Q3 2021 Sterling Bancorp Inc Earnings Call

Good morning, everyone. Thank you for joining us today to discuss Sterling Bancorp's financial results for the third quarter September 30, 2021.

Joining us today from Sterling's management team are Tom O'brien, Chairman, CEO, and President and Karen not Chief Financial Officer and Treasurer.

Tom will discuss the third quarter results and then we'll open the call to your questions before.

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.

These 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 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, 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 other quantitative information to be discussed today.

As well as the reconciliation of the GAAP to non-GAAP measures.

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

Great. Thank you.

Good morning, everyone and welcome to our third quarter earnings call I'm joined this morning by our newly appointed CFO Karen not.

Karen brings a long experience with sterling to us and.

I look forward to working together.

So today, we reported.

Earnings per share of 19th sense, which was comprised largely of a six and a half million dollar credit there.

That we received under the cares act for our employee retention.

Sterling is eligible for this credit because we have maintained our employee base without furloughs or layoffs and met the criteria for.

For eligibility, which was you know revenue was down year over year by 20%.

And fewer than 500 employees.

So.

We expect also to be eligible for a similar credit in the fourth quarter, which we think will amount to about $2 2 million.

These are employee tax credits and not income tax credits or refunds.

So, but more importantly, we had.

Some improvement in NIM in the quarter.

Reached 283.

We had a decline in operating expenses.

Excluding the.

Employee retention credit to about $17 6 million.

We had been hoping to see some modest decline in opex as certain of our remedial projects nearing conclusion.

Notably the look back required by the OCC under the formal agreement is now just about complete and that represented about a 10 million dollar effort over several quarters.

We are also near finality on the Securities litigation matters.

And that also helps to bring some.

Some expenses down.

So while the risk of volatile expenses remains elevated.

Are working tirelessly to move things along as best we can.

The various investigations and supervisory issues confronting Sterling Kantar.

Continue to be significant and we continue to cooperate fully and dress those issues under our control as quickly and comprehensively as we can.

I believe we have made substantial progress on the matters found in our formal agreement.

The system conversion conversion was.

A huge step in that direction.

Since our multiple remedial steps required that successful transition.

On the D O J side, we have less insight into criminal investigations of various individuals' again, we continue to fully cooperate.

B as transparent as we can whenever requested kantar.

Continue to believe we will have some greater insight into these matters.

As year end approaches, but resolution from the bank's perspective will not be forthcoming at least in my opinion.

Until well into 2022.

The credit story at the bank remains I'd say pretty much unchanged.

We continue to work the commercial criticized and classified list aggressively.

N P A's are pretty much unchanged from prior quarter, but as you can see from the tables in our release the split between the residential and commercial is roughly $40 million each.

We have not experienced significant credit losses to date on the residential side.

Notwithstanding obviously, the horrendous costs that we have.

Incurred to remediate.

The origination fraud that occurred in the past.

Also included in the residential N. P. A's are several loans that are paying but have yet to return to accrual status.

As I've noted over the last several quarters.

My my concern from the credit loss perspective remain centered in the commercial portfolio.

We have not seen much in the way of migration into.

Last Friday territory, and I think we at this point now we've properly risk rated the vast majority of the commercial portfolio. So again, that's where I think we.

Retained some element of risk.

Risk in the credit loss side, but you know.

We're looking at various alternatives.

We've had some success and moving loans out of the bank without incident, we would probably.

Look at some you know our individual or bulk loan sales in the quarter I had.

And and beyond.

And.

Our goal is to get that number down as.

Efficiently and as quickly as we can with minimum minimal loss, but.

As I've said are.

Over.

Probably since I've been at the bank the.

Exposure to loss really in my view continues to be.

Heavily centered in that commercial portfolio.

So that's kind of the story with the bank for the quarter, you know made a lot of.

A lot of progress.

Probably some of it below the water line that you.

You don't see are as appreciated as much as those of US who are on the inside.

Cannot see everyday but you know fixing the.

The supervisory issues that are found in the formal agreement or.

Really our you know one through infinity it's.

We're focused really on nothing else other than.

Clearing those things away as as quickly as we can and.

Trying to bring some finality to the sue.

<unk> efforts of the.

Difficulties that the bank has.

So with that operator I'm.

Through with anything I wanted to say and maybe you know Karen I can take some.

Questions from those on the phone.

Okay.

Yeah.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys.

Is that any time. Your question has been addressed and you would like to with part of your question.

Please press Star then to you at this time, we will pause momentarily to assemble our roster.

Okay.

Our first question comes from Ben Girl Linger without the hub. The group you May go ahead.

Hey, good morning.

Good morning, Ben.

How's everyone doing.

We're doing fine you're getting any sleep.

