Sterling Bancorp Inc (SBT) 2017 Q4 法說會逐字稿

Good day and welcome to the Sterling Bancorp fourth-quarter and year-end 2017 earnings conference call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Allyson Pooley. Please go ahead.

Thank you, Brandon. Good afternoon, everyone, and thank you for joining us today to discuss Sterling Bancorp's financial results for the fourth quarter ended December 31, 2017.

Today from Sterling's management team are Chairman and CEO Gary Judd; President, Chief Operating Officer, and Chief Financial Officer Tom Lopp; and as well President of Retail and Commercial Banking and Commercial Lending Officer Michael Montemayor is here and will participate in the Q&A portion of the call. Gary and Tom will discuss the fourth-quarter results and then we will open the call to your questions.

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. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements.

These 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.

With that, I'd like to turn the call over to Gary Judd. Gary?

Thank you, Allyson, and good afternoon, everyone. We thank you for joining us today. Since this is our first call as a public company, let me begin with a brief overview of the Company and our strategy and then discuss our fourth-quarter performance. Tom will provide additional details on our financial results.

But before we begin, on behalf of the management team and our Board, I want to thank all of the new shareholders who participated in our initial public offering. We appreciate their vote of confidence and look forward to working hard on their behalf to increase the value of their investment in Sterling Bancorp.

Sterling is a relationship-based spread lender serving four very attractive geographic markets with unique business model consisting of high-touch customer relationships, a suite of niche loan products, a high concentration of core deposits, a strong credit culture, and a very efficient back-office operations.

We were founded over 33 years ago and now have $3 billion in assets and primary branch operations in San Francisco and LA in California, New York City, and a loan production office in Seattle, Washington. Four of the most attractive markets in the United States based on population growth, household income and wealth, and job growth.

Our senior management team consists of banking professionals with decades of industry experience and have also worked at Sterling for over 20 years on average.

Our growth strategy, while somewhat unique for the industry, is straightforward. It's based on strong customer relationships, loan product simplicity, where we can earn a yield premium, and an efficient operating model with pristine credit quality.

Customer relationships are the key to our success. Sterling was built on the belief that highly personalized service leads to customer loyalty and thus a high concentration of stay-whole deposits. As a result, over 98% of our residential borrowers maintain a deposit relationship with us as well.

Our credit culture is key to our business model. It is built on loan programs that have delivered pristine credit quality. We are proud of our track record in credit and believe that it is one of our competitive advantages.

Finally, we operate in a highly efficient manner. Having our back-office operations located in Michigan, a lower-cost region of the country, is a huge competitive advantage and contributes to our industry-leading operating efficiency metrics for institutions of our size.

Our customer-facing personnel in our markets are able to focus on growing deposit relationships, producing loans, and serving our customers. In summary, we feel that our culture, products, and platform will allow us to continue to support our growth plans and further expansion in the attractive markets we serve, all with a focus on driving improved profitability.

Now let's turn to some financial results. We continued to see positive momentum in the fourth quarter, generating strong loan growth, continued pristine credit quality, and well-managed expenses. We generated $6.5 million in net income or $0.13 per share, which includes a $3.3 million or $0.07 per share write-down of our net deferred tax assets due to the reduction in the federal tax corporate rate.

For the full year, net income increased to $38 million or $0.82 per diluted share. And again, excluding the write-down on the DTA, our non-GAAP fully diluted EPS would have been a record $0.89 or $41.3 million, which represents an increase in net income of 24% from 2016. The increase was driven by a combination of 33% average loan growth, continued low credit costs, and improved operating leverage.

Importantly, the Company produced a strong ROA of 1.54% and an average return on stockholder equity of 20.3% for 2017, including the DTA write-down. Excluding the DTA write-down, ROA would have been 1.68% and a 22% return on average common equity.

From a business development perspective, we had a very solid quarter. Our total loans held for investment increased by $229 million from the third quarter, which equated to a 31% year-over-year growth rate and up 10% on a linked-quarter basis.

The growth was driven by our residential real estate portfolio, which is now 82% of our total loans. Residential loan growth was up 32% over 2016. Importantly, commercial real estate loans were up 23% and our construction loans were up 32% year over year.

