Sterling Bancorp Inc (SBT) 2019 Q4 法說會逐字稿

Good afternoon, and welcome to the Sterling Bancorp Inc. Fourth Quarter and Year-End 2019 Earnings Conference Call. My name is Sean, and I will be your operator today. (Operator Instructions) This call is being recorded and will be available for replay through February 12, 2020, starting this afternoon at approximately 1 hour after the completion of this call.

I would now like to turn the conference over to Mr. Larry Clark, Investor Relations for the company. Please go ahead, Mr. Clark.

Thank you, Sean, and good afternoon, everyone. Thanks for joining us today to discuss Sterling Bancorp's financial results for the fourth quarter and year ended December 31, 2019. Joining us today from Sterling's management team are Tom Lopp, Chairman, CEO and President; Steve Huber, Chief Financial Officer and Treasurer; and Michael Montemayor, President of Retail and Commercial Banking and Chief Lending Officer, who will be participating in the Q&A portion of the call. Tom and Steve will discuss the financial results, and then we'll 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. 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.

At this time, I'd like to turn the call over to Tom Lopp. Tom?

Thank you, Larry. Good afternoon, everyone, and again, thank you for joining us today.

Now let me begin with a brief overview of the year and our fourth quarter, and then Steve will continue the discussion in more detail. Our financial results for 2019 were generally in line with our expectations. Our full year performance reflected relatively stable net interest income, lower noninterest [income] (corrected by the company after the call), higher operating expenses and ongoing excellent credit quality. We reported net income of $57 million or $1.11 per basic and diluted share, which translated into a return on average assets of 1.74% and a return on tangible equity of 16.38%, again putting us at the upper end of our small cap community bank peers.

Our total loan portfolio was essentially flat for the year as new production and fewer loan sales were offset by higher payoffs. Deposits increased slightly for the year, with an increase in time deposits partially offset by a decline in money market, savings and NOW accounts.

Net interest margin for the year declined 16 basis points despite a 21 basis point increase in average loan yields as the average cost of our interest-bearing deposits increased 47 basis points due to both rate and mix.

Noninterest income declined for the year primarily due to fewer loan sales as we decided to retain more of our loan production on our balance sheet.

Noninterest expenses were up moderately in 2019 driven by higher salaries and employee benefits, occupancy and equipment costs and professional fees, a substantial portion of which related to increased spending on regulatory compliance and internal review initiatives.

Our asset quality remained solid. During 2019, we experienced net recoveries for the seventh year in a row, and our nonperforming assets only modestly increased, representing 41 basis points of total assets at year-end.

With all that said, the year wasn't without its challenges. As we previously announced on December 9, we decided to suspend our Advantage Loan program in connection with an ongoing internal review of the program's documentation procedures. While we can't go into detail regarding the review, apart from what we have already publicly disclosed in our filings with the SEC, we do expect our 2020 results to be adversely impacted by this action.

Specifically, we expect our total loan production to be below recent levels adversely impacting our portfolio loan growth rates. Our noninterest income is also likely to remain below recent levels as we expect to retain the vast majority of our new loan production on our balance sheet. In addition, our operating expense levels are expected to stay elevated as we complete our internal review and invest in our compliance infrastructure. We intend to offset a portion of our reduced loan volume by continuing to work on initiatives to diversify our overall loan production, including expanding our commercial lending and tenant-in-common lending efforts.

In addition, we continue to review new residential loan products that we believe can meet the needs of our customers in our served markets. We are presently in the planning stages for three new loan products that we think will appeal to traditional customers that found our programs attractive as well as expand and diversify our potential base of clients. All three of these loan products are similar in approach to the advantage loan program in that they target underserved customers and yet will require a higher level of documentation.

The first product would appeal to customers who live in higher cost areas, enabling them to access homeownership. The second product focuses mainly on serving foreign national borrowers. In the third product, we'll focus on investors seeking loans for income-producing residential properties. All three of these products allow for expanded credit metrics with prudent underwriting offsets, which is consistent with our lending history and one of the main reasons for our excellent credit quality.

While we are disappointed that we have encountered this setback with our Advantage Loan program, we are committed to making the necessary investments in 2020 to realize our long-term growth potential while maintaining our higher profitability metrics.

With that as an overview, I would now like to formally introduce you to Steve Huber, our recently appointed CFO and Treasurer, as this is his first time participating in our earnings conference call since his promotion. Steve has been an outstanding CFO for our bank and was the obvious choice to assume the roles of CFO and Treasurer for Sterling. We appreciate his significant contributions since joining Sterling 24 years ago and look forward to benefiting from his leadership and experience moving forward. Steve?

