Q3 2019 Earnings Call
<unk> earnings Conference call.
My name is wrong, so oh beer operator today.
At this time.
Are they listen only mode.
This call is being recorded.
Right place.
2019, starting this afternoon approximately one hour after the completion of this call.
I would now like to turn the conference over to Mr., Tony Robinson from financial profiles. Please go ahead Mr. Rossi.
Thank you Rocco and good afternoon, everyone. Thanks for joining us today to discuss Sterling Bancorp Sprint <unk> results for the third quarter ended September Thirtyth 2019.
Joining us today from Sterling's management team or Gary Jug, Chairman and CEO , Tom Lapa, President Chief operating Officer, and Chief Financial Officer, Michael Montani, or president of retail and commercial banking Chief lending officer, who will be participating in the queue, but a portion of the call.
Gary and Tom will discuss the third quarter results and then we'll open up the called 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 Sterling Bancorp and 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 SEC filings, which are available on the company's website.
The company disclaims any obligation to update 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.
This time I'd like to turn the call over to Gary Judd Gary.
Thank you Tony Good afternoon, everyone and again, thank you for joining us today.
As many of you have seen I recently announced my retirement, which will be effective June thirtyth.
That's a we my last earnings call I want to take a minute to thank each of you are covering analysts and also our shareholders for all of your support.
I appreciate your insight and I've enjoyed by interactions with all of you.
I wish you great success in your careers and future pursuits.
I leave Sterling and extremely capable am so Tom up I'm, you know very well.
When Tom takes over as CEO and chairman enjoys the board as a director on November Thirtyth.
Steve humor will be promoted to chief financial officer, and Treasurer of Sterling.
Tom and Steve our exceptional what they do.
And our well deserving of their promotions.
I congratulate them for their successes. Additionally, they have.
Bought in my opinion is one of the best team of associates, an executives in the community banking sector today.
I have been fortunate to work with the entire Sterling team.
Now let me begin with a brief overview of our third quarter and then Tom will continue the discussion in more detail.
Overall, our financial results for the third quarter were in line with our expectations.
We continue to generate top quartile returns as our annualized return on average assets was 1.67% and our annualized return on tangible common equity was 16%.
Our moderately higher reap, yes for the quarter was driven by higher noninterest income and well managed expenses.
Net income for the quarter was $13.9 million or 28 cents per diluted share.
Up from 13.4 million or 26 cents per door, Ginger <unk> second quarter.
Our prior quarter results included a 1.2 million dollar valuation allowance taken against our mortgage servicing rights.
Which impacted our second quarter diluted dps by approximately two cents this quarter, we experienced a much lower valuation allowance at $100000. So if you strip out the impact of the MSR valuation for both quarters EPS was essentially flat.
Our total loans, including both loans held for investment and held for sale declined by $20 million in the second quarter.
This was primarily driven by lower production during the third quarter.
Well production was lower during the quarter as we maintained our underwriting and pricing discipline in a very competitive lending market.
In addition, we're still experiencing some caution among some of our customers.
With respect to the ongoing trade friction in China, and tighter enforcement occurrence or control as well its inventory and general affordability concerns on the housing market, particularly in the Bay area.
Furthermore, our construction on commercial real estate production was relatively flat quarter over quarter.
As a number of loans are taking longer to close.
That being said, we currently have a strong pipeline of commercial loans that we expect higher overall production in the fourth quarter.
In fact, just an October alone, we have either closed or expect to close approximately $45 million or construction in theory loans.
That number compares to 40 billion of origination of these types of loans in the entire third quarter.
On the deposit side total balances were up 25 billion from the prior quarter.
The increase for the quarter was primarily attributable to growth and time deposits and noninterest bearing deposits.
This was partially offset by decreases in money market savings and I'll deposits, our deposit mix continues to shift as customers rotate out of lower yielding accounts into Cds.
However, we feel that this trend has about one its course and the Cds have reached a tipping point.
And our CD balances should start to decline.
What are tightening positive retail deposits within our time deposits retail deposits increased by 103 million brokered Cds decreased by 50 million.
Bottom line is that our core deposits increased during the quarter.
During the quarter net interest margin of 3.7% was negatively impacted by our increased liquidity.
And lower yields on our loan portfolio, all our cost of interest bearing liabilities was down slightly.
Well get into more detail.
As you know another component component of managing our balance sheet liquidity as loan sales.
During the quarter, we sold $76 million of residential loans, including agency loans.
Institutional demand in the secondary market for our loans remains healthy.
Reflecting the high quality of the loans, we originate and allowing us to realize continued attractive premiums for the loans we sell.
