Sterling Bancorp - Q1 2021

Transcript

Speaker 0

Good morning, everyone, and thank you for joining us today to discuss Sterling Bancorp's Financial Results for the Q1 March 31, 2021. Joining us today from Sterling's management team are Tom O'Brien, Chairman and CEO and President and Steve Huber, Chief Financial Officer and Treasurer. Tom will discuss the Q1's results and then we'll open the call to discuss questions. Before we begin, I'd 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 risks 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 on 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 compared GAAP measures. The press release available on the website contains the financial At this time, I would like to turn the call over to Tom O'Brien. Tom, please go ahead.

Speaker 1

Great. Thank you and good morning everyone. Sterling released its Q1 of 2021 financial results today and just the highlights, we reported $0.05 per share of net income. Generally, the margin continues to be pressured. It was $2.45 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 in the quarter were related to the multiple reviews and investigations that have been going on at the bank since long before I joined, but certainly during my tenure. Credit remained essentially flat in the quarter. The numbers didn't change too, too much. We're still dealing with the factors that I outlined in the press release. On the capital levels, I'd note the bank only capital levels continue to be pretty healthy.

But just keep in mind that the holding company, we do have $65,000,000 worth of debt, which is now callable and losing its capital treatment over the next 5 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 obviously, there are holding company costs that need to be considered. So that's something that will get our attention, our focused attention in the next quarter or so. Going back to credit, as I continue to note, the concern from my perspective remains centered in the commercial real estate and the construction portfolios.

We continue to manage these portfolios very aggressively to try to get down to the proper risk rating and understanding what the exposures are, the quality of the guarantors, the quality of the property or the project. So and we've made an awful lot of progress in that. To some extent, the past due loans are inflated because we've had loans that come up for maturity and but we basically have to on the commercial and construction side, we basically have to re underwrite each and every one of them and reappraise them and that just takes a long time. So there are several in that category that have gone past maturity by 90 days and we list those as non accrual and an abundance of caution and conservatism. But understanding that's, as I said earlier, that's where I think the risk is for the bank too.

On the positive side, we did announce, as I'm sure you saw, the securities class action settlement has been submitted to and I think at this point approved by the courts and it should begin to wind down to absolute closure in the next 2 or so months. Other matters including the look back required under our formal agreement with the OCC are nearing completion and that's been an expensive proposition for the bank and the company also. Notwithstanding that there are still a lot of moving parts, but we are working diligently to get passed as much and as expeditiously as possible. Keep in mind though that the OCC and DOJ investigations are basically out of our control. We have and continue to cooperate fully 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 that and the OCC item are out of our control and we hear about it pretty much at the same time that

Speaker 2

you do.

Speaker 1

So with that, probably always best to take questions and see what's on everybody's mind. So operator, if you'd open the line up for any questions.

Speaker 0

Thank you. We will now begin the question and answer session. And the first question will come from Ben Gurlinger with Hovde Group. Please go ahead.

Speaker 3

Hey, good morning guys.

Speaker 4

Hey, Ben.

Speaker 3

I was wondering if you could just kind of give some rough guidance. I completely understand that the expense level for legal is pretty much out of your control. But based on the last thought, I think you guys said 'twenty one expenses will be near 2 thirds or so of 'twenty, 2020 levels, which would kind of it would definitely imply a ramp down in the back half of the year. I was wondering if you had any updated thoughts on that?

Speaker 1

No, I think, yes, what we said last time was we expected in the second half of the year for expenses not to ratchet down dramatically, but start to step down as this look back completed is completed and as the securities class action is completed. And then hopefully some of the other matters start to wind down. So it's still our expectation that the second half will start to see the gradual diminution of these extraordinary expenses and nothing's really changed in that respect at this point.

Speaker 3

Got you. Okay. Well, that's helpful. And then, do you have any line of sight into opportunities to repurchase more advantaged loans? I guess that they're somewhat out of your control and the timing and windows of opportunity are pretty narrow.

I'm just curious if you see any kind of in concrete moments over the next 6 months so you could repurchase more?

Speaker 1

Yes. We are we finished one repurchase during the quarter. And you're right, they do take some time and documentation. It's kind of a complex operation. We have one more we're expecting in this quarter that is somewhat larger than the one we completed in the Q1.

I think that was about $88,000,000 or $89,000,000 This one is probably by the time we repurchase it might be in the $150,000,000 to $60,000,000 category. And then we've got one more that is much smaller in the 30s or so, but just given the securitization that it's in and the call opportunities, the sponsor really can't free those up until I think it's July next year. You can correct me if I'm wrong on that date.

Speaker 5

Yes, that's correct. The remaining smaller piece in the $30,000,000 range will be July 2022.