We originated $463 million in residential mortgage loans in the fourth quarter. This led to both solid growth in our retained single-family portfolio and an increase in our mortgages held for sale as compared to the end of last quarter. We continue to experience healthy demand for our niche mortgage products, including our advantaged loans and our tenant in common loans.

We had our strongest year ever in commercial loan originations, particularly in commercial real estate mortgages and construction loans, which are loans primarily used for the renovation of residential and mixed-use properties. Growing our commercial loan originations will remain a focus in 2018.

Moving to deposits, we were pleased that our total deposits grew by 39% for the full year, providing the funding for our strong loan growth for the year, which, as I mentioned, grew by 31% in 2017. Both of these metrics exceeded our five-year compounded average growth rate.

Our efforts to deepen our relationships with our customers continues to produce positive results to earn a greater share of their deposit balances. 88% of our deposits are core deposits, which we define as all liquid deposits and all retail CDs $250,000 and under, which speaks to the quality of our deposit base.

While the deposit cost has increased with the rise in short-term interest rates, somewhat negatively impacting our net interest margin in the near term, we have been more than able to mitigate this pressure with a higher loan base earning an attractive spread and residential loan pricing increases on new volumes initiated in late December.

Finally, productivity levels remain very high. The efficiency ratio for 2017 improved to 35.8% while we expanded our markets, sales force, and critical support functions with the addition of 100 associates in 2017. Tight expense control and strong productivity are a daily focus in the Company.

Turning to 2018, we expect another strong year. We plan to continue expanding our franchise through de novo branch or loan production office openings. The housing markets remain healthy in the regions where we operate and there continues to be good demand for our loan products. Our pipelines remain strong and should deliver another year of quality balance sheet growth.

During the first half of the year, we plan to open a new branch in the Seattle market, two in Southern California, and a loan production office in New York City with the intent to convert it eventually into a branch. The new branches should be particularly helpful in generating the core deposits that support our strong loan production.

However, given the level of loan demand that we are seeing in our markets, we have continued to develop new markets for sales of our residential mortgages to help us manage on-balance sheet loan growth in line with deposit growth. There is strong demand for the type of loans we originate, and our capacity for loan sales is increasing, which will be instrumental in supporting our balance sheet and liquidity management strategies. Accordingly, it is likely that we will see an increase in our loan sales and gain on sale income in 2018.

We are also investing in new banking talent to help us stay ahead of our growth, all with a continued focus on the bottom line. We have been expanding our lending staff, both in residential and commercial, as well as adding to our back-office support.

We are excited about the success we are having in attracting new customers to the bank and we believe the investments we are making in our business will add to our positive momentum.

With that as an overview, let me turn the call over to Tom Lopp to provide additional details on our financial performance in the fourth quarter. Tom?

Thank you, Gary. As I walk through the income statement and balance sheet, I'm going to focus just on those items where some additional discussion is warranted.

I will start with our net interest margin. For the fourth quarter of 2017, our margin was 3.97%, down 7 basis points from the third quarter. The decline was primarily attributable to a 14-basis-point increase in the average cost of our deposits. The competitive environment for deposits remains strong and we expect that we will continue to see increases in our deposit costs as we fund our robust loan growth.

The average yield on our loans was relatively flat during the quarter. However, approximately 74% of our loans are tied to one-year LIBOR and we expect that 48% of those will adjust in 2018. The margin on our LIBOR-based on loans is LIBOR plus, at a minimum, 3.95% for our Advantage product and LIBOR plus 3.50% for our TIC loans.

With LIBOR at 2.25%, that puts the loans that will reset in a minimum of 6.20% on Advantage and 5.75% on our TICs. In addition, another 10% of our loans are indexed to the prime rate and therefore will adjust with any change in the Fed funds rate.

So we expect to see a positive impact on our average loan yields in the first quarter and for the full year. In addition, as Gary mentioned, we increased some of our loan offering rates in late December that will also lead to increased loan yields.

In a rising interest rate environment, based on our modeling assumptions, we are slightly liability sensitive initially, but we become neutral relatively quickly. Our key driver, we believe, is net interest income. Our net interest income increased 30% in 2017. We expect a similar growth rate in net interest income for 2018.

