Sterling Bancorp, Inc.

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

Tom? Great. Thank you. Good morning, everyone. I am in San Francisco this week, so it's 8 a.m. here, and I'm in our office on the corner of Montgomery and California. So I guess first I'll start off and say with the First Republic Resolution, it's been another momentous weekend for bankers and investors and government agencies. I would say there's a meaningful cause for concern here which I think we'd all like to see addressed more proactively by bankers, especially risk managers, regulatory supervisory teams, and I'd also say the fundamental construct of the FDIC. Just these three failures basically in the last four weeks have cost the deposit insurance fund, you know, between $40 and $50 billion. The way we are going, you know, looks more like the early 1800s with the First and Second Bank of the United States. that concentrates power, resources, basic economic control in very, very few hands. So I'd argue it's just not good for, certainly not good for banking in general and ultimately not good for consumers. So let's hope that some saner heads prevail here and control both the risk-taking in banks that may look like these three, and also the regulatory process becomes much more forward-looking instead of backward-looking. So that's my soapbox comment, but I do feel it's fundamentally impacting 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 CECL. But anyhow, so basically kind of a break-even quarter again, a little bit of growth in... tangible book value mostly from some improvement in the mark to market on the health for sale securities margin had a little bit of compression a fair part of the margin is occupied by the cost of our sub debt and you know I think at the beginning of the year I set out basically three objectives to do in the order in which I could do them, and they were basically to settle with the DOJ, which we've done. Once that was done, I 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. It's very expensive and probably, I don't know, Karen can correct me, but something like 12 basis points on our margin at current rates. And obviously rates go up another 25, one or two times, that'll, you know, continue to impact us. 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. Nonetheless, our goal of protecting book value remains in place. We haven't financed much of this through capital, which was always certainly my goal. Our leverage ratio remains very strong by any calculation. Deposits just under $2 billion. And as we know in the press release, there was, 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 of just the other day, I think we're $25 or so million ahead of where we were. the day before the collapse of Silicon Valley. We keep all of our debt securities available for sale. I've never used held to maturity. I 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... sale process for the non-accrual and seriously delinquent residential loans. So we hired an independent advisor and got several bids and a very competitive process, which was nice to see. And I think we should have that sale concluded hopefully late May. And then, as you all know, of course, we had the DOJ settlement, which has to go through the court system to get approved and I think that'll probably be done in mid-July. But the elements are all there and the court has to approve it, which we expect shouldn't present any obstacles. So, you know, we've continued to do the job of fixing the bank and I think we've virtually accomplished 95% of what was the original goal 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 big issue. I can also say one of the biggest concerns I had when I joined the bank was liquidity. Given the loans that were... sold previously to outside investors and the risk with that, the reliance on broker deposits and home loan bank advances and things like that were, you know, in the hundreds of millions. But I think addressing that the way we did turned out to be good in what turned out to be a, you know, liquidity important period right here and now. I can't say I or any of us basically anticipated that, but it does validate the concerns that we in management had at that time in mid-2020 about the illiquid nature and the high loan-to-deposit ratio in the institution. So 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 address yesterday's problems. I mean, they just have to be more forward-looking and understand the market that exists today and the ability of all of us, basically, to move our money around at the click on our phone. And, you know, the lines of the 1930s can't be the model for solving bank issues today. I mean, you're always going to have banks that get in trouble like any other business. And whether it's, you know, a local economy or bad management, you know, things will happen. But it shouldn't be so unsettled a 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 CECL. And, of course, during the Q&A, she can answer any questions on that. So, Karen, if you don't mind.

Sure. So as required, we adopted CECL 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, you know, 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. When we moved that forward through the first quarter then, We did see our overall allowance decline primarily as a result of the transfer of the residential, delinquent, and non-accrual loans to held for sale. We took that charge off and reduced 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 portfolio. a real estate book and, you know, not what you're not seeing in the industry in general, some concerns there. And so we did take more of a provision on that portfolio.