Sterling Bancorp
Q3 2021 Earnings Call Transcript

Published: 21 Oct 2021

[Operator:]

Good day and welcome to the Sterling Bancorp Second [ph] Quarter ‘21 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.

[Jack Kopnisky:]

Hey, good morning everyone and thanks for joining our third quarter 2021 earnings call. Joining me today are Bea Ordonez, our Chief Financial Officer; Luis Massiani, our Bank President, Rob Rowe our Chief Credit Officer and Emlen Harmon, our Director of Investor Relations. We have a presentation on our website, which along with our press release provides detailed information on our quarterly and year-to-date results. In the third quarter, we reported adjusted earnings per share of $0.52 and adjusted net income of $99.6 million. Adjusted earnings per diluted share were in line with the linked quarter and represented an increase of 15.6% over the prior year’s quarter. Reported net interest margin excluding accretion income of 325 basis points represents a decline of five basis points compared to the link quarter and a 15 basis point increase year-over-year. The results for the quarter represent a return on adjusted common equity of 13.79% and return on average tangible assets of 144 basis points. We continue to deliver meaningful growth and tangible book value per share, which was $15.03 up 3% over prior quarter and 11% over prior year. Now I want to highlight three key points regarding our performance this quarter and our pending merger with Webster Financial Corporation. First, we had a strong quarter growing core commercial loans and overall deposits. As of September 30, 2021 our total commercial loans were $19.7 billion, an increase of $559 million or 2.9% over the linked quarter driven by organic growth and public finance, traditional C&I, commercial real estate and lender finance. We would expect a similar increase in outstanding’s in the fourth quarter of 2021. Total deposits of $23.9 billion increased 3.4% compared to the linked quarter. Secondly, our credit metrics continue to improve. Net charge-offs for the quarter were $5 million, or 10 basis points annualized. Non-performing loans increased slightly due to a single loan that is collateralized, while criticized classified loans decreased. As of the end of the quarter, our allowance for credit losses was $309.9 million, or 1.46% of total loans and 150.8% of non-performing loans. We recorded no provision for credit losses in the quarter consistent with the low level of charge-offs, stable asset quality metrics, and continued improvement in the macro economic outlook. Finally, regarding our announced merger with Webster Financial Corporation, we have been actively engaged with our partners at Webster to design a comprehensive integration plan that prioritizes our commitment to value creation, providing best-in-class service to our clients, a dynamic work environment for our colleagues, and -- continue and continued adherence to the highest standards of risk governance. We announced this merger on April 19 2021, received approval from the OCC our primary regulator in record time on August 02 2021, and then receive shareholder approval on August 17 2021. We are very confident in the merits of the proposed combination and are prepared to execute the merger upon receipt of the remaining regulatory approvals. I know that’s short, but try to hit the high points. So now let's open it up for the line for questions.

[Operator:]

Thank you. [Operator Instructions] We'll take our first question from Chris McGratty of KBW. Please go ahead. Your line is open.

[Chris McGratty:]

Hey, good morning, everybody.

[Jack Kopnisky:]

Good morning, Chris.

[Chris McGratty:]

I wanted to start with the loan growth, the range that you provided on slide 13, to $250 to $500. Could you just give a little bit more color, it sounds obviously you're reiterating the guidance and expect the building momentum to continue in Q4. Can you just provide a little bit more color on portfolios line usage, borrower conversations? Thanks.

[Jack Kopnisky:]

Yes, I will tell you, first of all, of course, the pipelines are very, very full in most of the asset categories. So, they're very full, and things like public finance, where municipalities are spending more money. They're very full in traditional C&I where, and maybe with a focus on some of the some of the innovation and technology finance in that group. Very full in terms of commercial real estate and things like warehouse and, and distribution centers and traditional CRE related to companies along the way. Lender finance continues to have three years and great outstanding, so those pipelines and portfolios are really full, even ABL is are starting to get more opportunities out there. And that is a business that hasn't performed all that well over the last couple of years. Areas where there is not are things like equipment, finance, pricing, pressure, and equipment finance, still is pretty strong. So those, those pipelines are a little more limited. We're about flat on the multifamily what we live in what we are, we have payoffs. We have about an equal amount put on so you will see the velocity of runoff as you have in the past on the multifamily side. So on the line you see side of this thing more and more folks are starting to pull on this. But what we're finding is, again, Metropolitan New York is super, super diverse, and the type of industries, characteristics, businesses. So and we have a pretty diverse offering in terms of different types of lending we can do in New York, and things like public finance more nationally, as an example. So we're seeing more activity in buildings, more activity and capital spends more activity in trying to trying to hire more people along the way, which has been the one of the biggest issues and across the board in all industry segments. So we feel very good about the pipeline, feel very good about the growth and a number of the businesses that I mentioned. Still some businesses, like I said equipment, the [Indiscernible] lag a bit out of this thing and they be still a lot of activity in multifamily but a lot of pricing pressure or multifamily to where you pay-off versus the originations out there.

[Chris McGratty:]

Yes, that’s great color. If I could ask one more, the single credit you talked about in the quarter, a piece of headlines as well. Could you provide a little more color on geography asset type, workout strategy?

[Jack Kopnisky:]

Yes. It's a mid-$30 billion credit. It is Metropolitan New York and we're well collateralized on this thing. We don't really sustain a loss. We've kind of worked with this this client for a while, and hopefully we can still work this thing out, but we're not concerned about losses in that particular credit.

[Chris McGratty:]

That's great. Thank you very much.

[Jack Kopnisky:]

Thank you, Chris.

