Q2 2021 Sterling Bancorp Inc Earnings Call

Good morning, everyone. Thank you for joining us today to discuss Sterling Bancorp's financial results for the second quarter June 32021, joining us today from Sterling as management team are Tom O'brien, Chairman, CEO, and President and Steve Huber, Chief Financial Officer, and Treasurer, Tom will discuss our second quarter results in the wall for.

The call to your questions. Please note. This event is being recorded.

Before we begin I'd like to remind you that the conference call contains forward looking statements with respect to the future performance and fine Okay financial conditions of Sterling Bancorp that involve risks and uncertainties various factors could cause actual results to differ differ materially.

Different from any future results expressed or implied by such forward looking statements. These 2 factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward looking statements made during the call. Additionally management may refer to non-GAAP measures.

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 other quantitative 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 Good morning.

Thank you for them the M.

Company released its second quarter results are today, and we're going to spend a little time going through those and then take your questions. The results, where we earned a $2.6 million or 5 cents a share.

Margin expanded a little bit.

Off the lows that it had driven primarily by.

Deposit repricing during the during the quarter and then the late.

Late in the quarter acquisition of some repurchased advantage loans.

So that helped bring the margin up to 270.

Expenses continue to run high you know a little bit.

Better than they have been but still quite elevated.

And capital continues to be a b, okay at the bank called out what the company as Ive mentioned in the last couple of calls with at some point have to address the M.

Subordinated debt issue, but.

As a M.

Upon us the debt.

That is into the variable stage of the tenure.

Initial 10 year maturity somewhere in the you know the second 5 years.

Following the quarter, we completed the sale of the Bellevue, Washington Branch and that was done on July 23rd So.

Oh, good good transaction for both buyer and seller and we're happy about that and deposits.

I think as we've mentioned earlier in the first quarter call the.

Greater definition to the needs to repurchase.

The advantage loans, both the timing and the dollar amounts.

We had built up liquidity and and let that run down in the quarter as we got a little more definition to that so the.

Also that benefited the margin because.

Liquidity is really quite expensive.

Yeah.

Typical with US the second quarter included a lot of moving parts.

Bank is going through a system conversion and.

That probably added a $600000 in costs during the quarter.

Professional costs were down net.

Predominantly because we got.

Around 2 and a half million dollars back from the insurance company.

And Theres been some you know as we expected some gradual reduction and and other professional and consulting type fees.

I think we're still pretty comfortable that cash.

Cost will drift down in the third and fourth quarter are not going to be dramatically, it's going to be M. I.

I think noticeable primarily because things like the M.

The look back that we had to do for our AML purposes is nearing its conclusion the securities class action is nearing its.

Final action and.

Several of the things that are at least beginning to.

From a finish up from where they were in the cost to go with it yeah, we'll start to dissipate with still have.

You know not insignificant legal costs.

Until these investigations.

At least from the bank's perspective start to.

Wind down some.

The.

Asset quality is.

Honestly better.

The allowance.

Allowance was basically.

Basically unchanged quarter to quarter, just about $72 million, we did take a $600000 benefit there but that was.

Basically dollar for dollar for recoveries, we had on loans that were nonperforming that paid off in full.

And.

Those were M. I think it was 5 or 6 advantage loans in that category.

So.

And that has been I would say probably the most typical.

Uh huh.

Outcome with these advantage loans as you know for those that go bad which.

Statistically is probably not too inconsistent with a general residential portfolios in the banking world.

The credit aspects are not us.

Dramatic as the <unk>.

Compliance and yeah.

The different.

You know activities in the original underwriting that led to the investigations and and the problems that the bank faces.

That's not to minimize those at all they've been painful.

But they were.

You know just from the pure credit perspective debt give us a 6.

$600000 back in the quarter.

Non performing loans had you down a little bit that $92.6 million and as I think again as I've said the last couple of calls the M.

You know in that too.

Total there is about say $50 million of commercial credits.

And you know maybe.

Mid thirty's or $40 million.

A advantage loans.

Thing because you all know the ones that I'm, most concerned about from the credit side or the.

The commercial products, we have a lot to.

To deal with there in terms of the M <unk>.

Criticized classified loans and all that it's it's the ones where we.

Expect to have.

