Q2 2021 Sterling Bancorp Earnings Call
Good day and welcome to the Sterling Bancorp second quarter 2021 earnings call. Today's call is being recorded at this time I would like to turn the conference over to Jack up Netscape. Please go ahead Sir.
Hey, good morning, everyone and thanks for joining our second quarter 2021 earnings call joining me today on our cash so maybe.
<unk> done on that as our Chief Financial Officer, Rob Rowe, our Chief Credit Officer at least Marci on the our chief operating.
Getting off certain value President and then when environment on our director of Investor Relations.
As you can see we have a presentation on our website, which along with our press release provides detailed information on our quarterly and year to date results on.
I'm going to kick off the call today, highlighting a few key points on our financial results before providing an update on our pending merger with Webster Financial Corporation.
In the second quarter, we reported EPS of <unk> 52 and <unk>.
Adjusted net income of a $105 million. This generated a return on tangible common equity of 14, 6% and return on tangible assets on 146 basis points.
We continued to deliver meaningful growth in tangible book value per share, which was $14.62 at period end up 4% over the prior quarter and up 11% year over year.
We grew our adjusted <unk> to $125 million up 1% over the prior quarter and 10% year over year.
Primary drivers of PPE on our growth included a step up in net interest income.
Turning to expense discipline.
We reported core net interest margin of 330 basis points flat relative to the prior quarter, despite a challenging interest rate environment.
That context, it is worth noting that our core NIM is up 25 basis points over the prior year's second quarter given.
Given the strong performance of our NIM to date, our 2021 outlook has been updated to incorporate full year core net interest margin in the $3.20 to 330 basis point range, we continue to optimize our funding costs for redeeming a $125 million on higher costs sub debt in the quarter and continued to actively.
We've reduced higher cost deposit categories.
Given the current rate environment, we will we will experience some pressure on our core net interest margin as funding costs are close to all time lows and assets coming on the balance sheet on applying pressure to existing loan and securities yields.
Core non interest expense of $110 million for it was down almost $1 million relative to the prior quarter, while we continued to invest in core business growth enhancing especially our digital capabilities.
Modest decline in Cds down $1.3 million versus the first quarter. When we recorded a $1.8 million in PPP fees, partially offset the positive PPE and our drivers in interest income and expense, we did see positive trends across several other fee line items as client activity and.
<unk> volumes continue to build off 10 day on the flows.
We continue to be very comfortable with our asset quality trends and reserve position by provision expense was $6 million this quarter versus charge offs of $14 million. This reduced our allowance for credit losses modestly to 152% on total loans versus 1.5.
3% in the prior quarter.
While the economy is gaining steam in the modeled reserve position drives a lower allowance requirement we may.
Maintain what we feel is an appropriately conservative view given continued uncertainty related to the New York Metro region in conjunction with the ongoing broader recovery.
During the quarter, we sold a portfolio of $123 million of commercial real estate loans in the quarter.
Which generated almost $12 million of charge offs. Most of these loans for criticized assets, where we believe the best economic asks task was to sell the assets. Excluding the effect on this sale core charge offs were approximately $2 million.
Nonperforming loans were effectively flat in the quarter and criticized and classified loans declined 8% as we've said previously we believe we have likely peaked in terms of criticized and classified assets and expect to see declines going forward.
Moving on to the balance sheet average, earning assets were down about $180 million.
This was principally in effect of contraction in mortgage warehouse balances, which were down $344 million on an average basis on an end of period basis commercial loans were down $323 million over the prior quarter.
Mortgage warehouse balances contributed $165 million of the decline on an end of period basis PPP loans declined $102 million from the previously mentioned loan sales, obviously also impacted our ending balances.
Excluding these effects, we saw some positive trends in the commercial loan book, including targeted growth on our public sector finance on traditional C&I business lines, we have revised our outlook to indicate we expect full year loan growth to be in the $250 million to $500 million range by year end.
