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spk07: Good morning, everyone, and thank you for joining us today to discuss Sterling Bancorp's financial results for the first quarter, March 31st of 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 first quarter'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 four looking statements with respect to the future performance and financial conditions of Starling Bancorp that involve risk 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. 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 and 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, please go ahead.
spk03: Tom O' Great. Thank you and good morning, everyone. Sterling released its first quarter 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, you know, dealing with the... 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 million worth of debt, which is now callable and losing its capital treatment over the next five years until its maturity. So you know, at some point we need to begin to consider additional liquidity at the holding company. Um, since we are precluded at this time, uh, from dividend up from the bank and, um, obviously there are, you know, holding company costs that need to be considered. So that's something that'll get our attention, um, our focused attention in the next, uh, quarter or so. Um, 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, quality of the guarantors, the quality of the property or the project. 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, 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 two 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 past 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 you do. 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.
spk07: Thank you. 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. And to withdraw your question, please press star then two. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Ben Gerlinger with Hubdy Group. Please go ahead.
spk06: Hey, good morning, guys. Hey, Ben. 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 call, I think you guys said 21 expenses will be near two-thirds or so of 2020 levels, which would definitely imply a ramp down in the back half of the year. I was wondering if you had any updated thoughts on that.
spk03: No, I think, yeah, 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 dramatically. as, you know, this look back is completed and as the securities class action is completed. And then hopefully, you know, 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.
spk06: Gotcha. Okay, well, that's helpful. And then, have you had any line of sight into opportunities to repurchase more advantage loans? I get 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, you know, in concrete moments over the next six months so you could repurchase more?
spk03: Yeah, we are... We finished one repurchase during the quarter. And you're right, they do take some time and documentation. You know, it's kind of a complex operation. We have one more we're expecting in this quarter that is, you know, somewhat larger than the one we completed in the first quarter. I think that was about $88 or $89 million. This one is probably, by the time we repurchase, it might be in the 150, 60 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.
spk01: Yeah, that's correct. The remaining smaller piece in the $30 million range will be July 2022. Gotcha. Okay.
spk06: And then just kind of thinking bigger picture, the selling of the Bellevue-Washington branch, I was kind of curious. I get that it's not really in your quote-unquote footprint, and then it was a little bit more of a one-off. I was curious how that process went or anything you're open to talking about in sort of like a bid-ask or was it completely sold to one person or the one entity, Washington First? Were they the target specifically or did they approach you or just any client color you might be able to provide them as well?
spk03: Well, there's two parts of it. First 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 and 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 looked to exit the way we did. And in terms of the process, yeah, we spoke to – A fair number of banks, there was, you know, some reasonable interest. And First Federal was, frankly, the most interested and the, you know, had the best chances of, you know, success on an application to do this transaction with their regulator. And, you know, proactive for all of our stakeholders, our employees, our customers, and for Sterling itself.
spk06: Yes. Okay. Well, that's helpful. I'll step back in the queue. Thanks. Sure.
spk07: The next question will come from Nick Cucciarelli with Piper Sandler. Please go ahead.
spk05: Hi, Tom and Steve. How are you? Good morning, Nick. Good morning. Good morning. On the liability side, can you remind us how much of the CD portfolio is expected to venture in the second quarter and your current offering rates there?
spk03: Okay. Steve, why don't you handle that?
spk01: Yeah, I can speak to that. Yeah, we have CDs maturing in the second quarter of $474 million 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 million are 12-month CDs, which are currently at rates of around 135 to 145. We're expecting those to reprice down into the 25 basis point category if they, again, choose to stay with the bank.
spk05: That's great, Culler. And then on the origination front, pretty stable from quarter to quarter. Do you anticipate loan demand ramping up in the coming period, or is it pretty likely to be consistent in the near term?
spk03: I think in the near term it's going to look like the past. the recent past. We, you know, we spend an awful lot of time on, you know, going through the portfolios that we have and, you know, with the regulatory overhang, it's not exactly easy to ramp up. So, you know, we'll continue to meet the credit demand in the communities that we're in, but I wouldn't look for anything too explosive.
spk05: Great. Thank you for taking my questions. Sure.
spk07: Again, if you have a question, please press star, then 1. Our next question will come from Jeremy 2 with PW. Please go ahead.
spk02: Hi, Tom. It's TCW, obviously. Yeah, TCW. All right. A quick question on the cash balance. You still have a pretty elevated cash balance. I know that you have some CDs coming due and the purchase of – advantage loan portfolio. Are there any other ways you would think about using the cash?
