This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Good morning, everyone. Thank you for joining us today to discuss Sterling Bancorp's financial results for the second quarter, June 30, 2021. Joining us today from Sterling's management team are Tom O'Brien, Chairman, CEO and President, and Steve Huber, Chief Financial Officer and Treasurer. Tom will discuss the second quarter results, and then we'll open the call to your questions. Please note this event is being recorded. Before we begin, I'd like to remind you that the conference call contains forward-looking statements with respect to the future performance and financial conditions of Sterling Bancorp that involve risks and uncertainties. Various factors could cause actual results to differ materially different 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 the call. 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 the financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures. At this time, I'd like to turn the call over to Tom O'Brien. Tom? Tom O' Great.
spk04: Good morning.
spk01: Thank you for that.
spk04: The company released its second quarter results today, and we're going to spend a little time going through those and then take your questions. The results were, you know, we earned $2.6 million or five cents a share. Margin expanded a little bit, certainly off the lows that it had, you know, driven primarily by, you know, deposit repricing during the quarter and then the late in the quarter acquisition of some repurchased advantage loans. So that helped bring the margin up to 270. Expenses continue to run high, you know, a little better than they have been, but, you know, still quite elevated. And, you know, capital continues to be okay at the bank, although at the company, as I've mentioned in the last couple of calls, we at some point have to address the subordinated debt issue that is... upon us. That is into the variable stage of the initial 10-year maturity, so we're in the second five years. Following the quarter, we completed the sale of the Bellevue, Washington branch, and that was done on July 23rd, so a good transaction for both buyer and seller, and we're happy about that. And deposits, we've I think as we've mentioned earlier in the first quarter call, with greater definition to the needs to repurchase the Advantage loans, both the timing and the dollar amounts, we had built up liquidity and had let that run down in the quarter as we got a little more definition to that. So also that benefited the margin because liquidity is really quite expensive. You know, it's kind of typical with us. The second quarter included a lot of moving parts. The bank is going through a high-key system conversion, and that probably added, you know, $600,000 in costs during the quarter. You know, professional costs were down net predominantly because we got around $2.5 million back from the insurance company. And there's been some, as we expected, some gradual reduction in other professional and consulting-type fees. I think we're still pretty comfortable that costs will drift down in the third and fourth quarter. It's not going to be dramatic, but it's going to be, I think, noticeable, primarily because things like the The look back that we had to do for AML purposes is nearing its conclusion. The securities class action is nearing its final action, and there's several other things that are at least beginning to finish up from where they were, and the costs that go with it will start to dissipate. We still have not insignificant legal costs as it until these investigations, at least from the bank's perspective, start to wind down some. The asset quality is modestly better. The allowance was basically unchanged quarter to quarter, just about $72 million. We did take a $600,000 benefit there, but that was basically dollar for dollar for recoveries we had on loans that were non-performing that paid off in full. Those were, I think it was five or six Advantage loans in that category. That has been, I would say, probably the most typical outcome with these Advantage loans. For those that go bad, which statistically is probably not too inconsistent with the general residential portfolios in the banking world. The credit aspects are not as dramatic as the compliance and the different activities in the original underwriting that led to the investigations and the problems that the bank faces. That's not to minimize those at all. They've been painful. But they were, you know, just from the pure credit perspective, did give us $600,000 back in the quarter. Non-performing loans edged down a little bit at $92.6 million. And as I think, again, as I've said the last couple of calls, you know, in that total there's about, say, $50 million of, commercial credits, and maybe mid-30s or $40 million of advantage loans. I think, as you all know, the ones I'm most concerned about from the credit side are the commercial products. We have a lot to deal with there, and in terms of the criticized classified loans and all that, it's the ones where we expect to have... some difficulty working out of those. So they will occupy more of our resources and our time and probably the allowance than anything else. I'm not expecting the Advantage loans, again, purely from the credit side, to behave much differently than they have to date. Other than that, as I said, the look back is nearing its completion. That was certainly a long time coming. It's been very labor-intensive and expensive. And the litigations appear to be at the tail end, I think, at this point on the class action. We're looking at September for conclusion there. And then the income tax expense was up in the quarter in all candor predominantly because certain person's executive compensation is not deductible for income tax purposes under 162M. So that, you know, with a lower dollar amount in earnings and a non-deductibility that drives up the effective tax rate and as the government has changed the, I guess, clarified or modified the 162M regulations, we, you know, have to deal with that. And other than that, things continue, you know. Progress at the bank is, you know, it's moving directionally, I think, where we anticipated. It is not, you know, not something we can speed up or control because it's really in the hand of some government agencies. But, you know, time has moved us along and I think we, you know, continue to be optimistic that we're much nearer the end of these things than anything else. And I will say I did make a trip out to San Francisco in July, I think it was. Spent some time at our branches out there and got to know the people. That was my first opportunity to make that trip. And, you know, there'll be further opportunities to do that for me in the in the near future. So with that, operator, we can go into the Q&A.
