Q1 2021 Sterling Bancorp Inc Earnings Call

Good morning, everyone and thank you for joining us today to discuss Sterling Bancorp's financial results for the first quarter March 31 of 2021.

Joining us today from Sterling as management team are Tom O'brien, Chairman, and CEO, and President and Steve Huber, Chief Financial Officer and Treasurer.

And we'll discuss the first quarter's results and then we'll open the call to discuss your questions before we begin I would like to remind everyone that this conference contains forward looking statements with respect to the future performance and financial condition of Sterling Bancorp that involve risk and uncertainties various factors could cause actual results to differ materially from any future results.

Expressed or implied by such forward looking statements. These two factors are discussed in the company's SEC filings, which are available.

And the company's website.

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 the website contains the financial and quantitative information to be discussed today as well as a reconciliation of the GAAP to non-GAAP measures at this time I would like to turn the call over to Tom O'brien. Tom. Please go ahead.

Right. Thank you and good morning, everyone.

Sterling released its first.

First quarter of 2020, one financial results today, and just the highlights we reported.

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<unk> per share of net income.

You know generally the.

Margin continues to be pressured it was $2 45, and and predominantly due to.

The ultra low interest rates, we're all experiencing and then the additional liquidity, we keep on the balance sheet.

Almost half of our reported expenses and the quarter were related to the multiple.

Multiple reviews and investigations that are low.

And going on at the bank.

Sure.

Long before I joined but certainly during my tenure.

Credit remained essentially flat and the quarter the.

And the numbers didn't change too too much.

We're still dealing.

Dealing with the.

The factors that I outlined and the press release.

On the capital levels I'd note the bank.

Bank only capital levels continue to be pretty healthy.

But just keep in mind at the holding company, we do have.

$65 million worth of debt, which is now callable.

And losing its capital treatment over the next five years until its maturity so.

At some point, we need to begin to consider additional liquidity at the holding company.

Since we are precluded at this time.

From dividend up from the bank and.

And.

Obviously, they're holding company costs that need to be considered and so that's something that will.

Get our attention.

Our focused attention and the next quarter or so.

Going back to credit and <unk>.

And I continue to note the concern from my perspective remains and.

And the commercial real estate.

And the construction portfolios.

We continue to manage these portfolios.

Very aggressively too.

Try to.

Get down to the the proper risk rating and understanding what the exposures are the.

Quality of the guarantor and the quality of the property or other projects. So and we've made an awful lot of progress and that to some extent.

The past due loans are inflated.

And because we've we've.

We've had loans that come up for maturity.

And but we basically have that's on the commercial and construction side, we basically have to re underwrite each and every one of them and.

And and reappraise them and that just takes a long time. So there are several and that category.

And that have gone.

Past maturity by 90 days and you know we list those as non accrual.

And in abundance of caution and conservatism, but.

Understanding that as I said earlier, that's where I think the risk is for the bank to.

And the positive side, we did analysis as I'm sure you saw the securities class action settlement.

Has been submitted to and I think at this point and approved by the courts and it should begin to wind down.

Two absolute closure and the next tour so much.

Other matters, including the.

And the look back required under our formal agreement with the OCC are nearing completion and that's that's about an expensive proposition for the <unk>.

Bank and the company also.

Notwithstanding that there are still a lot of.

Moving parts, but we are working diligently to get past as much and as expeditiously as possible.

Keep in mind, though that the OCC and Doj investigations are basically out of our control.

And we have and continue to cooperate fully with with all of those.

And as you probably noticed the Justice Department has begun to take action against certain individuals and we anticipate that effort will continue but as I said, both debt and the OCC item are out of our control and we hear about it pretty much at the same time, but are you doing.

So with that I'm, probably always best to take questions and see what's on everybody's mind, so operator, if you'd open.

Open the lineup for any questions.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys and to withdraw your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.

Okay.

And the first question will come from Ben Garlinger, what hub Degroup. Please go ahead.

Hey, good morning, guys.

Hey, Ben.

I was wondering if you could just kind of give some more guidance.