Thank you, Tom. I appreciate the opportunity to take over your former position as CFO. I look forward to continue to working closely with you and supporting you in your new roles as Chairman and CEO. I also look forward to continuing to meet with our investors and analysts to help them understand our business and long-term prospects.

Now turning to the results for the quarter. Starting with the income statement. For the fourth quarter, total revenue, net of interest expense, was $32.3 million, a decrease of 3% from the third quarter, which was primarily due to a decrease in noninterest income of $0.8 million.

Net interest income was stable at $30 million in the fourth quarter as a 1.3% decrease in average earning assets was substantially offset by a higher NIM. Our fourth quarter NIM of 3.74% increased by 4 basis points from the third quarter. The NIM expansion stem from -- mainly from a reduction of 12 basis points in our cost of interest-bearing deposits as well as interest recaptures from payoffs and nonperforming loans.

Given the Fed fund rate reductions in the second half of 2019, we expect our deposit costs to continue declining near term, providing some support to our NIM. However, lower levels of loan production in 2020 and associated one-offs in our comparatively high-yielding loan programs is likely to pressure our NIM this year. With less balance sheet growth in the near-term, there may be more opportunity to reduce deposit costs.

Our total noninterest income decreased by $0.8 million from the third quarter to $2.4 million. The decline was attributable to lower gains on sales of loans of $1.9 million, which was only partially offset by a $0.8 million increase in other income as a result of a final distribution on equity investment in a mortgage servicing valuation recovery.

Given our plan to keep more of our loan production on our balance sheet this year, we don't expect any gains on bulk loan sales in the near term.

Our total noninterest expense increased by $1.2 million from the third quarter to $14.6 million due mainly to higher professional fees, a substantial portion of which related to increased spending on regulatory compliance and internal review initiatives as well as higher occupancy and equipment expenses. Partially offsetting these increases were lower salaries and employee benefits and other expenses. In addition, we again did not incur any FDIC assessments due to a small bank assessment credit applied during the quarter. We expect to incur increased regulatory compliance costs, both ongoing and onetime in nature, in order to comply with our recent agreement with OCC, complete our internal review and invest in our compliance infrastructure.

Our effective tax rate for the fourth quarter of 2019 was 19%, down from 29% for the third quarter of 2019 and from 27% for the fourth quarter of 2018. The lower tax rate in the fourth quarter of 2019 was primarily due to changes in state tax estimates for 2019.

Moving to our asset quality. During the fourth quarter, we continued a seven year trend of net recoveries and showed stable credit metrics in the portfolio. Nonperforming assets increased by $1 million in the fourth quarter to 41 basis points of total assets compared to 37 basis points of total assets at the end of the third quarter. The increase was primarily due to a $4.4 million increase in residential nonperforming loans, offset in part by the full payoff of a $3.5 million construction loan that was previously classified as nonperforming. At year-end, the average LTV on our NPLs was 55%. Recoveries for the fourth quarter of 2019 were $76,000, and there were no charge-offs during the quarter.

The company recorded a provision for loan losses of $450,000 for the fourth quarter compared to $251,000 for the third quarter. The larger provision was primarily attributable to increases in required reserves and commercial real estate and construction allowance. The allowance for loan losses was 75 basis points of total loans compared with 72 basis points at the end of the third quarter.

During the quarter, we repurchased approximately 500,000 shares of common stock at an average price of $9.93 per share. For the full year 2019, we repurchased approximately 3.1 million shares at an average price of $9.68 per share. Given our substantial excess capital position and near-term organic growth headwinds, we expect to be active on our share repurchase program in 2020.

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

(Operator Instructions) Our first question today will come from Aaron Deer with Piper Sandler.

I guess just kind of to focus on some of those forward expectation items, one is on the net interest margin guidance. If I understood correctly, it sounds like you actually expect the margin to trend lower this year. But obviously, we saw a lift happen this quarter, and it seems like the trends ought to be similar in terms of continued downward deposit pricing less need for that additional liquidity. And -- so I just -- I guess, I would have thought that maybe we could see some margin lift through the year, not further pressure. So maybe if you can give some additional color there?

Yes, this is Tom, Aaron. Part of the driver there is the loans that are repricing. LIBOR has come down quite a bit. The new production yields are lower as well. I'd like to think we tend to guide conservatively. We may have more opportunity with the deposit pricing, especially on the money markets that we haven't really built into our forecast at this point, but we're going through that process right now.

I would also add, Tom, the payoffs tend to put some pressure. With the drop in interest rates in the low interest rate environment right now, you tend to see the higher-yielding loans pay off quicker, which could put some pressure on what we built into our assessment.

