Sterling Bancorp (STL) Q3 2021 Earnings Call Transcript

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Sterling Bancorp (STL)
Q3 2021 Earnings Call
Oct 21, 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 '21 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jack Kopnisky. Please go ahead.

Jack L. Kopnisky -- President and Chief Executive Officer

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 Emlen 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 $0.52 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 5 basis points compared to the linked 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 a return on average tangible assets of 144 basis points. We continue to deliver meaningful growth in 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 30, 2021, our total commercial loans were $19.7 billion, an increase of $559 million or 2.9% over the linked 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 $3.9 billion increased 3.4% compared to the linked quarter.

Secondly, our credit metrics continued 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 and classified loans decreased. as

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 in 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 19, 2021, received approval from the OCC, our primary regulator, in a record time on August 2, 2021 and then received shareholder approval on August 17, 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 tried to hit all the high points. So, now, let's open it up for -- the line for questions.

Questions and Answers:

Operator

Thank you.

[Operator Instructions]

We'll take our first question from Chris McGratty of KBW. Please go ahead. Your line is open.

Chris McGratty -- Keefe, Bruyette & Woods -- Analyst

Hey. Good morning, everybody.

Jack L. Kopnisky -- President and Chief Executive Officer

Hey, Chris.

Chris McGratty -- Keefe, Bruyette & Woods -- Analyst

I want to start with the loan growth, the range that you provided on slide 13, the $250 million to $500 million. Could you just give a little bit more color? It sounds -- 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, borrower conversations? Thanks.

Jack L. Kopnisky -- President and Chief Executive Officer

Yeah. I would tell you, first of all, the pipelines are very, very full in most of the asset categories. So, they're very full in things like public finance where municipalities are spending more money. They're very full in traditional C&I where -- 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. So, those pipelines and portfolios are really full. Even ABLs are starting to get more opportunities out there and that is a business that hasn't performed all that well over 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, those pipelines are a little more limited. We're about flat on the multi-family. What we are -- we have payoffs. We have about equal amount to put on. So, you won't see the velocity of run-off as you have in the past on the multifamily side. Folks on the line usage 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. 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. Still some businesses, like I said, equipment that may lag a bit out of this thing. And maybe -- still a lot of activity in multi-family. There's been a lot of pricing pressure on multi-family to where you have payoffs versus the originations out there.

Chris McGratty -- Keefe, Bruyette & Woods -- Analyst

Yeah, that's great color. If I could ask one more, the single credit you talked about in the quarter has seen some headlines as well. Could you just provide a little bit more color on geography, asset type, workout strategy?

Jack L. Kopnisky -- President and Chief Executive Officer

Yeah. Yeah, it's a mid-$30 million credit. It is Metropolitan New York and we're well collateralized on this thing. We don't really sustain loss. We've 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.

Chris McGratty -- Keefe, Bruyette & Woods -- Analyst

That's great. Thank you very much.

Jack L. Kopnisky -- President and Chief Executive Officer

Thank you, Chris.

Operator

We'll move on to our next question from Matthew Breese of Stephens Inc. Please go ahead. Your line is open.

Matthew Breese -- Stephens Inc. -- Analyst

Hey, good morning. Hey, Jack. Last quarter, you had 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?

Jack L. Kopnisky -- President and Chief Executive Officer

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 more -- 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 in being more competitive in the real estate side of this thing. So, loan yields are coming in in the kind of high 2s to kind of mid 3s in those areas.

Matthew Breese -- Stephens Inc. -- Analyst

Okay. Great. The other thing I wanted to touch on was 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? 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 and Webster merge.

Jack L. Kopnisky -- President and Chief Executive Officer

Yeah. We think it's a really great business, frankly. At the end of the day -- so, so far, we have about a baseline on the banking-as-a-service and actually online. There's probably a $0.5 billion worth of deposits to date. We really anticipate on an annual basis to be able to originate anywhere from a $0.5 billion to $1 billion worth of deposits in that.

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 $0.5 billion to $1 billion of deposits, of 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 come from the muni side, kind of wholesale deposits, we match that with banking-as-a-service out there deposits and the technology partnerships 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 where we're now bringing in real deposits and, frankly, would expect to end the year somewhere around $750 million to $1 billion in total deposits including the online deposits.

Matthew Breese -- Stephens Inc. -- Analyst

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 is trying to get a sense for post-COVID valuation impacts in New York City real estate and there's just not that many examples.

Beatrice Ordonez -- Executive Vice President and Chief Financial Officer

Sure. Thanks for the question. Yeah, so it's about $27 million in CRE loans, mostly rated substandard, as we noted, and a mixed bag of credits in the multi-family 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 were we potentially to see a long process to either return it to [Indecipherable] 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.

Luis Massiani -- Senior Executive Vice President and Chief Operating Officer

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 such that really had terrible DSCRs, OK? So, just think that it was a -- alternative investors are going to look for more yield on the deal. And that's why we didn't get to par on it.

Jack L. Kopnisky -- President and Chief Executive Officer

And so, overall, I think we'd say 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 to 105 range out there. There are many deals you could sell for higher than par and you kind of mix and match some of these things. But the prices have been better than we would have expected through a cycle like this.

Matthew Breese -- Stephens Inc. -- Analyst

Great, OK. Last one from me. Given all the recent news, there is some anxiety around timing of deal closures. Just curious if you feel comfortable with the 4Q timeframe for closing the deal and if there's been any updates from the remaining regulators on timing.

Jack L. Kopnisky -- President and Chief Executive Officer

Yeah. Best I can tell you on that, Matt, is we're very confident that we're going to close this deal and we're 100% ready for this. The timing is -- we're trying to figure out the timing, like everybody else on this.

Matthew Breese -- Stephens Inc. -- Analyst

Understood. Great. That's all I had. I appreciate taking my questions.

Jack L. Kopnisky -- President and Chief Executive Officer

Yeah. Thank you.

Operator

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.

Jack L. Kopnisky -- President and Chief Executive Officer

We really appreciate everybody's time. I know -- especially the analysts have a ton of calls today. I'd just remind everybody, this company has performed really well over the years. On a five-year CAGR basis, adjusted EPS is up 12.5% and tangible book value is up almost 15%. So, on a CAGR basis for about five years. We're very confident in the readiness and the opportunity to merge -- do a merger of equals with Webster and we think the combined organization is going to be really a great organization, high performing organization and a great value provider.

So, appreciate it. Have a great day. Take care. Thanks.

Operator

[Operator Closing Remarks]

Duration: 18 minutes

Call participants:

Jack L. Kopnisky -- President and Chief Executive Officer

Beatrice Ordonez -- Executive Vice President and Chief Financial Officer

Luis Massiani -- Senior Executive Vice President and Chief Operating Officer

Chris McGratty -- Keefe, Bruyette & Woods -- Analyst

Matthew Breese -- Stephens Inc. -- Analyst

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