spk01: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question will come from Ben Gerlinger with Hovde Group. Please go ahead.
spk05: Morning, guys. Morning, Ben. Morning. I was wondering if you guys could just take a second to kind of walk through the mechanics of the funding aspect of the balance sheet. I know that the time deposit balances have come down to $250 million per quarter and then also the yield. I know last quarter, I think it was last quarter, I believe you guys gave the repricing aspects per quarter. I think that might have been in a vacuum, though, if you didn't lose any deposits. I wonder if you could just kind of refresh us in terms of what is repricing when, and then kind of that new spot rate in terms of time deposit yields.
spk04: Yeah, Steve, why don't you handle that?
spk00: Yeah, the deposits will continue to reprice. Most materially that has occurred in Q1 and Q2, but we expected that to continue into Q3. We expect another, excuse me, 384 million to reprice. Again, mainly our certificates of deposits, mainly in the 12 month category. A lot of those are still at over 1%. So they'll continue to reprice down certainly to something lower if they continue to remain with the bank. Our total borrowing spot cost at the end of the quarter is 0.70%. So we would expect to have continued improvement on the deposit side. Certainly for Q3, probably less material in the Q4. As Q4, the repricing volume is about 152 million.
spk05: Okay, that is helpful. And then if we can move to the expense base, I get that professional fees are a little out of your control. And then Tom, based on kind of the guidance that you gave, excuse me, for the explanation for the 5.7 million this quarter, 2.4 was a reimbursement and then also 600,000 approximately for IT expenses. So Back of my bullet math, I'm netting around 7.5 million. Previously, you guys had indicated that FY21 would be about two-thirds of the level of 22. Is that still – or excuse me, FY21 would be two-thirds of the level of 20. Is that still kind of the guidance, or is there anything more material that you might want to include?
spk04: No, I mean, the timeline – supports that. But as you note, we can't accelerate the government's conclusion on any of these things. So the longer it takes, just the more it costs. And that gets a little bit hard to predict. But on the schedule we're on, it does seem like that's where we're going. And just the look back had its own shelf life, but You know, we're basically at the, you know, the final drafting stages of the report now. And, you know, that is, again, not entirely in our control, but, you know, the end is pretty predictable. And that was... I can't even venture the cost from start to finish, but it was, you know, it was significant. And the legal costs are, you know, wide-ranging, but they, you know, are heavily centered around the... DOJ and the OCC investigatory activities. So as they, at least with respect to the bank or the company, as those come to conclusion, there's the obvious benefit from that. So again, the timeline would suggest that as we get into the second half of fiscal 21, they will you know, inevitably moderate some, and then certainly hopefully more significantly as we get into 22.
spk05: Okay, that's helpful. And then just kind of touching base on the IT expense, I know you guys have the conversion or the upgrade in August, so this month. Is there any sort of dollar amount you can tag to it that might be in your 3Q numbers, or is there anything that's changing from a go-forward perspective in terms of the expense base?
