Q3 2020 Sterling Bancorp Inc Earnings Call

Good afternoon, everyone and welcome to the Sterling Bancorp incorporated third quarter 2020 conference call.

Jamie and I will be your operator today.

At this time all participants are in a listen only mode.

Call is being recorded and will be available for replay through November 12, 2020, starting this afternoon approximately one hour after completion of this call.

At this time I'd like to turn the conference call over to Mr., Larry Clark Oh Financial profiles, Inc. Please go ahead Mr. Clark.

Thank you Jamie and good day, everyone. Thanks for joining us today to discuss Sterling Bancorps financial results for the third quarter of 2020.

Joining us today from the company are Tom O'brien, Chairman, CEO, and President and Steve Huber, Chief Financial Officer and Treasurer.

Tom will begin the call with an overview of the financial results for the quarter and then afterwards, 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 factors are discussed in the company's FCC filings, which are available on the company's website.

The company disclaims any obligation to update any forward looking statements made during the call.

At this time I'd like to turn the call over to Tom O'brien Tom.

Great. Thank you, Larry and thanks, everyone for being on the call today Oh.

I Hope you and your families about remain healthy through the impact.

Impact of this virus.

Today, I will not be making any comments and I want to answer any questions with respect to the litigation and the investigation issues, but I kind of refer you to the recently filed 10-K.

Very timely and fulsome disclosure on these issues as of that date.

I will be discussing the third quarter results and our outlook.

My initial time here at Sterling has been taken up by our ultimately successful effort to get our past due west he see filings for yearend 2019, and the first two quarters of 2020 completed and filed.

That was.

A major undertaking on a very short period of time and you know we were successful.

Successfully completed all of those just.

Just a week or so ago.

Simultaneously the bank under one it's an annual safety and soundness exam with the L.C.C. and of course, there's been a lot of.

Remedial efforts here at the bank and.

In terms of all the fixes were trying to do.

So there hasn't been a lot of time to come up for air we've all been really busy.

In the quarter third quarter, while reporting a loss of $111000, which is.

Basically breakeven.

From my perspective.

The two biggest issues to spend some time on our probably opex and credit.

Margin declined to 274 basis points.

Basically a combination of you know low interest rates and some nonperforming loans. The the Npis had about a 24 basis points drag on margin.

If you followed the company over the recent.

Couple of years, you probably noticed an increase in commercial real estate lending in construction lending.

That is where we are finding the most credit risk from.

Structure and valuation.

Secondarily, the COVID-19 virus.

Virus has put pressure on a few of our commercial borrowers, but not too many.

The advantage long product.

While having all of the disclosed origination defects continues to perform on the credit side quite well.

Additionally, you know pay downs and that advantage portfolio remain fairly robust.

As you can see from the chart in the press release, the public related lawn forbearance cases are predominantly in the residential portfolio and they've declined pretty substantially from the second quarter highlights.

Down in that linked quarter by almost 60%.

Nonetheless, the M and the residential portfolio, where there is forbearance Sterling is committed to remain supportive of families negatively impacted.

And the nonperforming category, we have several loans that are past due at maturity 90 days or more each.

Each of these are being reevaluated with an eye towards better documenting or securing the bank's possession.

I think it's probably safe to say that the bulk of these are construction loans.

There are some emerging favorable economic signs among all of the noise around election and virus and so on.

My Crystal ball on the future is cloudy as anybody's, but I am a strong believer that no countries better position than ours and that we will ultimately whether this calamity.

We at Sterling or not heavily exposed to hotel airlines restaurants and retail.

I think that will serve us well.

But I do think sterling and and many banks will struggle to some degree with credit pressures over the next few quarters.

Opinion this is not a time for denial.

Deposit flows here have been strong as we prepared to build liquidity.

To buy back previously sold advantage lungs.

So far we haven't brought back a bought back just under $100 million.

[noise] there remains about $400 million, where we are in discussions with investors.

In terms of our operating expenses, obviously, the cost of the remedial work, including consultants and experts is substantial in addition to the cost of the shareholder litigation.

Our goal is first and foremost ticket sterling into strong regulatory compliance as firmly as expeditiously as possible.

Our regulatory challenges are not inconsequential and they will take time to properly remediation, but we will succeed.

In terms of litigation the only thing I can say to you is that it is obviously expensive, but you should know that your board in your executive management team will always act in the best long term interest of the bank and the company.