Well, we continue to opportunistically utilize loan sales to diversify our revenue going forward.
We may significantly reduce these sales in the fourth quarter and retain a majority of our new loan production on our balance sheet.
Loan sales will remain a tool for us going forward to help balance our loan growth with our core deposit gathering and to provide a supplemental source of revenue enhancing the composition of our earnings stream.
Finally productivity levels remain high as our noninterest expenses were essentially flat quarter over quarter after taking into account the lower ft. I see assessments, we benefited from in the third quarter.
Interest expense control and strong productivity are always a priority for us.
We remain optimistic and our outlook as we end the year, we are focused on converting our healthy loan pipeline into closed loans, while maintaining solid credit quality and reducing deposit costs.
During the fourth quarter, we expect resume our loan growth and achieve NIM stability, which should translate into continued strong returns for our shareholders.
With that it was an overview, let me turn the call over to Tom to provides additional details on our financial performance for the third quarter Tom.
Thank you Gary.
Before getting to the results I'd like to say a word about Gary.
It's been an honor to work with Gary for the past 11, plus years and to benefit from his extensive banking experience.
There's been a source of great guidance, and Mentorship and I want to thank him and wish him well and as retirement.
I'm equally honored to be chosen by the board of Sterling snack CEO and chairman.
And we'll work hard to build on Gary's legacy.
I'm excited to take the Howmet this great company and I'm deeply committed to carrying forward, our banks pattern of growth and expansion, while safeguarding the trust and confidence of our customers and shareholders.
In addition, I want to congratulate and welcome Steve humor, and his newly expanded roles, Steve It's been an outstanding CFO for our bank.
And as the obvious choice to assume the additional roll, our CFO and treasurer for Sterling.
We appreciate his contributions since joining sterling 24 years ago, and we look forward to many more to calm.
Now turning to the results for the quarter.
As I review, our financial results I will focus just on those items, where some additional discussion as warranted.
I'll start with net interest margin.
Our NIM for the third quarter was 3.7%.
Down 14 basis points from the second quarter.
The decrease was primarily the result of about 15 basis point decline and the average yield on earning assets.
Partially offset by two basis point decrease.
Cost of average interest bearing liabilities.
The decline in average yield was driven by three main factors.
First our average yield on loans in the second quarter benefited from elevated loan fees, mainly driven by higher prepayment fees.
We did not experience the same magnitude of seasonal third quarter, which had an approximate four basis point negative impact on the average loan yields.
Second we were carrying increase liquidity during the quarter, which drove up the percentage of lower yielding other interest earning assets relative to the total average interest earning assets.
Sam the effect of reducing our yield on total interest earning assets.
Approximately six basis points.
Third we experienced headwinds on our loan yields.
Excluding the impact of fees in the amount of two basis points. The recent decline rates drove lower resets on our prime based loans and the benefit that we had been experiencing mainly library based mortgage loans.
These loans that reprice at higher rates have decrease given the drop in LIBOR.
During the quarter approximately $132 million of LIBOR based mortgage loans repriced at an average of 80 basis points higher.
Whereas that differential was a positive 126 basis points in the second quarter.
As of September Thirtyth.
We have approximately $1.1 billion in LIBOR based loans that will reprice over the next two years.
Library declined by approximately 15 basis points in the third quarter and 98 basis points for the first nine months of the year.
We expect the prior to pay offs approximately $175 million of LIBOR based loans will reprice in the fourth quarter at a weighted average rate that is approximately five basis points lower.
In addition, we have approximately $108 million a prime based commercial construction and home equity loans that will reprice. The fed cuts raised by 25 basis points as expected this week.
This represents approximately 49% of our total prime based alone as the remaining 51% are currently at their floor rates.
If rates were to drop by an additional 25 basis points, then 59 million more in loans would reprice, resulting in 73% the total prime based portfolio being subject to floor rates.
Although we continue to see aggressive loan pricing among some competitors, we have been able to keep the pricing on our new production of residential loans relatively stable.
That being said, we're 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 decrease we saw on our average interest earning assets during the third quarter was partially offset by a two basis point decrease in our average cost of interest bearing liabilities.
It was a function of both rate and Max.
Our deposit cost for a flat quarter over quarter as our money market savings are now accounts declined by 11 basis points, but the shift in mix to time deposits combined with a two basis point increase in those cost essentially offset the benefit of a lower rates on our non maturity deposits.
However, as Gary mentioned, we feel that our CD balances should start to decline.
Typically impacting the Max going forward.