spk04: Well, there's two things with the IT conversion. One, it's not optional. And it is a total system conversion. The bank was operating on a homegrown system with a couple of programmers in-house. It just was really problematic from both a regulatory management perspective in terms of getting reports and So we wouldn't get out of the regulatory handcuffs of Renhead without a conversion, and frankly, we couldn't operate the bank without a conversion to a more contemporary system. So we were spending next to nothing historically, which is what kept the bank's efficiency ratio pretty low historically. as low as I've ever seen, frankly, over the years past. But it was low to a level that, you know, strains your ability to believe. Just too low. You know, not enough resources put into things like that. And that's where the, you know, at the end of the game, that's where the costs come. So I don't, you know, I don't expect any efficiencies from the IT conversion, I think there's probably gonna be some net cost to that as we complete the conversion and roll out. That might be over the historical record, it might be a million dollars more a year. But as I said, the cost of The regulatory difficulty and all that is significantly greater, and the absence of kind of comprehensive management information is a real roadblock for us. So it's not one of those things that you would say is optional. Gotcha.
spk05: Okay. I appreciate the call.
spk04: No efficiencies, Ben. Unlike other ones I've done where you get some efficiencies, it's just a cost. And I should have added, too, actually, just to sidetrack for a moment on that. The Advantage Loan repurchases, we repurchased 90. We were expecting more, but the sellers have call date difficulties, so we will be repurchasing the balance of those over the course of this year and then, you know, I think two more in 2022. They are coming back, but it's just a different time perspective. And the $90 million, I think, closed, I don't want to say at the last day of the quarter, but pretty close to the last day of the quarter.
spk05: Okay. Yeah, that is very helpful. I appreciate the call. I'll be back. Sure.
spk01: Again, if you have a question, please press star then 1. Our next question will come from Nick Tucciarelli with Piper Sandler. Please go ahead.
spk02: Good morning, everyone. Hope you're doing well.
spk01: Yep. Thanks, Nick. You too.
spk02: Hey, good morning. In the press release, you mentioned the commitment to repurchase another $100 million of Advantage loans. Can you provide some color on the timing of those repurchases, or is that yet to be determined?
spk04: It's pretty well set based on the call dates that I mentioned. I think, Steve, March next year was one, and July next year was the other big piece?
spk00: Yeah, all next year, basically beginning in March, and then throughout the next two quarters. We have a piece for $59 million and a piece for around $35 million at this point.
spk04: All of these loans were into securitizations that have, you know, call date features, so it's just a preference of the securitizer to do it that way.
spk02: Okay, that's helpful. And then certainly a fluid situation, but given the changing risk profile of the bank and the substantial build since the beginning of last year, do you sense that the allowance to loans ratio has peaked here?
spk04: Yeah, I would. That's my own opinion. You know, we haven't, the last two quarters, it's been steady. We haven't seen, you know, significant migration into the criticized and classified category. We've spent an awful lot of time trying to identify, you know, the weaknesses and, you know, from the credit perspective. And as I said, you know, it's, The credit loss perspective, I think, is going to be in the commercial portfolio. Identifying the level of classified loans the way we have, I think we've taken a more appropriate look at risk rating and trying to be in front of any potential problems or weaknesses with either the property or the project or the guarantor. And we've had a couple of, in the last quarter, towards the end of the quarter, we had a couple of loans that were non-accrual that paid off. We got a couple more coming where there's some net recoveries to some previous charged off loans, but that's not to say there won't be some realized losses in the period ahead. That's why I was saying the $50 million of roughly non-accrual commercial loans versus the $40 million of non-accrual advantage loans. On the credit side, I would say that a predominant source of risk is going to be in the $50, not the $40. Okay.
spk02: And just to follow up on funding, borrowings have remained pretty consistent over the past several quarters. Is there an opportunity to prepay some borrowings over the next several periods, or is that not part of the strategy at this point?
