Q4 2019 Earnings Call
Thomas E. Will discuss the financial results and then we'll open the call to your questions before we began to like to remind you that this conference call contains forward-looking statements with respect to the job 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 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 love Tom. Thank you Larry. Good afternoon, everyone. And again, thank you for joining us today and let me begin with a brief overview of the year and our fourth quarter and then Steve will continue the discussion and more detail.
Our financial results for 2019. We're generally in line with our expectations are full year performance reflected relatively stable and that interest income lower interest expense higher operating expenses, and I'm going excellent credit quality. We reported net income of $57 a month or $1.11 per basic and diluted share which translated into a return on average assets of 1.74% in a return on tangible a couple of 16.38%
again
Putting us at the upper end of our small-cap Comenity Bank peers.
Our total loan portfolio was essentially flat for the year as new production and fewer loans sales were offset by higher payoffs deposits increased slightly for the game with an increase in time deposits partially offset by a decline in Money Market savings, and now accounts
Not interest margin for the year declined 16 basis points. Despite a twenty one basis point increase in average loan yields.
Is the average cost of our interest bearing deposits increased 47 basis points due to both rate and Max.
Non-interest 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.
Non-interest expenses were moderately in 2019 driven by higher salaries and employee benefits occupancy and Equipment cost and professional fees.
Stancil portion of which related to increased spending on Regulatory Compliance an internal review initiatives
so
I asked that quality remains solid during 2019. We experienced Matt recoveries for the seventh year in a row and our non-performing assets only modestly increased representing 41 basis points of total assets at your end with all that said the year wasn't without its challenges as we previously announced on December 9th. We decided to suspend our advantage Loan program in connection with an ongoing internal review of the programs documentation procedures in a 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 back to be adversely impacted by this action.
specific
We expect our total Loan Production to be below recent levels adversely impacting our portfolio loan growth rates.
Our non-interest income is also likely to remain below recent levels is we expect to retain the vast majority of our new Loan Production on our balance sheet rock Edition. 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 ending in 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 serve 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 clients.
Three of these loan products are similar in approach to the advantage Loan program in that the Target under-served customers and yet will require a higher level of documentation off. The first product would appeal to customers who live in higher-cost areas enabling them to access home ownership.
The second product focus is mainly on serving foreign National Borrowers.
And the third product will 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 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 a 120 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 humor or recently appointed CFO and Treasurer is this is his first time participating in our 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 twenty-four years ago and looked forward to benefiting from his leadership and experience moved forward.
Steve thank you Tom. I appreciate the opportunity to take over your former position and see if I look forward to continue to working closely with you and supporting you in your new role as chairman and CEO . I also look forward to continuing to meet with investors and analysts to help them understand our business and long-term prospects.
All turning to the results for the quarter.
Starting with the income statement for the fourth quarter total revenue net of interest expense was thirty two point three million dollars a decrease of 3% from the third quarter, which was primarily due to a decrease in non-interest income a point eight million dollars.
net interest income was stable $30 in the fourth quarter is a 1.3% decrease in average earning assets was substantially offset by a higher nem
Our fourth quarter and M A 3.74% increase by 4 basis points from the third quarter the name expansion stem from mainly from a reduction of 12 or basis points in our cost of interest-bearing deposits as well as interest recaptures from payoffs and non-performing loans.
Given the FED fund rate reductions in the second half of 2019. We expect our deposit cost to continue declining near-term providing some support to our Nim.
Over lower levels of Loan Production in 2020 and Associated run off in are comparatively high-yielding loan programs is likely to press your earn em this year dead.
With less pain when she grows in the near-term. There may be more opportunity to reduce deposit cost money.
A total non-interest income decreased by eight million dollars from the third quarter to two point four million dollars. The decline was attributable to lower games on sales of like a 1.9 million, which is only partially offset by point eight million dollar increase in other income as a result of a final Distribution on an equity investment any mortgage servicing rights valuation recovery home.
Given our plan to keep more of our Loan Production on our balance sheet this year. We don't expect any gains on Falkland sales in the near-term.
Total managed to expense increased by one point two million dollars from the earth order to 14.6 million dollars due mainly to hire professional fees substantial portion of which related to increase spending a Regulatory Compliance and internal review initiatives as well as higher occupancy and Equipment expenses.
Partially offsetting these increases we're lower salaries and employee benefits and other expenses.
In addition we again did not incur any assessments due to a small Bank assessment credit supplied during the quarter.
We expect to incur increased Regulatory Compliance costs both ongoing and one-time in nature in order to comply with our recent agreement with those complete our internal you can invest in our compliance infrastructure.
Our effective tax rate for the fourth quarter of 2019 was 19%
From 29% for the third quarter 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 7-year trend of never recoveries and showed stable credit metrics in the portfolio.
Non-performing assets increased by 1 million dollars 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 off.
The increase was primarily due to a four point four million dollar increase in residential non-performing loans offset in part by the full payoff of a 3.5 million dollar construction a phone that was previously classified as non-performing.
year-end
Average LTV on our MPS was 55%
recoveries for the fourth quarter of 2019 were $76,000 and there were no charge offs during the corridor the company record our provision for loan losses of $450,000 for the fourth quarter compared to $251,000 for the third quarter a larger provision was primarily attributable to increases and required reserve a commercial real estate and construction loans.
