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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, everyone. Thank you for joining us today to discuss Sterling Bancorp's financial results for the forth -- first quarter ended March 31, 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 GAAP measures. The press release available on our website contains the financial and other quantitive 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?
Great. Thank you, and good morning to those on the call. Welcome to the First Quarter '24 earnings call. So I thought first, what I do is to kind of update you on some internal changes here at the bank. We have promoted Christie Meredith to be our Chief Operating Officer, and she has been our Chief Risk Officer.
Additionally, Christine was appointed to the Boards of the bank and the holding company replacing Lyle Wolberg, who stepped down. And replacing Christine as the Chief Risk Officer, Elaine 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. For all intents and purposes, it was a breakeven 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 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 3 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 better 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 of 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 nonperformers 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 cleared risk evaluations. We work day-to-day on the strategies that we have outlined in our prior 10-Qs and 10-Ks and that we've talked about in prior earnings calls, it is a very -- as I mentioned earlier, a very uncertain market, but I believe we operate at least at that level from a position of relevant strength and transparency. There's not a lot of complexity in the bank anymore. Very easy to understand who we are, what we are. And as I've mentioned a few minutes ago, the risk profile, in my opinion, anyhow is really quite modest. Margins remain under some pressure We think that's likely to continue. We do have a I think, a $50 million on 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, groceries, energy, and that is finding its way throughout the economic forecast. And I think probably we'll 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 3 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 1 or 2.
But it is, as I said, very uncertain and hard to hard to read at this point, but the inflation does so force their hand on the more restrictive side. Everything else is 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.
[Operator Instructions]
Our first question comes from Ross Haberman with RLH Investments.
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, I think we're -- 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 advanced 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 a little bit distorted quarter-to-quarter. But -- 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. So -- 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 elevated 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 would you -- how does that -- how are your loans repricing over the next couple of quarters and to hopefully offset 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...
Yes. We have about $200 million of loans that reprice every quarter, and they will reprice up a couple of hundred basis points likely. But as Tom mentioned, I still think that will be overwritten by the increasing deposit costs.
And these are 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, I was going to just -- I think some of it is just with the regular -- the money market type accounts where there is a variable rate there and as opposed to CDs. And 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 -- as they mature, I mean, they tend to be relatively short and intermediate term that we don't have 3- to 5-year type CDs. So if you say 1 year or 18 months being the longer ones than they do come up periodically. And they kind of reprice -- we try to price in the middle of the market. But given the liquidity pressures that a lot of banks, the competition has been pretty steep. So I think as Karen said, I think the likelihood is that the 2 factors on both sides of the balance sheet will kind of fight each other. And in the short run deposits repriced faster asset. And depending on where interest rates go, could be pluses or minuses. We do -- with our liquidity, we kind of do get the benefit of our rates being higher at this point. I think the negative is we've kind of discussed throughout my time here is Sterling was always funded more trip like, and we didn't have a lot of transactional demand deposits or lower cost deposits. So we've been trying to build that from virtually nothing to more moderate the total cost of funds, but 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 in a blackout period with that possibility?
There's compelling reasons to do buybacks, obviously, there are strategic reasons why we shouldn't or can't I'll leave it at that.
[Operator Instructions] Our next question comes from Anthony Polini with American Capital Partners.
I haven't heard from you in a while.
I've been on the webcast mostly -- it's tough when you get our rage, Tom. And you're doing such a great job. 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. But now -- always been a big fan or One little. Minor -- I mean, it's the store is 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 pipe 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. 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 advanced our legal fees for who were employed at the time who are aware of and witnesses to 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. If you took $6 million out of your reserves, you'd still have a on reserve to loan ratio above [ $1.75 million ]. Is it just a question of when? Is it a timing issue? I was surprised there wasn't $1 million, $1.5 million released this quarter.