Completely understand that the expense level approvals for legal and pretty much out of your control, but based on the last call I think you guys said.

And 21 expenses will be near two thirds, or so 22020 levels and what true.

Oh, definitely and Playa ramped down and the back half day here I was wondering if you had any updated thoughts on that.

No I think yeah, what we've what we said last time was we expected in the second half of the year.

Our expense up not the expenses not to.

Ratchet down dramatically, but start to step down.

As you know this look bad completed is completed and as the.

And the Securities class action is completed.

And and then hopefully you know some of the other matters and start to wind down and so it's still our expectation that the second half we'll start to see the gradual diminish and of these.

Extra ordinary expenses.

And.

Nothing's really changed in that respect.

At this point.

Gotcha, Okay, well that's helpful.

And then you had any line of sight into opportunities to repurchase more advantage loans I guess, they're.

Somewhat out of your control the timing and windows of opportunity are pretty narrow and I'm just curious though.

And you see any small.

And concrete moments over the next six months you could repurchase born.

Yeah, Yeah, we are.

We finished one repurchased during the quarter and Youre right. They do take some time and documentation.

You know, it's it's kind of a complex operation.

We have one more we're expecting.

And this quarter that is.

You know.

Somewhat larger than the one we completed and the.

The first quarter I think that was about 88 or $89 million.

This one is probably.

By the time, we repurchased that might be and the other.

<unk> 50, and 60 category.

And then we've got one more.

That is much smaller.

And the 30 or so, but just given the securitization that it's and and they.

Call opportunities the sponsor.

Net.

Really can't free those up until I think it's July next year.

And it can correct Rob.

And that day.

Yeah, that's correct the remaining smaller piece and the $30 million range will be July 2022.

Gotcha, Okay and then.

And just kind of thinking bigger picture.

And the selling of the Bellevue, Washington, and branch and I was kind of curious.

And get that does not really and you quote unquote footprint and then it was a little bit more of a one off I was curious how about that process went or anything here.

And you're talking about and sort of like a bid ask or was it completely sold the one person or the one entity.

Washington first right.

Well done and it's hard to specifically or did they approach you or any corner and color you might be able to provide a months ago.

Well, there's two parts of it first as the the motivation and really it is exactly as you said the <unk>.

And the Bellevue, Washington, and branch had been.

Fairly successful, but it was a single branch and a very very.

Remote market for our core business.

And we had some good business there are some very good employees.

And.

So that's why we look to <unk>.

The way, we did and in terms of the process. Yeah, we spoke to a fair number of banks there was some.

Some reasonable interest and.

And our first federal and was frankly, the most interested and the you know had the best.

Chances of success on and application to do this.

And this transaction what their regulator.

And.

And I practiced for all of our stakeholders our employees our customers.

And.

And for Sterling itself.

Okay, well, that's all I will I'll step back in the queue. Thanks.

Sure.

The next question will come from Nick Cuccia Rally with Piper Sandler. Please go ahead.

Hi, Tom and Steve how are you.

Good morning.

Good morning.

Good morning, and on the liability side can you remind us how much of the CD portfolio was expected to mature and the second quarter and your current operating rates there.

Okay.

Dave why don't you handle that yeah, I can speak to that.

Yeah, we have a Cds maturing and the second quarter of a 474 million approximately.

Which is about a third of the CD portfolio.

We're expecting those to reprice down pretty substantially and assuming that they choose to remain with the bank.

It's a significant piece of that 474 million or 12 month Cds, which are currently at rates of around $1 35 to $1 45.

And we're expecting those to reprice down and to the 25 basis point category if they.

Again choose to stay with the bank.

That's great color and then on the origination front I'm pretty stable from quarter to quarter.

Do you anticipate loan demand ramping up and then coming period or is it pretty likely to be consistent and the near term.

I think and the near term, it's going to look like the past recent past.

We you know, we we spend an awful lot of time and.

Going through the portfolios that we have.

And.

You know with the regulatory overhang it.

It's not.