spk04: Not part of the strategy. It's pretty expensive. We'll probably look at it a little bit later, but I think at the moment we're really just looking at letting them run off to maturity because they're basically yield maintenance payoffs. I don't know that it helps anything in the long run.
spk02: Thank you for taking my questions.
spk01: Our next question will come from Ross Haberman with RLH Investments. Please go ahead.
spk03: Good morning, Tom. Just a follow-up question on some of the deposits. Is there much more room to keep on lowering deposit rates on your CDs, money markets, or basically have we hit sort of the floor here? Thanks.
spk04: I think we've hit the floor, Russ. The You know, Sterling funded predominantly in the manner of a, you know, more of an old-line thrift. So, you know, not a big demand deposit base, not a big transaction base. It was, you know, basically money market savings and CDs. So I think, you know, and we've been careful lowering rates because of that. propensity of the savers that we did have, you know, two rates. So we didn't, you know, we didn't shock you. We, you know, kind of gradually drifted down closer to the market. But, you know, unless there's some change in the, you know, the market in general for interest rates, I'd say we're probably, you know, pretty close to the best we can do.
spk03: And just one last question on the litigation. Could you go over the non-government litigation? I guess you're being brought in on, I guess, what the ex-employees litigation, where does that stand and when is there going to be some sort of resolution there?
spk04: Well, we have, you know, there have been criminal complaints and plea deals with a couple of former employees. Again, that's other than supplying information that might be requested by the Justice Department. We don't really have a role in that other than being cooperative. That's ongoing and usually when I refer to trying to get things done, I try to be careful to say with respect to the bank or the company because that's about the only thing I can really care about at this point in time. Individual issues are what they are, and they're not our concern. And then the securities actions were the class action and then the reported derivative, and they're hopefully kind of at the tail end.
spk03: And you're hypothetically reserved for... All of that.
spk04: That's hard to say. Okay. We are reserved at a level that is, you know, our very best approximation of the likelihood of the bank not getting, you know, I mean, as the Justice Department said in their own press release, the bank's been the victim. Right. That's not to say there's not some accounting from the... the bank for, especially in the BSA space. So based on nothing other than our best estimate, we have set aside a reserve for potential fines and penalties. But I don't I can negotiate those, but I can't set them.
spk03: I got you. No, no, I just wanted to know if you could be dragged in on some of the other non-governmental suits. They can drag you in and, you know, you might have some liability, which you really didn't anticipate because, you know, for whatever it is, they're going to go for the deep pockets and, you know, they're going to make life, you know, your life hell until, you know, I don't know, you need to throw them a bone possibly, I don't know, or not. You get involved with lawyers, they're going to drag in any and everybody.
spk04: I've seen that movie a couple of times.
spk03: Yes, you have.
spk04: You can't control what happens in these kind of messy situations. The foundations for the problems were laid over many years, and the consequences and the number of people involved is significant, and the You know, the time and cost involved in kind of unwinding these Gordian knots are just, you know, it's painful.
spk03: Right.
spk04: Painful. I mean, it hurts.
spk03: I know you can't control it, but what do you think is the timing on these things sort of wrapping up? I mean, is it going to be next quarter or two, or it's going to go into 2022?
spk04: Well, this is purely aspirational on my part for a comment. I'm hoping that only, again, as respects the bank or the company, that we have our reconciliation with the agencies by year end. I think that's right, and I think that's fair. And it's very hard to... you know, to run the bank strategically, you know, until these things are resolved as it respects us.
spk03: I got it. Okay. The best of luck. I do appreciate the time.
spk04: Oh, anytime. Yeah.
spk03: Thank you.
spk01: 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: No, anything. I hope everybody's enjoying a, a nice summer and through the conclusion and labor day, we'll look forward to our, uh, third quarter call and again thank you for your interest and participation today.
spk01: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer