U.S. Markets close in 5 hrs 19 mins

Sterling Bancorp Inc (SBT) Q2 2019 Earnings Call Transcript

Motley Fool Transcribers, The Motley Fool
Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Sterling Bancorp Inc (NASDAQ: SBT)
Q2 2019 Earnings Call
Jul 29, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the Sterling Bancorp Inc., Second Quarter 2019 Earnings Conference Call. My name is Allison and I will be your operator today. [Operator Instructions]. This call is being recorded and will be available for replay through August 12, 2019, starting this afternoon at approximately one hour after the completion of this call.

I would now like to turn the conference over to Mr. Larry Clark from Financial Profiles. Please go ahead, Mr. Clark.

Larry Clark -- Investor Relations

Thank you, Alison. And good afternoon, everyone. Thanks for joining us today to discuss Sterling Bancorp's financial results for the second quarter ended June 30, 2019. Joining us today from Sterling's management team are Gary Judd, Chairman and CEO; Tom Lopp, President, Chief Operating Officer and Chief Financial Officer; and Michael Montemayor, President of Retail and Commercial Banking and Chief Lending Officer. We'll be participating in the Q&A portion of the call. Gary and Tom will discuss the second quarter results and then we'll open the call to your questions.

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

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

Gary Judd -- Chairman and Chief Executive Officer

Thank you, Larry. And good afternoon, everyone. And again, we thank you for joining us today. I'm going to begin with a brief overview of our second quarter. And then, Tom, will continue the discussion in more detail. Our financial results for the quarter were generally in line with our expectations. We generated higher pre-provision net interest income during the quarter. Driven by slightly higher average loan balances and a relatively stable net interest margin.

Our non-interest income was marked by a lower gain on sale loans and $1.2 million valuation allowance taken against our mortgages servicing rights primarily due to the decline in long-term interest rates. While we experienced improved loan production, payoffs trended upwards, reflecting the low mortgage rate environment, resulting in flat total loan growth after loan sales.

Net income for the quarter was $13.4 million or $0.26 per diluted share. The $1.2 million valuation allowance taken against our mortgage servicing rights mentioned earlier impacted our diluted EPS by approximately $0.02 [Phonetic].

Even with the lower reported net income for the quarter, we still generated attractive returns for our shareholders with an annualized ROA of 1.64% and a return on average tangible common equity of 15.6%. We continue to do a good job reaching our target customers and demand for our suite of loan products remains healthy across all of our markets, particularly for our niche residential mortgage loans and our commercial loans.

Total loan production was $356 million, an increase of $52 million from the first quarter, driven mostly by strong residential mortgage loan origination, which were up 23% from the prior quarter. This underlying demand is an encouraging and particularly in light of the fact that one segment of our customer base. The foreign national Chinese homebuyer, has experienced a significant pullback in demand over the past 12 months due to a combination of tighter currency controls and overall caution over the ongoing trade dispute between the US and China.

That being said, we have seen an increase in demand from Asian American buyers who desire to own their home. And the recent decline of mortgage rates is providing a nice catalyst, spurring both new purchase and refinance activity. We were seeing the demand continue into the third quarter. However, with increased industry wide refinancing activity. Our existing portfolio isn't immune and as a result, we experienced higher payoffs during the quarter, muting our overall loan growth.

Our commercial real estate construction business remains healthy, despite somewhat lower originations in the second quarter, mainly due to temporary project delays. Our pipeline for commercial loans is the strongest it's been in a number of years.

On the deposit side, we had a strong quarter. Total deposits grew by $110 million during the period, driven by significant growth and time deposits, partially offset by declines in money market, savings and NOW accounts.

This shift in mix is primarily due to customers rotating out of lower yielding accounts into higher yielding CDs as they seek to lock in higher fixed rates ahead of potential rate declines. While, competitions for deposits remains high, particularly in San Francisco and Los Angeles markets, we continue to have success in tracking a net inflow of deposits across our branch network.

We believe the customer relationships are key to our success and we build our reputation on highly personalized service, which has led to customer loyalty and thus a high concentration of stable deposits. As a result, over 88% of our deposits are core deposits, managing our balance sheet liquidity and revenue diversity continues to be a top priority an on-going sales are a key component of that strategy.

