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Sterling Bancorp, Inc. (NASDAQ:SBT)
Q4 2020 Earnings Call
Feb 01, 2021, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, and welcome to the Sterling Bancorp Inc. fourth-quarter 2020 earnings conference call. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded.

I would now like to turn the conference over to Stephen Huber, chief financial officer and treasurer. Please go ahead, sir.

Steve Huber -- Chief Financial Officer and Treasurer

Thank you, Chad, and good afternoon, everyone. Thanks for joining us to --today to discuss Sterling Bancorp's financial results for the fourth quarter and year ended December 31, 2020. Joining us today from Sterling's management team are Tom O'Brien, chairman, president, and CEO; and myself, Stephen Huber, chief financial officer and treasurer. Before we begin, I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of Sterling Bancorp that involve risks and uncertainties.

Further information is contained within the press release which we encourage you to review. Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most dir -- directly comparable GAAP measures. The press release available on the website contains financial and other quantitative information to be discussed today, as well as a reconciliation of GAAP to non-GAAP measures. At this time, I'd like to turn the call over to Tom O'Brien.

Tom.

Tom O'Brien -- Chairman, President, and Chief Executive Officer

Thanks, Steve, and good afternoon, everyone. Thanks for joining us. Sterling had, as you probably know, two press releases today. The first one was about the pending settlement of the class action lawsuit, and that went out first thing this morning.

But we're very pleased to announce that. As you can probably imagine, those things are a distraction. They consume an awful lot of time. And of course, they are expensive.

So the -- as noted in the press release, the -- the resolution is subject to approval of the court. But we're optimistic that that will all come through accordingly and -- and without too much delay, although it certainly takes a couple of months to get through this entire process. But anyhow, we're very pleased about that. And the resulting outcome is that the press release also notes the -- the -- the cost of the -- the settlement is borne by the bank's insurers.

And -- and so as a consequence, we had to set up some reserves in the -- earlier in 2020, and $10 million of those were released in the fourth quarter. The second release, of course, was our kind of normal fourth-quarter and full-year 2020 financial results. And I think they're pretty self-explanatory. The -- the quarter remained noisy.

Apologize for that. But still, a lot to do here at the bank. But underlying all of the noise in the quarter, I think you'll probably see a fair amount of progress being made. We still have a fair amount of remedial compliance and technology work ahead of us in 2021.

But the -- the groundwork that we've done so far in 2020 has certainly paid some benefits. And we just don't underestimate the work to be done, but, as I said, progress is meaningful and measurable at this point. We're pleased with that. Financially, margin is under pressure primarily due to the level of liquidity we have on the balance sheet, coupled with the very low-interest rates expenses, even though they were down in the quarter if you take account for the -- the $10 million recovery.

But expenses are still running high with legal and consulting work being done in the fourth quarter. We're -- we're optimistic that as the class action comes to full resolution and the costs there with that disappear that as we get into the second half of 2021, the -- the opex line will start to find its way lower. I guess the most noticeable thing in the quarter is the loan loss provision. We made a provision of $27.6 million increase in the allowance to just about 2.9% of total loans.

And as I have mentioned on the previous few calls, the -- the allowance reflects our concern with the credit risk profile in -- in various different components of the legacy bank loan portfolio. Of concern are the SRO loans in the San Francisco area and, of course, to some extent, the Advantage loans, and -- and the bank's construction loans. Those remain our -- our focus and reflect some degree of concern as to how they will -- will work out. So we just thought of, frankly, it was more prudent to get as much of this done as circumstance would allow in the fourth quarter and also give us the flexibility going forward in 2021 to move as aggressively as circumstances permit.

Nonperforming loans remain stubbornly high. There are some TDRs in there which help out. And of course, as you probably read in the press release, we moved about $23 million, $24 million worth of loans into help resale and took a writedown on those. Our goal is to liquidate those loans in the -- either late this quarter or the very early part of Q2.

