Sterling Bancorp Inc (SBT) 2019 Q1 法說會逐字稿

Good afternoon, and welcome to the Sterling Bancorp Bank's First Quarter 2019 Earnings Conference Call. My name is Cole, and I will be your operator today. (Operator Instructions) This call is being recorded and will be available for replay through May 13, 2019, starting this afternoon at approximately 1 hour after the completion of this call. I would now like to turn the conference over to Ms. Allyson Pooley from Financial Profiles. Please go ahead, Ms. Pooley.

Thank you, Cole, and good afternoon, everyone, and thank you for joining us to discuss Sterling Bancorp's financial results for the first quarter ended March 31, 2019. Joining us today from Sterling's management team are Gary Judd, Chairman and CEO; President, COO and Chief Financial Officer, Tom Lopp; and President of Retail and Commercial Banking and Chief Lending Officer, Michael Montemayor. Gary and Tom will discuss the first quarter results, and then we'll open up the call to your questions.

Before we begin, I'd like to remind you that this 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, also 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.

At this time, I'd like to turn the call over to Gary Judd. Gary?

Thank you, Allyson, and good afternoon, everyone. And thank you for joining us today. We are pleased with our start to 2019, which reflects our focus on generating strong and consistent earnings. For the first quarter, we reported net income of $15.7 million, down 2% from the fourth quarter and EPS of $0.30 per diluted share, which is flat as compared to the fourth quarter, again producing upper quartile returns on average assets and tangible equity of 1.94% and 18.46%, respectively.

Our earnings were driven by continued increases in loans, albeit at a slower pace, disciplined expense management and low credit costs. During the quarter, we generated total revenue net of interest expense of $34.1 million flat from a year ago, down 7% from the fourth quarter primarily due to lower noninterest income, as we sold fewer loans during the quarter.

We should point out that market demand remains strong for the loans we sell, reflecting the outstanding quality and performance of the loans we originate. As we indicated in our last call during the latter half of 2018, we began to see a change in the market environment with respect to housing and also impacted by the trade corrections with China, which created uncertainty among a number of our customers. This general sense of caution continued into the first quarter of 2019.

As a result, this caution, coupled with the expected seasonal drop in loan demand, our loan production was down again this quarter. Annualized loan growth for the quarter was 4%. Loan growth continues to be driven by a residential real estate portfolio, which was up nearly 7% on an annualized basis. Our commercial real estate and construction loan portfolios were both down slightly from the fourth quarter.

Our new construction loan originations more than doubled in the fourth quarter, and the mean -- full amount of this production will translate into higher loan balances in the coming quarters as these projects are built and the funds are drawn down.

Total originations for the quarter were $305 million, down from $333 million last quarter with residential mortgages accounting for $258 million and construction loans for the remaining $47 million.

At quarter-end, our commercial real estate and construction pipeline remains over $100 million, and we again expect a significant portion of that pipeline to close in the current quarter. We are seeing some rebound of residential production as mortgage rates are lower and demand is increasing.

However given the continued level of caution among our customer base, we remain cautious ourselves about the near term. Moving to deposits, total deposits were $2.44 billion, essentially flat as compared to the fourth quarter. However, there was some movement within our deposit categories. As expected, we are seeing some migration from lower yield money market savings and NOW accounts into higher-yielding time deposits. This shift reflects the market expectations over the short-term rates to remain range bound. With respect to our time deposits, we actually experienced a net $74 million pickup in retail deposits, the majority being from new funds to the bank. This retail growth allowed us to let our entire $34 million balance of brokered CDs runoff during the quarter.

We've remained dedicated to deepening our relationships with our customers with an objective of capturing a greater share of their deposit balances. Currently, 92% of our deposits are core deposits, which speaks to the quality of our deposit base. Our cost of deposits continued to increase with the rise in short-term interest rates during the quarter, which adversely impacted our first quarter net interest margin in line with our guidance.

