Sterling Bancorp (STL) Q2 2021 Earnings Call Transcript

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Sterling Bancorp (NYSE: STL)
Q2 2021 Earnings Call
Jul 22, 2021, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Sterling Bancorp Second Quarter 2021 Earnings Call. Today’s call is being recorded. At this time, I would like to turn the conference over to Jack Kopnisky. Please go ahead, sir.

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Jack L. KopniskyPresident & Chief Executive Officer

Hey! Good morning everyone and thanks for joining our second quarter 2021 earnings call. Joining me today are [Indecipherable] Bea Ordonez, our Chief Financial Officer; Rob Rowe, our Chief Credit Officer; Luis Massiani, our Chief Operating Officer and President; and Emlen Harmon, our Director of Investor Relations. As you can see we have a presentation on our website, which along with our press release provides detailed information on our quarterly and year-to-date results. I’m going to kick off the call today highlighting a few key points on our financial results before providing an update on our pending merger with Webster Financial Corporation.

In the second quarter, we reported EPS of $0.52 and adjusted net income of $100.5 million. This generated a return on tangible common equity of 14.6% and return on tangible assets of 146 basis points. We continue to deliver meaningful growth and tangible book value per share which was $14.62 at period end of 4% over the prior quarter and up 11% year-over-year. We grew our adjusted PPNR to $125 million of 1% over the prior quarter and 10% year-over-year. Primary drivers of PPNR growth includes a step up in net interest income and continued expense discipline.

We reported core net interest margin of 330 basis points flat relative to the prior quarter despite a challenging interest rate environment. And that contract, it is worth noting that our core NIM is up 25 basis points over the prior years second quarter. Given the strong performance of our NIM to date, our 2021 outlook has been updated to incorporate full year core net interest margin in the 320 to 330 basis point range. We continue to optimize our funding costs redeeming $125 million of higher cost sub debt in the quarter and continuing to actively reduce higher cost deposit categories. Given the current rate environment, we will experience some pressure on our core net interest margin as funding costs are close to all-time lows and assets coming on the balance sheet are applying pressure to existing loan and securities yields. Core non-interest expense of $110 million for it was down almost $1 million relative to the prior quarter, while we continue to invest in core business growth and enhancing especially our digital capabilities. A modest decline of these down $1.3 million versus the first quarter when we recorded a $1.8 million and PPP fees partially offset the positive PPNR drivers in interest income and expense.

We did see positive trends across several other fee line items as client activity in transaction volumes continue to build off pandemic lows. We continue to be very comfortable with our asset quality trends and reserve position. Our provision expense was $6 million this quarter versus charge-offs of $14 million. This reduced our allowance for credit losses modestly to 1.5%, 2% of total loans versus 1.5%, 3% in the prior quarter. The economy is gaining steam in the model reserve position drives a lower allowance requirement, we maintain what we feel is an appropriately conservative view given continued uncertainty related to the New York metro region and even with — what the ongoing broader recovery.

During the quarter we saw a portfolio of $143 million of commercial real estate loans in the quarter, which generated almost $12 million of charge-offs. Most of these loans were criticized assets where we believe the best economic path was to sell the assets. Excluding the effect of the sale, core charge-offs were approximately $2 million. Non-performing loans were effectively flat in the quarter and criticized and classified loans declined 8%. As we have said previously, we believe we have likely peaked in terms of criticizing classified assets and expect to see declines going forward.

Moving onto the balance sheet, average earning assets were down of about $180 million. This was principally an effect of contraction in mortgage warehouse balances which were down $344 million on an average basis. On an end of period basis, commercial loans were down $323 million over the prior quarter. Mortgage warehouse balances contributed $165 million of the decline on an end-of-period basis. PPP loans declined $102 million and the previously mentioned loan sale obviously also impacted our [Indecipherable] balances. Excluding these effects, we saw some positive trends in the commercial loan book including targeted growth in our public sector finance and traditional C&I business lines. We have revised our outlook, to communicate the expect full-year loan growth to be in the $250 million to $500 million range by year-end, which means that we expect commercial loan growth in the second half of 2020 to be in the $1.25 billion to $1.5 billion range. There are plenty of lending opportunities in our pipelines and it is clear we will need to be more aggressive in pricing to drive this volume.