Speaking of the board, we've announced some changes there Peter Sinatra has left our board concurrent with our announcement of the agreement to sell our registered investment advisor quantum.

We certainly wish Peter well in the future.

Recently, we announced the appointment of Danny Kim and Steve a lot of to our board's.

Danny has long experience and capital markets and community Bank investing analytics.

He worked for several years, a WL Ross and company.

And then add capacity he served as a director at calmer and he was also a board observer at Sun.

Steve had a long career as a partner at KPMG, where he had extensive leadership experience and financial services audits from the largest companies and you know down into the community Bank space.

We are fortunate to have the benefit of their combined experience in our boardroom.

So we're in transition mode here, it's kind of like moving into a new house you have to get out of the old one which takes time and get settled and the new one.

In the middle is transition and that's basically where we are right now.

Good progress is being made but it isn't time for any victory laps here or else we risk crooked.

We have a very strong and experienced group of management and advisors working with me every day with.

With the sole goal of identifying and fixing problems here everything else is secondary sales.

Steve and I are here and we are happy to take questions at this point.

Ladies and gentlemen at this point, we will take questions in order to ask a question. Please press star and then one using a touchtone telephone.

Withdraw your question you May press star in Q.

If you are using a speaker phone with you. After you. Please pick up the handset in order to ensure the best sound quality.

Once again in order to ask a question Please press star and the one well.

Well pause momentarily to assemble the roster.

Our first question today comes from Ben started probably TCW. Please go ahead with your question.

Hi, guys.

Hey, Nick how are you.

Hi, Vince.

Yep.

Sorry, sorry.

Question regarding the construction loan specific specifically the 46.1 million of nonperforming construction loans right could you provide some color on what type of projects. These are and.

Just basically yeah, some additional color would be helpful.

Oh sure Yeah, there's some.

Single family construction in there there's some multifamily construction a I would say that's the bulk of it there's not a lot of.

No you know retail or office space or anything like that.

Basketball cuts in there and I think it's about about 15 million of them are just you know matured and were going through them.

We actually see where we are and we've also.

I had UBS.

Couple actually pay off in the last.

Last week or so so.

[laughter] trying to assess what my level of concern is about them I'm concerned about everything because it's you know everything is kind of notably here.

So we're watching them carefully you know some.

Some will probably exit out of.

And.

Others, I think will be okay, but.

If the loan is matured were not just extending that.

Finally in.

And going forward, we're taking a very good luck at what what the project is what our.

Collateral value was as it stands relative to what the ultimate value us.

The one charge off you saw during the quarter was really a.

A construction loan where the.

Cost to finish was.

Pretty much equal to the appraisal. So we wrote off the difference between that and our loan.

We're just we're just trying to be careful with them but.

I guess.

Beyond that it's a little bit you know dependent on what happens in the general economy.

But for the most part whether its single family residential homes are running.

Desirable areas where values have been.

At least.

No good if not strong.

I have to get finished.

Given their N.

It given it's in the single family industry or at least some of them are where they nonperforming.

Because their pass through maturity.

So the 90 days past maturity, which is.

The classic Definitionally.

Of nonperforming.

Okay I'm just wondering why they themselves are struggling given you know prices of single family have gone up.

No. They just have to finish projects. If it was done that would be a lot easier to.

To tell you, where we are but if it's.

20% down or 40% done.

You know, we've just got to make sure that.

There is enough.

Time and money there to finish the project as advertised a budget is going where.

We expect it to go that the ultimate value is what we anticipated or.

You know somewhere you know pretty close to that and what the capacity of the developer is to finish the deal.

Okay, I mean other they're not.

You know, they're not in that NPL category, because they're pristine but I.

I would also say you know they're not dumb.

Not dead in the water, there's just the heightened concern.

Okay in terms of non interest expenses, how long do you expect it to stay elevated at this level it was up significantly even quarter over quarter. It's.

It's yeah. This was a tough quarter.

Very hard to predict.

But I would say.

Yeah, I'd like to say this was more towards a peak quarter certain things will start to come down.

But you know litigation is expensive.

Just kind of have to get through it. It's it's very hard to predict but I would I would say.

There's certainly going to be elevated.

This current quarter and probably the first quarter.

I'm, hoping they're nowhere near as high as they were in this third quarter, but it's it's really tough to predict that.

Okay. Thanks, guys.

Sure. Thank you.

And our next question comes from Anthony Paolone from American Capital Partners. Please go ahead with your question.

Hey, Tom Hey, Steve.

Anthony Hopkins Yeah.