And then on the governance side, we accepted the resignation of Barry Allen, who had been a longtime director of Sterling, a longtime chairman of the audit committee, and I think Barry had a total of 22 years on the board. So we were sorry to see him leave but understand his desire to have some time for himself. And -- and with that, we did announce, subject to some regulatory approvals, the appointment of Tracey Dedrick to the board. And Tracey will join us as soon as we receive the nonobjections from our -- from our regulator.

And all of that is our efforts moving forward in terms of providing the -- the governance level that the -- that the company and the bank need and the oversight that we, in management, require. So we're -- we're pleased -- pleased to announce that. And -- and with that, it's probably going to be most beneficial if I just take some questions here, Operator, so maybe open it up and we'll just see what's on everybody's mind.

Questions & Answers:


Operator

Right. Thank you, sir. We will now begin the question-and-answer session. [Operator instructions] At this time, we will pause momentarily to assemble our roster.

And the first question will be from Ben Gerlinger with Hovde Group. Please go ahead.

Ben Gerlinger -- Hovde Group -- Analyst

Thank you. Good afternoon, guys.

Tom O'Brien -- Chairman, President, and Chief Executive Officer

Hi, Ben.

Steve Huber -- Chief Financial Officer and Treasurer

Good afternoon.

Ben Gerlinger -- Hovde Group -- Analyst

Hi. So the 27% reduction in professional fees from the third quarter and the fourth quarter is a pretty sizable step-down. And now that since you have that -- that pending settlement as of announced today, and can you do give a little guidance to kind of what we should project going forward. I get that they're all of January could be included in those of age professional fees.

I'm just kind of curious. Since you do have that pending settlement now, should we to assume a ramp down, to hold steady in your current levels? Or was this kind of baked into that -- that elevated 12, then this really doesn't apply? So that -- that's my first question. I have one more follow-up after.

Tom O'Brien -- Chairman, President, and Chief Executive Officer

Well, I've -- I've -- what I've generally said, Ben, is that I think in the second half of the year, the -- the legal and professional fees will start to trend down. I'm not -- at this point, I would not be able to say GAAP down because it's just too hard to predict. But as we get things resolved and there's a little more clarity, then they should -- should start to reduce. I know -- I know, Steve, do you have any specific numbers you want to throw in there?

Steve Huber -- Chief Financial Officer and Treasurer

Well, for next year, we're expecting on the maybe come down by as much as a third and compared to year 2020. But again, not real material probably in the first second end quarter of 2021. More would be a second-half event as Tom has mentioned.

Ben Gerlinger -- Hovde Group -- Analyst

Yeah. OK. So full-year '21, so about a third less than full-year '20, if I get that right?

Steve Huber -- Chief Financial Officer and Treasurer

Yeah, correct.

Ben Gerlinger -- Hovde Group -- Analyst

And then my other question had to do with the -- the time deposits. I saw from second quarter and the third, or do you guys reduced that by about 33 bips in the yield. And then third quarter and the fourth, it was just 10. I was curious if you could talk about kind of how -- how some of the time deposits are coming off over the next few quarters in terms of percentage of the -- the total amount? And then what -- what's the kind of the re -- the -- the spot rate relative to that 158 of where you've gotten re -- reassuring that -- those released?

Steve Huber -- Chief Financial Officer and Treasurer

Yeah.

Tom O'Brien -- Chairman, President, and Chief Executive Officer

Steve, why don't you talk 30s?

Steve Huber -- Chief Financial Officer and Treasurer

Sure, our -- our spot rate at year-end is just under 1%. So hovering around 1%. We continue to decrease deposit rates, particularly in time deposits and money markets. So we're expecting those to reprice and take effect as we move forward here.

We do have a lot of time deposits coming due to reprice beginning materially in the first quarter and basically through the third quarter. Probably about anywhere from 16% to 25% of our deposits are going to reprice. So we are expecting to take the opportunity of the lower rates that we've just set recently to bring that cost down a little bit. Re -- remains to be seen on how many of those still stick with us as they renew in a new time deposit or move to our money markets.

But we're expecting some of those deposits to -- to leave the bank altogether as well.

Ben Gerlinger -- Hovde Group -- Analyst

Catch it. And -- and you said 16 to 25? I was -- just making sure I got it right. That's basically the quarter of the time deposits per quarter or is that in totality?

