Sterling Bancorp
Q3 2022 Earnings Call Transcript

Published:

  • Operator:
    Good morning, and welcome to the Sterling Bancorp Third Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.
  • I would now like to turn the conference over to Tom O'Brien. Please go ahead, sir.:
  • Thomas O'Brien:
    Okay. Thank you, and Good morning, everyone. Welcome to the third quarter call. As always, I turn your attention to the disclosures regarding our presentation that are available for your review in the 8-K. With that, I assume everybody has had a chance to look at those, understands them.
  • So in the third quarter here, as I noted in the press release, we've made very good progress on several fronts. There's still a lot of noise. I mean we recognize that, obviously. And with all of that, we're managing a small profit. But notably, in the quarter, credit continues to improve. On the commercial side, for the first time in my tenure, there were no delinquencies and no NPAs and any of the commercial portfolio. That was helped in large measure by our sale of $22 million worth of weaker commercial real estate credits. And -- but also we saw a nice decline in the residential nonaccruals and delinquencies through both payoffs and some reinstatements.:
  • The margin improved to 3.19% during the quarter helped obviously by higher interest rates that are in the market and our barely liquid portfolio. And -- but additionally, we had some interest recoveries from loans that paid off in the quarter. Prospectively, I think it's fair to say liabilities will continue to reprice upwardly. The idle funds from the past several years are -- now customers are looking for higher returns and better opportunities. So I think both Sterling and virtually all of the industry will experience continued increases in liability costs as interest rates continue to move up fairly aggressively and fairly quickly.:
  • Obviously, I think everybody knows, we signed a consent order with the OCC right at the end of September. In that consent order, we agreed to a $6 million civil money penalty that was assessed by the OCC for prior [indiscernible] and the old Advantage Loan Program. Simultaneously, the OCC released the bank from the formal agreement and recognition of the significant improvement we have made in the past 2 years in addressing a very significant level of very severe findings and many violations of law. So both of those, obviously, one a little more painful than the other, but both of them are major accomplishments in a relatively short period of time as regulatory enforcement matters go. And then finally, the court's approved the settlement of the derivative shareholder action, and that is now done.:
  • So the only remaining outstanding issue for us is the Justice Department and SEC. As I've stated, I think on every call, we have very little viability -- liability or I've got to say that, very limited visibility into the timing of the final resolution. And we continue to work aggressively and have regular conferences with the DOJ. Obviously, we're pushing that as quickly as we possibly can. But it's not something we have very much control over and certainly very, very limited feedback. So I can't provide any estimate of timing or cost. We're just hopeful that wraps up in the next few months, and we can put that behind us. And then that for the institution, Sterling institution, that will resolve many, many issues that have been dogging us for quite a long time. Individual actions will continue into the foreseeable future, notwithstanding how the bank settles out.:
  • So that's kind of the condition of things in the third quarter. I think for most of us, the year went very quickly. We're now in the final stretches of 2022. And I think in the 2 years, I'd say an awful lot was accomplished that really aren't visible to most people. We did a complete transformation of the IT platform of the BSA and AML platform of the risk platform, obviously, of the credit acceptance and credit management. And obviously, we've been paying the price in expenses for legal and professional fees to get to this point. And that's another reason the sooner it's resolved, the happier we'll all be.:
  • So with that, operator, we can take some questions and go to that.:
  • Operator:
    [Operator Instructions] And our first question will come from Nick Cucharale with Piper Sandler.
  • Justin Crowley:
    It's actually Justin Crowley filling in for Nick this morning. So I wanted to start with expenses. So just given the resolution with the OCC that you'd alluded to and that's been disclosed, can you sort of share with us how you're thinking about that reduction in professional fees that we saw? And then to the extent you can maybe quantify your expectations for sort of a near-term run rate, just more broadly on expenses?
  • Thomas O'Brien:
    That, Justin, is a real challenge. The timing, of course, impacts that dramatically. So the longer it goes on, the more we'll spend. If the end of the OCC investigation plus the conclusion of the formal agreement will help reduce the expenses we had and that settle process, and then as soon as the DOJ has done, obviously, there will be -- undoubtedly be a penalty associated with that. We don't know what it's going to be, not even a clue. So we'll continue to have some legal and professional expenses with respect to that. But I'd be reluctant to put a number on it or a percentage other than we're doing our best to make it include as quickly as possible. It seems like every time I think they're going to go down, they go down for a quarter or 2 and the next quarter, they're up. So I'm more often wrong than right on estimates there.
  • Justin Crowley:
    Got it. Yes, pretty hazy crystal ball. I totally understand. And then I guess moving on, so you noted in the release, and you spoke a little bit on it earlier, but the variable rate sub debt contributing in part to the upward move in liability costs that you referenced. I just wonder, given this real strong capital position, is there any sort of potential to pay this down just to alleviate some of the funding pressures that you guys know that are certainly now impacting kind of everybody in this environment?
  • Thomas O'Brien:
    I would do it in a heartbeat, if I were able, but the liquidity at the holding company is different than the liquidity of the bank, and I can't get that much money up to the holding company or even a fraction of it at this point in time. But obviously, the sooner I can, the better, and it is particularly painful right now.
  • Justin Crowley:
    Sure. And so I guess, I don't want to put words in your mouth, but in the near term, sort of unlikely by the sounds of it?
  • Thomas O'Brien:
    I would say in the near term, unlikely. Yes.
  • Justin Crowley:
    Okay. And then just one last one for me. Can you just remind us how much remains in the mortgage repurchase liability allowance? And then sort of where you stand with respect to further purchases?
  • Thomas O'Brien:
    I can tell you that the balance of the loans sold to others has dropped dramatically with our purchase of the $35 million in the quarter. And keep in mind, when I joined the bank, I think it was around $800 million. And it's -- I'll let Karen speak to the reserve and what's outstanding.
  • Karen Knott:
    Sure. So in terms of Advantage Program Loans, there's only $45 million left outstanding. We don't expect that we will be repurchasing those loans, although we still have an agreement where one of the investors could still request that we do so. So to that end, we still have a modest, just over $0.5 million reserves in case they do pull the trigger on that agreement. And then we just have a small amount for our agency loans that we -- that's insignificant.
  • Operator:
    [Operator Instructions] Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Tom O'Brien for any closing remarks.
  • Thomas O'Brien:
    Well, you made it very easy on us today. So hopefully, we answered all your questions in the press release and in the opening remarks. But I just assure you that we continue to push forward and move to a successful resolution of all the remaining issues that we've had to deal with. And we never obviously forget the interest of our public shareholders and all of the stakeholders and the ultimate success of Sterling. So with that, enjoy your Halloween, and we look forward to talking to you at the year-end call. Thank you.
  • Operator:
    And thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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