Sterling Bancorp Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 25, 2023

There are 3 speakers on the call.

Operator

Good morning, everyone. Thank you for joining us today to discuss Sterling Bancorp's Financial Results for the Q3 Ended September 30, 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 Q3 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 conditions of Sterling Bancorp that involve risks and uncertainties.

Operator

In particular, forward looking statements may be made on this conference call regarding the economy and financial markets, Government investigations, credit quality, the regulatory scheme governing the company's industry, competition in the company's industry, interest rates, the company's liquidity, the company's business and the company's governance. Any forward looking statements made during this conference call are based primarily on the company's current expectations and projections about future events and trends that the company believes may affect its business, financial conditions, results of operations, prospects, business strategy and financial needs. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward looking statements. These factors as well as examples of forward looking statements are discussed in the company's SEC filings, which are available on the company's website. These are not exhaustive.

Operator

New risks and uncertainties emerge from time to time, and it is not possible for the company to predict all risks and uncertainties. These could have an impact on the forward looking statements made during this conference 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 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.

Operator

Please note this call is being recorded. At this time, I'd like to turn the call over to Tom O'Brien. Tom?

Speaker 1

Thank you. Good morning, everyone. Welcome to our Q3 earnings call. I'll run through some of the Highlights as I see them here, and then we'll take some questions. Just generally, I'd say the quarter was Relatively quiet.

Speaker 1

We had accomplished the redemption of the subordinated debt in mid July And finished up the settlement with the Department of Justice And also in July. So those accomplishments kind of over and done. The quarter had Very, very modest profit of $300,000 margin flattish at $262,000 I think we're still Seeing both here and in the industry pressures from higher interest rates And competition on deposit accounts and that doesn't show any sign of letting up in the Immediate future, so I think trying to be careful in terms of liability pricing and balances. But it's a difficult time of both high interest rates after extended period of Ultra low interest rates and high inflation combined probably not seen since Probably since I started in banking, which was 100 years ago. So we're navigating that Both at the bank and I think in the industry in general.

Speaker 1

We had a recovery in the quarter as we've had in the last And the allowance for credit losses, the ratios maintained basically the same at 2 point 4%, 2%. I would also tell you that deposits have been relatively flat. The balance It was relatively flat too except for the payment that went out of the company to redeem the subordinated debt And the settlement with the Justice Department that is in the form of Return to certain shareholders. So that combined with about $90,000,000 I think End of quarter, but other than that, things were relatively flat here. The credit levels Continue to be about the same.

Speaker 1

Our capital remains very strong. Our liquidity is strong. As I said, credit, I think, is pretty strong. It's a very uncertain time just in terms of what's available for us to do. We're Trying to preserve our capital.

Speaker 1

We're trying to maintain the strengths that we have. I think we've been timely with respect to addressing And disposing of a lot of the non accrual and low grade loans that the bank had, especially on the commercial side. As I mentioned in the press release, I think in selected markets, But I'd say predominantly coastal markets, there continues to be an awful lot of pressure in the Office and Hospitality space and I think more in the Northeast, Now you're going to see problems emerging with multifamily property loans just based on higher cap rates, interest rates. If you're lucky, flat rents and revenues and expenses like taxes and oil going up. I just anticipate that area is going to have a fair amount of pressure in the time ahead.

Speaker 1

And again, I think that's probably just highlights the timeliness of our disposition of Remember the totals now, but well over $100,000,000 of loans that both on the commercial and then And the Q2 on the residential side that were just long term deadweight for us. And other than that, it's relatively quiet here at Sterling. Even as we get into the Q4, Doesn't seem like an awful lot is changing. I think, as I said, the pressures that have Been brought to bear mostly in terms of liability pricing and What the Fed may or may not do in terms of increased interest rates, I think my own sense is that they'll A little cautious and patient, but that the bias is still towards another 1 or 2 increases Until there is a sense that inflation is more under control and it remains Stubbornly high and high inflation is a very difficult road to navigate And most all industries, but certainly in financial services. So with that, I said Not an awful lot to spend time talking about here.

Speaker 1

So operator, probably best to take some questions.

Operator

We will now begin the question and answer session. The first question today comes from Ross Haberman with RLH Investments. Please go ahead.

Speaker 2

Good morning, Tom. How are you? Hey, Ross. I'm fine. How are you?