Hey, welcome to the rat race Huh.

Thanks [laughter].

You know just as a follow up here, but looking at the expense side and I guess that was probably what drew me. The most this quarter. When you look at these problem assets build.

Are you thinking about things like a workout reserve goes into any of that expense you took this quarter.

Do you think a bulk sale or something that.

You are considering more and more now or what do you think the ultimate I guess workout.

Well, what what type of shape do you think that will take.

Well I've got you know generally.

Two visions on that one.

I would just say from a residential owner occupied.

Oh, so I've never in my life put a family on the Street.

And I won't do it again.

That's something that.

You know is an anybody's interest. So you know I don't know how those play out I as I said the credit performance has been really.

Quite good there, but you know what.

Certainly have some.

On the commercial side.

Too early to say I mean, there's nothing.

That I don't think we would consider.

You know I've done bulk sales I've done the workout [noise].

I've done.

They can lose I've done foreclosure sub.

[music].

Pretty hard to predict right now where that will go.

I think you know as I said some of them.

I would describe you know when I say structure and things like that you know I would have preferred you know in some cases to see stronger gearing towards or more definitive.

And achievable things like rent rolls and stuff like that so.

It's not.

You know as I said earlier, it's not it's not that the properties are dogs necessarily it's just.

We've got to work with data around what we have and what's there today.

But I wouldn't you know.

It's the best thing to do was to you.

You know doing individual or a bulk sale and stuff I mean I guess.

No Oh goodness I can't begin to tell you how many of those I sold at Sun.

A lot.

Probably a couple of hundred million.

And.

There's just really at the end of the day Anthony It's a it's an analysis should jump financially.

What's the best use of your capital and how much time is it going to take to reach.

Realize how much money.

Given that.

Surgeon in P. age should we take comfort in the fact that the provision came down about half.

Well you know [laughter] it went up a whole bunch in the [laughter] I guess that was the March March quarter, Yeah export out.

That anticipated.

Some.

You know some concerns.

<unk>.

As I said some.

The absolute number here in terms of the allowance and the provision that you know supporter as is.

As you know what we calculated based on everything we know, but like like any provision or any quarter you.

You know every quarter you take a good luck and go through the analysis and your your procedures.

Look for the right number.

So right now I would take some comfort I guess them.

Yeah, I mean, I guess the direct question is more do you feel comfortable that you can assess the loss content in the nonperforming portfolio at this point or is it really a moving target.

I think for where we stand at the moment I you know I think it's it's pretty well assess.

We you know as I said, you know, there's certainly signs in the economy, but.

You know things, especially outside of the city centers are are doing reasonably well.

But I just think we're gonna have to get through this the uncertainty of this time period, it's not a lot of liquidity in the market.

And.

But I'll say the other thing and at least in my experience over the years.

And.

When there is trouble.

Troubled bank loans around the the market gets.

Very competitive you know, there's a lot of demand for that so let's see but I think.

You know as I said earlier, I think sterling and to some degree is going to experience what ultimately.

Many thanks for going to experience and that as credit pressures and you know some charge offs.

I think anybody who doesn't have met that is.

And Tonight.

You did have some originations this quarter about 66 67 million Oh, yeah.

What was added.

Oh, there was you know some residential and then some of these and predominantly in the northern California market and a little bit in southern California. These.

What we generally called take loans tenants in common kind of like a.

Ah I guess I would I would like it to a New York City co op loans joint ownership.

I have a.

Multiple residence building.

They've been pretty good I think what we're generally pretty happy with those.

Okay have you had conversations with NASDAQ recently.

Just good ones [laughter].

So that is the least of your regulatory slash legal issues [laughter] Yeah. No I think you know NASDAQ and you know they were they were very understanding because we just had such a tight window.

To do a you know a year end and then two quarters and now.

We got to get the third quarter outside.

You know they were understanding and I was highly confident we will get there but.

There's just a lot to ask from.

You know people within the bank.

You know to kind of go through 2019, and then half of 2000 through 2020.

I want to ask of our legal advisors and not the least of which allowed to ask of our accounting firm.

So everybody.

Everybody was all hands on deck and.

You know I can't I can't underestimate how.

Much work, it was and and the time pressures but.

That was good you know we're fine with NASDAQ.

Good.

I'm, a big fan of anyone named Sinatra.

But I'm wondering if the quantum sale makes it easier for the regulators to assess the risk that your company.

It certainly doesn't hurt.