Which means that we expect commercial loan growth in the second half of 2020 to be on the 125 billion for 1.5 billion range. There are plenty of lending opportunities in our pipeline and it is clear we will need to be more aggressive in pricing to drive this volume.
On the funding side, we were able to reduce higher cost deposits and borrowings, including the previously mentioned some debt redemption core deposits increased 1.7% over the prior quarter.
In addition to the increase in tangible book value per share I mentioned earlier, we also build capital ratio ratios significantly with TCE ratio of 10, 2.9% and tier 1 leverage of 10, 91% at the end for reporting period.
Been doing this for a long time this is by far the most amount of capital we've ever had in any bank debt.
That I've been associated with.
So we're chockfull capital way on liquidity.
To wrap up my financial comments I wanted to know 1 other change for our outlook.
We expect the trend to a full year effective tax rate of 19, 5% to 20% given lower provision requirement and a higher taxable income.
Moving to our progress with our approvals and integration planning process Western Sterling have filed the regulatory application and proxy for the transaction on the shareholder vote on the merger are scheduled for August 17.
We named the senior management team on the combined organization in early June we continue to target an early fourth quarter close for the transaction with our integration planning well underway.
Our integration management team draws on experienced project leaders on both sides of the combined organization and our integration process have moved from planning phases to design an execution.
We have established 55 work streams alone business lines and functions, both John and I are impressed by the effectiveness on the integration planning process. The strong talent in both organizations and the incredible opportunities for revenue growth in targeted business lines.
There is real excitement about the potential of this combination with clients colleagues and investors. We are bringing together 2 organizations with complimentary footprints products business lines and cultures, we will have a unique organization in terms of diversity in both asset and funding generation.
<unk> operating in a geographically dense and affluent footprint.
And as you see it and you can see on the numbers, we put out at the deal announcement, we think that combination drives very attractive returns for shareholders with continued focus on incremental revenue gains.
With that operator, please open the line for questions.
Thank you if you wish to ask a question at this time. Please press star 1 on your telephone keypad. Please ensure the mute function on your telephone is switched off to low your.
Sigma Richard quick once again, please press star 1 to ask a question.
We will take our first question from Matthew Breese from Stephens, Inc. Please go ahead.
Hey, good morning.
Hey, Jack you mentioned that you expect to see some pretty good commercial loan growth opportunities in the second half for the year could you just talk a little bit about yes.
The pipeline there and and then just a follow up you mentioned pricing as being 1 lever you might have to pull just give us some sense for where your pricing commercial loans versus peers and what that Delta currently is.
Yes, great Great question so.
We have a lot of good opportunities in everything from traditional C&I to public finance to real estate sectors going forward.
Some of our low.
Under finance businesses and technology businesses those are the areas, where we have the greatest opportunity going forward.
And on all times and the pipelines are pretty full there is there is a ton of opportunities out there, but it is clear from the quarter in the past 6 months, we've held the line on the returns and the pricing along the way, it's pretty clear on that theres tons of liquidity out there in the marketplace and then we are going.
Net adjust our pricing models a bit on the state. So it will drive a little bit less NII or if you would low yields and in turn we expect greater volume out of this we held the line on price discipline.
And we will continue to always hold the line on structure discipline, but.
There are tons of opportunities out there that frankly, I had dinner with that.
Prospect last night literally billions of dollars of opportunities out there. So there there are.
There are opportunities out there, which is going to have to be a little finer on some of the pricing dynamics.
Got it Okay, and then on the commercial real estate loans sales what was the composition was it office retail industrial and maybe Keith could you just give us some color as to the sales price.
Relative to loan value and relative to the last transaction value.
Should we get a sense of.
The true impact from from the pandemic.
On the transaction.
Yeah, Let me Tee this up.
Ill turn it over to Rob to go through the details.
Views always that youre better off instead of working out when he knows or struggling real estate youre better off thrusting, indicating on the portfolio earlier than later so all of these deals we could we couldn't have worked out over a longer period of time.