Speaker 2

Could you address some of the expenses this Quarter, what do you think is one time? What's and You referred to, I guess, some of your coverage of some of the people and your insurance, which has run out. Could you just sort of Touch upon that and can we continue to see this level or just some a bunch of bills came in this quarter and I don't know what Similar stuff coming in next quarter. Just give us an overall sense of expense level and could we see them coming down over the next quarter From the level this September quarter. Thank you.

Speaker 1

Yes, sure, Ross. The Cost in the quarter for indemnified individuals was 1,700,000 And then I would say some of the costs that the bank itself incurred on Related matters was probably a couple of 100,000. So let's say $2,000,000 in legal expenses. It is, as I mentioned in the release and as you noted, it's for individuals who are either Witnesses or individuals with facts that the government is interested in learning about. And They're represented by counsel and we are obligated to pay their expenses.

Speaker 1

And this has been Going on pretty much since I've been here, although this quarter was Unusually high and it reflects, I think, what we could safely say is The coming culmination of some efforts on behalf of the government with respect to individuals, we are indemnifying people who we Are obligated to, as I mentioned. And obviously, we're not indemnifying any individual who Behavior and conduct is subject to our resisting those claims. The insurance, The D and O insurance for the company, we did exhaust it during this quarter. I think we're expecting a payment from the insurer In the next couple of weeks, somewhere between $3,000,000 $4,000,000 but that will be the last of it. I don't expect that the future quarters will have this kind of Expense for individuals primarily because of the intensity of the government inquiries, but it's a little hard for us to project that.

Speaker 1

But just Based on the volume of people that were interviewed, that's kind of our current expectation.

Speaker 2

Just two further questions. The $3,000,000 or $4,000,000 do you pick that up as income when that comes in, when those checks Those reimbursement checks come in? Yes. Okay. And if there's an adverse, I get adverse opinion or adverse claim against any of those individuals.

Speaker 2

Is that your liability? Or do you identify them?

Speaker 1

No.

Speaker 2

And you don't know if most of those that I guess, inquiry against them is,

Speaker 1

are we in

Speaker 2

the 9th inning with that stuff with them before?

Speaker 1

Or I guess when you deal with

Speaker 2

the government, you never know. Yes.

Speaker 1

I guess, if I look at a crystal ball, Obviously, there's the civil and the criminal part of it. So the civil part of it, which is the OCC, I would my guess is we're 8th or 9th. And with the criminal part of the DOJ, I just don't have a lot of visibility into that Other than kind of reading tea leaves with inquiries we get, but I think that's more likely going to be in 2024.

Speaker 2

Rates stay up at existing levels For the next year. You're wrong. They don't raise them more. They just keep them at these high levels through the next year. How does that scenario affect your Your margin or your spread?

Speaker 2

And when will it bottom out with that scenario? Thanks.

Speaker 1

I think there's still some pressure to come in the current quarter and maybe the quarter after. But then we have some roll off in loans that get reinvested at higher rates. We have some Roll off in securities that get reinvested in higher rates. But I would say there's still Some potential downward pressure in a scenario where rates stay pretty much as they are.

Speaker 2

Okay. Thank you. The best of luck. Thanks a lot.

Speaker 1

Good. Thanks, Ross. Take care.

Operator

We have no further questions at this time. And this concludes our question and answer session. I would like to turn the conference back over to Tom O'Brien for any closing remarks.

Speaker 1

Okay. Thank you. Thank you all for participating And hope you're enjoying the tail end of the nice weather wherever you are. But the Next opportunity we have to be together will be for the year end call in January, and I will look forward to

Operator

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

Powered by Quartr

Key Takeaways

  • Sterling reported Q3 profit of just $300,000 with a flat net interest margin and deposits roughly unchanged as the bank navigates ongoing high‐rate and deposit competition pressures.
  • The bank completed its subordinated debt redemption and settled with the Department of Justice in mid‐July, removing major legacy items from its balance sheet.
  • Legal expenses rose to about $2 million due to indemnification costs, exhausting the bank’s D&O insurance, though a $3–4 million reimbursement is expected and future legal costs are anticipated to decline.
  • Credit quality remains solid with an allowance for credit losses of ~2.4%, strong liquidity and capital, and over $100 million of non‐accrual and low‐grade loans disposed, but pockets of stress persist in coastal office, hospitality, and emerging multifamily sectors.
  • Looking ahead, management warns of continued margin pressure in the next two quarters from high funding costs, with some easing expected as loan and security repricing occurs and the Fed maintains a cautious yet hawkish stance on rates.
AI Generated. May Contain Errors.
Earnings Conference Call
Sterling Bancorp Q3 2023
00:00 / 00:00