Despite declining rates, we are still attracting new retail deposits and we remain mindful of our deposit pricing as we don't want to lose momentum on our deposit gathering activities, which will enable us to fund our loan growth when that reserves.
We also believe that the absolute level of our cost of funds relative to our competition gives us more flexibility with our deposit pricing going forward.
So while the environment for deposit gathering remains competitive we do expect to see some benefit from lower interest rates on the fourth quarter.
Overall with respect to our loans and deposits, we will remain diligent and managing the variables that we have control over.
All things considered we would expect NIM to stabilize in the fourth quarter.
Our total noninterest income increased $1.1 million from a second quarter to $3.2 million.
The increase was primarily attributable to a lower mortgage servicing rights valuation allowance taken this quarter as compared to the prior quarter as Gary match.
Our gain on loan sales was slightly lower due to a different maxim mortgages that were sold.
The amount of gain on sale and Tom we generate from quarter to quarter will vary based on a number of factors, including our long production levels. Our success in gathering deposits and our short term liquidity needs.
Our total non interest expense decreased point $3 million from the second quarter to $13.4 million due mainly to lower FDIC assessments advertising and marketing expenses data processing and other expenses.
Partially offset by higher salaries and employee benefits and professional fees.
A portion of which were related to increased regulatory compliance initiatives.
We have added personnel to drive and support our loan deposit and revenue growth and to increase our corporate back office operations team to support that crop.
We expect that our operating expenses will increase in the coming quarter 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, well is ongoing and onetime in nature in order to comply with our recent agreement what the LCC.
Moving to our asset quality.
During the third quarter, we again experience not recoveries and positive credit metrics on the portfolio.
Non performing assets were essentially flat quarter over quarter and represent 37 basis points of total assets.
We did see an increase in nonperforming loans were $3.3 million due to one 3.5 million dollar construction loan.
It was placed on non accrual during the quarter.
We don't believe that there is any impairment on this loan and there is more than sufficient collateral values accordingly.
We do not see any meaningful losses in any of our past due loans.
Or rated credits.
We had recoveries of $35000 and no charge offs during the quarter and our provision for loan losses was $251000.
Our allowance for loan losses was relatively steady at 72 basis points of total loans at September Thirtyth.
Up one basis point from the end of the second quarter.
Finally, we remain active in buying back our shares both during the third quarter and year to date.
During the quarter, we repurchased approximately <unk> point 4 million shares at an average price of $9.89 per share.
In year to date, we have repurchased 2.7 million shares at an average price of $9.64 per share.
If our shares continue to trade at a significant discount to fair value.
There is likely that we will remain active on this front.
Our share repurchases demonstrate that we remain confident in the long term prospects for our business.
And our commitment to creating shareholder value.
With that let's open up the call to answer any questions you may have.
Operator, we're ready for questions. Thanks, you when I became the question answer session.
To ask a question you're my press Star then one on your telephone keypad.
If you are using the speaker phone, we I see a place where your per handset before pricing the keys to withdraw your question. Please press Star then too.
Today's first question comes from Aaron Deer of Sandler O'neill Partners. Please go ahead.
Hi, good afternoon, everyone.
Hi, Eric.
First I want to.
Which Gary congratulations on your.
Pending retirement hair and Tom Congratulations on your new role.
Thank you Eric Thanks to the.
And then I'd like to start on the origination volumes because it seems like they've continued to come down and I know you highlighted the inventory and affordability concerns, but it's just it's really surprising that I'm seeing a number of other banks that kind of traffic in your same space that seem to.
Be.
Where their volumes seem to be holding up okay, and so I'm just wondering if you mentioned in the press release that it's partly related to competition. If if if that's really the driver here what what types of thinks you seem to competition doing that you guys are unwilling to do or are there other factors that I'm just not getting.
Fair and this is Michael Mcneill are.
I would say that some of the competition has offered longer term fixed rates on some of the products that we had and.
We are looking at some of those currently and evaluating.
Whether that's right for us.
But they they've gone out longer on grind the maturity and that maybe we weren't competing with.
Okay, and then I guess with the the decision to start retaining more of your production.
Hey, I mean, there, obviously, leaving yourself lot of flexibility and it in terms of your balance sheet management, and and I'm sure. What the secondary market is offering but it is I had at least anticipated the outlook for your earnings but that was a fairly good sized contributor.
Heading into next year like north of 10% of my EPS number.
So just trying to understand you know if if you are retaining that obviously that that's going to weigh on the on the near term earnings, but it will help build the balance sheet faster. So what what does your where do you kind of prospectively looking for in terms of overall balance sheet growth next year, obviously, it seems like if you're retaining more you wish to lot better than.