I haven't had any sleep at all a.

It's a little too little ones in Halloween candy make for not much sleep for anybody but.

Appreciate it if I exercise or do we start with with Karen If you look at the deposit cost.

Cost of deposits is a pretty good reduction linked quarter, Balkan and time balances and the yield I was curious have you had any insight of or what.

What could be coming up for renewal and then what is the new rate that is coming on over the next quarter or two.

Sure. So in the next quarter, we have about 150 million Cds are maturing and the rate on those is about 1%.

Our highest operating rate base right now is about 65 basis point that we do expect to see.

The more a reduction in our cost of funds in the next quarter.

Okay. Good to hear and then Tom just thinking.

Big picture I know that you can't answer it with a sign to come but if you look at the professional and legal fees reduction linked quarter. So theres a lot of heavy lifting being done behind the scenes, which I think we can all agree that it's important so but there's not a lot of clarity in terms of total costs going forward. So if you had any thoughts to what prefer.

It'll fees might be for the fourth quarter, even in the first quarter, and then kind of juxtaposed against that like what would theoretically are a core run rate be.

That for that line item.

Well I got to start at the back end of the question. So I think.

Karen can fine tune it, but I think our core runaway right would be.

Oh something in the or.

Around the $12 million range does that sound right.

Yeah, I would say with the current level of.

Is that where you think third party score.

So the yeah. So they you know the excess over that in this case for the quarter. So we.

Kind of adjusted it to $17 6 million.

That's down from.

19 2021.

And.

You know prior quarters over the last year or so.

So the you know the I guess, what we call the extraordinary cost with predominantly legal and.

Professional or advisory type work.

You know what would run anywhere from.

You know almost a doubling of our regular opex.

10 of $11 million a quarter.

You know as I've said before I think they will drift down.

A little more as we get into the fourth quarter and as we get into the first quarter the risk of volatility, though remains high if something comes out of one of these investigations that requires us to.

Do another deep dive.

And it's something I'm not aware of it at the moment that's been going on.

For a year Predating My arrival, so you know two plus years.

So I you know I think.

The trend that we've talked about which is.

Slowly declining rates with them the risk of some volatility you know is intact, but it's really really hard to put a number on it.

Cause a month to month, but you know it can vary.

At a level beyond what we might expect or something gets delayed you know an expense that we might've occurred gets pushed off to the next quarter.

You know that the secret really is just that.

You know get get these things past us and you know.

Resolve all of the issues in a formal agreement quickly and then.

You know as best as we can you know push them.

Pushed for resolution of the.

The banks are.

<unk>.

Our exposure with the.

The regulatory and the Justice Department side.

And and with the SEC.

It's like an alphabet soup sometimes of.

Of agencies.

But I I just you know.

Uncomfortable trying to give you a hard and fast quarter to quarter estimate.

Because a lot of it's out of our control, but as we tick off things like the Securities litigation.

You know they normal no more.

No longer contribute to you know the risk of higher expenses.

Well that's got Ya.

Okay. That's fair I mean, just thinking just from an optics perspective, theres no like looming lump sum that could cause it to increase outside of the unforeseen investigation right.

There's a lower it's just the pace is an unknown.

Yep.

Okay.

Yeah, Okay. The trend the trend continues to be better you know just as I said we.

We're not going to have any more expenses, probably as we get into 2022 with US litigation. That's it's over we're not going to have any more expenses with a look back because it's over.

So it's you know fewer.

Pure you know fewer kids eating at the table.

Fair enough, okay, well I appreciate it it was a good good to see the tangible book value growth Oh, Yeah, Yeah, that's a nice benefit thanks.

Our next question comes from Nick Couture Rally with Piper Sandler you May go ahead.

Good morning, everyone. How are you.

Well, Nick how are you.

I'm doing very well. Thank you that's all I wanted to start on the loan balances are milder than the residential portfolio continues to run off you had strong commercial real estate growth. This quarter do you anticipate this becoming a trend and just some color there on the sequential increase would be great.

We did actually originate.

A loan or two on the commercial side and the.

Context of.

Our new credit to the bank and then you know some of the loan growth in the commercial side is we've had matured are construction loans that moved into them.

I guess, the sales period you'd call it and we put those down as bridge loans just to.

More properly identify what's really construction risk and what's now.

I guess your marketing and your sales.

I'm in sales risk.

So that's the bulk of it nothing.

You know dramatic.

But the.

But I would say you know.

That would not be something I'd be uncomfortable with them to the extent we can find some.

Good commercial product.

In and around our various markets and you know with them with people that are weak.

We've known before that I have no problem with that the residential side is.

You know it's it's in my view as you probably know it's it's it's for community banks, it gets tougher and tougher to be.

A residential lender of any substance.