Some difficulty working out of those so they will occupy more of our M. Our resources and our time and and probably the allowance then than anything else I'm not expecting the advantage loans again purely from the credit side to behave much differently than they have to date.

Other than that.

Hum.

For the look back because.

Nearing its completion and debt was certainly a long time coming.

Coming now it's been very.

Labor intensive and expenses.

And the you know the.

The litigation appear to be.

Net the tailwind I think.

At this point on the class action, we're looking at.

September for conclusion, there and then.

Income tax expense was was up in the quarter.

And in all candor predominantly because.

Certain persons executive compensation is not deductible for income tax purposes.

Under 162 M. So that you know with a lower dollar amount and earnings and a M.

Non deductibility that's for.

Drives up the price.

Drives up the effective tax rate and.

As the government is <unk>.

<unk> the.

I guess clarified or modified the 162 of them.

Regulations.

I don't have to deal with that.

And.

Other than that things continue you know.

Progress at the bank is.

It's moving Directionally, I think where we anticipated it.

It is not I'm not.

That's something we can speed up or control because it's really in the handle.

From government agencies, but.

Time has moved us along and I think we continue to.

Be optimistic that for a much near the end of.

These things and.

And then anything else and.

And I will say I did make a trip out to San Francisco and.

July I think it was spent some time at the at our branches out there and got to know the people that was my first opportunity to make that trip.

And are you.

There'll be a further opportunities to do that for for me on them in the near future.

With that operator, we can go into the Q&A.

We will now begin the question and answer session to ask a question you May Press Star then 1 on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question. That's been attracting you would like to withdraw. Your question. Please press Star then 2 at this time, we will pause momentarily to assemble our roster.

Our first question will come from Ben Garlinger with half Day group. Please go ahead.

Hi, guys good morning, Ben.

I was wondering if you guys could just take a second to kind of walk through the mechanics.

The funding aspect for the balance sheet.

No.

Deposit balances.

<unk> come down.

$2.250 million linked quarter loan yield.

M.

I know last quarter I think it was last quarter I believe you guys gave the repricing aspects per quarter.

That might have been in a vacuum, though if you didn't lose new deposits I Wonder if you could just.

Kind of refresh us in terms of what is repricing win and then kind of a new spot rate in terms of time deposit yields.

Yes, Steve why don't you handle that.

Yes.

Yes, the deposits will continue to re price.

Most materially that has occurred in Q1 and Q2, but we expect that to continue into Q3 weeks.

We expect another.

Excuse me $384 million.

To re price.

Again, mainly our certificate of deposits, mainly in the 12 month category.

A lot of those are still at over 1%.

Although continue to reprice down.

Certainly that's something lower if they continue to remain with the bank.

Our total borrowing costs at the end of the quarter and 7 zero percent.

So we would expect to have continued improvement on the deposit side certainly for Q3.

Probably the last material into Q4 as Q for the repricing volume is about a $152 million.

Okay that is helpful.

And then if we could move to the expense base.

Get that professional fees are a little out of your control and then Tom based on the guidance that you gave excuse me for the explanation for the $5.7 million this quarter.

2 point for was a.

Reimbursement and then also 600000.

Approximately for expenses, so just back of envelope math from net.

7.5 million Hum.

Previously you guys had indicated that FY 'twenty, 1 day about 2 thirds of the level of 22.

Is that still.

Sorry, excuse me FY 'twenty 1 for you 2 thirds of all I'm. Just wondering is that still kind of the guidance or is there anything more material that you might wanted to include.

No I mean, the the timeline you know supports that the M, but as you note that.

We can't we can't accelerate you know the government's M conclusion on any of these things. So you know the longer it takes.

Just the more it costs and you know that.

It's a little bit.

Hard to predict but but on that schedule. We're on it does seem like that's where we're going and just you know that.

The look back cat a M.

You know its own shelf life, but.

We're basically at the.

The final drafting stages of the report now M.

And.

That is.

Not entirely in our control, but you know the end is pretty predictable.

And that was.

You know I can't even venture the costs from start to finish but it was you know it was significant I reported and the legal costs are.

Wide ranging but they.

We're heavily centered around the M D O J in the OCC.

Investigatory activities so.

As they at least with respect to the bank or the company as those come to conclusion, there's a M.

The obvious benefit from that so again, the timeline, which suggests that.