Our total noninterest income declined by $3.4 million from the third quarter. The decline was primarily the result of a $3.3 million decline in the gain on sale of portfolio loans due to a decrease in the amount of loans sold in the secondary market, a combination of timing, as well as our efforts to manage our balance sheet and liquidity.

As Gary mentioned, we expect to see an increase in our loan sales and gain on sale income in 2018, including the first quarter, in response to balancing deposit growth and net interest margin.

Our total noninterest expense increased by $1.6 million from the prior quarter and included $0.2 million of severance expense, $0.2 million of expenses related to the initial public offering, and $0.1 million in expenses following an annual reassessment of the Company's BOLI liabilities.

Excluding these items, our noninterest expense increased $1.1 million, which was primarily due to salaries and benefits, third-party professional fees, advertising, and FDIC insurance. Most of these increases reflect supporting the strong growth in the balance sheet, but typically our fourth quarter is higher.

Our efficiency ratio was 40.2% for the fourth quarter and 35.8% for the full year. Given our expectations for continued revenue growth and our focus on controlling expenses, we would anticipate that our efficiency ratio would be in the 34% to 37% range for 2018, which is inclusive of our goal to add approximately 100 new staff to support our continued growth.

Turning to income tax expense, we recorded additional tax expense of $3.3 million in the fourth quarter to reflect the impact of the lower federal corporate tax rate and the value of our net deferred tax assets. For 2018, we anticipate an effective tax rate of between 28% and 30%, down from 41.4% in 2017.

The 41.4% does not include the one-time $3.3 million impact. With this lower effective tax rate, we expect to earn back the one-time expense related to the deferred tax asset in approximately four months.

Looking at our balance sheet, Gary already discussed the major trends we saw in loans, so I will start with liabilities. In the fourth quarter, we continued to experience core deposit growth, which reduced our use of wholesale funding.

Our historical and proven strategy has been to fund our loan growth with our money market product. But we will be opportunistic at times and add longer-term fixed rate deposits, which we did in the fourth quarter.

Turning to our asset quality, we had another quarter where we continued to exhibit excellent credit quality. Our nonperforming assets were $3.8 million or 13 basis points of total assets at December 31, down slightly from $3.9 million or 15 basis points of total assets at the end of the prior quarter.

Our net charge-offs were actually negative in the quarter and for the full year as loan-loss recoveries exceeded very minimal gross charge-offs. All of which were from legacy portfolios.

We recorded a provision expense of $600,000 in the fourth quarter as a result of the growth in the loan portfolio. We have recorded net recoveries in each of the last five years.

Our total allowance for loan losses was down slightly to 71 basis points of total loans. So as you can see, our credit quality remains excellent, which is a testament to our time-tested loan products and our strong credit culture.

With that, let's open up the call to answer any questions you may have. Operator, we are ready for questions.

(Operator Instructions) Aaron Deer, Sandler O'Neill.

Nice to see the growth trends continue to remain very strong. I wanted I guess to start on the subject of the margin and looking in particular at the deposit costs in the quarter, which seemed to jump a good deal higher.

As you're looking out here into the first part of the year, I know you kind of gave some guidance in terms of where the rates might move on the loan side, but looking really just more on the liability side and what you are seeing on deposit pricing, how do you see the betas continue to push out?

Is there going to be more pullthrough on this deposit pressure early in the year that is going to offset the loan benefit where we might see some continued sharp compression here early on? Or is this going to -- are these effects going to offset one another so maybe we see a little bit better stability than what we saw in the fourth quarter?

Well, I would say, Aaron, that we definitely don't expect any sharp decrease in the margin. I think when we model based on our assumptions, we are slightly liability sensitive.

We use a beta of 70% for our lead product. We have not to this point gotten close to that 70-basis-point beta. We did make some changes for deposit pricing right at the end of the third quarter, which did impact the fourth quarter.

Thus far in the first quarter, we've made a nominal increase on the deposit side. And when you look at the prime-based loans that are going to get a full impact in the first quarter, I think that will offset at least what we did in the first quarter, the first part of this year.

So I expect a comparable number, maybe slight headwinds to -- because of the deposit increases. But we recover very quickly on margin. So we don't expect any kind of strong decrease.

So just to clarify, when you say a comparable number, you are talking about a comparable margin or a comparable reduction in the margin?