You know it's a high.

High risk from a compliance side, it's very very costly.

You know that the risk of doing something wrong on the compliance side is always high in.

And when I say that I don't mean, the things that Sterling went through but I'm just you know good faith mistakes.

Hum.

And you know the the market multiples arent so great for revenues from.

Gain on sale and.

Residential loan business in general so it's it's not one of my favorites.

Mhm.

In your prepared remarks, you referred to some bulk loan sales is that solely on the commercial side.

At this point, it's on the commercial side the residential I'm I'm honestly all for that.

You know, we did move that group of loans that I referenced in the press release to held for sale.

But.

We can't do much until the.

Justice Department investigation is over.

So we're kind of stymied on that.

But once you know.

As it pertains.

Pertains to the bank once that's over then.

Be more inclined to for us to say.

All of those.

Yeah.

As quickly as I could and we had some good interest in those but theres just this.

Issue with them.

You know the Doj part of it that we've got it.

Yeah.

Retain those until.

Till they finished with the bank.

So another reason could be to encourage them to move along.

Yeah completely understandable we've discussed this on past calls, but can you update us on your scheduled loan repurchases over the course of future periods.

Yeah, we're pretty much through.

Everything there's about so when I joined the bank there was about $800 million worth of loans.

Risk of repurchase 750, maybe.

And that's now down to about 160.

And the.

And they do continue to pay off pretty quickly yourself, but the.

Schedule committed repurchases I think we have.

Thank you.

Me again, but I think we have one in March of 'twenty, two and one in July of 'twenty, two and that is it in that manner.

That's too about.

Yeah.

70, $580 million 90 minutes.

In the aggregate.

And then we'll have what does today.

It's almost half of that 160.

And then the rest of you know the.

Investors, who bought those didn't take.

Or so I assume they remain outstanding.

We've had no interest from them in.

Putting them back.

Okay and then the other part of that is just the excess liquidity that you're holding your part for the potential of our purchases when do you anticipate more normalized levels of liquidity.

I think were you know we got we got down some in the quarter.

I would say I'd go back and say.

I feel a little better when the when we reached some finality with the.

The governmental investigations.

You know because you're you're just.

I always have to be cautious.

With issues that could surround that and you know potential.

Potential publicity or something like that that causes a problem. So we're more cautious.

Hum.

The the various needs for liquidity, but the you know the the big need at the point in time, when I joined the bank for loan repurchases is pretty well extinguished.

And then lastly, as you pointed in the press release, the lower tax rate relative to the prior quarter.

What's your expectation for the go forward tax rate.

That's why we have a new CFO on the call.

Yes.

Yeah, I mean, I think typically were around the 30% range, maybe slightly less than I anticipate that's where we'll be for the whole year at the end of the year.

Thank you for taking my questions.

And that's what this is.

I'll say, it's also Nick is the tax rate you know from a guy who spent his life working in New Jersey, and New York banks.

The.

You know what the tax rate in the state of Michigan.

Consolidated has a substantially more attractive than it is in.

New York, or New Jersey, or most of the northeast states that I've.

I've worked in.

I can confirm that as well.

[laughter] go Michigan.

[laughter] takes again Argo, Michigan State I should say that wasn't [laughter].

Again, if you have a question. Please press star then one to be joined into the queue or.

Our next question comes from Ross Haberman with R. L. H investments you May go ahead.

Tom Tom how are you yeah fine How're you Ross good I just wanted to focus in a little bit on the on the non performers both the residential and the commercial I guess, the commercial was down a little bit.

Does that answer was up could you give us a sense of what's in there and how comfortable you are with your carrying values and what youre doing to readily get rid of them work them down.

And could we see any significant drop off in the fourth quarter.

Sure.

So let me start with the residential side and that's actually why we broke the mountain of tables for this quarter. So the residential.

I said and I think I said in my remarks.

There's a there's a number of those that are you know I guess you'd call them you know.

Either a radically performing you know where they they may catch up payments with some regularity and Theres also some that were you know substantially delinquent and then brought current.

And so that in and Karen may know, the exact breakdown or rough breakdown to those two differentials on the residential side we've not.

Experience.

Losses.

Either in you know short sales or liquidations or anything like that on the residential side.

Notwithstanding the you know the compliance remedial costs, we've incurred but you know the.

Credit side of it has been you know fairly benign.

No reason I have to think that that won't continue.

That group of about.

20.

$2 million or so that we mark to held for sale at year end.

You know.

Paid down to around $11 million at this point and.

From loan Satisfactions, and you know repayments prepayments things like that.

Without without any credit loss in them so that.

You know whether or not that continue it's hard to see but it's you know, it's certainly not indicative of.

You know loans with the residential loans with the <unk>.

