Start Time: 11:00 January 1, 0000 11:30 AM ET
Sterling Bancorp, Inc. (Southfield, MI) (NASDAQ:SBT)
Q4 2022 Earnings Conference Call
January 30, 2023, 11:00 AM ET
Company Participants
Tom O’Brien – Chairman, President and CEO
Karen Knott – EVP and CFO
Conference Call Participants
Ben Gerlinger – Hovde Group
Ross Haberman – RLH Investments
Operator
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 31, 2022. 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 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 Web site. 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 Web site 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?
Tom O’Brien
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, 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 $0.00 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 own financial results. So we’ll kind of go through those highlights a little bit here and then take some questions.
But as I said, the loss was $200,000 in the quarter. 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 precedent on the consolidated margin to the tune of probably a drag of 25 basis points or so. 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 back 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’ll see we still carry a pretty significant expense relative to these investigations. Asset quality also continues to be pretty good. And I should note too that we continue to have a low loss ratio on the legacy Advantage loans notwithstanding all of their other issues that have been the source of the investigations and the internal control issues that existed at the Bank previously.
We try 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 can’t say that there’s anything in the way of hints or direction or guidance that they might give us that would help you understand where it’s going. We just — as I said, we have no visibility into that other than we’ll get some expression of appreciation for the cooperation and the information we continue to provide.
We do think collectively that it’s going to be resolved or at least the beginnings of a resolution sometime this quarter, but it’s — 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 20 questions. And as I said, we just make the case known that we need and would like resolution as quickly as possible. And hopefully, we get it. But I just can’t predict at this point.
So with that, the Bank itself, we continue to 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 completed all that, signed the consent order and paid the fine. And I would say in terms of all of the agencies that have taken an interest in the Bank, we continue to provide transparency and cooperation wherever it’s needed. So on that part, you should have no concerns with respect to that.
And I guess just going back to the DoJ is just to try to understand too that this was a multiyear problem. And as the frauds were uncovered early in 2020 and continuing, it was a multiyear. It wasn’t an incident. It wasn’t a single person who misbehaved. It was 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. So Karen, if you would.
Karen Knott
Sure. So 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 of 5.9 million 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 recap shore 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, we’ve worked through most of that process and really now that we need to be [indiscernible] controls validated by our internal/external auditors, and then we’ll be prepared to implement that as required. Tom noted the non-performing assets. 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 quarter-over-quarter, just a $3 million reduction. We were able to stabilize deposits. But as you can see on the NIM, it came at a little bit of a price as the deposit book increased. Tom?
Tom O’Brien
Okay. So 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, I think we’re back to a period where deposits and liquidity have a relatively high value where not so long ago in 2022, the industry was flushed 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 had suppression in their interest rates earned with the ultra low rates for a couple of years. So there’s 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 held 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 speaking of dealing with things, I think the benefits of the derisking 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 anything in the way of construction, income producing property type credit, we had a very significant exposure in the time I joined the Bank and some 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 improving market earlier in ’20, 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 happy to hear what’s on your mind.
Question-and-Answer Session
Operator
We will now begin the question-and-answer session. [Operator Instructions]. And our first question here is going to come from Ben Gerlinger from Hovde. Please go ahead.
Ben Gerlinger
Hi. Good morning, everyone.
Tom O’Brien
Hi, Ben.
Ben Gerlinger
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 rather precipitously once the DoJ is completed. But now that the BSA is also done, I was curious, can that wane down? And then — go ahead?
Karen Knott
Yes. For a bank of our size, right, we have a pretty hefty BSA department. However, we still do have a large book of those Advantage loans on our system. So while I think eventually that will wane down, 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.
Ben Gerlinger
Can you quantify or are you not at that — you don’t want — like at the level to just say how much is the BSA where it could potentially run off to get like a true core, core number?
Karen Knott
Yes, I’d be hesitant to say at this time. I haven’t prepared an answer for that. I can tell you there’s 40 roughly people in our BSA department currently. So it gives you a sense on a $2.5 billion bank what that looks like.