spk03: No, we had to, we had to build cash, Jeremy, because we weren't really, there was no way to determine the level of, um, advantage loans that we ultimately would repurchase. So we had to be prepared for all of that. Uh, and, and, and then, you know, whatever, uh, deposit flows happen to be given, you know, some of the, um, you know, some of the news that was coming out last year with, you know, the delayed quarterly and 10K filings and things like that. So we built up liquidity in an abundance of caution. And those who were taking us up on our offer to repurchase the Advantage loans have, you know, raised their hand and were in that process, and the others have declined. So we pretty much know what our needs are in that context, uh, at this point. And, and that's why you'll see, you saw in the first quarter, there would, we'd let, uh, you know, deposits run off a little bit through both, um, pricing. And then as, um, uh, we discussed a minute ago, the sale of the, uh, the state of Washington branch, um, will take up some of that liquidity also. So we hope to get down to a more normal level of liquidity, which should, um, you know, help, help margin and, um, uh, stabilize things better now that we pretty much know who's, who's going to give us back the, uh, advantage loan and who not. And, and then, you know, you're always worried in these situations with, you know, banks like I've been in with, you know, the risk of, um, uh, reputational damage. And, uh, we, you know, we haven't seen that and that's really a, uh, you know, a credit to the people that we have working in our, in our system and in our branches. And, and I think in the way we've tried to communicate to, you know, clients and investors alike. Yeah.
spk02: So, 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 them much better than we did. Yeah. Much better than we did when I joined the bank. I mean, and we, When you buy back the advantage loans, are you buying them back apart? Are these performing loans or non-performing loans?
spk03: 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 the formula for the repurchase. But it's basically such that we pay on the reduced principal balances the premium that we were paid on the original sale. So, for instance, if we sold 100 million of loans at 102, and that 100 million is now 40 million, we would buy the 40 million back at 102. 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'd hit 2% of $40 million 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 two-point discount to closer to par. And it really depends on you know, the market interest rates at the time of the repurchase. And that, that we flow through the, the income statement. And are these, I'm sorry, I was going to say it does include. So in this case, if we buy back 40 million of, you know, 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, you know, 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, you know, relatively modest. You know, I'd say, you know, 2% to 3%.
spk02: Well, that just stands for my second part of the question. And then you were also looking at unload a small portion of the resi portfolio. Has there been a lot of interest on that? And do you think you'll unload that at par or at your mark rather than any discount? We marked them down.
spk03: We marked about $22 or $23 million of non-performing advantage loans to held for sale at year end. And at the time, what I was saying is that, you know, we intend to sell them. We just had so many things going on in the first quarter that I just didn't want to overload the system. So we, you know, we had them marked, and I think we marked them down to 85 cents on the dollar. And we're now going to begin the process of actively marketing it. as soon as we get the 10Q filed, and hopefully they'll be done this quarter. And my expectation is that the sale price will be no worse than where the mark is. Thank you.
spk02: Sure.
spk07: Again, if you have a question, please press star, then 1. 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 Polino with American Capital Partners. Please go ahead, sir.
spk04: Hey, Tom. Hey, Steve. How you doing, Anthony? Anthony. Great Mets game last night. So, guys, how hard did you try to find charge-offs this quarter?
spk03: 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. 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? I think just given especially the focus we have on instruction you know, I just, I think we're going to, we'll see some charge-offs. So, you know, from the reserve perspective, I think we're okay because, as I mentioned, you know, there's a, among the non-performing loans, the level is elevated, but you kind of have to break it down between the content of the different loan portfolios. And in that, you know, there's, I don't know, let's say 60 to 70 million of commercial and construction that you know, I would say I worry about, um, and, and the balance, not the balance of the non-accrual, not so worried about.
spk04: Now that 72 odd million 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 ups, we wouldn't necessarily have a like increase in provision in the quarter.
spk03: Yeah, no, as I mentioned, the credit quality has been pretty stable, 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 realize losses on some of the commercial and construction, it's pretty well accounted for in the allowance. But, you know, some of the product, like, you know, we have these loans in San Francisco that are what are kind of generically referred to as SROs, but single room occupancy. You know, that's, in my view, kind of akin to a hotel type loan. And, you know, those are slower to recover in terms of occupancy and valuation and cash flows. So, you know, it remains to be seen. But, yeah, it's an elevated concern for us, you know, as we look at that portfolio.
spk04: Do you have a good handle now?
spk03: Oh, I'm sorry. Yeah. 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, you know, 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 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. Okay.
spk04: How big was the Bellevue branch?
spk03: 70, Steve?
spk04: Yes. It was 78 million in deposits. Do you have a pretty good handle now, a good idea of what size this company will be by the end of the year, or is that still a pretty...
spk03: moving target? 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 you know, a low $3 billion balance sheet, in my opinion.
spk04: Okay. Well, I think you're doing a great job, and I know it's tough, but I congratulate you guys. Thank you.
spk03: Thanks, Anthony. I appreciate it. Thank you.
spk07: 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.
spk03: Okay, thank you. I'm just, you know, 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, you know, the process we're going through here. It's, you know, at times it's, you know, it's challenging, but, you know, we wouldn't have this opportunity were it not for the public investors we have in Sterling Bancorp, and we're all appreciative for that and for your interest and I'll look forward to the next quarter. Thank you.
spk07: The conference has now concluded. Thank you for attending today's presentation. You may now
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