But our view was that.
In my experience for our experience through many cycles is that subsidiary to get rid of things that are struggling the better.
What we're trying to do get that behind US Rob do you want to talk through the composition of.
Matt It was it was mostly free.
Not include industrial there was some retail there was more mixed.
There might have been a little bit on multifamily in there with a little bit of ground floor retail.
We did sell also some past us that was non relationship oriented small ticket so but that's not at the same show the special mentioned on the sub standard we got off in the.
Low 9.
And we think thats, a reasonable price and to take advantage of liquidity on the marketplace, but we don't want anybody to think that we thought that these were imminent and tas are eminent charge offs that was not really the case rate. These are things that just weren't having their rate debt service coverage levels and we felt we could take advantage of the marketplace.
Okay.
Got it did you say <unk> got out in the low nines.
I'm sorry, yes about 92.
Understood Okay.
And then the last question is you've mentioned just relative uncertainty in the New York Metro area. I was hoping you could just hold on that commentary down a little bit.
Is that is that an asset class driven comment or more behavior stats and related to the general recovery of the of the area.
I think.
There are areas recovery just fine I think there is a lot of good progress in just about all of the categories. I think the only category that we that is unknown as frankly office.
A little bit of.
Still on travel.
While walking around.
Far from New York Theres lots of tourists from lots of people coming back so I think theres a good.
Good path long.
And in the future I think there is just a question over a longer period of time.
The office network.
In New York. So I think there is there is some uncertain categories in.
Metropolitan New York and those are 2 examples.
Some uncertainty.
Got it I appreciate it that's all I had thank you.
Thank you.
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We will now take our next question from Chris Mcgratty from K B W. Please go ahead.
Hey, good morning.
Maybe following maybe following up on on the prior question about the loan sales as you guys head into the merger.
Interest and obviously there is a thirst for assets in the market is there any more kind of low.
On sales being contemplated to kind of.
Optimize the balance sheet before close.
Not not is that not at the level that we have now we will do there will always be onesies and twosies going forward, but.
We want to get these things behind us as we enter the merger.
Nothing of significance.
Yeah.
Okay, and then maybe the follow up is on.
On the non interest income.
I'm interested kind of as we stand today I see the guide, but you know where we're on the P&L you still might not be where you think you can get back to post pandemic what areas of fee income still are probably under earning a bit that'd be great. Thanks.
Sure Hi, Chris Yeah look what we're seeing a little bit of crush strength on the derivatives business for customer facing swaps, we haven't seen that quite recovery with covenant pre pandemic levels. We've seen just sort of that rate rate related sort of weakness in transactional volume and related to production.
And some of the transaction type fee income category.
Being a bad we've seen a nice rebound from that in 2020 lies but what does that mean on back to pre pandemic levels that.
On the flip side, what we have seen sort of relative strength in the syndication business.
Couple of other categories, so that theres, a little bit as an offset there, but overall, we're seeing a nice pick up on.
And we expect to sort of continue to have an upward trajectory through the back half.
Great and then just to clarify I wonder if I could on the expense guide for the year does that $4.30 to 440.
Is that is that on a GAAP basis or is that adjusted for the 1 timers.
It seems on it.
Excluding 1 time expenses.
Great. Thank you very much.
Thank you.
As a reminder to ask a question. Please press star 1 on your telephone keypad will pause for a moment for everyone to signal.
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Okay.
As there are no further questions in the queue at this time I would like to turn the call back to your speakers for any additional or closing remarks.
And I think that we are popularity must be wayne are assumptions not enough questions.
Yes, no we really appreciate everybody following the company and we're really looking forward to aligning these 2 companies, it's going very very smoothly and we.
We see opportunities virtually every meeting we have.
Really quickly.
Best in class company together, so appreciated have a great day, everybody. Thank you Eric.
Thank you that will conclude today's conference call. Thank you for your participation ladies and gentlemen, you may now disconnect.
Yeah.