Sterling Bancorp, Inc.

Good morning, everyone. Thank you for joining us today to discuss Sterling Bancorp's financial results for the first quarter ended March 31st, 2024. 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 the future performance and financial condition of Sterling Bancorp and the banking industry generally that involves 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 its SEC 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 gap measures. The press release available on our website contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the gap to non-gap measures. At this time, I'd like to turn the call over to Tom O'Brien. Tom?

Great. Thank you, and good morning. those on the call welcome to the first quarter 24 earnings call so I thought 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 boards of the bank and the holding company, replacing Lyle Wohlberg, who stepped down, and replacing Christine as the Chief Risk Officer. Eleni 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. You know, for all intents and purposes, it was a break-even quarter driven in large part by the, what I'll go through in a minute, but some legal expenses towards the tail end of these OCC investigations. The bullet points in the press release really, you know, at least in my perspective, provide insight into all the meaningful highlights. 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 bans from participating in the affairs of any federally insured depository along with other prohibitions. 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. 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, 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, 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 and non-performers has served us very well. In both cases, we exited those credits at very attractive prices and 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 10Qs and 10Ks and that we've talked about in prior earnings calls. It is a very, as I mentioned earlier, a very uncertain market. 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 understand, you know, who we are, what we are, and as I mentioned a few minutes ago, the risk profile, in my opinion, anyhow, is really quite modest. Margins remain under, you know, 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 or early June.

Middle of May.

Middle of May, okay. And that's at a relatively low rate, just under 2%, if I recall correctly. So as that leaves, and depending on what happens with interest rates in our markets and as we price our liabilities, there certainly may be some additional pressures on margins. It's 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 of the quarter. Inflation remains stubbornly high, especially in what would be called kind of daily consumables, you know, groceries, 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 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 one or two. But it is, as I said, very uncertain and hard to read at this point, but inflation does force their hand on the more restrictive side. Everything else is, you know, 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. 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 time, we will pause momentarily to assemble our roster. Our first question comes from Ross Haberman with RLH Investments. Please go ahead.

Good morning, Tom. How are you? I'm well, Ross. How are you? I just have a couple of very Brief numbers questions. Did I understand it on the expense side going forward that they'll begin to tail off a bit compared to this March quarter? Or I think you said you spent over $3 million in the quarter. Is that going to be continuing for another couple quarters at that rate?

No, 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 that we advance legal expenses for. But with the consent orders last week, as we understand it, the OCC is done with their investigation. So I think that ends. Keep in mind also in the prior quarter, there was an insurance reimbursement on some of those legal expenses. So it's a little bit distorted quarter to quarter. And as I mentioned, 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 appear as witnesses, but we don't think that will be significant. But I think we're finally done with all of that.

Were there any other sort of less recurring items in the quarter besides the elevator professional fees?

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

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

Well, 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 assets. I don't, do you have any?

Yeah, we have about 200 million of loans that reprice every quarter, and they will reprice up, you know, a couple of hundred basis points likely, but as Tom mentioned, I still think that'll be overwritten by the increasing deposit costs.

And these are, these are CDs or something which are, I guess, rolling over from what, from like 2.5% or 3% up to 4% or 4.5% or 5%? Is that it? Or I thought you said in prior quarters we've run through most of that repricing and we were probably the top of the ninth inning in terms of that repricing up of those CDs.

Well, no, I was going to just, I think some of it is just with the regular, you know, the money market type accounts. where there's a variable rate there as opposed to CDs. And, you know, it just depends on the interest rate environment with CDs, where they're coming off and where they're 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. But they go, you know, as they mature, I mean, they tend to be relatively – short to intermediate term that, you know, we don't have, you know, three to five-year type CDs. So if you say one year or 18 months being the longer ones, then, you know, they do come up periodically. And, you know, they kind of reprice. You know, we try to price in the middle of the market. But given the liquidity pressures at a lot of banks, the, you know, the competition has been pretty steep. So I think, you know, as Karen said, I think the likelihood is that, you know, the two factors on both sides of the balance sheet will kind of fight each other. And in the short run, deposits reprice faster than assets. And depending on where interest rates go, you know, it could be pluses or minuses. We do, you know, with our liquidity, we kind of do get the benefit of, you know, rates being higher at this point. I think the negative is we've kind of discussed throughout my time here is Sterling was always, you know, funded more thrift-like, and we didn't have a lot of transactional demand deposits or lower-cost deposits. So, you know, we've been trying to build that. from virtually nothing to more moderate the total cost of funds. But that is, you know, that's a work in progress. But we've had some good success.

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 on a blackout period with that possibility? Sure.

There's compelling reasons to do buybacks, obviously. There are strategic reasons why we shouldn't or can't. Okay. I'll leave it at that.

Okay. Thank you for the time. I greatly appreciate it. Yeah, anytime. Good to hear from you.

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

Hey, Tom. Hey, Karen. How are you? I haven't heard from you in a while.

Hey, I've been on the webcast mostly, you know. Oh, okay. It's tough when you get our age, Tom. And you're doing such a great job, you know. I hope you're almost done. I wish you got the New York community gig. You would do probably a better job and get a hell of a lot more money. Thank you. I've always been a big fan of yours. You're kind. I mean, the story's all here. 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 those DOJ legal costs, any more expenses, I guess, from the regulatory side, are we talking about baskets of $100,000 potentially? Is that what we're looking at?