Ben Gerlinger
Sure. Yes, it’s quite a bit. And then whoever wants to answer, Tom or Karen, when you think about just the liquidity today, I know Tom you referenced deposits have more value. And then I think this fourth quarter earnings 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 a fund to 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 expense of deposits relative to your kind of — you’re still in shrink mode on the balance sheet. Just kind of curious, 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?
Tom O’Brien
Yes, I can handle that, Ben. So we’re — I think the last two quarters I’d say we’ve pretty much kept the balance sheet flat. And 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. But 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 business DDAs, things like that. So, the bank was pretty much a money market or CD deposit. We have over the last I’d say six months, Ben, developed and then we started marketing a demand product and on a relative basis, starting with zero, we’ve had some 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, the TCE diminution from the higher rates on what were in some cases relatively long duration securities at lower rates. So 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.
Ben Gerlinger
Got you. 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 9 million, because that’s just not how life works. But it’s — assuming that it’s under as a balance sheet adjustment, or I’d say over or under, i.e. I’m asking, it won’t flow through the income statement, correct?
Tom O’Brien
It won’t close the bank?
Ben Gerlinger
No, I’m 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.
Tom O’Brien
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 9 million is the most I can get in there. So that’s why it’s 9 million. But I don’t know more than that.
Ben Gerlinger
Got you. Okay. I appreciate the call. I’ll follow up later if I have anything else. Thanks.
Tom O’Brien
Yes, sure.
Operator
[Operator Instructions]. Our next question here will come from Ross Haberman with RLH Investments. Please go ahead.
Ross Haberman
Good morning, Tom. Tom, how are you?
Tom O’Brien
I am fine.
Ross Haberman
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 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 realistically make a CECL adjustment as of the first quarter?
Tom O’Brien
Well, CECL when fully implemented, as you know, just a debit or credit to the equity accounts, I think it’s probably safe to say we have no significant concerns with the effect of the impact. 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 we think appropriate and probably 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.
Ross Haberman
Okay. And just a follow-up question about the margin. Every bank is sort of coming in and saying, hey, deposits are ratcheting up much quicker than we ever expected. If we do see another 50 or 75 basis points over the next six to 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 of quarters?
Tom O’Brien
Yes. Well, it’s funny because you probably watch a lot of the same banks that I do. But for all of us, obviously, the increases were fast and furious and there was the typical lag in liability repricing, but the magnitude was greater. So a lot of institutions felt that more than others. Honestly, I think 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 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 1.5 billion out of 2.5 billion. The Advantage loan portfolio, I think when I joined the bank was about, I think a little over 2 billion, it’s around 800 million now. So at different states, but it continues to pay down. But the bulk of those have been — were originated as adjustables. We haven’t looked at too, Ross, I should also mention we’ve done some — we continue to do some analysis with respect to payment shocks. But to date, we haven’t seen any significant credit issues, especially on the residential side with 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 all pretty well seasoned. And obviously, the equity levels, even if the markets give back some, are very, very significant so that if they could to from a credit perspective behave the same way and every one that pays off is one less we have to deal with. Long answer, sorry.
Ross Haberman
No, I appreciate that. How are you — just specifically, how are you dealing with — unless 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. They come in and they say I can get 4 plus in markets or 4 something on a two year, what are you going to do for me? Are you adjusting those guys immediately and to what level?
Tom O’Brien
Well, fortunately, we had several of those when I joined the bank. And I viewed those as I guess higher maintenance costs, right. And so in several cases, we’ve nurtured those down to more modest levels. I don’t even — I can’t tell you the largest that we have now. But they’re all pretty manageable. There’s no one that would be noticeable to anybody just looking at margins were it to reprice. They’re all pretty much what you’d expect in a California-based retail deposit gathering system, but there were several before.
Ross Haberman
Okay. I think that’s about it. Okay. Thank you very much. Let’s see how things develop over the next months and quarters, I suppose, hopefully, months and quarters.
Tom O’Brien
Okay.
Operator
[Operator Instructions]. 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.
Tom O’Brien
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 look forward to our first quarter ’23 earnings call in April. Have a good day. Thank you.
Operator
The conference has now concluded. Thank you very much for attending today’s presentation. You may now disconnect your lines.
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