We are talking about a comparable margin, give or take a slight amount. And when I say margin, I'm referring to the NIM. Obviously, the net interest income grew in the fourth quarter. We expect that to continue in the first quarter and throughout 2018.

As I said earlier, we are expecting a comparable growth rate in the net interest income. The first quarter of net interest income I believe will be higher than the fourth-quarter increase in net interest income.

Okay that's helpful. Thank you. And then with respect to the outlook for loans, it sounds like the pipeline remains very strong, demand is strong. And so just as you're looking out in terms of how you are going to balance that growth vis-à-vis loan sales versus retention on the balance sheet, it sounds like the loan sales are going to increase some this year.

What does that mean for loan growth? Could we continue to see the kind of pace of loan growth that we saw in 2017? Or are we going to feel a little bit of just kind of the law of large numbers here and see that just pull back some?

No, I think we are going to continue to see -- this is Michael Montemayor. We are going to continue to see the kind of growth as we've invested in some of these new markets and adding personnel, both in the Seattle, LA, and New York markets as well as San Francisco.

Our expectations are that we will be able to continue those and augment our loan sales as we go forward and manage our balance sheet. So we are very excited about our opportunities to continue on that path and what we've been able to do.

And our pipelines are similarly strong as you compare to last year at this time. There is some seasonality to our business. We do a lot of purchase business and there is some seasonality to that. But if you compare year over year this time last year, we are significantly higher than where we were a year ago.

That's great. And then kind of along those lines in terms of the growth efforts and the impact that's going to have on expenses, if we back out some of these one-time items here in the fourth quarter -- the severance, the IPO, and the BOLI true-up -- with these -- the 100 new employees, the new branches, where do you see the kind of core noninterest expense number going over the course of 2018 as you make these investments?

Well, like I said, the efficiency ratio, which obviously is a product of that, we expect to be in the mid- to 37% type of range. I think our fourth quarter 2017 was actually slightly lower than the fourth quarter 2016.

And we didn't have a major loan sale in the fourth quarter of 2017. But as far as the overall mix, let me find that. And if you have another question to ask to keep it moving, I will look for that as well.

Okay. Just maybe one question on where -- any changes in underwriting in the quarter. Can you maybe just give us an update on the average sizes and average loan to values on the single-family that were produced?

And then similarly on the construction, since you had some good growth there, too. What the loan to cost is and kind of what the average size of loans that were originated in the quarter.

I'm sure, Aaron, I would say there have been no significant underwriting changes. We are constantly looking at what we do and we make adjustments from time to time.

But we've had nothing significant change in our residential or our commercial underwriting. And our average originating LTVs are very similar and holding steady and have maintained what we have been doing over the last couple years.

Okay. Good stuff. I appreciate you guys taking my questions.

Anthony Polini, American Capital Partners.

Congratulations. I got a couple of questions. One is I guess a follow-up on the credit quality. I'm looking at the provision for this quarter and it came in about half what we estimated.

And I was wondering if you could give some guidance as to what were your thoughts? Is there a certain percentage of new loans that are -- that you are funding with that provision? Is there a targeted maybe allowance to loans ratio?

Yes, Anthony, we target to no lower than 70 basis points. We have traditionally been in the 70-basis-point to 75-basis-point-range. And I will point out on the fourth-quarter provision, we were helped out a little bit by a moderate recovery that came in. So that may explain some of the difference between what we recorded and your estimate.

Okay, good. One other small item, then. When you said that the gain on sales would be higher this year, was that it implying higher than last year's total or higher than the fourth quarter?

Higher than last year's total.

Now, when I look at last year's total, are we looking at the same number? Would that be just a little bit under $10 million?

Correct.

Yes. We would anticipate it could be slightly higher than that this year.

Okay. Is there any seasonality to that number?

I wouldn't say there is seasonality to that number. But there is timing differences. So when we actually execute and when we get through the process and deliver the trade, if you will. But other than that, I don't think there's really any seasonality. There seems to be strong demand for it whenever we come to market and market it.

Great. Thanks, guys.

(Operator Instructions) It appears there are no more questions, so this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

And this is Gary Judd again. Once again, thank you for joining us today. We look forward to speaking with you next quarter and enjoying the kind of growth and business model momentum that we believe exists in this Company. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.