You know as we get into the second half of fiscal 'twenty, 1 they will.

Inevitably moderate some and and then certainly hopefully more significantly as we get into 'twenty 2.

Okay. That's helpful. And then just kind of touching base on the debt.

<unk> expenses.

I know you guys have the conversion from the upgrade Inc.

August this month.

Any sort of dollar amount you can tag to it that might be any <unk> numbers or is there anything that's changing from a from both.

For perspective, so items.

The expenses well.

But you know that.

I guess 2 things with the I T conversion 1 it's it's it's not optional.

And it is a total system conversion the bank was operating on a M.

Homegrown.

System with you know a.

Couple of programmers in house.

It was really problematic from.

From both the <unk>.

Regulatory.

And management perspective in terms of getting reports.

So we wouldn't.

Now I'll just say this we wouldn't get out of the M. You know the regulatory.

And Cups will run had without a conversion and frankly, we couldn't operate the bank without a conversion to a more contemporary system.

So.

We were spending next to nothing.

Historically, which is.

What kept the bank's efficiency ratio pretty low.

Got.

As low as ive ever seen frankly in.

And you know over the years past.

But it was low to a level that you know strange.

Your ability to believe just too low.

And you know not enough resources put into things like that and and Thats, where the you know at the end of the game, that's where the the.

Cost come so I don't I don't expect any efficiencies.

From the from the it conversion I think there's probably going to be some.

Net.

Cost to that as.

As we complete the conversion and rollout.

And that might be.

Over the.

Over the historical records it might be $1 million more a year.

But as I said.

The cost of.

The regulatory difficulty and all of that is significantly greater than the you know the absence of them kind.

A comprehensive management information is a real well.

Roadblock for us so.

It's not 1 of those things that you would say it was optional.

Got you Okay I appreciate all efficiency, it's been coming from.

Unlike other ones that are done you know where you get some efficiency cost.

And then you know I should have added 2 actually.

Sidetrack for a moment on the the advantage loan repurchases.

We repurchased 90, we were expecting more.

But the.

The sellers have.

Call date.

Difficulties, so we will be repurchasing the balance of those over the course of.

This year and then you know I think 2 more in 2022.

So they are coming back, but it's just a different time perspective, and the the $90 million of enclosed I don't want to say it the last day of the quarter, but pretty close to the last day of the quarter.

Okay. Yeah that is very helpful. I appreciate the color.

Sure.

Again, if you have a question. Please press Star then 1 our next question will come from Nick <unk> with Piper Sandler. Please go ahead.

Thanks, Nick and good morning.

In the press release, you mentioned that commitment to repurchase another $100 million of advantaged loans can you provide some color on the timing of those repurchases or is that yet to be determined.

That's pretty that's pretty well set based on the call dates that I mentioned I think.

I don't know what Steve March next year was 1 in July next year.

For the other big piece, yes.

Oh nice share basically beginning of March and then throughout the next 2 quarters.

We have a piece for $59 million and a piece for around $35 million at this point.

All of these loans were into Securitizations that have call date features that would cause.

Right right, Okay preference for the securitize or to do it that way.

Okay. That's helpful and then certainly a fluid situation, but given the change in risk profile of the bank and the substantial build since the beginning of last year do you sense that the allowance for loans ratio has peaked here.

Yeah, I I would my own opinion.

You know we haven't last 2 quarters that's been <unk>.

When study we havent.

We haven't seen significant migration.

Into the.

Criticized and classified.

Category, we've spent an awful lot of time trying to identify.

You know the weaknesses and you know from the credit perspective.

And as I said you know it's.

The credit loss perspective, I think is going to be in the M.

The commercial portfolio and.

No the.

Identifying the level of classified loans the way we have I think you know we've taken up.

More appropriate look at risk rating.

And trying to.

You know be in front of any potential.

Alums or weaknesses with either the property or the project to the guarantor.

So and we've had a couple of.

I think in the.

And the last quarter towards the end of the quarter, we had a couple of loans that were.

Non accrual that paid off.

And patent for when we got you know we've got a couple more coming where theres some new.

Net recoveries to some previous charged off loans, but that's not to say there won't be some.

Realized losses.

And the in the period ahead, but.

That's why I was saying the.

The $50 million of roughly you know non accrual commercial loans versus the $40 million of non.