Additionally, the shift in our deposit mix with more time deposits added to rate pressure. While we began to see the competitive environment on deposit promotions abate last quarter, the market remains highly competitive and is particularly strong in some of our geographies. We continue to mitigate some of the NIM pressure with our mainly variable late -- rate loan portfolio, which continues to reset at higher rates based on increases in the LIBOR and prime rates. But with recent -- the decline in LIBOR, we are not expecting as much of a lift as we have seen in prior quarters.

As you know, another component of managing our balance sheet liquidity is loan sales. During the quarter, we sold $48 million in pools of residential loans, down over 50% from the fourth quarter as expected. Institutional demand in the secondary market for our loans remains healthy, which allows us to realize attractive premiums on the loans we sell. The sales have also enabled us to keep our loan-to-deposit ratio relatively stable.

Finally, productivity remains very high as our efficiency ratio for the quarter was 38.5%. Focused expense control and strong productivity are always a priority for us. During the first quarter, we increased our presence in the Los Angeles market, with an opening of a branch in Koreatown. With respect to new branches, we continue to be very selective about pursuing the right locations and giving the timing, any additional branch openings will be in the latter part of the year. Additionally, we will continue to evaluate market conditions as the year progresses, which will also impact our de novo strategy.

Given the continued caution among our customers, we remain slightly more guarded for 2019. However, we continue to believe our long-term prospects remain favorable as we operate in 4 of the most attractive markets in the U.S. We will continue to adapt to market changes and make the necessary investments to grow our business profitably. We continue to expand our presence in our markets, adding client-facing professionals including commercial loan officers.

Accordingly, we continue to believe these efforts will generate growth in both loans and deposits in the high single to low double-digits for the year. Let me now turn the call over to Tom to provide additional details on our financial performance for the first quarter. Tom?

Thank you, Gary. I'll start with the income statement. For the first quarter, total revenue net of interest expense was $34.1 million, a 7% decrease from the fourth quarter, which was primarily driven by a $2.1 million decrease in gain on sales revenue as we sold fewer loans than in the fourth quarter.

Net interest income was down slightly from the fourth quarter at $30.3 million due to a 4 basis point decrease in net interest margin and a $6 million decline in average earning assets. As expected, our net interest margin was down slightly from the fourth quarter to 3.86%.

While our deposit costs were higher in the quarter, we were able to offset much of the pressure on our margin with the increase in our average loan yields.

Loan yields improved again in the first quarter, but at a slower pace given the current rate environment. Our average yield increased by 2 basis points to 5.67% driven by approximately $180 million of mainly LIBOR-based mortgage loans that repriced at an average of 175 basis points higher and approximately $233 million of our prime-based loans, also benefiting from the late December increase in the prime rate.

Additionally, we have one loan that went nonperforming mid-quarter, which combined with lower prepayment penalties in the quarter, had a negative impact on the yield by about 3 basis points. Our average reset for our entire loan portfolio remains at approximately 24 months, which continues to provide us with positive exposure to last year's interest rate increases.

As of March 31, we have approximately $1.1 billion of LIBOR-based loans that will reprice over the next 2 years. As Gary mentioned, LIBOR has declined by approximately 29 basis points since the beginning of the year. And the interest rate outlook for the remainder of the year is flat to potentially down.

Therefore, while we will continue to benefit from loans that will reset in subsequent quarters, we want to see as much of a positive impact as we have in previous quarters. We expect that prior to payoffs, approximately $175 million of LIBOR-based loans will reprice in the second quarter of 2019 at a weighted average rate that is approximately 130 basis points higher.

The increase we saw in our average loan yields was more than offset by a 13 basis point increase in our average cost of interest-bearing liabilities. As Gary mentioned, we have experienced some customer shifting funds into CDs out of our lower yielding deposit products in order to lock in higher rates.

