Sterling Bancorp Q2 2024 Earnings Call Transcript

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July 24, 2024

There are 4 speakers on the call.

Operator

Good morning, everyone. Thank you for joining us today to discuss Sterling Bancorp's Financial Results for the Second Quarter Ended June 30, 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 Q2 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.

Operator

For a complete discussion of forward looking statements and factors that could cause actual results to differ from those two statements, the company encourages all participants to refer to its SEC filings, especially those on Forms 8 ks, 10Q, 10 ks 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 the call. Additionally, management may refer to non GAAP measures, which are intended to supplement, but not substitute for the directly comparable GAAP measures. The press release available on our website contains the financial and other quantitative information to be discussed today as well as reconciliation of the GAAP to non GAAP measures. At this time, I'd like to turn the floor over to Tom O'Brien.

Operator

Tom?

Speaker 1

Okay. Thank you, and good morning, everyone. Welcome to our Q2 earnings call. So I'll start basically by saying the second quarter was the continuation of what we have seen in recent quarters. We are operating essentially at a breakeven level, plus or minus a few pennies each quarter.

Speaker 1

Our capital and liquidity continue to remain strong. Notable during this quarter was the final maturity of our last wholesale funding. The $50,000,000 home loan bank advance was called during the quarter and that brings to an end what were various forms of wholesale funding that we had on the balance sheet here some years ago, but including brokered listing deposits, these kind of advances and some above market CDs that peaked at over $1,000,000,000 a few years ago. So now we essentially are looking at core deposit funding in the bank with nothing wholesale and nothing out of the ordinary course of what you expect to see in a bank deposit portfolio. Expenses are finally peaking and trending in the right direction.

Speaker 1

The result basically of some cost cutting that we did in the beginning of the year and then additionally the reduction in fees and expenses related to all the different investigations that have been going on here since 2019. As we noted in the press release, it appears that we are done with all of the investigations and the costs related thereto since the Department of Justice notified us during the quarter that their investigation is now closed. The time invested and the money spent by the company over the last 4 years to complete these investigations has been painful as you all know. Unfortunately in our system of justice, the price paid for the activities of individuals is all too often visited upon the companies. And we have paid dearly.

Speaker 1

But more importantly, we continue to focus our efforts on the strategy that we have outlined over the last several quarters. Our strategies and objectives remain the same. We have looked at a variety of alternatives. We continue to do that and try to find ways to position the bank to be able to grow and prosper in the periods ahead. I think we've kind of outlined the various strategies that we would consider and these calls are public filings, our press releases.

Speaker 1

These tend to be probably a little bit chaotic given the nature of the market over the last year, but there does appear to be, as I noted in the press release, some continued thawing in the market and some greater regulatory certainty as to what the future holds for the industry. I think the formal end of these investigations and as an additional matter helps remove clouds of uncertainty that surrounded the company in addition to the cost and the time efficiencies that should help us going forward. I think the general direction of both Sterling and the industry probably will be helped assuming there's one rate cut this year, maybe as we get into September, there seems to be momentum in that direction. But that whether it's at meaningful or not in the scheme of things, I think it does help put an end to the speculation as to will rates stay at this elevated level where they go higher or will they drift a little bit lower. So I think the momentum towards lower obviously would be helpful.

Speaker 1

In terms of our margin, and again, as I noted in the press release, the cost of liquidity is relatively high. Loan opportunities, we've seen some growth in commercial real estate And the residential continues to pay down pretty aggressively. And I suspect that will continue on a kind of a similar path of month to month and quarter to quarter. We are not originating any residential loans and have no plans to do so. And we will continue to look at commercial opportunities as they come along.

Speaker 1

But again, it's a market for us in particular to be cautious in and to be mindful of what our charges here and continue to state protect the book value and the integrity of the balance sheet and put us in a position to take advantage of opportunities that may present themselves over the coming months and quarters. So again, I don't think too much different in the quarters ahead. In terms of financial performance, I think credit conditions stay pretty mild for us. Reserve levels continue to be very healthy. The industry in general is continues to see weakness in office and in some overbuilding areas in multifamily and then of course in the Metro New York area with the rent regulated multifamily is experiencing and probably will continue to experience a considerable degree of pressure as the values there have just been hammered.

Speaker 1

So with that, probably easiest if I take some questions and see what's on everybody's mind. So operator?

Operator

Ladies and gentlemen, at this time, we'll begin the question and answer session. And our first question today comes from Ross Haberman from RLH Investments. Please go ahead with your question.

Speaker 1

Good morning, Tom. Tom, how are you? I'm doing well. Always good to hear from you.

Speaker 2

The legal and compliance costs, how much of that was in the 2,100,000 dollars of professional fees for the quarter?

Speaker 1

Let me start with that. Okay. I'm going to ask Karen to answer that.

Speaker 3

So in terms of legal fees, there's about $1,300,000 The other professional fees were around $800,000 There wasn't too much noise in terms of the investigation, but there was a couple of 100 1,000 related to those matters.