Big losses embedded in them, so I'm not at all uncomfortable with where we are in the residential side and Karen do you know the breakdown between the.

Kind of rough awkwardly performing.

Yeah.

Just slightly less than half of that nonperforming residential loans are not even 90 days delinquent are either current or maybe 30 day, but like you said they just really haven't established a regular repayment patterns then they went on to nonaccrual.

Yeah.

<unk> achieved that would go bad and according to our policy, we can flip them backwards, yes monitoring them.

Yeah.

Okay.

So that's a residential commercial.

Commercial as you know I think I've said every call I've been out it's the one that troubles me the most from a credit risk perspective.

And you know, it's it's a combination of.

You know what gets.

Get the banks into trouble all the time as you know.

Too aggressive on you know commercial originations and.

I'd say, probably the last lack of them.

Expertise or talent in certain areas that you know.

Creates credit exposures.

That gets difficult to manage so we've got these you know these SRO loans single room occupancy loans.

Predominantly in the city of San Francisco.

You know I think were were over lent on several of those.

Hum.

And you know we've had some success and encouraging the owners to refinance elsewhere.

As the loans came to.

We've had some.

Some where we could improve the credit by restructuring it and proving the amortization schedule.

Getting additional collateral things like that.

And we've got a couple of others that are just stinker separately, you know, we're going to lose money on them.

And then in the construction side.

Again, you know my experience at a lot of different banks has always been you know.

You know.

Banks get into construction lending because they get seduced by the.

You know the terms and the rates and things like that but you know that's a whole different game and.

The expertise to manage a sophisticated construction portfolios is hard to come back and we did not have it.

So you know we've had again we've had some success with those.

Those loans that are.

Completed.

And you know, we're looking at marketing periods.

And we've had one or two of those.

Pay down significantly or pay off as a property got sold.

And there's a couple of others that you know are ill conceived and problematic and I think you know well.

We'll end up.

Experiencing some losses on those but you know we we.

We.

Talk about them every day almost or at least you know those that are on the agenda for that day.

We look at them.

We look to reduce the risk to the bank in the most efficient.

Way we can.

<unk> deficiencies.

Measured in both dollars, but also in time on our books.

No.

That's why I said earlier I wouldn't you know.

Wouldn't hesitate to look at a handful of bulk sales.

And in the period ahead.

I'm, just you know and in all candor I've got too.

Manage the.

Yeah.

I've got a I've got to manage carefully here the.

Things that I put into the bank for us to do so the.

Project management is a it's important and I just can't you know we've got a lot of priorities I can't overload. The system here. So we had a lot to do with the I T conversion, we had we had.

Our regulatory exam.

August and September.

So you know I kind of have to look out on the calendar and do these things in a way that is best.

Best for the.

Yeah, just shut off for them.

The institution and the staffs ability to well.

Handle all of the moving parts.

I no no I was just curious I've got it.

I was looking at the allowance you put in about 400000 for the quarter.

I've got it would seem at least from what you know today after you've gone through all your all your summer is that I guess you're fairly.

I'm comfortable I guess with what you're carrying all that the commercial let's just talk about the commercial well what you're carrying that now otherwise I guess, we would've seen a much bigger provision.

In end of September quarter, exactly would that be a good.

Good summary.

I think you've told me well enough by now.

If I'm uncomfortable it would reflect the number that you know I think it should be.

That's why it went up in and you know 'twenty 'twenty I think.

Last question I know you sold the you sold the Washington Office.

Any are there any other offices you are you still you see I shouldn't say superfluous, but extraneous or Oh, sorry, you know not fitting in well, which.

If you got a bid you you would you would sell it. Thank you. That's my last question. Thanks, a lot sure sure.

Well I could probably say, yes to that.

<unk> location, if if somebody where you know that interested in it but you know as a general rule I think we have to look at the markets that are.

Let's call them non core right.

And and and evaluate those and we are doing that I mean, we look when we look at every location and and even in our core markets. We're looking at individual branches.

To see if you know it makes more sense to you.

Either consolidate or if we've been there for a while and the branch hasn't really achieved what we thought it should you know is there a reason to stay so.

Again, I've got to be careful with what I load into the system here, because we're all working a lot but.

Branch locations are high on the.

High on the priority list.

Okay, Alright, the best of luck, Thanks, a lot and I'll say, it's actually.

God I hope you do thanks.

Yeah.

This concludes our question and answer session I would like to turn the conference back over.

To Tom O'brien for any closing remarks.

Okay, well. Thank you again I appreciate the questions and your interest in the bank and.

While it's hard to believe the next call we'll be into 2022 so.

And it's moving along quickly here I hope you all enjoy a.

Like for fall and well look forward to talking to you and.

In January with our yearend commentary thanks.

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