The demand from institutional buyers continues to be healthy, reflecting the outstanding quality and performance of the loans we originate. We will continue to strategically utilize loan sales going forward to balance our loan growth once our core deposit gathering, and to provide a supplemental source of revenue enhancing the composition of our earnings stream.

Disciplined expense control and strong productivity continue to be a primary focus for us, even as we expand our presence in our markets and add client facing professionals, making the investments to support our long term growth plans. That being said, our non-interest expense increased during the second quarter, primarily due to slightly higher salaries and employee benefits and professional fees. A portion of which were related to the increased regulatory compliance initiatives.

Looking to the second half of the year, we remain optimistic about our opportunities to continue delivering positive results despite some headwinds. Our business remains sound and we expect loan growth to continue as our pipelines are healthy and credit quality remains excellent which should translate into increased revenue and continued strong returns for our shareholders.

We expect some near-term pressure on margins due to the expected decline in interest rates. Furthermore, expenses related to regulatory compliance are expected to remain somewhat elevated. Our stock repurchase program remained active during the quarter and we plan to continue to be active on this front if our shares continued to trade at a significant discount to fair value, demonstrating our confidence in the long term prospects for our business and our commitment to creating shareholder value.

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

Tom Lopp -- President, Chief Financial Officer, Chief Operating Officer

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'll start with net interest margin. We've worked hard to protect our NIM and will remain diligent in managing the variables that we have control over.

Our NIM for the second quarter of 2019 was 3.84%, down 2 basis points from the first quarter. It was positively impacted by an 11 basis point increase and the average yield on earning assets, primarily from our loans was offset by an 11 basis point increase in the cost of our interest bearing liabilities.

Loan yields improved again in the second quarter. Our average yield increased by 11 basis points to 5.78%, driven by approximately $157 million of mainly LIBOR based mortgage loans that repriced at an average of 126 basis points higher. This was down from 175 basis point positive differential that we experienced in the first quarter and the repricing of a $180 million of LIBOR based loans.

Additionally, our net interest margin benefited during the quarter from elevated loan fees, mainly driven by higher prepayment fees, which had an approximate 5 basis point positive impact on the average yields. Our average reset for our entire loan portfolio remains at approximately 24-months, which continues to provide us with positive exposure through 2019, but will become a headwind in 2020 as LIBOR and prime resets will begin to reflect the recent decline in rates.

As of June 30th, we have approximately $1.1 billion of LIBOR based loans that will reprice over the next two years. LIBOR declined by approximately 53 basis points in the second quarter and 75 basis points year-to- date.

The interest rate outlook for the second half of the year is more toward slightly lower rates. Therefore, while we will continue to benefit from loans that will reset in subsequent quarters. We won't see as much of a positive impact as we have in previous quarters.

We expect that prior to payoffs, approximately $145 million of LIBOR based loans will reprice in the third quarter of 2019 at a weighted average rate that is approximately 75 basis points higher. In addition, we have approximately $130 million of prime based commercial, construction and home equity loans that will reprice if the Fed cuts rates as expected this week.

This represents approximately 58% of our total prime based loans as the remaining 42% are currently after poor rates. Although we continue to see aggressive loan pricing among some competitors, we have been able to keep our pricing on our residential loans stable. That being said, we are putting new loans on the balance sheet at rates that are lower than the current average loan yield, therefore putting pressure on our average loan yields going forward.

The increase we saw in our average loan yields during the second quarter was offset by an 11 basis point increase in our average cost of interest bearing liabilities, which was a function of both rates and mix. Our deposit costs increased by 13 basis points during the quarter. Our money market savings and now accounts actually declined by 1 basis point. However, this was more than offset by a 20 basis point increase in the cost of our time deposits. Furthermore, as Gary mentioned, we have experienced on customers shifting funds in the CDs out of our lower yielding deposit products, in order to lock in higher rates.

While the environment for deposit gathering remains highly competitive, we do expect to see some benefit from lower interest rates in the third quarter. We are also seeing fewer deposit promotions among our competitors than in past quarters. We lowered our rates on CDs in mid-May and again in mid-July. All things considered, we would expect continued moderate pressure on our NIM, and in the third quarter and we likely seeing stabilization in the fourth quarter.

Our total non-interest income decreased $1.7 million from the first quarter to $2.1 million. The decrease was primarily attributable to the $1.2 million mortgage servicing rights valuation allowance. And to a lesser extent, $478,000 decrease in the gain on sale of loans.