On the funding side, we were able to reduce higher cost deposits and borrowings including the previously mentioned sub debt redemption. Core deposits increased 1.7% over the prior quarter. In addition to the increase in tangible book value per share I mentioned earlier, we also build capital ratio significantly with TCE ratio of 10.29% and Tier 1 leverage of 10.91% at the end of the reporting period. I got to tell you, I’ve been doing this for a long time. This is by far the most amount of capital we’ve ever had in any bank that that have been associated with. So we’re trap full [Phonetic]

Capital and liquidity.

To wrap up my financial comments, I wanted to note one other change to our outlook. We expect to trend to a full year effective tax rate of 19.5% to 20% given lower provision requirements and a higher taxable income. Moving to our progress with our approvals and integration planning process, Webster and Sterling have filed the regulatory application proxy for the transaction and the shareholder votes on the merger are scheduled for August 17. We need the senior management team of the combined organization in early June. We continue to target an early 4th quarter close for the transaction with our integration planning well underway.

Our integration management team draws on experienced project leaders on both sides of the combined organization and our integration process have moved from planning phases to design and execution. We have established 55 workstreams alone business lines and functions. Well, John Ciulla and I are impressed by the effectiveness of the integration planning process, the strong talent in both organizations and the incredible opportunities for revenue growth in targeted business lines. There is real excitement about the potential of this combination with clients, colleagues and investors. We are bringing together two organizations with complementary footprints, products, business lines and cultures. We will have a unique organization in terms of diversity in both asset and funding generation capabilities, operating in the geographically dense and affluent footprint. And as you see — you can see in the numbers we put out at the deal announcement, we think the combination drives very attractive returns per shareholders with continued focus on incremental revenue gains.

With that, operator, please open the line for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] We will take our first question from Matthew Breese from Stephens, Inc. Please go ahead.

Matthew BreeseStephens, Inc. — Analyst

Hey, good morning. Hey, Jack, you mentioned that you expect to see some pretty good commercial loan growth opportunities in the second half of the year. Could you just talk a little bit about the pipeline there. And then just a follow-up, you mentioned pricing has been one lever you might have to pull. Just give us some sense for where you’re pricing commercial loans versus peers and what that delta currently is.

Jack L. KopniskyPresident & Chief Executive Officer

Yeah. Great question. So we have a lot of good opportunities in everything from traditional C&I to public finance to real estate sectors going forward to some of our lender finance businesses and technology businesses. Those are the areas where we have the greatest opportunity going forward. In all times — the pipelines are pretty full. There is a ton of opportunities out there, but it is clear for the quarter in the past 6 months, we’ve held the line on the returns and the pricing along the way. It’s pretty clear that there is tons of liquidity out there in the marketplace and then we’re going to have to adjust our pricing models a bit on the same. So it will drive a little bit less NII or if you would loan yields and in turn we expect greater volume out of this. We held the line on price discipline and we will continue always hold the line on structure discipline, but there are tons of opportunities out there. Frankly, I had dinner with prospect last night that literally have billions of dollars of opportunities out there. So there — there are opportunities out there, which is going to have to be a little finer on some of the pricing dynamics.

Matthew BreeseStephens, Inc. — Analyst

Got it, OK. And then on the commercial real estate loan sales, what was the composition was it office retail, industrial and maybe could you just give us some color as to the sales price relative to loan value and then relative to the last transaction value. So we’re — should we get a sense of the true impact from the pandemic and the — and the transaction.

Jack L. KopniskyPresident & Chief Executive Officer

Let me say this and I’ll turn it over to Rob to go through the details. Our view is always that you’re better off. It’s still working out. We know they’re struggling real estate, you’re better off thrusting and getting on the portfolio earlier than later. So all these deals, we could have worked down over a longer period of time, but our view was that in my experience or our experience through many cycles is that the sooner get rid of things that are struggling the better and this — we’re trying to do get that behind us.

From — time through that transition. So we’re — so, Matt, it was mostly free and it did not include industrial. there was some retail — that was more mixed type of stuff. There might have been a little bit of multifamily in here with a little bit of ground floor retail. This we did sell also some past stuff that was non-relationship oriented small ticket, but that’s not — that’s a sideshow. The special mentioned in the substandard we got off in the well in 2019. And we think that’s a reasonable price and to take advantage of liquidity in the marketplace, but we don’t want anybody to think that we thought that these were imminent NPAs or imminent charge-offs that was not really the case. Right? These are things that just weren’t having the right debt service coverage levels and we thought we could take advantage of the marketplace.