Speaker 2

So that should be going away. So that number should be going down by should average, what, around $1,500,000 a quarter?

Speaker 3

Maybe more like $1,800,000 or so, at least through the next couple of quarters.

Speaker 2

And was there any other sort of,

Speaker 1

I guess, what will be less recurring

Speaker 2

items besides that couple of 100,000 going forward?

Speaker 3

Within that category or just in general?

Speaker 2

No, within the non interest expense.

Speaker 3

There wasn't really too much other noise in the quarter. It was pretty quiet.

Speaker 2

Okay. Okay.

Speaker 1

Seeing Tom, I guess,

Speaker 2

what are you seeing

Speaker 1

on roll off of your loans?

Speaker 2

If you if we do see a drop off in rates, say, a quarter in September, then another quarter in, say, December for argument's sake, Do

Speaker 1

you think you'll

Speaker 2

see some or and will that be will that help your margin if we do see 2 quarter rate drop?

Speaker 1

Well, the question I always have in this context is, do we see 1.5 point drop in September ish to put a bigger statement in terms of the decline in rates or as you mentioned 2 1 quarter point drops. But I think that's the magnitude of what we're talking about. I don't see any real change in our prepayment levels because on the residential because virtually all of them are in the adjustable periods now. So they all had the payment changes and the level of prepayments there. There's some seasonality to it, but generally it's been maintained at on a percentage basis similar levels quarter to quarter during my tenure here.

Speaker 1

And the performance really hasn't changed much. So I don't know that I'd expect to see much greater in the way of prepayments, but prepayments are pretty significant in that portfolio. On the commercial side, I think it will really depend more on the availability of credit to see if there's going to be more banks stepping into the market to provide lower rate opportunities. But I think that might be a little bit slow coming. So I don't expect to see much on that.

Speaker 1

I do think lower rates as we reprice liabilities would begin to help margin Certainly.

Speaker 2

And any large expenditures expected over the next quarter, 2 or 3, or everything will be basically similar or less the what was your ongoing legal

Operator

expenses?

Speaker 1

Joanne?

Speaker 3

Yes. Our annual merit process takes effect in the Q3, but other than that, I don't foresee anything.

Speaker 1

Yes. That's Nothing that would be out of the ordinary. I think over the last couple of years, we were always talking about the kind of the quarterly level run rate for expenses. And I think we generally were saying 14 ish million was probably the right level and we're gradually getting down there. I think, I mean, there's always a couple of 100,000 of things that go one way or the other, but as a general matter, I don't see anything out of the ordinary here.

Speaker 2

And just one last question about your asset quality seems pristine. Anything delinquencies or criticize that's keeping you up at night?

Speaker 1

No. We have I'll go to the commercial stuff. The things that kept me up at night over the years here were sold off a while ago. So generally our commercial portfolio has done at least for the last several quarters, virtually no delinquencies or if they are, they're just loans that are matured and going through the renewal or the payoff process. So we really haven't seen anything there.

Speaker 1

The residential, we always tend to see slow pays and loans that I think virtually all of our non accruals at this point are residential. The vast bulk of them are paying in some fashion or another. So I think that will continue to be a little bit volatile, but on the residential, it's they're also well seasoned that even I think is 5 that are in foreclosure residential or loans that are in foreclosure And they'll go pretty quickly. But to date, we've not really lost any money on a residential foreclosure. They're kind of few and far between and the equity built up over the years plus the market improvement because most all of these predate 2020 in terms of their originations.

Speaker 1

So they had certainly price appreciation, especially in the West Coast market. I think we're fine there.

Speaker 2

Okay. That was most of my questions. Thank you.

Speaker 1

Yes. Anytime. Thank

Operator

And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the floor back over to management for any closing remarks.

Speaker 1

Okay. Well, thank you for participating today. And Ross, I always appreciate your questions. The summer is going by quickly. We will look forward to the Q3 call with you coming up in 2 short months.

Speaker 1

And again, thank you for your interest and your time and enjoy the balance of the summer. Thank you.

Operator

And ladies and gentlemen, with that, we'll conclude today's conference call. We thank you for

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Key Takeaways

  • Sterling reported another breakeven quarter, maintaining strong capital and liquidity levels.
  • The final maturity of the $50 million Home Loan Bank advance marks the end of all wholesale funding, leaving only core deposit funding on the balance sheet.
  • Expenses have peaked and are declining after cost‐cutting measures and the closure of regulatory investigations, with legal and compliance costs expected to drop by ~$1.5–1.8 million per quarter.
  • Management reaffirmed its unchanged strategy of selective growth, avoiding new residential lending, focusing on commercial real estate opportunities and preserving book value.
  • Asset quality remains pristine, with minimal delinquencies, non‐accruals largely in seasoned residential loans and no significant foreclosure losses.
AI Generated. May Contain Errors.
Earnings Conference Call
Sterling Bancorp Q2 2024
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