Speaker 3

Got you. Okay. And then just kind of thinking bigger picture, the selling of the Bellevue Washington branch, I was kind of curious, I get that that's not really in your footprint and it was a little bit more of a one off. I was curious how that process went or anything you're hoping to talking about in sort of like a bid ask or was it completely sold to 1 person or the one entity, Washington First, I think, were they the target specifically or did they approach you or just any kind of color you might be able to provide on that as well?

Speaker 1

Well, there's 2 parts of it. 1st is the motivation and really it is exactly as you said, the Bellevue Washington branch had been fairly successful, but it was a single branch in a very, very remote market for our core business. We had some good business there, some very good employees. And so that's why we look to exit the way we did. And in terms of the process, yes, we spoke to a fair number of banks.

There was some reasonable interest and First Federal was frankly the most interested and the had the best chances of success on an application to do this transaction with their regulators and attractive for all of our stakeholders, our employees, our customers and for Sterling itself.

Speaker 3

Got it. Okay. Well, that's helpful. I will I'll step back in the queue. Thanks.

Sure.

Speaker 0

The next question will come from Nick Cucarelli with Piper Sandler.

Speaker 1

On

Speaker 2

the liability side, can you remind us how much of the CD portfolio is expected to mature in the Q2 and your current offering rates there?

Speaker 1

Pete, why don't you handle that?

Speaker 5

Yes, I can speak to that. Yes, we have CDs maturing in the second quarter of $474,000,000 approximately, which is about a third of the CD portfolio. We're expecting those to reprice down pretty substantially, assuming that they choose to remain with the bank. A significant piece of that $474,000,000 are 12 month CDs, which are currently at rates of around $135,000,000 to 1.45 We're expecting those to reprice down into the 25 basis point category if they again choose to stay with the bank.

Speaker 2

That's great color. And then on the origination front, pretty stable from quarter to quarter. Do you anticipate loan demand ramping up in the coming periods or is it pretty likely to be consistent in the near term?

Speaker 1

I think in the near term, it's going to look like the past, the recent past. We spend an awful lot of time on going through the portfolios that we have and with the regulatory overhang, it's not exactly easy to ramp up. So we'll continue to meet the credit demand in the communities that we're in, but I wouldn't look for anything too explosive.

Speaker 0

Our next question will come from Jeremy Chu with PW. Please go ahead.

Speaker 6

Hi, Tom. It's TCW, obviously.

Speaker 1

Yes. TCW, sorry.

Speaker 6

A quick question on the cash balance. You still have pretty elevated cash balance. I know that you have some CDs coming due and the purchase of advantaged loan portfolio. Are there any other ways you would think about using the cash?

Speaker 1

No. We had to build cash, Jeremy, because we weren't really there was no way to determine the level of advantage loans that we ultimately would repurchase. So we had to be prepared for all of that. And then whatever deposit flows happen to be given some of the news that was coming out last year with the delayed quarterly and 10 ks 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 raised their hand and we're in that process and the others have declined. So we pretty much know what our needs are in that context at this point. And that's why you saw in the Q1 that we'd let deposits run off a little bit through both pricing. And then as we discussed a minute ago, the sale of the State of Washington branch will take up some of that liquidity also. So we hope to get down to a more normal level of liquidity, which should help margin and stabilize things, better now that we pretty much know who's going to give us back the advantage loan and who not.

And then you're always worried in these situations with banks like I've been in with the risk of reputational damage and we haven't seen that. That's really a credit to the people that we have working in our system and in our branches. And I think in the way we've tried to communicate to clients and investors alike.

Speaker 6

Yes. So in other words, you think you have a pretty good visibility of the cash needs at this point, you just sort of slowly working that down through letting the Yes, much better than we

Speaker 2

did when

Speaker 1

I joined the bank. I mean it

Speaker 6

was When you buy back the advantaged loans, are you buying them back at par? Are these performing loans or non performing loans?

Speaker 1

Well, we buy back the portfolios with those who are interested in taking us up on it. And the mortgage loan purchase agreement that we entered into at the time sets forth a formula for the repurchase. But it's basically us that we pay on the reduced principal balance the premium that we were paid on the original sale. So for instance, if we sold $100,000,000 of loans at $102,000,000 and that $100,000,000 is now $40,000,000 we would buy the $40,000,000 back at 102. Dollars And in the last year, if you recall, we set up what we called the repurchase reserve to account for that cost.

So in this case, we hit 2% of $40,000,000 comes out of that reserve. And then we have a process for fair valuing the loans that we repurchase at the time of purchase. And that has been as much as a 2 point discount to closer to par and it really depends on the market interest rates at the time of the repurchase and that we flow through the income statement.