In addition, the higher level of deposit costs is partially being driven by the strategy we implemented in 2018 to issue a higher proportion of 24- and 30-month CDs to extend our deposit maturities, which is an initiative that we have significantly scaled back.

Our total amount interest income was $3.8 million for the quarter, down from $6 million for the fourth quarter due to the decrease in the gain on sales of loans, which we anticipated due to a large amount sold in the fourth quarter. The amount of loans that we sell in any given quarter will vary depending on a number of factors, including loan production in our balance sheet and liquidity management strategies.

While we are still seeing healthy demand in the secondary market, we expect gain on sale revenue will be somewhat similar to down slightly in the second quarter of 2019. Our noninterest expense for the first quarter totaled $13.1 million, a decrease from $13.7 million for the prior quarter. The decline was primarily due to salary expense, occupancy and equipment cost and other expenses including travel and loan origination expenses.

The lower salary expense was due to normal seasonal patterns between quarters as year-end service rewards are recorded in the fourth quarter. Additionally, our occupancy costs were higher in the fourth quarter due to onetime expenses associated with our new branch leases, which did not recur in the first quarter.

We expect operating expenses to gradually increase going forward, as we start to see the full quarter effect of our recently opened branches and as we continue to hire talent to help us gather core deposits and grow lending. But despite the increase in expenses, we expect to maintain our efficiency ratio within our targeted range of the mid- to high 30s.

Moving to the balance sheet. Total loans, which include loans held for investment and held for sale, were $2.94 billion at the end of the fourth quarter, an increase of 1% from the previous quarter driven by $26 million increase in total loans per investment. As Gary mentioned, we expect that our loan growth for the full year will be dependent upon the amount of loans that we sell as part of our balance sheet management strategy and our ability to grow core deposits.

Turning to deposits. Total deposits were $2.44 billion at March 31, down slightly from the end of the previous quarter. This was mostly due to a $56 million decrease in nonmaturity retail deposits, partially offset by a $40 million increase in time deposits.

Our retail time deposits increased by $74 million and were partially offset by the runoff of our $34 million balance of brokered CDs. Moving to asset quality. Nonperforming assets totaled 44 basis points of total assets at the end of the quarter, up from 32 basis points at the end of the prior quarter. The increase was primarily due to one construction and one residential loan, totaling $2.8 million that were moved to nonaccrual status and a $1 million construction loan added to troubled debt restructurings.

The company believes that no impairment exists as there is more than sufficient collateral value supporting these loans. We experienced minimum net charge-offs, which were $138,000 for the first quarter and consisted of $176,000 in gross charge-offs on a legacy loan and $38,000 of recoveries.

We have an excellent credit history. In fact, the last residential mortgage charge-off on a nonlegacy loan we originated was in January of '12, and the last commercial charge-off was in December of that year. With virtually no historical loss rates, our allowances are based upon qualitative factors, which capture the economic and other risks inherent in our portfolio segments. Our provision for loan losses for the quarter was negative $1 million as we released previously recorded loan loss reserves. As a result, our allowance for loan losses decreased 5 basis points to 70 basis points of total loans at March 31.

Finally, I would like to update you on our share repurchase program, which we initiated last quarter. During the quarter, we repurchased approximately 1.2 million shares of common stock at an average price of $9.52 per share. We have not purchased any additional shares since quarter-end. We will continue to opportunistically repurchase shares when we believe they are at a discount to fair value, demonstrating our commitment to enhancing shareholder value. With that, we will open up the call for your questions. Operator, we're ready for questions.

(Operator Instructions) And our first question today comes from Aaron Deer with Sandler O'Neill.

I guess I'd like to start on the -- with respect to the origination outlook. You give some guidance in terms of your expectations for loan and deposit growth on the balance sheet, but in terms of your overall outlook given the new branch location that you've opened or all the hiring that you've been doing. I'm just curious, what your expectations are for total loan originations this year?