Steve Huber -- Chief Financial Officer and Treasurer

I -- it -- it might be a little more clear if I can put it into -- in dollar terms. Was about -- we have about $253 million repricing in the first quarter, $432 million approximately in the second quarter, and $352 million in the third quarter.

Ben Gerlinger -- Hovde Group -- Analyst

Perfect. Thank you. I will step back into the queue. Thanks.

Tom O'Brien -- Chairman, President, and Chief Executive Officer

Sure.

Steve Huber -- Chief Financial Officer and Treasurer

Thank you.

Operator

And the next question will be from Nick Cucharale with Piper Sandler. Please go ahead.

Nick Cucharale -- Piper Sandler -- Analyst

Good afternoon, gentlemen. Hope you've been well.

Steve Huber -- Chief Financial Officer and Treasurer

Yeah, thank you.

Nick Cucharale -- Piper Sandler -- Analyst

So I -- I wanted to start with the liquidity position, which continues to grow. Given the optimism for mortgage repurchases in early 2021, do you feel that once that process concludes, liquidity will come down in a meaningful way?

Tom O'Brien -- Chairman, President, and Chief Executive Officer

Yeah, absolutely. And I would -- it's -- it's obviously a big drag on margin, and we don't see any signs of -- of -- of that changing anytime soon. So as Steve mentioned, we've got some significant CDs maturing. So our -- our -- our goal, frankly, would be to bring the balance sheet down in size somewhat and -- and then get these repurchase loans funded probably very late this quarter or early April.

Nick Cucharale -- Piper Sandler -- Analyst

OK. And then in -- in terms of the loan originations, a similar amount to last quarter. Are -- are the originations predominantly in that TIC product that you guys offer?

Tom O'Brien -- Chairman, President, and Chief Executive Officer

They've been predominantly there and we continue to fund commitments on construction loans. And then we've done a -- some residential loans. But the -- the tenants-in-common product has sent the bulk of it.

Nick Cucharale -- Piper Sandler -- Analyst

Thank you for taking my questions.

Tom O'Brien -- Chairman, President, and Chief Executive Officer

Sure. Thank you.

Operator

And the next question will come from Anthony Polini with American Capital Partners. Please go ahead.

Anthony Polini -- American Capital Partners -- Analyst

Hey, guys.

Steve Huber -- Chief Financial Officer and Treasurer

Hey, Anthony.

Tom O'Brien -- Chairman, President, and Chief Executive Officer

Hi, how are you?

Anthony Polini -- American Capital Partners -- Analyst

You actually beat our revenue projections by 500,000.

Tom O'Brien -- Chairman, President, and Chief Executive Officer

All right.

Anthony Polini -- American Capital Partners -- Analyst

I don't know if we were depressed or you actually had a good quarter. But --

Tom O'Brien -- Chairman, President, and Chief Executive Officer

One gold star.

Anthony Polini -- American Capital Partners -- Analyst

Obviously, credit quality is -- is the key issue here. And -- and I know -- I know, Tom, you have a hell of a lot of experience with this. And whether you want to use a baseball analogy or a garbage truck analogy, are we in the early innings as far as -- that garbage truck fall analogy, just the cleanup process, dumping it? Or is that front end still having a little more activity than you'd like at this point?

Tom O'Brien -- Chairman, President, and Chief Executive Officer

I'm not sure if it's a fair question. I mean it's -- it's hard to predict. I mean I'll -- I'll speak to Sterling, but I do think in the community bank space kind of generally between the level and kind of the aggressiveness of originations over the last few years, coupled with the impact of the coronavirus, I just think there is going to be some reckoning throughout 2021 that will not be insignificant. And that philosophy is kind of guided where we are at Sterling.

I have my concerns as I've mentioned on a few prior calls with the commercial construction portfolio, and I don't want to be cut short. So I would say we've got almost a 3% of total loans reserved. I'm feeling OK about that, gives us a lot of flexibility to work with the loans that come into a problem status and -- and those that we've identified. And I will tell you, we have been very, very thorough and aggressive in terms of risk rating and identifying loans through the -- the last few months.