Not exactly easy to ramp up so we will continue to meet the credit demand and the communities that we're in.

But I wouldn't look for anything to to explosive.

Great. Thank you for taking my questions.

Sure.

Again, if you have a question. Please press Star then one our next question will come from Jeremy too with PW. Please go ahead.

Hi, Tom as TCW, and obviously, so yeah TCW alright.

And.

A quick question on the cash balance and you still have a pretty elevated cash balance I know that you have some cds coming and coming due and the purchase of a <unk> event.

And its loan portfolio or other any other ways youre thinking about using the cash.

No we had that we had to build cash Jeremy because we weren't really there was no way to determine the level of advair.

Advantage loans.

We ultimately would repurchase so we had to be prepared for all of that.

And and then you know whatever.

Deposit flows happen to be given some of the you know.

Some of the news that was coming out the last year with the delayed.

Our quarterly and 10-K filings and things like that so we built up liquidity and an abundance of caution.

And those who were taking us up on our offer to repurchase the advantage loans have.

Raise their hand, and where and that process and the others have declined so.

We pretty much know what our needs are and that context at this point.

And and that's why you'll see it and you saw in the first quarter that would we'd let our deposits run off a little bit through both the.

Pricing and then as.

And <unk>.

And we discussed a minute ago the sale of the zone.

State of Washington Branch.

Pick up some of that liquidity also so we hope to get down to a more normal level of liquidity, which should.

Hell helped margin and.

And stabilize things pattern now.

Pretty much now who's who's going to give us back the.

Advantage long enough and that and.

And then you know.

You're always worried and these situations with banks like I've been and with the risk of.

Our reputation damage and.

And we.

You know, we haven't seen that and Thats really a.

You know a credit to the people that we have working and our AR and our system and and our branches and and I think and the way we've tried to communicate to them.

Clients and.

And investors alike.

So the other word that you think you have a pretty good visibility of the cash needs at this point and just sort of slowly working that down through.

And much better than we do other things yeah.

Much better than we did when I joined the bank and we.

Yes, so we buy back the event its loans are you buying them back at par are these performing loans, our nonperforming loans.

Well, we buy back the portfolios.

You know with the with those who are interested and <unk>.

And this up on it and the mortgage loan.

Purchase agreement that we entered into at the time sets forth the formula for the repurchase but it's basically.

Such that we.

Hey on the reduced principal balance the premium that we were paid on the original sales. So for instance, if we sold 100 million and loans at one or two.

And that $100 million is now $40 million.

We would buy the 40 million back at one O two.

And and.

And the.

And the.

Last year, if you recall, we set up what we called the repurchase reserve.

To account for that.

Cost.

So.

And in this case you know we'd hit.

Our two per cent of $40 million comes out of that reserve.

And then we have a process.

For fair valuing.

The loans that we repurchased at the time of purchase.

And that has been.

As much as a two point discount to closer to par and it really depends on.

The market interest rates at the time of the repurchase.

And that debt, we flowed through the.

And the income statement.

And are these.

And it doesn't flip Oh.

Oh, I'm, sorry, I was going to say it does include so in this case, if we back buyback $40 million.

You know our portfolio from a seller and a less than that would be the entire portfolio. So there might be some non accruals and there there might be some slow pace and there might be you know obviously just regular.

Performing loans for the most part the non accrual percentages have been no worse than what we've seen at the bank for our own portfolio and that's been relatively modest and I.

Seth.

2% to 3%.

It sounds from a second part of the question up and then you were also looking at a low to a small portion of the resi portfolio.

Has there been a lot of interest on that and what do you think you unload at a par.

No.

Sure Mark rather than.

And we are Cisco and or yeah.

We mark them down and we marked about 22 or $23 million of nonperforming and advantage loans to held for sale at year end.

And at the time, what I was saying is that you know we intend to sell them.

We just had so many things going on and the first quarter that I just didn't want to overload the system.

So we you know we we had them marked and I think we mark them down to 85 cents on the dollar and.

And we're now going to begin the process of actively marking and.

