Sterling Bancorp
Q2 2021 Earnings Call Transcript

Published: 22 Jul 2021

[Operator:]

Good day and welcome to the Sterling Bancorp Second Quarter 2021 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jack Kopnisky. Please go ahead, sir.

[Jack Kopnisky:]

Hi, good morning everyone and thanks for joining our second quarter 2021 earnings call. Joining me today are attached of many, Bea Ordonez, our Chief Financial Officer; Rob Rowe, our Chief Credit Officer; Luis Massiani, our Chief Operating Officer and Bank President; and Emlen Harmon, 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. 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 $0.52 and adjusted net income of $100.5 million. This generated a return on tangible common equity of 14.6% and return on tangible assets of 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 PPNR to $125 million, up 1% over the prior quarter and 10% year-over-year. Primary drivers of PPNR growth include the step-up in net interest income and continued expense discipline. We reported core net interest margin of 330 basis points flat relative to the prior quarter, despite a challenging interest rate environment. In that context it is worth noting that our core NIM is up 25 basis points over the prior year's second quarter. 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 320 to 330 basis points range. We continue to optimize our funding costs regaining $125 million in a higher cost sub-debt in the quarter, and continuing to actively reduce higher cost deposit categories. Given the current rate environment, 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 are applying pressure to existing loan and securities yields. Core non-interest expense of $110 million was down almost $1 million relative to the prior quarter, while we continue to invest in core business growth and enhancing especially our digital capabilities. A modest decline in fees down $1.3 million versus the first quarter when we recorded $1.8 million in PPP fees partially offset the positive PPNR drivers in interest income and expense. We did see positive trends across several other fee line items as client activity and transaction volumes continue to build of pandemic lows. We continue to be very comfortable with our asset quality trends and reserve position. Our provision expense was $6 million this quarter versus charge-offs of $14 million. This reduced our allowance for credit losses modestly to 1.52% of total loans versus 1.53% in the prior quarter. While the economy is gaining steam and the model reserve position drives a lower allowance requirement, we maintain what we feel is an appropriately conservative view given continued uncertainty related to the New York Metro region and including the reaction 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 were criticized assets where we believe the best economic path was to sell the assets. Excluding the effect of this sale, core charge-offs were approximately $2 million. Non-performing loans were effectively flat in the quarter and criticized classified loans declined 8%. As we have said previously, we believe we have likely peaked in terms of precise and classified assets and expect to see declines going forward. Moving onto the balance sheet, average earning assets were down about $180 million. This was principally an 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 to period basis, PPP loans declined $102 million and the previously mentioned loan sale obviously also impacted our ending balances. Excluding these effects, we saw some positive trends in the commercial loan book, including targeted growth in our public sector finance and traditional C&I business lines. We have revised our outlook that we 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 in the $1.25 billion to $1.5 billion range. There are plenty of lending opportunities in our pipelines 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 sub-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 built capital ratio significantly with TCE ratio of 10.29% and Tier 1 leverage of 10.91% at the end of the reporting period. I got to tell you, I've been doing this for a long time. This is by far the most amount of capital we've ever had in any bank that I've been associated with, so we're a trustful capital and liquidity. To wrap up my financial comments, I wanted to note one other change to our outlook. We expect the trend to a full year effective tax rate of 19.5% to 20% given lower provision requirements and a higher taxable income. Moving to our progress with our approvals and integration planning process, Webster and Sterling have filed the regulatory application and proxy for the transaction and the shareholder votes on the merger are scheduled for August 17th. We need the senior management team of 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 stages to design and execution. We have established 55 work streams along business lines and functions. Both John Ciulla and I are impressed by the effectiveness of 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're bringing together two organizations with complementary footprints, products, business lines, and cultures. We will have a unique organization in terms of diversity in both asset and funding generation capabilities operating in a geographically dense and affluent footprint. And as you see – and you could see in 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.

[Operator:]

Thank you. [Operator Instructions] We will take our first question from Matthew Breese from Stephens Inc. Please go ahead.

[Matthew Breese:]

Hey. Good morning.

[Jack Kopnisky:]

Good morning.

[Matthew Breese:]

Hey, Jack, you mentioned that you expect to see some pretty good commercial loan growth opportunities in the second half of the year. Could you just talk a little bit about the pipeline there? And then just a follow-up, you mentioned pricing has been one lever you might have to pull. Just give us some sense for where you're pricing commercial loans versus peers and what that delta currently is?

[Jack Kopnisky:]

Yes. 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 to some of our lender finance businesses and technology businesses. Those are the areas where we have the greatest opportunity going forward. In all times – the pipelines are pretty full. There is a ton of opportunities out there, but it is clear for the quarter in the past six months, we've held the line on the returns and the pricing along the way. It's pretty clear that there is tons of liquidity out there in the marketplace and then we're going to have to adjust our pricing models a bit on the same. So it will drive a little bit less NII or if you would loan yields and in turn we expect greater volume out of this. We held the line on price discipline and we will continue always hold the line on structure discipline, but there are tons of opportunities out there. Frankly, I had dinner with prospect last night that literally have billions of dollars of opportunities out there. So there – there are opportunities out there, which is going to have to be a little finer on some of the pricing dynamics.

[Matthew Breese:]

Got it. Okay. And then on the commercial real estate loan sales, what was the composition was it office retail, industrial and maybe could you just give us some color as to the sales price relative to loan value and then relative to the last transaction value. So we get a sense of the true impact from the pandemic and the – and the transaction?

[Jack Kopnisky:]

Yes. Let me see this up and then I'll turn it over to Rob to go through the details. Our view is always that you're better off instead of working out with, when you know there's struggling real estate; you're better off thrusting in and getting out of a portfolio earlier than later. So all these deals we could have worked out over a longer period of time. But our view was that in my experience or our experience through many cycles is that the sooner you get rid of things that are struggling the better and that's what we're trying to do, get that behind us. Rob, you want to talk through the transition?

[Rob Rowe:]

So Matt, it was mostly free and it did not include industrial. There was some retail; that was more mixed type of stuff. There might have been a little bit of multifamily in here with a little bit of ground floor retail. We did sell also some past stuff that was non-relationship oriented small ticket, so, but that's not – that's a sideshow. The special mention in the substandard, we got off in the low-9s, and we think that's a reasonable price and to take advantage of liquidity in the marketplace. But we don't want anybody to think that we thought that these were imminent NPAs or imminent charge offs, that was not really the case, right? These are things that just weren't having the right debt service coverage levels, and we thought we could take advantage of the marketplace.

[Matthew Breese:]

Got it. Did you say you've got out in the low-9s?

[Rob Rowe:]

Sorry. Yes, about $0.92.

[Matthew Breese:]

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 hone that commentary down a little bit. Is that an asset class driven comment or more behaviors stats and related to the general recovery of the area?

[Rob Rowe:]

I think that the area's recovery just fine. I think there's a lot of good progress in just about all the categories. I think the only category that we – that is unknown is frankly office. There's a little bit of – of still on travel, but even like you walking around that fall from New York, there's lots of tourists and lots of people coming back. So I think there's a good path along the – in the future. I think there's just a question over a longer period of time about the office network in New York. So I think there's – there's some uncertain categories in metropolitan New York, and those are two examples of some uncertainty.

[Matthew Breese:]

Got it. I appreciate it. That's all I had. Thank you.

[Jack Kopnisky:]

Thank you.

[Operator:]

[Operator Instructions] We will now take our next question from Chris McGratty from KBW. Please go ahead.

[Chris McGratty:]

Good morning. Maybe following-up 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 anymore the kind of loan sales being contemplated to kind of optimize the balance sheet before close?

[Jack Kopnisky:]

Not at the level that we have now. We will do, there will always be onesies and rwosies going forward, but we want to get these things behind us as we enter the merger. So nothing of significance.

[Chris McGratty:]

Okay. And then maybe the follow-up is on the non-interest income. I'm interested kind of as we stand today. I see the guide, but where in 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.

[Bea Ordonez:]

Sure. Hi, Chris. Yes, look we're seeing a little bit of pressure on the derivatives business, the customer facing swaps. We haven't seen that quite recovered a pre-pandemic levels or we're seeing just sort of the rate related sort of weakness in transactional volume and related to production in some of the transaction type fee income categories. What's certainly not back? We've seen a nice rebound from 2020 lows, but we're certainly not back to pre pandemic levels there. On the flip side where we have seen sort of relative strength is in the syndication business and in a couple of other categories. So that there's a little bit of an offset there, but overall, we're seeing a nice pickup and we expect to sort of continue to have an upward trajectory through the back half of the year.

[Chris McGratty:]

Great. And then just to clarify one, if I could on the expense guide for the year. Does that 430 to 440, is that – is that on a GAAP basis or is that just for the one-timers?

[Bea Ordonez:]

Yes. And it excludes one-time expense.

[Chris McGratty:]

Great. Thank you very much.

[Jack Kopnisky:]

Thank you.

[Operator:]

[Operator Instructions] As there are no further questions in the queue at this time, I would like to turn the call back to your speaker for any additional or closing remarks.

[Jack Kopnisky:]

Yes. We are popularity must be waiting or something, not enough questions. Now we really appreciate everybody following the company. And we're really looking forward to aligning these two companies. It's going very, very smoothly and we see opportunities virtually every meeting we have to really put the – a best-in-class company together. So appreciate everyday everybody. Take care.

[Operator:]

Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen you may now disconnect.