Yes. I mean we have a fairly conservative model. I probably should take out the word fairly. For good reason, I think well, if you look around the industry, you see kind of all sorts 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 1.5% is probably the right level for the vast bulk of the industry. We do keep our higher. I don't know how -- yes, we could keep it higher. So there's probably room. 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 I guess I wouldn't personally be surprised if it came a little closer to down to the levels you mentioned over the course of the next few quarters.
Okay. I mean it just seems logical. It's not that you have a whole lot to do with the extra money right now either, right?
No, no.
You're not really growing the balance sheet. -- doesn't seem to be a time where you need to leverage up, so to speak. So you're sitting on the cash, either in equity or in reserves.
Yes. I mean honestly, I think those are our strengths are what makes sterling attractive today from a lot of perspectives. The price of the stock distresses me but a whole bunch of other ones that I look at to stress me too. It's -- I think the market is going to have to digest what's going on in a lot of these balance sheets. And the -- and that's why I said it's still, in my view, to try to defend a very low allowance today because one way or the other 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 is doing that to you anyhow. And aren't bad.
Yes, we have the good multi year loans. We're not...
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 at 40% above, you trade at 40% of book and keep your allowance low. It doesn't matter.
Yes. But at the end of the day, if you're right and you never needed it, you take it back. Nobody -- it's not lost to Trinity. 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 circulating the balance sheet is strong, right? And I just wish I could see what to do with the money. I mean you can leverage those reserves that take those reserves. You can leverage the excess capital. You just got to find missing ingredient, I guess, the one thing that's missing now is that business plan what to do because you have, I think, the ag fundamentals and the balance sheet to grow from here grow into what is the question.
No, honestly, that's -- Anthony, that's 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 legal, all of a sudden, you have no business. And so whatever we do in that context would require an investment in systems, controls, people, client acquisition, and a relatively long start-up 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 -- and at least in my view, not prudent to tie risk, it's -- 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 struggled. We struggle with how that's kind of reinvent the bank or where to reinvent it and if there was a different market, it would be an easier conversation.
Yes. 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.
We have a follow-up question from Ross Haberman with RLH Investments.
Just one follow-up question regarding the nonaccruals, the $9 million. Do you think those will -- you can resolve those over the next quarter, 2 or 3?
Yes. They're -- I think they're 100% residential. And roughly half of them are paying and current but 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 loss content in them. And the ones that are current and paying kind of worked their way back into performing over at least 6 months of steady payments. And the other is, I think we've got maybe 2 that are in foreclosure, 3 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 that at some point, and 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 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 what it is. But I'm not worried about the 9 -- put it that way.
Okay. And anything in the delinquency bucket or the criticized that you're losing sleep about?
No, I'll tell you, we had one old construction loan out in South San Francisco that wasn't that, it was like $4 million or $5 million. So -- but I would tell you that was one that for the last year or 2, 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 -- and it was very slow coming to fruition, but the builders now got, I think, 3 or 4 contracts at prices I find -- I can't believe it, but -- so it looks like we're fine. But that was the one I was concerned about, and we had a couple of criticized or classified loans that are there for more technical reasons. In one case, there's probably 1 or 2 cases. There's a small shortfall in the debt service coverage, but the dollar amount is not significant. And I think we're pretty cautious and conservative on our risk ratings. And I don't think 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.
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-market on all the assets and liabilities. And you had a very small mark on your loan I think it was $5 million or $6 million. Generally, do you put much credence into that footnote when -- 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.
Yes. I would say it's a data point. It's a reasonable estimate. In our case, I think from a yield perspective, that's pretty much how you get there. From a performance perspective, so I would say the economics probably support it. Can you execute at that price either way, plus or minus, I don't know. But I think it is a good measure, though, of whatever the embedded interest rate risk is. If you're looking at mostly adjustables and longer values in the case of residential owner occupied, things like that, yes, that tells you. It's like a bond portfolio. 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 down 7% or something, then it's probably pretty market-sensitive and as the product of rates going up as quickly as they did.
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 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.