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 there's no further effort. But the extent of what we might be inclined or presented with would be legal costs for a small handful of people who could potentially be called as either witnesses or for information hearings with the prosecutors. I don't know When or if that will happen, hard to predict the cost, but as I said, in the scheme of things, it certainly wouldn't be material. Okay. But I already know.

Penalties, they would pay them, not the bank.

There's nothing, no, nothing for us. This does not involve the company or the bank, and it's just for individuals who we advance their legal fees for who were employed at the time who are, you know, aware of and witnesses to, you know, certain conduct and behaviors.

Okay. And I really only had one other area and that's really why you kind of missed our number. And I understand the conservative attitude and 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 loan reserve to loan ratio above 175. is it just a question of when? Is it a timing issue? You know, I was surprised there wasn't a million, a million and a half released this quarter.

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

Okay. It just seems logical. It's not that you have a whole lot to do with the extra money right now either, right? No. You're not really growing the balance sheet. It doesn't seem to be a time where you need to leverage up, so to speak. You're sitting on the cash, either in equity or in reserves.

Yeah. Honestly, I think those are our strengths, our what makes Sterling attractive today from a, uh, a lot of perspectives, um, you know, the price of the stock distresses me, but, um, but a whole bunch of other ones that I looked at distress me too. Um, it's, you know, I think the market's going to have to digest what's going on in, uh, a lot of these, uh, these balance sheets and the, um, and that's why I said, I, you know, it's, It's silly, in my view, to try to defend a very low allowance today because one way or the other, it's 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 to you anyhow. Yeah, you know how it is.

My multifamily loans aren't bad. Yeah, we have the good multifamily loans. We're not the same.

I've been saying that for a couple of years. That was due to happen. It's just a question of when, but that market is suspect.

And you know something, even if you're right, it doesn't matter from a stock price standpoint. It doesn't matter whether you're right or wrong. You want to trade a 40% a book, trade a 40% a book and keep your allowance low. It doesn't matter.

Yeah, but at the end of the day, if you're right and you never needed it, take it back. It's not lost to eternity. But I would suspect in that particular product, there's a lot of pain to come over the next couple of years.

Well, I think you're sitting pretty. The balance sheet's strong, right? I just wish I could see what to do with the money. I mean, you can leverage those reserves, you know, take those excess reserves. You can leverage the excess capital. You just got to find the missing ingredient, I guess. The one thing that's missing now is that business plan to what to do, you know, because you have, I think, the rough and the fundamentals and the balance sheet to grow from here. But grow into what is the question?

No, honestly, that's, Anthony, that is fantastic. what we talk about here all the time. But it is the unfortunate consequence of having a monoline business all those years. And when the monoline turned out to be illegal, all of a sudden you have no business. And so whatever we do in that context would require a, you know, an investment in systems, controls, people, client acquisition, and a relatively long startup period. So it becomes that kind of a challenge. 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 the residential lending business is, at least in my view, not prudent. It's high risk. 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 come. So that's what we struggle with. We struggle with how to kind of reinvent the bank or where to reinvent it. And if it was a different market, it would be an easier conversation.

Yeah. I mean, I get it. I don't expect you to go out and buy a private banking team. No, you're not going to see us do that. Well, you've been doing a great job, and I appreciate the time. You're kind. Thank you. Okay.

Good luck. Yep. Yep.

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

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

Yeah, I think they're 100% residential, and roughly half of them are paying and current. Oh, okay. But they've been... They've been slow pays, and so I think it's safe to say there's no big issue in those. I'd probably argue there's probably no lost content in those. And the ones that are current and paying kind of work their way back into performing over at least six months of steady payments. And the others, I think we've got maybe two that are in foreclosure. 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, but at some point, and it may be immediately before the sale, the loan satisfies or somebody buys us out or whatever but so that's why I said I don't the commercial portfolio you know basically based on what we did previously is fine I mean there's no delinquencies of any significance there and that's pretty pristine and the residential is is what it is but I'm not I'm not worried about the nine put it that way okay and anything in the delinquency bucket or the criticize that you that you're losing sleep about no we you know i'll tell you we had one um old construction loan out in um uh south san francisco that um it wasn't that was like four or five million dollars so but um i tell you that was one that for the last year or two uh 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 um 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. So it looks like we're fine. But that was the one I was concerned about. And we had, you know, a couple of criticized or classified loans that, you know, are there for more technical reasons. In one case, probably one or two cases, there's a small shortfall in the debt service coverage, but the dollar amount is not significant. We're pretty cautious and conservative on our risk ratings. I think, you know, unlike the first year or so, I don't think we're getting any big surprises anymore. And, frankly, most of the – a good part of the legacy loans are – they're either very well-seasoned now or they've paid off.

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, and you had a very small mark on your loan. I think it was $5 or $6 million. Generally, do you put much credence into that footnote, whether your banks or any other ones? I'm just curious, how do you look at that note for your bank? the 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 data point.

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

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

Yep, you too.

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

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