Non accrual advantage loans.

From the credit side I would you know.

I would say the predominant source of risk is going to be in the 15 to 40.

Okay.

And then just just just to follow up on funding our borrowings have remained pretty consistent over the past several quarters is there an opportunity to prepay some borrowings over the next several periods or is that not part of the strategy at this point.

That part of the strategy there is.

It's it's pretty expensive and 2 of them.

You know.

Look at it a little bit later, but I think at the moment, we're really just looking at letting them run off to maturity, because they're basically yield maintenance payoffs.

And.

I don't know that I don't know if it helps anything in the long run.

Thank you for taking my questions.

Our next question will come from Ross Haberman with R. L. H investments. Please go ahead.

And Tom just a follow up question on some of the deposits is there much more room, so keep on lowering deposit rates on Cds money markets or basically have we hit sort of a floor here. Thanks.

I think we've hit the floor Rusty.

Sterling funded predominantly in the manner of a M.

You know more of our old line thrift.

So you know not a not a big M.

Our demand deposit base not a big transaction base. It was you know basically money market savings and Cds.

I think and we.

We've been careful lowering rates because of that.

Propensity of the savings that we did have to rates.

So we didn't we didn't shocking.

Kind of gradually drifted down closer.

Closer to the market, but I you know unless there's.

Some change in the M.

The the market in general for interest rates I'd, I'd say, we're probably pretty close to.

Best we can do.

And just 1 last question on the litigation.

What was the could you go over the non government litigation Youre I guess share being.

Brought in on I guess, what the Dx from Florida. Please.

Litigation, where does that stand and when is there going to be some sort of resolution there.

Well, we have you know they've been.

Criminal complaints and plead deals with a couple of former employees.

That's.

Other than <unk>.

Supplying information that might be requested by the Justice Department you know, we don't really have a role in that other than being.

Being cooperative.

That's that's ongoing and M.

I you know you.

Usually when I when I referred to trying to get things done.

I tried to be careful to say with respect to the bank of the company because that's about.

You know the only thing I can really care about at this point in time.

And the individual issues are what they are and they're not our concern.

But the M.

And then the securities actions, where you know that.

The class action and the.

Reported derivative and.

Hopefully kind of at the tail end.

And and year Hypothetically reserve for <unk>.

All of that.

That's hard to say, okay. We are reserved right level that is.

You know, our very best approximation of the likelihood.

The bank not getting you know I mean is the Justice department set in their own press release, the bank has been the victim.

That's not to say that.

There is not some accounting from the.

The bank for them, you know, especially on the BSA space.

Based on.

Nothing other than our best estimate.

You know we have set aside a reserve for potential fines and penalties.

But I don't.

Okay.

I can negotiate those when I can't set them.

I gotcha.

I just wanted to know if you could be dragged in on some of the other non governmental suits. They can drag you into New York.

You might have some liability, which you really didn't anticipate because you know for for whatever it is they're going to go for the deep pockets and you know yeah, yeah, yeah, they're gonna make like you like tell until.

Yeah, you know I don't know you need to throw them, a bone, possibly I don't know or not.

You get involved with lawyers, you know theyre going to Greg and every any and everybody, okay and I've seen that moving a couple of times price, yes, yes, you're assets so but.

For you know I mean, you you can't control what happens.

And these kind of messy situations.

You know the the foundations for the problems were laid over many years and.

You know the consequences and the number of people involved is significant and the M.

The time and cost involved in kind of.

Unwinding these gordian knots or just.

Painful right.

Painful when I.

[laughter] that hurts.

I know you can't control, but.

What do you think is the timing on on settle all these things sort of wrapping up I mean, theres going to be next quarter or 2 or it's going to go into 'twenty 2.

This is this is purely aspirational on my part for a comment I'm I'm, hoping.

Net only again as respects the bank or the company right now.

We we have our reconciliation with the agencies by you know by year end I think.

You know I think that's right and I think that's fair M.

And you know it's very hard.

2.

To run the bank strategically.

Until these things are resolved as it respects us.

I got it so okay. That's the luck I do appreciate the time anytime yep. Thank you.

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

Anything I hope everybody is enjoying a a nice summer and through the conclusion in labor day, we'll look forward to our.

Third quarter call and again, thank you for your interest and participation today.

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