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spk02: Good day, and welcome to the Sterling Bancorp, Inc. Fourth Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Stephen Huber, Chief Finance Officer and Treasurer. Please go ahead, sir.
spk06: Thank you, Chad, and good afternoon, everyone. Thanks for joining us today to discuss Sterling Bancorp's financial results for the fourth quarter and year ended December 31st, 2020. Joining us today from Sterling's management team are Tom O'Brien, Chairman, President, and CEO, and myself, Stephen Huber, Chief Financial Officer and Treasurer. 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. Further information is contained within the press release, which we encourage you to review. 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 financial and other quantitative information to be discussed today, as well as a reconciliation of GAAP to non-GAAP measures. At this time, I'd like to turn the call over to Tom O'Brien. Tom?
spk04: Thanks, Steve, and good afternoon, everyone. Thanks for joining us. Sterling had, as you probably know, two press releases today. The first one was about the pending settlement of the class action lawsuit. And that went out first thing this morning, but we're very pleased to announce that. As you can probably imagine, those things are a distraction. They consume an awful lot of time. And of course, they are expensive. So as noted in the press release, the resolution is subject to approval of the court, but we're optimistic that that will all, you know, come through accordingly and without too much delay, although it certainly takes a couple of months to get through this entire process. But anyhow, we're very pleased about that and the resulting outcome is that the press release also notes the cost of the settlement is borne by the banks insurers and And so as a consequence, we had set up some reserves earlier in 2020, and 10 million of those were released in the fourth quarter. The second release, of course, was our kind of normal fourth quarter and full year 2020 financial results. And I think they're pretty self-explanatory. you know, the, uh, quarter remained noisy. I apologize for that, but, um, you know, still a lot to do here at the bank, but, um, underlying all of the, uh, noise in the quarter, I think you'll probably see, uh, you know, a fair amount of progress being made. Um, we still have, you know, a fair amount of remedial compliance and, uh, technology work ahead of us in 2021, but the, um, You know, the groundwork that we've done so far in 2020 has certainly, you know, paid some benefits. And, you know, we just don't underestimate the work to be done. But as I said, you know, progress is meaningful and measurable at this point. You know, we're pleased with that. You know, financially, you know, margins under pressure primarily due to, you know, the level of liquidity we have on the balance sheet. coupled with the very low interest rates. Expenses, even though they were down in the quarter, if you take account for the $10 million recovery, but expenses are still running high with legal and consulting work being done in the fourth quarter. We're optimistic that as the class action comes to full resolution and the costs that with that disappear, that as we get into the second half of 2021, the OpEx line will start to find its way lower. I guess the most noticeable thing in the quarter is the loan loss provision. We made a provision of $27.6 million, increasing the allowance to just about 2.9% of total loans. And as I've mentioned on the previous few calls, the allowance reflects our concern with you know, the credit risk profile in, uh, in various different components of the legacy bank loan portfolio. Um, you know, of concern are the SRO loans in the San Francisco area. And, uh, of course, you know, to some extent the advantage loans and, um, and the bank's construction loans. Um, those, you know, remain our, um, our focus and, you know, reflect some degree of, uh, concern as to how they will work out. So we just thought, frankly, it was more prudent to get as much of this done as circumstance would allow in the fourth quarter and also give us the flexibility going forward in 2021 to move as aggressively as circumstances permit. Non-performing loans remain stubbornly high There are some TDRs in there which help out. And, of course, as you probably read in the press release, we moved about $23, $24 million worth of loans into health for sale and took a write-down on those. Our goal is to liquidate those loans either late this quarter or the very early part of Q2. And then on the governance side, we... accepted the resignation of Barry Allen, who had been a longtime director of Sterling, longtime chairman of the audit committee, and I think Barry had a total of 22 years on the board, so we were sorry to see him leave, but understand his desire to have some time for himself. And with that, we did announce, subject to some regulatory approvals, the appointment of Tracy Diedrich, to the board, and Tracy will join us as soon as we receive the non-objections from our regulator. And, you know, all of that is our efforts moving forward in terms of providing the, you know, the governance level that the company and the bank need and the oversight that we in management require. So, you know, we're pleased to announce that. And with that, it's probably going to be most beneficial if I just take some questions here, operator. So maybe open it up and we'll just see what's on everybody's mind.
spk02: All right. Thank you, sir. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. And the first question will be from Ben Gerlinger with Hubdy Group. Please go ahead.
spk05: Hey, good afternoon, guys. Hi, Ben. Good afternoon. Hi. So the 27% reduction in professional fees from the third quarter to the fourth quarter is a pretty significant sizable step down, and now that since you have that pending settlement as of announced today, I was wondering if you could give a little guidance to kind of what we should project going forward. I get that all of January could be included in those elevated professional fees. I was just kind of curious, since you do have that pending settlement now, should we continue to assume a ramp down? Should we hold steady in your current levels, or... was just kind of baked into that elevated 12, then this really doesn't apply. So that's my first question. I have one more follow-up after.