What we saw in 2019 or at least year to date and.
I mean can we get back closer to some of the historical growth periphery had or somewhere in between or what are your thoughts on that front.
Aaron I think it's probably somewhere in between I think it is really driven by our ability to.
Well, our and our originations.
But obviously we look at.
Amount of liquidity, we're currently holding.
Next in terms of maturity that we're holding our when we come up to these decisions.
So we thought it would just be prudent given.
Our current liquidity.
Our origination volumes, but we're doing a lot of different things too.
Returned to a higher growth rate than we've seen in the past.
Quarter too.
Okay.
And then on the on the margin I guess.
The three months ago, when we spoke I think you had.
Guided toward moderate margin pressure.
For the third quarter seems like maybe it was a little more.
In a little worse than that but.
Now you're talking about Stabilisation here in the fourth quarter. It can you.
Give us more color behind what's supporting your expectation of stabilization of you really started to see or deposit rates come down and in a material way that's going to give you. Some some really from upfront.
Oh, absolutely Aaron this is Tom I in the third quarter, we've decreased our CD rates five times.
And our money market rates or at least a portion of our money market rates three times.
I can share with you that our September Nam.
<unk> was higher than Q.
Q3 average.
So we're very encouraged by that and we honestly think that if the rates pot.
Our the fed cuts rates here.
We will likely cut deposit rates again, and then make some further progress.
Okay. That's encouraging okay I've got a few other questions I'll get back in queue. Thank you.
Our next question today comes from Matthew Clark with Piper Jaffray. Please go ahead.
Hi, good afternoon, and congrats to you Gary Tom and Steve.
Thank you.
You happen to have the the spot rate on interest bearing deposit costs at the end of September or maybe even in the month of September either one.
We can dig that out for you here I was a result.
Any other questions Matt.
Sure Yeah, and then just on.
The new production this quarter, if you can give us a sense for the weighted average rate on on those new loans.
For the third quarter, Matt This is Michael.
They were down 15 basis points.
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Second quarter.
[noise], Kevin 13 basis, sorry, it's hard to hear you densities.
Yeah, we narrowed down to 498 in Q3.
Down seven basis points from two to 530.
Okay, great. Thank you and Matt I'm sorry.
Last year earlier question, we have a spot rate of 1.7 sex interest bearing.
Deposits.
Is that at the end of September or was that the month of September that's the end of September .
Thank you.
And then just on the excess liquidity you accumulated this quarter I guess what are your thoughts in terms of.
Redeploying those proceeds and in terms of the timing and I see no go into more of this.
The balance sheet growth of retaining more loans.
Yeah, I think with further rate cuts on the deposit side. That's a one thing we're going to do with the excess liquidity.
As well as you all different thought on loan sales as we alluded to.
That is a factor.
We also and that's kind of goes to Aaron's question as well.
You know, we have a pretty significant number of Cds coming up for maturity.
Hi in November .
So we have the opportunity to let some of that higher.
Cost funding.
Moving on and right size the cash.
Okay.
And then just on the buyback I'm, a little slower this quarter, just thoughts behind that whether or not you might be able to finish the authorization by the end of the year.
Yeah, I don't think well finish by the end of the year, Matt I think I'm were just over half way.
What we've been authorized Dan as you acknowledge it slowed down I don't think wall well get through there.
By the end of the here.
Okay. Thank you.
And our next question today comes from Anthony Plenty of American Capital Partners. Please go ahead.
Hey, guys congratulations.
Thank you.
Oh I just had a couple of questions as far as the balance sheet growth and perhaps lower gains going forward is this something that is kind of definitive like don't model any gains for next quarter or it's just something that you expect to.
It's a process that you're starting now and we'll see outlook for next year lower gains more growth more balance sheet growth, but does it mean zero games.
I think the latter Anthony.
Yeah, we're in the middle of looking at you know what to do here in Q4, you know there's a lean towards.
I'm not selling much maybe not selling any that's not definitive yet.
And that's really.
The thought for Q4.
To be revisited for 2020.
Again with me.
Bigger picture thought of.
You know as we've always guided us slightly weaning off over time so.
Well revisit that for Q1 2020 Wes.
Potentially a completely different lock in.
Try to communicate as accurately as we can what our.
Plan and thought process.
Okay and I.
I I realised.
Twentys way out there but.
If we look at what's happening to the margin so far this quarter and let's say, we get to more than 25 basis point cuts on the fed and the yield curve steepens a little bit over the next few weeks.
How does that vote for the margin in 2020.
Yeah, I think that.
Where neutrally possession pretty well.