Yes, this is Steve. I would also add. During Q4, the NIM was lifted 4 basis points by interest recaptures during the quarter and also 4 basis points by fee income, particularly prepayment fee income.

I'm sorry, that was 4 basis points of interest recapture, and what was the second?

4 basis points of additional fee income compared to Q3.

Prepayment penalties.

Particularly prepayment penalties.

Understood. Okay. And then it sounds like you've got some new loan programs under development. And I know you're pushing harder on -- in some of the commercial categories as well. Given that and the fact that you are not planning to sell any production at this point, what's your outlook for portfolio loan growth for 2020?

Why don't we talk first quarter first?

Yes. I would say the first quarter, we're certainly going to see some pressure with the lower loan volumes, Aaron. This is Michael. I believe that we expect that to pick up as some of these other plans and programs come to fruition. On the short order, we're having more focus on our existing loan programs. But I believe the first quarter will be down potentially given the loan volumes that we expect in the first quarter.

Okay. So initially, it sounds like the kind of regular flow of payoffs is going to be a little too strong to offset that.

Yes. So with the lower loan production, we're expecting first quarter production, which is really all we have visibilty into, and we'll try to guide as best we can quarter-to-quarter, but we would expect loan volume to be down in the $150 million to $180 million range.

Q1.

For Q1.

Got it. Okay. And then in the noninterest income, I just want to understand, particularly, the other line. It seems like there was some noise there. Can you maybe give a little bit additional color on what the -- caused the increase there?

Yes.

Yes. We had investment properties that we settled on and collected $800,000.

A legacy loan. This is Michael, Aaron. It was a legacy loan that we worked out a partnership for some property we took back 10-plus years ago.

Got it. Okay. Maybe -- could you give some color behind the CRA purchase and sale that seemed a little unusual? What was the thinking there?

Just our need to purchase some CRA-qualifying assets in different markets to meet certain thresholds that we've set for ourselves. Once we purchase them and book them, then we make some decisions on ultimate resolutions. In this case, we purchased them, booked them and then ultimately, sold them for various reasons within the quarter.

Yes. And Aaron, we've done this historically, but it hasn't been as obvious because of both loan sales and getting mixed in with that. So it's more noticeable this quarter. And the reason for them, in general, is most of the markets we're in, less opportunity for low- to mid-income-type profiles.

Okay. And then what was the MSR valuation adjustment in the actual dollar amount in the third and the fourth quarter? Just wanted to try to better understand the variances there.

Yes. The third quarter, we had to take a valuation adjustment of $99,000. In the fourth quarter, we were able to recapture a valuation adjustment of $321,000. We still have $1.1 million on the balance sheet as a valuation adjustment. So we'll deal with that in the future as rates fluctuate.

Okay. And then the FDIC credit in the quarter, it was, what, around $240,000. Is that about right?

About $230,000 quarter-to-quarter. We were able to recapture that entire amount in Q3 and Q4, and we have about $199,000 remaining as a credit going forward for Q1. Remains to be seen if we can actually use that, but we're expecting to.

Okay. Perfect. And then also sticking with the expense line, the professional fees, obviously, elevated given some of the initiatives that are underway. Just trying to get a sense, though, how much of what might have been in the fourth quarter might have been onetime in nature. Or how persistent we can expect professional fees to be at this level? Or how quickly they might drop back down to something more normalized?

Yes. I would say that Q4 was definitely very high. Q1, I think, would be comparable. But then I think you could see that start to drop meaningfully.

Okay. Good. And sorry to keep going. But hopefully, I'm not hogging this call from other analysts. The -- I did have -- and then just with these new products that are under development, what kind of expenses might be associated with that and diversifying your business lines and new hires to support any new products?

I don't think there'll be a significant amount of initial expense. Really existing staff, time, energy focus would be what I'd say our investment is on it. And it's really to support our lending staff and their abilities to go out and offer product -- different product -- unique product that helps expand credit to the markets we serve.

Okay. Training, that type of thing?

Yes. It will be similar on training, but mostly with existing staff, I would add, Tom. But I do believe that there will not be a tremendous amount of additional expense other than what we currently are carrying as operational costs.

Okay. And then just finally, on the tax rate, just wondering if the full year 2019 effective rate is a good proxy for 2020?

It is not. You'll roughly want to use between 27% and 29% going forward.

(Operator Instructions) At this time, there are no further questions in the question queue. And I would like to turn it back over to the management for any closing remarks.

We'd like to thank everyone for their support, and we look forward to talking to you next quarter. Thank you.

The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.