Allyson Pooley - Investor Relations, Financial Profiles Inc. Gary Judd - Chairman and CEO Tom Lopp - Chief Operating Officer and Chief Financial Officer Michael Montemayor - President Retail and Commercial Banking and Chief Lending Officer.

Aaron Deer - Sandler O'Neill and Partners Anthony Polini - American Capital Partners.

Good afternoon, and welcome to the Sterling Bancorp Second 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Allyson Pooley of Financial Profiles. Please go ahead..

Thank you Chad and good afternoon everyone. Thank you for joining us today to discuss Sterling Bancorp's financial results for the second quarter ended June 30, 2018.

Joining us today from the management team are Gary Judd, Chairman and CEO; Tom Lopp, Chief Operating Officer and Chief Financial Officer and Michael Montemayor, President Retail and Commercial Banking and Chief Lending Officer who will be participating in the Q&A portion of the call.

Gary and Tom will discuss the results and then we'll open it up for your questions. Before we begin I would 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 involves risk and uncertainties.

Various factors that could actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings which are available on the company's website. The company disclaims any obligation to update any forward-looking statements made during the call.

Additionally management may refer to non-GAAP measures which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release also available on the website contains the financials and other quantitative information to discuss today as well as the reconciliation of the GAAP to non-GAAP measures.

At this time, I would like to turn the call over to Gary..

Thank you Allyson 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.

We executed well in the second quarter in our formula of strong loan production, disciplined expense management and exceptional credit quality continue to generate a high level of performance and profitability. Net income for the quarter was $16 million or $0.30 per diluted share. This represents a year-over-year increase of 52% and 50% respectively.

The high level of efficiency and broad activity that we generate from the business model we've developed continues to result and return that are near the top of the industry with an annualized ROA of 2.08% and an ROATCE of 21.3% in the second quarter.

We continue to do a good job reaching our target customers and demand for our suite of loan products continues to be strong across all of our markets particularly for our niche residential mortgage loans and our commercial loans.

Total loan production was $434 million an increase of 6% relative to the first quarter resulting in annualized loan growth of approximately 8% in the quarter including both loans held for investment and loans held for sale. With continued strong loan production managing our balance sheet liquidity continues to be a top priority.

Loan sales during the quarter were a key component of that strategy. This enabled us to keep our loan to deposit ratio relatively stable and manage our funding cost while fully capitalizing on the productivity of our loan origination platform.

When you include the loans we sold in the quarter, our total annualized loan growth would have been above 30% which is consistent with our recent trends.

We will continue to strategically utilize loan sales going forward to balance our loan growth with our core deposit gathering, protect our NIM and ensure that we continue to meet the borrowing needs of our customers. Total deposits grew by $49 million during the quarter driven entirely by growth and time deposits.

While we experience modest declines in DDA's, money market and savings accounts. This shift and mix is primarily due to our strategic focus on our liability management. We're choosing to extend deposit maturities in this rising rate environment.

Competition for deposits remains high particularly in the San Francisco and LA markets that being said, we've started the third quarter with healthy deposit influence across our branch network. We also believe that our recent branch openings and newer markets will generate stronger deposit growth particularly in the greater Seattle market.

We're relatively new entrant in this region and we think there is a significant opportunity to increase our market share as we expand our presence in the areas. Consistent with industry trends we've seen in acceleration in our cost of deposits in the first half of 2018.

However, we've been able to largely offset this pressure with increases in our yields on earning assets. With most of our loans tied to the one-year LIBOR and prime. We are [indiscernible] impacted this many banks by the flattening of the yield curve with short-term LIBOR increasing notably this year.

During the second quarter, our loan beta and our deposit beta were relatively similar which helped keep our net interest margin unchanged from the prior quarter. However, we do see some signs of increasing price competition on the loan side which we believe could create some headwind as we move forward.

Tom will go into more detail in his discussion of our net interest margin. In a competitive market for loan and deposit pricing, the importance of operating with high level of efficiency becomes even more critical. Disciple expense control and strong productivity continue to be a daily focus at Sterling.

