insignificant amounts. I don't think we expect anything significant out of the CECL full implementation.
spk04: Okay. And just a follow-up question about the margin. Every bank is sort of coming in and saying, hey, you know, deposits are ratcheting up much quicker than we ever expected. If we do see another 50 or 75 basis points over the next six or nine months, how do you see that affecting your margin and your spread, given how quickly everything else, all the deposits have jumped up in the last couple quarters?
spk02: Yeah, well, it's funny because you probably watch 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 leg and liability repricing, but, you know, the magnitude was greater. So, you know, a lot of institutions felt it more than others. Honestly, I think, you know, in our case, Ross, we had been building liquidity as painful as it was in 21 and 22, for obviously a variety of reasons that are unique to Sterling, but in any case, liquidity did build. And we reduced credit risk. So I think there's at least some dividend for us being proactive at this point in time. Another couple of increases. our liability costs will gallop along the way everybody else's 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, it's, I don't know, Karen, you can correct me if I'm off here, but it's about a billion five out of two and a half. 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, at different speeds, but it continues to pay down. But, you know, the bulk of those have been – were originated as adjustables. We haven't looked at two, Ross. I should also mention we've done some – we continue to do some analysis with respect to – You know, payment shocks, but to date we haven't seen any significant credit issues on the, especially on the residential side with, you know, higher rates as the loans adjust. We haven't written an advantage loan since, I'm going to say around the third quarter of 2019. So they're, you know, they're all pretty well seasoned. And obviously the equity levels, you know, even if the markets give back some are, you know, very, very significant. So that, you know, they continue to, from a credit perspective, you know, behave the same way. And, you know, and every one that pays off is one less we have to deal with. Long answer, sorry.
spk04: Okay, no, no, 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 multimillion 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, 120-ish, and they come in and they say, I can get four plus in markets or something on a two-year, what are you going to do for me? Yes. Are you adjusting those guys immediately and to what level?
spk02: Well, fortunately, we had several of those when I joined the bank. And I viewed those as higher maintenance costs. And so in several cases, we've nurtured those down to more modest levels. I can't tell you the largest that we have now, but they're all pretty manageable. There's no one that is would be noticeable to anybody just looking at margins were it to reprice them. And they're all pretty much what you'd expect in a California-based retail deposit gathering system. But there were several before.
spk04: OK. I think that's about it. OK. Thank you very much. Let's see how things develop over the next months and quarters, I suppose. Okay. Hopefully months and quarters. Thank you. Thank you, by the way.
spk03: Okay. Again, to join the queue, press star, then 1 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.
spk02: Okay, just quickly, obviously, happy 2023 to everybody, and thank you for joining us. As I mentioned earlier, I can assure you we spend significant time, 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'll look forward to our first quarter 23 earnings call in April. Have a good day. Thank you.
spk03: The conference has now concluded. Thank you very much for attending today's presentation.
spk02: You may now disconnect your lines.
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