Matthew BreeseStephens, Inc. — Analyst

Got it. Did you say you’ve got out in the low 9s?

Jack L. KopniskyPresident & Chief Executive Officer

Sorry. Yes, about $0.92.

Matthew BreeseStephens, Inc. — Analyst

Understood. Okay. And then the last question is you’ve mentioned just relative uncertainty in the New York metro area, I was hoping you could just hone that commentary down a little bit. Is that an asset class driven comment or more behaviors stats and related to the general recovery of the area?

Jack L. KopniskyPresident & Chief Executive Officer

I think [Indecipherable] areas recovery just fine. I think there is a lot of good progress and just about all of the categories. I think the only category that we — that is unknown is frankly office. There’s a little bit of of still on travel, but like you were walking around that’s fall from New York. There’s lots of tourists, lots of people coming back. So I think there is a good path along in the future. I think there is just a question over a longer period of time about the office network in New York. So I think there is some uncertain categories in metropolitan New York and those are two examples of some uncertainty.

Matthew BreeseStephens, Inc. — Analyst

Got it. I appreciate it. That’s all I had. Thank you.

Jack L. KopniskyPresident & Chief Executive Officer

Thank you.

Operator

[Operator Instructions] We will now take our next question from Chris McGratty from KBW. Please go ahead.

Christopher McGrattyKBW — Analyst

Good morning. We maybe following up on the prior question about the loan sales. As you guys head into the merger interest and obviously there is a thirst for assets in the market, is there anymore the kind of loan sales being contemplated to kind of optimize the balance sheet before close?

Jack L. KopniskyPresident & Chief Executive Officer

Not as that — not at the level that we have now. We have pulled there will always be onesies and twosies going forward but we want to get these things behind us as we enter the merger. So nothing of significance.

Christopher McGrattyKBW — Analyst

Okay. And then maybe the follow-up is on the non-interest income. I’m interested kind of as we stand today. I see the guide. But where in the P&L, you still might not be where you think you can get back to post pandemic, what areas of the fee income still are probably under earning a bit, that would be great. Thanks.

Bea OrdonezChief Financial Officer

Sure. Hi, Chris. Yeah. Look, what we’re seeing a little bit of pressure is on the derivatives business. The customer facing swaps we haven’t seen that quite recovery recover to pre-pandemic levels always seem to sort of rate related, sort of weakness in transactional volume and related to production. In some of the transaction type of fee income categories was certainly not back. We’ve seen a nice rebound from 2020 lows. But we’re certainly not back to pre-pandemic levels there.

On the flip side, what we have seen sort of relative strength within the syndication business. I mean a couple of other categories, so that there’s is a little bit of an offset there. But overall, we’re seeing a nice pickup and we expect to sort of continue to have an upward trajectory through the back half of the year.

Christopher McGrattyKBW — Analyst

Great. And then just to clarify one if I could on the expense guide for the year, does that 430 to 440 is that on a GAAP basis or is that adjusted for the one-timers?

Bea OrdonezChief Financial Officer

Yeah. And it excludes one-time expense.

Christopher McGrattyKBW — Analyst

Right. Thank you very much.

Jack L. KopniskyPresident & Chief Executive Officer

Thank you.

Operator

[Operator Instructions] As there are no further questions in the queue at this time, I would like to turn the call back to your speakers for any additional or closing remarks.

Jack L. KopniskyPresident & Chief Executive Officer

Yeah, we are popularity must be weaning or something you’re not enough questions. We really appreciate everybody following the company and we’re really looking forward to aligning these two companies. It’s going very, very smoothly and we see opportunities. Virtually, every meeting we have really put a best-in-class company together so appreciate. Have a great day everybody. Take care.

Operator

[Operator Closing Remarks]

Duration: 18 minutes

Call participants:

Jack L. KopniskyPresident & Chief Executive Officer

Bea OrdonezChief Financial Officer

Matthew BreeseStephens, Inc. — Analyst

Christopher McGrattyKBW — Analyst

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