Aaron, this is Michael Montemayor. Obviously, that's a moving target for us. Our expectations are that they will continue. We've seen nice increases in our pipelines both in residential and commercial. We've been able to expand our commercial staff from 7 to 10 over the last quarter or 2. And so we believe that as these people get settled in and we continue to add to our residential staff, we'll continue to see an uptick in our overall volumes. Taking seasonality into account, clearly, the first quarter was down, but probably more so than what we would've hoped for. But we're seeing a nice rebound into this second quarter.

Okay. And then it sounds like you've dialed back your longer-term CDs, which make sense given the kind of change in rate outlook. But the -- I'm curious with the CDs that you have been adding, what is the pricing on those? And how does that compare to the FHLB borrowings that runoff in the quarter?

That's a good question, Aaron. Since we've changed the rates on that long-term CD initiative, the average rate on our CD is that we've initiated since then is 2.48%, which is lower than the overnight FHLB, which is roughly in the 280 range. Sometimes we can do a little bit better when we take 2-week advances, that type of thing. But these CDs at these lower rates are lower cost than the overnight advance.

Okay. And then, I guess, I'm a little surprised by the commentary regarding share repurchases, I would've thought that at the current stock price that, that might still seem to be an attractive use of some of your excess capital but it sounds like you're probably going to dial that back some at this point. Is that -- am I reading that correctly?

No, not actually, Aaron. Basically, we got out with the blackout period. So we've been out during that period. But as we've said in the earlier -- with where their share price is at, we're still in the market or will be in the market. We will be in the market, yes.

I misunderstood. And then are you going to put a 10b5-1 plan in place? Or what are your thoughts there?

Talking about it.

Yes, we talk about it from time to time, but not at this point. We have not decided to do that at this point.

And our next question comes from Matthew Clark with Piper Jaffray.

Can you give us a sense for where -- given the move in LIBOR and curve flattening, where new rates -- or new originations are coming on for the low doc portfolio and that's -- the tenant-in-common? Just trying to get a sense for how those 2 origination rates are trending.

Obviously, with the pullback in some of the rates, competition and other things we have seen some flattening or downward pressure on offering rates. Having said that during the first quarter, I believe new originations were up a couple of basis points from 530 to 532. But I would tell you that there's still some continued pressure on the initial offering with the current rate environment. So we don't see a lot of opportunity to see that expand, and there could be some pressure on the new origination volume offering rates in both of those programs, Matt.

Okay. Great. And then maybe on the deposit side of things given the changes.

Well. Yes, on the deposit side, like we talked earlier, we have pullback from some of our longer-term strategy even when we were doing some longer-term CDs at 3% that wasn't much more than the overnight FHLB rate, but we did pull back from that given the significant change in rates over the last 3 to 6 months. But our current offering, as Tom said, is averaging $2.48 million, our new CD offerings. We have a $2.50 million CD out there that we're offering. So 15-month is kind of the most attractive one that's drawing the most activity.

Okay, okay. Great. And then any update just getting into LA and the opportunity on the tenant-in-common business? What you're seeing there early on?

We're very pleased with that initial activity out of the LA market for tenants in common. We're looking at some development work on the commercial side and on the residential side. It had been picking up nicely for us. We've got some staff that are trained down there, and we've announced some staff from the San Francisco market that are making regular visits down there to do some seminars and trainings. So we're pretty pleased with the uptick. We think that is going to be a market that could be at least as large as our San Francisco marketplace for TACs eventually. But the pickup's been nice over the last 3 to 6 months.

Okay. And then just the new nonaccruals and TDR this quarter. Just what the plans are for resolution and potential timing?

