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spk04: Good day and welcome to the Sterling Bancorp second quarter 21 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jack Kopunsky. Please go ahead.
spk05: Hey, good morning, everyone, and thanks for joining us for 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 Emelyn 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 52 cents 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 late 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 30th, 2021, our total commercial loans were $19.7 billion, an increase of $559 million or 2.9% over the length quarter, driven by organic growth in public finance, traditional C&I, commercial real estate, and lender finance. We would expect a similar increase in outstandings 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 macroeconomic 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 continued adherence to the highest standards of risk governance. We announced this merger on April 19th, 2021, received approval from the OCC, our primary regulator, in record time on August 2nd, 2021, and then receive shareholder approval on August 17th, 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 trying to hit on the high points. So now let's open it up for the line for questions.
spk04: Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star followed by one. That is star one, if you wish to queue for a question.
spk03: We'll pause for a brief moment to allow everyone an opportunity to signal for questions. We'll take our first question from Chris McGrathy of KBW.
spk04: Please go ahead. Your line is open.
spk01: Hey, good morning, everybody. Good morning, Chris. I want to start with the loan growth, the range that you provided on slide 13, the 250 to 500. Could you just give a little bit more color? It sounds, you know, 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, you know, borrower conversations? Thanks.
spk05: Yeah, you know, I would tell you, first of all, the pipelines are very, very full in most of the asset categories. So, you know, they're very full in things like public finance where, you know, municipalities are spending more money. They're very full in traditional CNI and maybe with a focus on some of the innovation and technology finance in that group. Very full in terms of commercial real estate and things like warehouse and distribution centers and traditional CRE related to companies along the way. Lender Finance continues to have great years and great outstanding. Those pipelines and portfolios are really full. Even AVL are starting to get more opportunities out there, and that is a business that hasn't performed all that well in the last couple of years. Areas where there is not are things like equipment finance. Pricing pressure in equipment finance still is pretty strong. So, you know, those pipelines are a little more limited. We're about flat on the multifamily. We have payoffs. We have about an equal amount to put on, so you won't see the velocity of runoff as you have in the past on the multifamily side. Folks on the line usage side of this thing, more and more folks are starting to pull on this. What we're finding is, again, metropolitan New York is super, super diverse in the type of industries, characteristics, businesses. So, you know, 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 in capital spends, more activity in trying to hire more people along the way, which has been one of the biggest issues across the board in all industry segments. So we feel very good about the pipeline, feel very good about the growth in a number of the businesses that I mentioned earlier. Still some businesses, like I said, equipment that may lag a bit out of this thing. And maybe, you know, still a lot of activity in multifamily, but a lot of pricing pressure in multifamily, too, where, you know, payoffs versus the originations out there.
spk01: Yeah, that's great, Collar. If I could ask one more. The single credit you talked about in the quarter period, I see some headlines as well. Could you just provide a little more color on geography, asset type, you know, workout strategy?
spk05: Yeah. Yeah, it's a mid $30 million credit, and it's metropolitan New York, and we're well collateralized on this thing. We don't really anticipate any loss. We've, you know, kind of worked with 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.
spk03: That's great. Thank you very much. Thank you, Chris.
spk04: We'll move on to our next question from Matthew Brees of Stevens Incorporated. Please go ahead. Your line is open.
spk02: Hey, good morning. Hey, Jack. Last quarter you'd mentioned 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 produce a little bit more?
spk05: Yeah, 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 loan yields. So Most of that competition is in the real estate side where we got 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 I 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 rate. in being more competitive in the real estate side of this thing. So loan yields are coming in in the kind of high twos to kind of mid threes in those areas.
spk02: Okay. Great. The other thing I wanted to touch on was, you know, over the last, I would say, 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? You know, 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.
spk05: Yeah, we think it's a really great business, frankly. At the end of the day, you know, so far we have about a – there's probably a half a billion dollars worth of deposits to date. We really anticipate on an annual basis to be able to originate anywhere from a half a billion to a billion dollars worth of deposits in that. And 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 of deposits, relatively very low cost deposits on an annual basis. As you know, 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 you originate from the commercial teams, deposits that you come from the muni 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 is very high. We are being very selective also. So 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 now bringing in real deposits and frankly would expect to end the year somewhere around $750 billion in total deposits including the online deposits.
spk02: 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 these were? Were they multifamily, mixed-use, office? And what the clearing price was versus when it was underwritten? I think everybody's trying to get a sense for post-COVID valuation impacts on New York City real estate, and there's just not that many examples.
spk00: Sure. Thanks for the question. Yeah, so it's about 27 million in CLE loans, mostly rated substandard, as we noted, and a mixed bag of credits in the multifamily space and the mixed-use 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 as 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 past three or a longer expensive 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.
spk06: And Matt, the only thing I would add is that there were some reserves beyond the charge-offs that Bea mentioned. But the way to think about that sale is that really 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, you know, stuff that really had terrible DSCRs. Okay. So you 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 on it.
spk05: Yeah. I think 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're kind of in the 95, uh, you know, 105 range out there. There are many deals you could sell for higher than par, and you can mix and match some of these things. But the prices have been better than we would have expected through a cycle like this.
spk02: Great. Okay. Last one for me. You know, given all the recent news, there is some anxiety around timing of deal closures. Just curious if you feel comfortable thinking with the 4Q timeframe for closing the deal and if there's been any updates from the remaining regulators on timing.
spk05: Yeah, the best I can tell you on that, Matt, is, you know, we're very confident that, you know, we're going to close this deal when we're 100% ready for this. The timing is, you know, we're trying to figure out the timing like everybody else on this.
spk02: Understood. Great. That's all I had. I appreciate you taking my questions.
spk04: Yep. Thank you. 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.
spk05: We really appreciate everybody's time. I know especially the analysts have a ton of calls today. Just to remind everybody, this company has performed really well over the years. You know, on a five-year, 10-year basis, adjusted EPS is up 12.5%, and tangible book value is up almost 15%. So, on a 10-year basis over the past five years. And, you know, we're very confident in the readiness and the opportunity to do a merger of equals organization is going to be a really great organization, high-performing organization, and a great value provider. So appreciate it. Have a great day. Take care. Thanks.
spk04: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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