spk04: Well, what I've generally said, Ben, is that I think in the second half of the year, you know, the legal and professional fees will start to trend down. At this point, I would not be able to say gap down because it's just too hard to predict, but As we get things resolved and there's a little more clarity, then they should start to reduce. And I don't know, Steve, do you have any specific numbers you want to throw in there?
spk06: Well, for next year, we're expecting them to maybe come down by as much as a third compared to year 2020. But again, not real material probably in the first, second, and quarter of 2021, more would be a second half event, as Tom has mentioned.
spk05: Yes. Okay. So full year 21 is about a third less than full year 20, if I get that right. Yeah, correct. Okay. And then I have a question that had to do with the time deposits. I saw from second quarter into third, you guys reduced that by about 33 dips in the yield. And then third quarter into fourth, it was I was curious if you could talk about kind of how some of the time deposits are coming off over the next few quarters in terms of percentage of the total amount and then what's the kind of the spot rate relative to that 158 of where you guys are reissuing those CDs?
spk04: Yeah. Why don't you talk about the 30s and
spk06: Sure. Our spot rate at year-end is just under 1%, so hovering around 1%. We continue to decrease deposit rates, particularly in time deposits and money markets, so we're expecting those to reprice and take effect as we move forward here. We do have a lot of time deposits coming due to reprice beginning materially in the first quarter and basically through the third quarter. probably about anywhere from 16 to 25% of our deposits are going to reprice. So we're expecting to take the opportunity of the lower rates that we've just set recently to bring that cost down a little bit. It will remain to be seen on how many of those still stick with us if they renew in a new time deposit or move to a money market. But we're expecting some of those deposits to leave the bank altogether as well.
spk05: Gotcha. And you said 16 to 25. I was just making sure I got it right. That's basically a quarter of the time deposits per quarter, or is that in totality?
spk06: It might be a little more clear if I put it in dollar terms. We have about $253 million repricing. in the first quarter, $432 million approximately in the second quarter, and $352 million in the third quarter.
spk05: Perfect. Thank you. I will step back into the queue. Thanks.
spk02: Sure.
spk05: Thank you.
spk02: And the next question will be from Nick Cucciarelli with Piper Sandler. Please go ahead.
spk00: Good afternoon, gentlemen. Hope you've been well. Thank you. So far. So I wanted to start with the liquidity position, which continues to grow. Given the optimism for mortgage repurchases in early 2021, do you feel that once that process concludes, liquidity will come down in a meaningful way?
spk04: Yeah, absolutely. It's obviously a big drag on margin, and we don't see any signs of that changing anytime soon. As Steve mentioned, we've got some significant CDs maturing. So, you know, our goal, frankly, would be to bring the balance sheet down in size somewhat and then get these repurchase loans funded probably, you know, very late this quarter or early April.
spk00: Okay. And then in terms of the loan originations, a similar amount to last quarter, are the originations predominantly in that TIC product that you guys offer?
spk04: They've been predominantly there, and we continue to fund commitments on construction loans. And then we've done some residential loans, but the Tenants in Common product has done the bulk of it.
spk00: Thank you for taking my question.
spk02: Sure.
spk00: Thank you.
spk02: And the next question will come from Anthony Polini with American Capital Partners. Please go ahead.
spk03: Hey, guys. Anthony, how are you? You know, you actually beat our revenue projections by 500,000. All right. I don't know if we were depressed that you actually had a good quarter. One gold star. You know, obviously – credit quality is the key issue here. And, and I know, I know Tom, you have a hell of a lot of experience with this and whether you want to use a baseball analogy or a garbage truck analogy, you know, are we in the early innings as far as, you know, is that garbage truck full and now it's just the cleanup process, you know, dumping it or is that front end still having a little more activity than you'd like at this point?
spk04: Um, that's a, you know, the, Fair question. I mean, it's hard to predict. I mean, you know, I'll speak to Sterling, but I do think in the community bank space kind of generally, you know, between the level and kind of the aggressiveness of originations over the last few years coupled with the impact of the coronavirus, I just think, you know, there's going to be some reckoning throughout 2021 that will not be insignificant. And that philosophy is kind of guided where we are at Sterling. You know, I have my concerns, as I've mentioned on a few prior calls with the commercial construction portfolio, and I don't want to be caught short. So I would say, you know, we've got almost a 3% of total loans reserved. I'm feeling okay about that. It gives us a lot of flexibility to work with the loans that come into a problem status and those that we've identified. And I will tell you, we have been very, very thorough and aggressive in terms of risk rating and identifying loans through the last few months. There was an awful large back log of loans to review when I joined the bank. We've got a very good team in there now going through it. We're being deliberate about it. As you saw in the press release, there's I think about 35 million, if I've got the number correct, of loans that are just past due maturity by 90 days. But we're reviewing them and looking carefully at them as to whether or not we're going to extend or, you know, find another strategy. So that's a long way of saying, Anthony, you know, I'd like to think at least from the Sterling-specific perspective, you know, we're heading into the stretch.
spk03: Sounds like we might have a lower provision in the next quarter.
spk04: I hope it's not higher.
spk03: All right, guys, I think you're doing a great job, by the way. I know you're very familiar with the process, but it doesn't make it any more fun. And congrats, guys.
spk04: Good job. The fun comes much later in the game.
spk03: Yes, sir.
spk04: Thank you.
spk02: And once again, if you'd like to ask a question, please press star then one. The next question is from Jeremy Chu with BCW Sepulveda. Please go ahead.
spk01: Hi, Tom. How are you? I'm doing fine, Jeremy. How are you? Good, good. Just curious. I read level of criticized and classified loans is stubbornly high. What is that level of criticized and classified?
spk04: Steve, I've got so many numbers in my head, I'll get it wrong.
spk06: I mean, it's really, it's a combination of commercial and residential, but significantly commercial. Tom mentioned, you know, concern with the construction and SRO portfolio.
spk01: Yeah. Do you have a rough idea of the level? I think it's about 150, Jeremy. 150, okay, great. If that's not right, we'll get back to you. Okay. I appreciate it. You also said you reclassified non-performing mortgage loans with a cost basis of $19 million as help for sale. What is write-down associated with those loans?
spk04: Three and a half. It was about $24 million, I think, in 2018. That's valued $23.5 million, something like that?
spk06: Yeah, that's correct. And then we wrote it down approximately a 15% discount, which was $3.5 million.
spk01: Got it. Presumably you're looking to sell these loans, I guess? We are indeed. These are one-to-four family mortgages? Exactly. Given the overall one-to-four family value has gone up and Loans you made are fairly low LTV compared to the value of the property. Why can't they be sold at par, I guess? Can you just walk us through what's the rationale behind the breakdown?
spk04: If that's a bid, I'll take it.
spk01: I mean, are these loans still, the value of these loans above the home price?
spk04: Yes.
spk01: Market price?
spk04: Let me tell you my thinking. Yes. Let me tell you my thinking, and it's not entirely financial. These are all those advantage loans. Basically, all of the advantage loans that are non-accrual. And I felt it would be important for a lot of reasons. If you look at this portfolio and say, okay, this is the bottom of the barrel of the advantage loans, it would be very helpful to have some price discovery because I think that gives... all of us, investors, regulators, bankers, some degree of comfort as to what these are. They are, by all factors that we know, well secured. The collateral coverage is very good. The appraisals have plenty of room in them. And so in the normal course, you might say it might be more financially beneficial to you know, spend a period of time and go through the foreclosure process and get paid out whole. And I wouldn't, you know, argue with that. It's just really an opinion. But I just felt like it might be wiser to go through this process for the reasons I outlined and do it on a more expedited basis. It's a little bit of a test. And, you know, as I said, I think it provides some non-financial benefits. And from an investor perspective, you look at, okay, they're going to put up their money, they've got to spend time and resources, and, you know, they need to get a pretty healthy return. So, you know, we'll see how it plays out, but that's my thinking on these.
spk01: Got it. Okay. Okay. And then going forward, I guess, do you have any thinking in terms of areas of focus for banks to continue making loans? What's the new areas of business that you're thinking about?
spk04: Yeah, that's kind of the question we all struggle with. But at the moment, our commitment both internally to the board and to our regulator is we have to focus on the remedial actions necessary to address the formal agreement and the, um, you know, requirements of that. And, and they are going to take, you know, a lot of time and energy. So, you know, we're going to have to, um, you know, buying back these loans in this quarter will, um, help, uh, the balance sheet from a, um, income statement perspective. Uh, but it's just premature for us to be sitting here spending time, um, developing loan products when we just got, you know, a fairly healthy list. If you read, you know, the formal agreement, it's a public document. There's a lot to do there. There's an awful lot. So that's kind of why I said at the beginning of this, you know, there's been a lot of underlying progress, but, you know, we don't kid ourselves that there's, you know, a fair amount to do going forward. And, you know, in Canada, if you look at the, you know, the timeline of the formal agreement when it was announced in 2019, you know, there's not an insignificant amount of time that we've lost just, you know, getting to the point where we, you know, got a strong focus on it this past summer. So we've got to make up for that. So that's, you know, again, a long way of saying our priority is to fix the broken parts before we get back into, you know, more strategic businesses. Got it. Thanks.
spk02: Once again, if you'd like to ask a question, please press star then one. Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Tom O'Brien for any closing remarks.
spk04: Tom O' Thank you, and I'd just like to express the board and my appreciation, all of management, to those of us who follow the company and invest in it. You know, we certainly appreciate your interest and your commitment. You know, we ask for some patience, but our goal is to under-promise and over-deliver, so that is what we're trying to do. But thank you for participating today. I'll look forward to opportunities to talk in the near future. Thank you. Thanks, Operator.
spk02: Thank you, sir. The conference has now concluded. Thank you for attending today's presentation.
spk04: You may now disconnect.
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