[Operator:]

We'll move on to our next question from Matthew Breese of Stevens Incorporated. Please go ahead. Your line is open.

[Matthew Breese:]

Hey, good morning. Hey Jack, last quarter, you'd mentioned on the on the loan side perhaps getting more competitive on loan yields to generate volume. Could you just talk a little bit about where new loan yields are coming on and what the ultimate adjustment was so that you could you could produce a little bit more?

[Jack Kopnisky:]

Yes, that's a great, that's a great question. You always remember what we said last quarter, which is awesome. So we did get a little more competitive and you can see that adjustment in the margin on loans yield. So we -- that most of that competition is in the real estate side, where we got more, a bit more competitive. Not as much in public finance, not as much in lender finance. And frankly not as much in C&I, as they think through it, it's more in the commercial real estate side of it. And it probably looked at about a 25 basis point decline in being more competitive in the real estate side of this thing. So loan yields are coming in and kind of high twos to kind of mid threes and in those areas.

[Matthew Breese:]

Okay, great. The other thing I wanted to touch on was over the last, I would say a couple of years, we've seen several banking as a service and technology partnerships. Could you just touch on how much balance sheet impact those partnerships have had, what have they produced in the way of deposits and loans? Has there been any fee income, and maybe give us a sense for the opportunity on those businesses, as you know, you and Webster merge?

[Jack Kopnisky:]

Yes, we think it's a really great business. Frankly, at the end of the day, so, so far, we have about, based on the banking as a service, and actually online, there are probably a half a billion dollars worth of deposits. And today, to date we really anticipate on an annual basis to be able to originate anywhere from half a billion to a billion dollars worth of deposits in that. And but what we're trying to do is we're trying to create optionality in different types of funding, verticals or channels. So banking as a service is one really good viable channel, we feel really good about that potential channel to originate that kind of half a billion to a billion dollars worth of deposits relatively, very low cost deposits, on an annual basis, as you know in all the all the pricing is all compressed today. But over time, we think it's a low cost long term sticky funding mechanism. And you kind of match that with traditional branch deposits, deposits that originate from the commercial teams, deposits they come from the money [ph] side, kind of wholesale deposits. We match that with banking as a service out there, deposits and the technology partnerships that we're doing. So we feel very confident and the amount of opportunities that we have to drive partnerships is continuing to increase. Our pipeline of opportunities that we screen are -- is very high. We are being very selective also. So we, we've been careful about making sure that the technology companies and partners on this have the mechanism and structure to be able to conform to the risk management devices, we require them to go through. So we've been a little more specific about those types of things to make sure that these are long term relationships, not one shot and we have to fix something they did. So we now have the platform all in place. We're, we're we're now bringing in real deposits and frankly would expect to end the year, somewhere around $750 billion in total deposits including the online deposits.

[Matthew Breese:]

Great, I appreciate that. The other one I had was in the release, you note that you sold a $23.7 million commercial real estate loan rated substandard. Could you just give us a sense for what types of commercial real estate you know these were they multifamily mixed use office and what the clearing price was versus when you're, when it was underwritten. I think everybody trying to get a sense for post COVID valuation impacts on New York City real estate, and there's just not that many examples.

[Bea Ordonez:]

Sure. Thanks for the question. Yes, so it's about 27 million in Cleveland must be rated substandard as we noted, and a mixed bag of credits in the multifamily space and the mixed used space. We took 1.2 million in charge-offs on that, and again, look it's in line with what we did in prior quarters. We view this is a strategic move for certain types of loans in the portfolio where we potentially just see a long process to either return it to a path, or a long license [ph] process to work out. So for those kind of assets where we see better owners of the assets, we're just proactively managing down that risk and exiting those credits.

[Jack Kopnisky:]

And Matt, the only thing I would add is that there were some reserves beyond the charge-offs that Bea mentioned. So the -- but the way to think about that sale is that really, if somebody else will do that, and they'll just want more pricing on the deal, it wasn't necessarily that these were bad deals or that they were stuff that really had terrible DSCRs, okay. So just think that it was a -- alternative investors that are going to look for more yield on the deal, and that's why we didn't get par off.

[Rob Rowe:]

Yes, I think so overall, I think we would say that, that, in general, the prices are better than what we would have expected going through a cycle like that. They are kind of in the 95, 105 range out there. There are there's there are many deals, you can sell for higher than par. And you can mix and match some of these things. But, but the prices have been better than we would have expected through a cycle like this.

[Matthew Breese:]

Great. Okay. Last one for me. Given all the recent news, there is some anxiety around timing of deal closures. Just curious if you feel comfortable with the 4Q timeframe for closing the deal and if there's been any updates from the remaining regulators on, on timing?

[Jack Kopnisky:]

Yes, I can tell you on that Matt is we're very confident that we're going to close this deal when we're 100% ready for this. The timing is trying to figure out the timing like everybody else on this.

[Matthew Breese:]

Understood. Great. That's all I had. I appreciate taking my questions.

[Jack Kopnisky:]

Yes, thank you.

[Operator:]

And it appears there are no further questions over the audio at this time. I'd like to turn the conference back for any additional remarks.

[Jack Kopnisky:]

We really appreciate everybody's time. I know, especially the analysts have a ton of calls today. Just to remind everybody, we this company has performed really well over the years. On a five year CAGR basis, suggested EPS is up 12.5% and tangible book value is up almost 15%. So on a CAGR basis for the past five years, we're very confident in the readiness and the opportunity to merge, do a merger of equals with Webster and we think the combined organization are going to -- it's going to be a really a great organization, high performing organization and a great value provider. So, appreciate it. Have a great day. Take care. Thanks.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.