Our gain on loan sales was lower due to a different mix of mortgage pools that were sold. The amount of gain on sale income we generate from quarter-to=-quarter will vary based on a number of factors, including our loan production levels, our success in gathering deposits in our short term liquidity needs. Our total amount interest expense increased $600,000 from the first quarter to $13.7 million. Due mainly the slightly higher salary expense and professional fees.

A portion of which were related to increased regulatory compliance initiatives. We have add personnel amount to drive and support our loan, deposit and revenue growth and to increase our corporate back office operations team to support that growth. We expect that our operating expenses will continue to increase in the coming quarters as we hire additional loan officers and business development professionals and corporate back office support.

In addition, we expect to incur increased regulatory compliance costs, both ongoing and onetime in nature, in order to comply with our recent agreement with the OCC. Moving to our asset quality, we continue to experience net recoveries and positive credit metrics in the portfolio. Non-performing assets declined $2 million to $12.2 million or 37 basis points of total assets at the end of the quarter from 44 basis points of total assets at the end of the first quarter.

The decline was primarily due to a $2 million construction loan, which was placed on non-accrual in the first quarter, being paid off in full during the second quarter. We did not see any meaningful losses in any of our past due loans in rated credits. We had recoveries of $40,000 and no charge-offs during the quarter.

Our provision for loan losses was $180,000 for the quarter, which was primarily attributable to our very low historical loss rates. As you may recall, we recorded a negative provision of $1 million in the first quarter. As we released previously recorded loan loss reserves. Our allowance for loan losses was relatively steady at 71 basis points of total loans at June 30th, up 1 basis point from the end of the first quarter.

Finally, I would like to update you on our share repurchase program. During the quarter, we repurchased approximately 1 million shares of common stock at an average price of $9.67 per share. Year-to-date, we have repurchased approximately 2.2 million shares at an average price of $9.59 per share. We will continue to opportunistically buy shares when we believe they are at a discount of fair value demonstrating our commitment to enhancing shareholder value.

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

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question today will come from Aaron Deer of Sandler O'Neill and Partners. Please go ahead.

Aaron Deer -- Sandler O'Neill and Partners -- Analyst

Hi. Good afternoon, everyone. I apologize for the background noise. Quick question on the margin outlook. Sounds like you suggested it could be down a little bit in the third quarter than stabilizing in the fourth quarter. Does that reflects the pay-off benefit that you had, tend to like there's maybe -- that I hear 5 basis points of benefit from early pay-offs in the margin in the second quarter. How does that affect your guidance?

Tom Lopp -- President, Chief Financial Officer, Chief Operating Officer

That is part of it, Aaron. Aaron our guidance for Q2 was more of a decrease in NIM, but because of those other factors that held stronger than we had anticipated. So we're not projecting that same type of benefit in Q3.

Aaron Deer -- Sandler O'Neill and Partners -- Analyst

Okay. Thank you. And then any expectation in terms of what volume of loan sales you might be looking to do in the third quarter?

Michael Montemayor -- President Commercial and Retail Banking, Chief Lending Officer

We are evaluating that currently, we do have some pools that put together, Aaron. This is Michael Montemayor. We do have some pools that we're looking at right now that we're marketing. I think it will depend on how successful we are in the first part of this quarter in terms of deposit growth, what we actually sell. But I would say it would be down from the first quarter levels.

Aaron Deer -- Sandler O'Neill and Partners -- Analyst

Okay, great. Thanks for taking my questions.

Michael Montemayor -- President Commercial and Retail Banking, Chief Lending Officer

Thank you. Second quarter levels. And then, Tom, corrected me.

Operator

And our next question will come from Matthew Clark of Piper Jaffray. Please go ahead.

Matthew Clark -- Piper Jaffray Co. -- Analyst

Hi. Good afternoon.

Gary Judd -- Chairman and Chief Executive Officer

Good afternoon, Matt.

Matthew Clark -- Piper Jaffray Co. -- Analyst

Just want to talk through deposit costs going forward, assuming the Fed cuts on Wednesday. Kind of what your outlook is for deposit costs well enough to potentially peak here in the third quarter or do you think there's going to be a little bit of a lag with the CD repricing before they can even start to pass through some of those -- some of that rate cut to depositors?