Our efficiency ratio for the second quarter was 34.9% up from the first quarter but down over 250 basis points from the second quarter of 2017 and within our mid-to-high 30% targeted range. Looking to the second half of the year, we're optimistic about our opportunities to continue delivering positive results.

Housing and commercial real estate continue to be healthy in our markets. Our loan pipelines are strong as demand for our niche residential mortgage loans remain solid. We were also seeing our commercial loan pipelines at record levels and expect to see a pickup in commercial loan production in the second half of the year.

Further our continued expansion into our newer markets including the greater Seattle area as well as in New York and Los Angeles should be helpful in generating core deposits to support our planned loan growth.

In summary, based on our second quarter performance and the solid trends we're seeing, we believe that 2018 will be another record year of profitable growth.

Sterling remains committed to executing on our strategy to expand our franchise through high touch customer relationships that results in strong [indiscernible] production and a high percentage of core deposits combined with our strong credit culture and high efficient back office operations.

This should continue to drive exceptional returns for our shareholders. With that as an overview let me turn the call over to Tom to provide additional details on our financial performance for the second quarter.

Tom?.

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. Overall we were pleased with our continued balance sheet and earnings growth.

As I mentioned on last quarter's call, one of the key performance metrics that we track internally is our total revenue net of interest expense as a percentage of average loans.

We believe that this measurement provides a more complete picture of all the revenue sources from our loan portfolio and services including the contribution from loans held for investments and the loans that we saw.

Since we began selling a portion of our residential mortgage loans back in 2015, we have consistently generated net interest income and non-interest income as a percentage of average loans at 5% or better on an annual basis although there can't be some significant variance in this metric from quarter-to-quarter due to timing of loans in loss [ph].

In the second quarter of 2018, our annualized net interest income and non-interest income represent 5.1% of our average loans up from 5% in the first quarter. Now looking at the net interest margin. Our NIM for the second quarter of 2018 was 3.96% flat in the first quarter.

It was positively impacted by 10 basis point increase in the average yield on earning assets, but offset by 11 basis point increase in the cost of interest bearing liabilities. As Gary mentioned the environment for deposit gathering remains highly competitive and so we expect to see continued increases in our deposit cost.

The average yield on our loans increased 12 basis points during the quarter. This was primarily due to the upper [ph] repricing of our loans tied to the one-year LIBOR or prime, which make up 86% of our total loans.

The number of LIBOR based loans repricing in our portfolio continues to increase each quarter [indiscernible] monthly repricing of approximately $80 million on average for the remainder of the year. And given where LIBOR currently stands, we would expect these repricing to exceed 150 basis points.

So we expect to see a positive impact on our average loan yields in the coming quarters. That being said, as Gary mentioned we're seeing increasingly aggressive pricing among some competitors so we're finding that we need to lower some of our initial rates on residential mortgage loans in order to remain competitive.

This will likely reduce the level of increase in our average loan yields going forward. Combined with the impact of higher deposit cost this will likely lead to some NIM compression in the third quarter. Our total non-interest income increased 14.6% from the first quarter to $6.3 million.

The increase was primarily due to a $1.1 million increase in the gain on sale of portfolio loans sold in the secondary market during the quarter.

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 and our short-term liquidity needs.

Our total non-interest expense increased 9.7% from the first quarter to $12.6 million due primarily to higher salary expense, professional fees and a full quarter impact of branches opened earlier this year. Much of the increase in salary expense was implemented in March, so we saw the full effectiveness in the second quarter.

We've also added personnel to drive and support our loan deposit and revenue growth. We expect that our operating expenses will continue to increase in the coming quarters as we open new branches and higher additional loan officers and business development professional.

We will also continue to increase our corporate back office operations team to support our ongoing growth initiatives. However, even with the increase and expenses we anticipate maintaining our efficiency ratio within our targeted range of mid-to-high 30s.

With respect to deposit, as Gary mentioned our total deposits were up approximately $49 million in the quarter. We saw an increase in retail deposits of approximately $66 million which was partially offset by a reduction in our balances of brokered CDs of approximately $17 million.