I think with what you're describing we'd probably you know fair a pretty well.
I'd be optimistic that we could make some headway on the margin was wherever add on our deposit pricing on particular relative to.
Competition.
Yes, the big yes.
Unknown factor would be the one year library in the repricing impact.
On our loss.
Okay now when I look at overall expense growth. This year, it's it's going to be something like 77.5%, obviously much lower than previous years when balance sheet growth was much greater.
You have a little bit of regulatory issues here that you're working through.
Oh, what expansion plans you have for 2020 and is that 7% growth rate.
At this stage a good ballpark for next year.
I believe it is I think thats fair enough.
If you've nailed the two issues you know as the growth has slowed somewhat expenses do reflect that as well as some incremental cost for yeah regulatory compliance, but I think seven and a half or sign as a fair estimate.
And every quarter, we will try to.
Guide best we can at least a quarter all.
Okay, great. Thank you guys.
Thank you.
Ladies and gentlemen, once more if you'd like to ask your question. Please press Star then one today's next question comes from Andrew Talker of Genesis Associates. Please go ahead.
Yes, Kevin in guys. Thanks for taking the question I guess just two questions first just quickly if you give us more granularity on the one apartment loan just in terms of whatever metrics you can disclose about LTV or guarantor. Just gives you the comfort that there's no loss content. There just given the overall size of and then secondly, if you.
Talk about you know and the same vein at some of the other questions on balance sheet growth in sales and alike.
Your if you could talk about your efforts to diversify your origination platform I know you have a and obviously you have a great franchise in the Chinese American in Chinese National borrower, but we don't know how.
How long that's going to take to resolve the issues today and I know you've been building other platforms and you have other platts <unk>, even have other web portals and other languages. So if you could just talk about your efforts to diversification diverse rounds, the origination side as well. Thank you.
This is Michael month May our thanks for the question I would start with the out one problem loan it's actually a single family residence.
In San Francisco, we've had it recently a praise to we've looked at it consistently over time.
We've decided to move on from the relationship.
Due to the time that is taken this developer to move the asset.
Through its progression to completion.
We feel very confident based on a number of different factors, including like I said, the appraisal that there's a significant amount of equity.
In the project and while things can be delayed.
We do anticipate potential resolution with that and that coming months I'll potentially by quarter end, but.
There are various things that could happen that could delay that so I don't want to get ahead.
South with it but.
We believe that there's opportunities for this developer to move the relationship.
How does the bank and for him to continue with this project elsewhere. So that's what gives us the confidence that we don't have any pending loss on that a large project.
Very high end area San Francisco.
As for.
Loan diversification and product diversification, we've been working very diligently on Onboarding, new staff over the course of here for our commercial originations.
Multifamily development loans and Cnine, we've been able to really expand our.
Pipeline for originations in that regard.
The pipeline currently is as high as we've ever seen that we do have a new higher on bringing just this quarter, that's going to continue expand our staff and that allows us to fill that side of the balance sheet part and the balance sheet.
On the residential side Weve expanded our origination staff to include some ethnic Spanish and Indian in Korean speaking target different market segments.
As you mentioned, we even have a.
Website, a landing page has dedicated to.
Spanish speaking individuals so we're hopeful that that expansion within some of the products and the expansion of some of our t. lending down to the L.A. market starting to get gather some momentum over the last quarter or so or so to increase our volumes and pipeline can tell as regard. So it's a continued effort.
All of those fronts.
And.
We've started we're beginning to see some progress on several fronts.
Great Okay guys. Thanks.
Thank you.
Our next question is a follow up from Aaron Deer Sandler O'neill partners. Please go ahead right.
Hi, Thanks, guys actually date Andrew's question, they'll just kind of into one of the areas, but I was curious about in particular the T. I see so thank you for addressing that and then one other just kind of.
Cleanup thing at the FDIC credit in the third quarter I'm guessing that was right around 200000, but can you give us the the exact dollar amount and that's we can.
Just for modeling purposes.
A 240000.
Okay, and the remaining credit on that I'm guessing, that's probably going to last at least at some point into the so the new year.
Yeah, we believe two more.
Good stuff, thanks, guys already in Q1 or Tony.
Terrific. Thank you.
And ladies and gentlemen. This includes your question answer session I want to turn the conference back over to the management team for any final remarks.
Thank you very much everyone again for joining us today.
We do appreciate the time and.
Appreciate the opportunity to talk to do an again from my personal standpoint.
And Sir Thank you for all of your support and.
And some insights knives experience over the last several years. So thank you and that will finish the call.
Thank you Sir todays conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines have a wonderful day.
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