Gary Judd -- Chairman and Chief Executive Officer

Yeah, I think we'll see just a little bit of lag. But on the CDs, but on the money market, I think that's going to be the key driver to our deposit costs going forward. We anticipate with the Fed move, we'll be very likely to lower the money market rates as well as looking at additional CD rate changes. But as far as the pure CD I think there is a little bit of lag, if you will, before we start to see that net decrease.

Operator

Our next question will come from Anthony Polini of American Capital Partners. Please go ahead.

Anthony Polini -- American Capital Partners -- Analyst

Hey, guys. Nice quarter.

Gary Judd -- Chairman and Chief Executive Officer

Thank you, Anthony.

Anthony Polini -- American Capital Partners -- Analyst

It hasn't been that easy this quarter. One thing I'm looking at, is that commercial book that you have, the CRE and the CNI that really got hit on the prepaid. Did you fight for some of that? Is it going away just because it's too competitive to try to keep, what's going on? What's the dynamics there?

Michael Montemayor -- President Commercial and Retail Banking, Chief Lending Officer

Well, certainly there, Anthony, this is Michael Montemayor. Certainly there is a lot of competition on multi-family front in the marketplace. But I would say most of the decline on the commercial side has been on the construction portfolio and some of it was anticipated. Some of it was paid off quicker than we had expected. And then we had a little bit of a lag in closings that we thought would occur earlier in the year that [Indecipherable] appear for the third quarter itself. A bit of a timing issue, but I'd say most of the down was on the construction pay-off post [Phonetic].

Anthony Polini -- American Capital Partners -- Analyst

As far as the dynamics in that segment, you're still actively trying to increase the portfolio?

Michael Montemayor -- President Commercial and Retail Banking, Chief Lending Officer

Yes, we are actively trying to increase our commercial portfolios. In fact, we've added in the second quarter two additional lenders, one in the New York market and one in the LA market. Our pipeline there is probably the largest we've had in recent memory. Several years currently so we're pleased with the prospects of the coming quarter or two. As we close out, loans are in process.

Anthony Polini -- American Capital Partners -- Analyst

Hopefully the New York market will get a little less competitive going forward.

Michael Montemayor -- President Commercial and Retail Banking, Chief Lending Officer

I will hope so.

Anthony Polini -- American Capital Partners -- Analyst

In the rent control area, that might help you guys?

Michael Montemayor -- President Commercial and Retail Banking, Chief Lending Officer

Yeah, we're really happy to add a second lender in the New York market, we think it is a strong market and a lot of opportunity there.

Anthony Polini -- American Capital Partners -- Analyst

Where did you pick up that New York lender from?

Michael Montemayor -- President Commercial and Retail Banking, Chief Lending Officer

He came was -- he came from a local New York bank. I'm trying to blank on the name at top of my head, but it was a local Community Bank in New York.

Anthony Polini -- American Capital Partners -- Analyst

Okay, I've been following all the local community banks in New York since they've been public.

Michael Montemayor -- President Commercial and Retail Banking, Chief Lending Officer

I can follow up with you, Anthony. Let you know, but --

Anthony Polini -- American Capital Partners -- Analyst

Thanks. On the expense side, you actually came in a little bit below where we had you pegged. When we look at the outlook for the second half of the year versus the first half on core expense [Technical Issues] going?

Michael Montemayor -- President Commercial and Retail Banking, Chief Lending Officer

It kind of cut-out a little bit on the second half of your question, Anthony. Could you repeat that?

Anthony Polini -- American Capital Partners -- Analyst

The operating expense outlook for the second half of the year?

Michael Montemayor -- President Commercial and Retail Banking, Chief Lending Officer

Yeah, I think, we did come out a little bit better in the quarter. I would say that we're looking at, high single digit type of annual growth rates.

Anthony Polini -- American Capital Partners -- Analyst

Okay. And the provision came in a little lower, but not much you can do there when you don't have any charge offs, right. And loan growth is kind of flattish?

Michael Montemayor -- President Commercial and Retail Banking, Chief Lending Officer

Right. And, we're maintaining that 70 basis point to 75 basis point type of outlook.

Anthony Polini -- American Capital Partners -- Analyst

And the tax rate came in a little lower. Should we still use 29.5% [Phonetic] for the back half of the year?