There was an awful large backlog of loans to review when I joined the bank. It's got a very good team in there now going through it. We're being deliberate about it. I just saw in the press release, there's think about 35 million if I've got the number correct of loans that are just past due maturity by 90 days.

But we're reviewing them and looking carefully at them as to whether or not we're going to extend or find another rub -- another strategy. So that's a long way of saying, Anthony, I'd -- I'd like to think at least one of Sterling-specific perspective were heading into the stretch.

Anthony Polini -- American Capital Partners -- Analyst

Sounds like we might have a lower provision in the next quarter.

Tom O'Brien -- Chairman, President, and Chief Executive Officer

All to stand higher.

Anthony Polini -- American Capital Partners -- Analyst

All right, guys. I think you're doing a great job by the way. I know you're not -- I know you're very familiar with the process, but it doesn't make it any more fun. And congrats, good -- good job.

Tom O'Brien -- Chairman, President, and Chief Executive Officer

No. The fun -- the fun comes much later in the game.

Anthony Polini -- American Capital Partners -- Analyst

Yes.

Tom O'Brien -- Chairman, President, and Chief Executive Officer

Thank you.

Operator

[Operator instructions] The next question is from Jeremy Zhu with TCW Sepulveda. Please go ahead.

Jeremy Zhu -- TCW Sepulveda -- Analyst

Hi, Tom. How are you?

Tom O'Brien -- Chairman, President, and Chief Executive Officer

I'm good, Jeremy. How are you?

Jeremy Zhu -- TCW Sepulveda -- Analyst

Good. Good. Just curious. I read level criticize and classify loans were -- is stubbornly high.

What is that level for the size and classified?

Tom O'Brien -- Chairman, President, and Chief Executive Officer

Steve, I'm going to -- I've got so many numbers in my head. Hit it on.

Steve Huber -- Chief Financial Officer and Treasurer

Yeah. I mean it's really -- it's -- it's a combination of commercial and residential. But significantly commercial. Tom mentioned comes to con -- concern with the construction and SRO portfolio.

Jeremy Zhu -- TCW Sepulveda -- Analyst

Yup. But do you have a rough idea of that le -- level?

Tom O'Brien -- Chairman, President, and Chief Executive Officer

I think it's about 150, Jeremy.

Jeremy Zhu -- TCW Sepulveda -- Analyst

Hundred and fifty. OK. And --

Tom O'Brien -- Chairman, President, and Chief Executive Officer

If that's not right, we'll get back to you.

Jeremy Zhu -- TCW Sepulveda -- Analyst

OK. I appreciate it.

Tom O'Brien -- Chairman, President, and Chief Executive Officer

I think that's about right.

Jeremy Zhu -- TCW Sepulveda -- Analyst

You -- you also said you reclassified nonperforming mortgage loans with a cost base of $19 million that's held for sale. What is writedown associated with those loans?

Tom O'Brien -- Chairman, President, and Chief Executive Officer

Three and a half. It was about $24 million I think, and --

Steve Huber -- Chief Financial Officer and Treasurer

That -- that's --

Tom O'Brien -- Chairman, President, and Chief Executive Officer

Value, 23.5, something like that.

Steve Huber -- Chief Financial Officer and Treasurer

Yeah, that's correct. And then we wrote it down approximately 15% discount by -- which was at 3.5 million.

Jeremy Zhu -- TCW Sepulveda -- Analyst

Got it. Presumably, you're looking to sell these loans I guess? These are --

Tom O'Brien -- Chairman, President, and Chief Executive Officer

We are indeed.

Jeremy Zhu -- TCW Sepulveda -- Analyst

These are one-to-four-family mortgage?

Tom O'Brien -- Chairman, President, and Chief Executive Officer

Exactly.

Jeremy Zhu -- TCW Sepulveda -- Analyst

Given the overall that one-to-four-family value has gone up and loans you made are fairly low LTV compared to the value of the property.

Tom O'Brien -- Chairman, President, and Chief Executive Officer

Yeah.