Yes, I'll touch on those, Matt. The -- one residential is a loan that's been in and out of delinquency for the last 6, 12 months. It happened to go to a point where we decided to put it on nonaccrual, but we have been receiving payments on and off from this gentleman. But we don't really know the cause of why he goes delinquent and then brings it current type of thing. And that's about an $800,000 credit. On the commercial side, we do have a $2 million construction loan that's been delayed on its take out financing from our borrower for lots of different reasons. We're expecting a payoff on it, although that hasn't happened as of yet. We're still hopeful that he'll be able to get his transaction closed and pay us off, so that should come back to us if it does pay off here in the near term. And then the third one was a TDR. It was a commercial loan that had suffered some vacancies. Again a [tour] looked a little bit on the weaker side, and we extended the loan that had come up for maturity on an interest-only basis, so we thought that would be -- classified that as a TDR given the financial issues he's having with his tenant base and the vacancy. And so we're hopeful that, that will -- he's making his payments, but we felt the extension was a TDR.

Okay. And then just on the coverage ratios, the reserve to loan ratio has been in the range for quite a while now, it's 70 basis points. But how does that 70 basis points kind of compare to your coverage ratios on -- that you require on new originations on the single-family resi side between the 2 products. Just trying to get a sense for whether or not that ratio could drift a little bit lower? Or do you think we're kind of stable here?

Yes. No, on the residential side, it's lower than the 70 basis points average. And as we alluded to, it's mostly 2-factor based, it's approximately 55 basis points on the advanced program, for example.

And our next question comes from Anthony Polini with American Capital Partners.

Is that tax rate still good at around 29%?

Yes, I would say 29%, 29.5%. What's driving that is the increase in production in New York. So we're getting more volume there, and that's going to increase it a little bit here.

As far as the outlook for core expense, I'm kind of tempted to lower my number a little now that we -- originally I was maybe looking for 3 more branches by midyear, and it looks like maybe 1 or 2 branches towards the back half of the year. As far as that core expense rate, granted Koreatown might not be in for a full quarter, is something like a run rate of 14 good for next quarter?

Well, I think you're going to see -- that's probably a reasonable kind of thought. Overall, I think you'll see expenses continue to increase as the balance sheet increases. But for the next quarter, I think that's a reasonable thought.

And for NIM outlook, given the fact I guess the repricing isn't going to be as beneficial this quarter. But then again we've had a little bit of an abatement on the competitiveness for deposits something in the 4 to 6 basis point decline. Is that reasonable for next quarter?

Yes, I think we're currently projecting pretty close to the decrease that occurred this quarter. So your estimate is right in that ballpark.

Okay. And I guess I'll just factor in a $1 million reserve release quarter through next year?

Well I wouldn't do that. But -- no, that's rare for us. But basically, had to do with the seasoning of predominantly our advantage loans in new markets and some of the foreign national production that we do. Basically, rolled down from a higher requirement to a lower requirement, and that's the main driver for the recapture.

All right. I mean, what I've been doing -- realizing that the -- kind of balances around a little bit on the provision line, I've been putting $1 million a quarter in the provision line, and this way I'll kind of hit or miss by a little bit on the upside and the downside. Is that still a reasonable way to project?

Yes, I would say that's -- again, it's dependent on growth. So really if you look at the growth and say 70 basis points, something like that, you're going to -- 70 to 75, you're going to get to where we should be at.

(Operator Instructions) And our next question is a follow-up from Aaron Deer with Sandler O'Neill.

Just one quick follow-up on the deposit costs. Do you have the volume of CD maturities in the second and third quarter? And what the average rate is on those maturities?

Yes. The second quarter is $84 million and maturity averaging 1.54%.

And third quarter is $55.5 million at 1.83%.

Okay. So we should -- that should then gradually converge probably by early next year to -- assuming that there's no change in rates between now and then?

Yes.

Yes, that's fair.

And there are no further questions at this point. I would like to turn the conference back over to Mr. Judd for any closing remarks.

I think we lost Gary there.

I'm sorry. I haven't learned how to press the mute button. But anyway, thank you, everybody. We appreciate your joining us, and we look forward to speaking to you at the end of next quarter. And if you do have questions, don't hesitate to reach out and contact us.

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