Speaker 6

And are these And does it include

Speaker 1

I'm sorry, I was going to say it does include so in this case if we buy back $40,000,000 of a portfolio from a seller to us then that would be the entire portfolio. So there might be some non accruals in there. There might be some slow pays and there might be 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. I'd say 2% to 3%.

Speaker 6

I hope that answers my second part of the question. And then you were also looking at unload a small portion of resi portfolio. Has there been a lot of interest on that? And do you think you'll unload that at par or I may add your mark rather than any discount or?

Speaker 1

Yes. We marked them down. We marked about $22,000,000 or $23,000,000 of non performing advantage loans to held for sale at year end. And at the time, what I was saying is that we intend to sell them. We just had so many things going on in the Q1 that I just didn't want to overload the system.

So we had them marked and I think we marked them down to $0.85 on the dollar and we're now going to begin the process of actively marking it as soon as or marketing it as soon as we get the 10 Q filed. And hopefully, that will be done this quarter. And my expectation is that the sale price will be no worse than where the mark is.

Speaker 6

Thank you.

Speaker 1

Sure.

Speaker 0

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 Palino with American Capital Partners. Please go ahead, sir.

Speaker 4

Hey, Tom. Hey, Steve. How are you doing, Anthony?

Speaker 5

Hi, Anthony.

Speaker 4

Great mitts game last night. So guys, how hard did you try to find charge offs this quarter?

Speaker 1

We always try to make sure we're careful with that. But this is a little bit more of a benign quarter than one might expect. But that's why I said in the press release, Anthony, we're going to have some. It's undoubtable what other institutions may or may not face, who knows. But I think just given especially the focus we have in construction, I just I think we're going to we'll see some charge offs.

So from a reserve perspective, I think we're okay because as I mentioned, there's among the non performing loans that the level is elevated, but you kind of have to break it down between the content of the different loan portfolios. And in that, there's, I don't know, I'd say $60,000,000 to $70,000,000 of commercial and construction that I would say I worry about and the balance not the balance of the non accrual not so worried about?

Speaker 4

Now that $72 odd 1,000,000 in allowance that you have, I assume the high percentage of that is allocated toward that worrisome portfolio. And if we had an increase in charge offs, we wouldn't necessarily have a like increase in provision in the quarter?

Speaker 1

Yes. As I mentioned, the credit quality has been pretty stable, which is and we had some recoveries in the allowance during the quarter. So that's why that really didn't move so much. I think that's a fair assessment, Anthony, that if we have deterioration or actually realized losses on some of the commercial and construction, it's pretty well accounted for in the allowance. But the some of the product like we have these loans in San Francisco that are what kind of generically referred to as SROs, but single room occupancy.

That's in my view kind of akin to a hotel type loan and those are slower to recover in terms of occupancy and valuation and cash flows. So it remains to be seen, but yes, it's an elevated concern for us as we look at that portfolio.

Speaker 4

Do you have a good handle now? I'm sorry. Yes.

Speaker 1

No, I was going to say the construction stuff. I mean, my general feel with construction is I feel okay if the project has never started or if it's completed. But in the middle, that's where I worry. So we've got some that are completed and they're in the marketing period and I think we feel pretty good about the chances of success for marketing those. Those in the middle, you just you have to monitor them closely, but you're not really in control of the process until they get near completion and they can start marketing it as originally intended.

But there's some elevated concern there with the valuations at the original underwriting and the structure.

Speaker 4

How big was the Belkin branch?

Speaker 2

$70,000,000 Steve?

Speaker 5

Yes. It says $78,000,000 in deposits.

Speaker 4

Do you have a pretty good handle now, a good idea of where the what size this company will be by the end of the year? Or is

Speaker 1

that still a pretty

Speaker 4

moving target?

Speaker 1

By the end of the year, that's probably a little harder to guess. Ideally, if you look at the structure of the retail distribution in California, the number of branches, the product mix and all that and the capital levels, you'd say ideally this is a low $3,000,000,000 balance sheet in my opinion.

Speaker 4

Okay. Well, I think you're doing a great job. And I know it's tough, but I congratulate you guys. Thank you.

Speaker 1

Thanks, Anthony.

Speaker 5

I appreciate it. Thank you.

Speaker 0

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.

Speaker 1

Okay. Thank you. I'm just always happy to have these calls and a chance to catch up with our investors and we certainly appreciate your interest in our efforts and in the process we're going through here. It's at times it's challenging, but we wouldn't have this opportunity were it not for the public investors we have in Sterling Bancorp and we are all appreciative for that and for your interest and I look forward to the next quarter. Thank you.

Speaker 0

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