Jeremy Zhu -- TCW Sepulveda -- Analyst

Why -- why can't they be sold at par I guess? Can you just walk us through what's the rationale behind the writedowns?

Tom O'Brien -- Chairman, President, and Chief Executive Officer

If that's -- if -- if that's the bid I'll take it.

Jeremy Zhu -- TCW Sepulveda -- Analyst

I mean are these loans still -- the value of these loans above the home price?

Tom O'Brien -- Chairman, President, and Chief Executive Officer

Yup. Let me tell you my thinking.

Jeremy Zhu -- TCW Sepulveda -- Analyst

Yeah.

Tom O'Brien -- Chairman, President, and Chief Executive Officer

Let me tell you my thinking, and it's not entirely financial. These are all those Advantage loans. Basically, all of the Advantage loans that are nonaccrual. And -- and I felt it would be important for a lot of reasons if you look at this portfolio and take it, this is the bottom of the barrel of the Advantage loans.

It would be very helpful to have some price discovery because I think that gives all of us, investors, regulators, bankers some degree of comfort as to what these are. They are by all factors that we know well-secured. The collateral coverage is very good. The appraisals have plenty of room in them.

And so in the normal course, you might say it might be more financially beneficial to spend a period of time and -- and go through the foreclosure process and get paid out whole. And -- and -- and I wouldn't argue with that, it's just really an opinion. But I just felt like it might be wiser to go through this process for the reasons I outlined and -- and do it on a more expedited basis. It's a little bit of a test and I was I said I think it provides some nonfinancial benefits.

And from an investor perspective, you look at OK, they're going to put up their money, they've got to spend time and resources, and they need to get a pretty healthy return. So we'll see how it plays out, but that's my -- that's my thinking on this.

Jeremy Zhu -- TCW Sepulveda -- Analyst

Got it. OK. And then going forward I guess, do you have any thinking some of areas of focus for bank to continue making loans? Wha -- what's the new areas of business that you're thinking about?

Tom O'Brien -- Chairman, President, and Chief Executive Officer

Now, that's -- that's kind of the question we all struggle with. But at the moment, our -- our commitment both internally to the board and to our regulator is we have to focus on the remedial actions necessary to address the formal agreement and the requirements of that, and -- and they are going to take a lot of time and energy. So we're going to have to -- buying back these loans in this quarter will help the -- the balance sheet from a income statement perspective. But it's just premature for us to be sitting here, spending time developing loan products when we've just got a fairly healthy list.

If you read the formal agreement, it's a public document. There is a lot to do there. There's an awful lot. So that's kind of why I said at the beginning of this, there's been a lot of underlying progress but we don't kid ourselves that there's a fair amount to do going forward.

And in -- in candor, if you look at the -- the timeline of the formal agreement when it was announced in 2019, there's -- there's not an insignificant amount of time that we lost just getting to the point where we got a strong focus on it this past summer. So we've got to make up for that. So that's, again, a long way of saying our priority is to fix the broken parts before we get back into more strategic businesses.

Jeremy Zhu -- TCW Sepulveda -- Analyst

Got it. Thanks.

Operator

[Operator instructions] Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Tom O'Brien for any closing remarks.

Tom O'Brien -- Chairman, President, and Chief Executive Officer

Thank you. And no, just a -- like to express the board and my appreciation, all of management to -- to those of us who follow the company and invest in it. We -- we certainly appreciate your interest and -- and your commitment. We ask for some patience, but our goal is to underpromise and over-deliver.

So that is what we are trying to do. But thank you for participating today. I will look forward to opportunities to talk in the near future. Thank you.

Thank you, Operator.

Operator

[Operator signoff]

Duration: 26 minutes

Call participants:

Steve Huber -- Chief Financial Officer and Treasurer

Tom O'Brien -- Chairman, President, and Chief Executive Officer

Ben Gerlinger -- Hovde Group -- Analyst

Nick Cucharale -- Piper Sandler -- Analyst

Anthony Polini -- American Capital Partners -- Analyst

Jeremy Zhu -- TCW Sepulveda -- Analyst

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