Good answer [laughter] I profit.

I know you're knee deep in and.

Survival mode, we'll call it for lack of a better word but have you given any thought to the new business model.

I have you.

Yeah, we actually had a habit.

You know a healthy discussion about that at the at the board meeting.

Tuesday this week so.

Yeah. It's.

We've got to be careful here, because you know that.

[laughter] tried to explain I think everybody but.

You know the bank had.

Essentially.

The bulk of its business and one product.

And that product, we can no longer do.

The.

We can't go up we can't fall back say on the M.

You know a seeing eye department and say, okay. We can look to them for a.

Some growth or no.

Leasing department or whatever else you might say in a more diversified business mix. So we had one product.

And too.

Kevin.

Where we stand on the regulatory world. It's typical that if you're going to start a you know a brand new product that you have to go through a.

No as you show the full risk assessment and.

Understanding the credit and economic impact and the talent and the systems you have.

And you know and run that by your regulator.

Now for some time to build some comfort with them.

To be honest. This is not the time for me to go to the regulator to ask for anything other than you know what we're doing to fix the banner ads.

That's why I kind of said at the end of my remarks, our job really as you know the repairs here we.

We've got to get past that and build.

Uh huh.

Bill the regulatory compliance here so that.

You know we have the opportunity to look at some of the other.

Business lines that are that are out there that you know, we can and should consider.

Okay, you have about a 918 million in the cash balance now yeah. What do you think make does it make sense to shrink does it make sense to reinvest what are your thoughts there as well.

Well, we've got a.

400, and some million dollars of loans previously sold that are still out there.

That.

You know weve offered to buyback and so I've.

I've got to keep the liquidity for that so you know on a a $3.9 billion balance sheet. If you net that amount of money out of the liquidity then you're looking at 400 and some million of liquidity, which is not.

I wouldn't put that in the excessive category.

So it's the.

Kind of a two stories there if if in fact, we're not going to end up buying.

The some of the loans back then we.

We can adjust accordingly, and I have no problem shrinking the balance sheet, a couple hundred million dollars either.

Okay I guess the one consistent thing is that the bank still appears to be very well capitalized.

Yeah capitals good.

Yeah. That's this is one of the things that I'm not sure what the board when we talked about things that are.

That are working well and things that we have to work on but you know bank level capital is is strong and on liquidity at the holding company is reasonably okay.

You know you try to think strategically and plan.

For you know various contingencies that.

Ill.

If things don't go well, but at this point you know even with a small loss in the quarter I mean I'm.

I'm not.

You know I'm not in the short run here worried about.

Word about capital.

Okay, well, that's all I have today or I, just want to congratulate you guys I think you're doing a great job.

Thank you we are trained thank you appreciate and Anthony.

Our next question comes from Ross Haberman from our L. H. Please go ahead with your question.

Yeah, Hi, Tom I'm, sorry, most of my questions have have been answered I. Just have 111 question about the margin or the spread if we continue to see these low rates.

The next I don't know 234 quarters or so.

How do you see that are tracking.

In the March in going forward and is there much room for you to further lower C. D ore deposit rates. Thank you.

Yes, sure good to hear from you.

You know theres always room to lower we.

Early in my tenure here, we you know we built liquidity because of the.

Concerns I had about the Oh the advantage on buybacks.

I think you know margins are going to be.

Difficult because rates are.

You don't fight the fed they've said rates are going to be low for two years. So that's what I take is.

The window here I'm.

I think I think you'll see you know margins under pressure enough credit spreads may widen and then that would be helpful. But I think sterling and most banks like us are going to struggle with.

NIM and and lending margins for a while here.

Thank you the best of luck yeah.

Yeah. Thank you.

[noise] once again, if he would like to ask a question. Please press Star then one Philip.

Phil withdraw yourself from the question can you May press star into.

Once again that is star and then one to join the question for you.

[noise] and ladies and gentlemen at this time, it's showing no additional questions I'd like to turn the conference call back over to Mr. Obrien for any closing.

Remarks.

Oh, well, that's great and thank you all as I said in the beginning for your interest in Sterling and for participating on the call today.

We are up.

Working.

Diligently on.

Everything that weve laid out and the filings and in the press release you.

We plan to have the third quarter 10-Q filed on time.

And and then before you don't worry at year end so.

But I do appreciate your interest your investment.

And we will.

Continue to work hard to fix things here.

Got it straight away.

Thank you.

Ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for attending you may now disconnect your lines.

[noise].