Michael Montemayor -- President Commercial and Retail Banking, Chief Lending Officer

Yeah, I would say so. Yes.

Anthony Polini -- American Capital Partners -- Analyst

All right. Nice job, guys. Thanks again.

Michael Montemayor -- President Commercial and Retail Banking, Chief Lending Officer

Thanks, Anthony.

Anthony Polini -- American Capital Partners -- Analyst

Thank you.

Operator

[Operator Instructions] Our next question will be a follow up from Matthew Clark of Piper Jaffray. Please go ahead.

Matthew Clark -- Piper Jaffray Co. -- Analyst

Yes. Sorry, about that. Did you quantify the payoffs in the quarter and the amount of loan sales?

Michael Montemayor -- President Commercial and Retail Banking, Chief Lending Officer

Payoffs during the quarter were right, approximately $200 million.

Tom Lopp -- President, Chief Financial Officer, Chief Operating Officer

Up $40 million from.

Michael Montemayor -- President Commercial and Retail Banking, Chief Lending Officer

Yeah, up $40 million from Q1. Thank you, Tom.

Gary Judd -- Chairman and Chief Executive Officer

What was the second part of the question, Matt?

Matthew Clark -- Piper Jaffray Co. -- Analyst

Loan sales. How much you had this quarter?

Michael Montemayor -- President Commercial and Retail Banking, Chief Lending Officer

Is in right around $70 million.

Matthew Clark -- Piper Jaffray Co. -- Analyst

And that's for the Q2, right?

Michael Montemayor -- President Commercial and Retail Banking, Chief Lending Officer

Q2, $70 million.

Tom Lopp -- President, Chief Financial Officer, Chief Operating Officer

Every quarter, you know. Go ahead, Matt.

Matthew Clark -- Piper Jaffray Co. -- Analyst

Is that up from the $48 million last quarter?

Michael Montemayor -- President Commercial and Retail Banking, Chief Lending Officer

Correct.

Matthew Clark -- Piper Jaffray Co. -- Analyst

Okay, fine.

Michael Montemayor -- President Commercial and Retail Banking, Chief Lending Officer

Different mix also, we look every quarter, whether it sell investment property loans that carry a little higher premium with prepayment penalties versus one, one armed versus, seven one arms. So mix was different. Also, how we sell in terms of servicing released or servicing retained and all those play into the total. But yes.

Matthew Clark -- Piper Jaffray Co. -- Analyst

Okay. And Gary, did you speak to the loan growth guidance for the year. I think you guys previously look to achieve, high single digit, low double digit. I don't know, again, based on year-to-day performance, whether or not that's still?

Gary Judd -- Chairman and Chief Executive Officer

Yeah, I think that's still our expectation. The unknown obviously, is what the Fed does and whether that triggers any further acceleration and pay-offs, but certainly with the pipelines we have across the residential and the commercial portfolios. We believe the second half will continue to be quite healthy.

Matthew Clark -- Piper Jaffray Co. -- Analyst

Okay. And then any update on the efficiency gains as well, mid-to-high 30s. Is that still OK with BSA expenses or is it the high end of that range?

Michael Montemayor -- President Commercial and Retail Banking, Chief Lending Officer

No, that is the guidance. I think once the NIM stabilizes and depending on what we do at loan sale there, I think we can still stay in that range.

Matthew Clark -- Piper Jaffray Co. -- Analyst

Okay. Thank you.

Operator

Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to management for any closing remarks.

Gary Judd -- Chairman and Chief Executive Officer

Once again, thank you all for joining us. We look forward to speaking with you next quarter and please reach out to us if you have further questions.

Operator

[Operator Closing Remarks].

Duration: 28 minutes

Call participants:

Larry Clark -- Investor Relations

Gary Judd -- Chairman and Chief Executive Officer

Tom Lopp -- President, Chief Financial Officer, Chief Operating Officer

Michael Montemayor -- President Commercial and Retail Banking, Chief Lending Officer

Aaron Deer -- Sandler O'Neill and Partners -- Analyst

Matthew Clark -- Piper Jaffray Co. -- Analyst

Anthony Polini -- American Capital Partners -- Analyst

More SBT analysis

All earnings call transcripts

AlphaStreet Logo

More From The Motley Fool

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.