And as soon as Mark Katina and as soon as we get the 10-Q filed.

And hopefully they'll be done this quarter and my expectation is there.

The sale price will be no worse than where the markets.

Great.

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Sure.

Again, if you have a question. Please press Star then one.

This concludes our question and answer session excuse me. It seems that we just had a question to come in.

Okay.

And that next question will come from Anthony Pollino with American Capital Partners. Please go ahead Sir.

And Tom Hey, Steve.

How're you doing Anthony and.

Hey, David.

Great Mets game last night.

[laughter] our market share.

Hello, guys, how hard did you try to find charge offs this quarter.

We always try to make sure we're careful with that but this was a little bit more of a benign quarter.

And then one might expect but and that's why I said in their press release Anthony.

We're going to have some and it's you know I'm doubtful.

You know what what other institutions may or may not face.

Who knows but I think you know just given especially that you know the focus we have construction.

You know I, just I think we're going to and we will see some charge offs. So you know from a reserve perspective, I think we're all we're okay because as I mentioned.

As a.

Among the nonperforming loans.

And the level is elevated.

And you kind of have to break it down between the.

The content of the default loan portfolios and and that you know there is.

I don't know I'll say $60 million to $70 million of commercial and construction that you know.

I would say I worry about and and the balanced not.

The balance of the non accrual and not so worried about.

Yeah that 72 odd million and allowance that you have I assume the high percentage of that is allocated toward that worrisome portfolio and.

If we had to increase and charge offs, we wouldn't necessarily have a like increase in provisions in the quarter.

Yeah, no and as I mentioned that the credit quality has been pretty stable.

Which is and we had some recoveries and the allowance during the quarter. So that's why that.

It really didn't move so much I think that's a fair assessment Anthony that and if we.

If we have deterioration or actually realized losses on some of the commercial and construction.

It's pretty well accounted for and the allowance.

Yeah.

But the you know that some of the some of the product like you know we have these loans and San Francisco debt.

Or what.

And the generically referred to assess our Roes, but single room occupancy.

You know, that's and my view kind of akin to a hotel type loans and you.

You know those are slower to recover.

In terms of occupancy and valuation and cash was.

So you know it remains to be seen but yeah. It's it sits and elevated concern for us.

You know as we look at that portfolio.

So you're not going to stretch handle now.

Oh, I'm, sorry, Yeah, no I was going to say the construction stuff I mean, my general feel with construction is.

I feel okay. If the project is never started.

Or if it's completed but and the metal that's where I work. So we've got some that are.

Our completed and they are and the marketing period, and I think we feel pretty good about the chances of success for marketing and those.

You know those and the middle East.

And all you have to monitor them closely but you're not really in control of the process until there.

Near completion, and they can start marketing it.

As originally intended but there's you know there's some.

Elevated concern there with.

You know the valuations at the original underwriting and and the structure.

How big was the belt and branch.

Hum 70, Steve 70 debt instead of seven.

78 million and deposits.

Do you have a pretty good handle now a good idea of where where the what size. This company will be by the end of the year or is that still a pretty.

A moving target.

By the end of the year, that's probably a little harder to guests.

Ideally.

You know if you look at the structure of the you know the retail distribution.

And California, the number of branches.

The product mix and all that and the capital levels you'd say ideally this is.

You know a low $3 billion balance sheet.

And my opinion.

Okay.

Thank you are doing a great job and Oh, and I know, it's tough, but I congratulate you guys.

Thanks Anthony.

Thank you.

This concludes the question and answer session I would like to turn the conference back over to Tom O'brien for any closing remarks. Please go ahead Sir.

Okay. Thank you I just you know always I'm happy to have these calls and a chance to catch up with our investors and we.

We certainly appreciate your interest and our and our efforts and and the you know the process, we're going through here, it's and other times. It's you know it's.

It's challenging but you know.

And we Wouldnt, we wouldnt have this opportunity were it not for the <unk>.

The public investors, we have and Sterling Bancorp and hull.

And how appreciative for that and for your interest and I look forward to the next quarter. Thank you.

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

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