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 five hundred thousand shares of common stock at an average price of $9.93 per share for the full year 2019. We were purchased approximately 3.1 million shares at an average price of $9.68 per share.
given
Substantial access care proposition in 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. Thank you will begin the question-and-answer session to ask a question, please press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.
Our first question today will come from please. Go ahead.
Good afternoon, everyone. Good afternoon. El I guess just kind of just focus on some of those forward expectation items one is on the the net interest margin guidance if I understood correctly. It sounds like you actually expect the the margin to Trend lower this year. But obviously we saw lift up in this quarter and it seems like the the trends ought to be similar in terms of continued downward deposit pricing less wage. No 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 they're dead.
Yeah, I think this is.
Aaron, you know part of the driver there is a loans that are repricing, you know libraries come down quite a bit. The new production yields are slower as well. I like to think we tend to guide conservatively. We may have more opportunity down with the deposit pricing especially on the money markets that you know, we 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 just also the payoffs tend to put some pressure on with the drop and interest rates and the low interest rate environment right now you tend to see the higher-yielding Loans pay off quicker, which could put some pressure what we built into our our assessment. Yeah, this is Steve. I would also during Q4 birth.
Name was lifted four basis points by interest recaptures.
A quarter and also four basis points by fee income particularly prepayment fee income.
I'm sorry, that was for basis points of interest recaptured. What was the second?
4 basis points of additional fee income compared to Q3 prepayment penalties particularly prepayment penalties understood. Okay, and then it's it sounds like you've got a new loan programs under development and I know you're pushing harder and and some the commercial categories as well given that and the fact that you are not wage, um planning to sell any production at this point. What's your outlook for portfolio loan growth for 2020?
Let me talk first quarter first. Yeah, I would say the first quarter were certainly going to see some pressure with the lower loan volumes here. And 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 a more focused 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 the the the kind of regular flow of payoffs is going to be a little too strong to to to offset that yes, and with the lower Loan Production. We're expecting first quarter production, which is really all we have Vision into and we'll try the guide as best. We can quarter-to-quarter, but we would expect loan volume to be down in the hundred fifty to a hundred and eighty million.
dollar range
Got it. Okay, and then in the the non-interest income just want to understand particularly. The the other line seemed like Thursday Some Noise there. Can you maybe give a little bit additional color on on what the it caused the increase their? Yes.
Yeah, we had a investment property that we settled on and collected 800,000.
From Legacy loan. This is Michael Erin a legacy loan that we worked out a a partnership for some property. We took back 10 plus years ago.
Got it, okay.
Could you give some color behind the the the c r a purchase-and-sale that seemed a little unusual? What what was the thinking they're just our need to purchase some c r a qualifying Assets in different markets to meet certain thresholds that we've set for ourselves. Once we purchase them and both of them then we make some decisions on Ultimate resolutions. In this case. We purchased them both down and then ultimately sold them for various reasons within the quarter. Yeah, and and we've done this historically but it hasn't been as obvious because of both loan sales and getting mixed in with that.
Okay.
Cuz more noticeable this quarter and you know, the reason for them in general is most of the markets were in, you know less opportunity for Life low to moderate-income type profiles.
Okay.
Okay, and then what was the MSR valuation adjustment in the actual dollar amount in the third and the fourth quarter? Just wondering to try to better understand finances there.
The third quarter we had to take evaluation adjustment on 99,000 and the fourth quarter. We were able to recapture evaluation adjustment of 321000.
Okay, and then
Sorry, go ahead. We still have one point 1 million on the balance sheet as a valuation adjustment. So, you know, we'll deal with that in the future as rates fluctuate.
Okay, and then the FDA see credit and that was what around 240,000. Is that about right about $230,000 a month. We were able to recapture the entire amount in Q3 and Q4 and we have about $199,000 remaining as a credit to going forward for q1 remain to be seen if we can actually use that but we're expecting to
Okay, perfect.
And then also sticking with the expensive indeed the professional fees obviously elevated given some of the initiatives that are underway it just trying to sense though how you know how much of what might have been in the fourth quarter might have been one-time in nature or how persistent we can expect professional fees to be at this level or how quickly they could drop back down to something more normalized.
Yeah, I would say that Q4 was definitely very high Q1 I think could be comprable then. I could see that start to drop meaningfully. Okay good and sorry to keep going off. But I hopefully I'm not hog in this call from other analysts the I did have oh and then just with these new products that are offered what what kind of expenses might be associated with with that and diversifying your business lines and new hires to support any new products.
I don't think that.
Will be a significant amount of initial expense really existing staff time energy Focus would be what I'd say our investment is done it and it's really support our lending staff and their abilities to go out and offer product different product unique product that helps expand credit to the markets Reserve training. Yeah, it'll be some a little on training but mostly with existing staff, I would add Tom but I do not believe that there will not be a tremendous amount of additional expense other than what currently carrying as operational costs. I agree.
Okay, and then just finally on the on the tax rate just wondering if if the full year 2019 effective rate is a good proxy for 2020.
I might it is now, you know roughly want to use between 27 and 29% going forward.
Okay. All right. Perfect. Thank you for taking my questions. Thank you. As a reminder. If you would like to enter into the question queue, please press * then 1 month.
Again, that is star then one to ask you a question at this time. There are no further questions in the question queue and I would like to turn it back over to 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.
Thursday
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