It is worth noting that during the quarter, added $92 million of two-year CDs as part of our strategic focus on extending deposit maturities in this rising interest rate environment. Moving to our asset quality, we continue to experience net recoveries and positive credit metrics in the portfolio.

Non-performing assets decline fairly significantly to $3.6 million or 12 basis points of total assets at the end of the quarter from $8.1 million or 27 basis points of total assets at the end of the first quarter.

The decline was primarily due to the large residential real estate loan that we discussed last quarter being upgraded to performing status. The loan has subsequently been fully repaid. We do not see any meaningful losses in any of our past due loans. We had recoveries of $52,000 and charge offs of $4,000 during the quarter.

Our provision for loan losses was $1.1 million for the quarter which was primarily attributable to the growth in our loans held for investment. Our loss for loan losses was relatively steady at 72 basis points of total loans down two basis points from the end of the prior quarter. With that let's open up the call to answer any questions you may have.

Operator, we're ready for questions..

[Operator Instructions] the first question will come from Aaron Deer with Sandler O'Neill and Partners. Please go ahead..

I would like to start with the outlook for loan growth. It sounds like you're pretty optimistic on the pipeline and I'm sure kind of what you're seeing in terms of deposit inflows to support that, it's going to - you had some basis on how you retain versus sell that.

But maybe you can give a sense at this point as you look out through the remainder of the year, what you expect for full year origination volumes in terms of dollar amount and then how you expect that might play out in terms of what's held on balance sheet versus sold into the secondary market..

Aaron this is Tom. I would expect you will see similar trends in the loan production in the second half as we saw in the first quarter. Although residential is showing some renewed strength and the commercial loan pipeline is in an all-time high and then we should see some stronger production.

So I would say slightly higher in the second half of the year. we also see the deposit inflow thus far in this quarter being very strong which would imply that all things equal, loan sales for the quarter would likely be similar to slightly lower than Q2..

Okay, and you're speaking specifically then about the third quarter expectation for loan sales..

Yes, just the third quarter..

And then it sounds like you're seeing pricing pressure both on the loan side always with respect to SRF [ph] well - and everyone's reporting on the deposit side.

Can you talk a little bit about what specifically what you're seeing in terms of deposit pricing pressure really just within say the past few weeks relative to what you're saying earlier this year? Do you expect betas to be materially higher or kind of given the fact you guys had already started with the higher kind of toward the higher end or where the market was maybe you're not seeing the kind of catch up in pricing that we're seeing amongst some other banks?.

Aaron this is Michael Montemayor. We're seeing some renewed competition in the market for the deposits over the last few weeks or month or two for sure, where some of the increases have come through. The competition has seemed to accelerated.

We certainly were pretty pleased with our ability to maintain our betas on deposits for the second quarter, but we feel that will can [indiscernible] continued pressure on deposits as there's more competition in the deposit side of the balance sheet in the coming quarter..

Aaron this is Tom. I would add that as far as the betas go, I think we should see a pretty steady rate of increase if you will, not what you're seeing was some or the other banks that are seeing a more rapid increase in their betas. So I would expect similar trends from us..

Okay, that's encouraging. And then maybe kind of relatively I guess, with respect to - can you give us what the average rate was on the new SFR production in the quarter and then where that rate is currently pricing..

I have the total four all loans. Let me look into, if I can find the breakout for addressing [indiscernible]..

And that's fine. I mean the single family [indiscernible] production..

Yes absolutely. It was up to 546 bank wide, which was up 25 basis points from the first quarter. But as Tom mentioned during the presentation, we have become more competitive.

We're - to help accelerate our growth so we would come back a little bit to try and increase production and we began to see some results in that already just over the last few weeks..

Okay and then I guess, where then would be your incremental cost of funding those loans?.

Well the incremental cost would be on our CD offerings that we put on as well as the money market that, our lead product there. We're getting most of the most money in the 24 month CD as well as the money market, and that's been two to 2.5 range..

And then one last question, I'll step back.

Just curious what the volume of loans were that were sold in the quarter?.

Well we don't disclose exactly how much we sell, you can see from our total production and from what we had on our books at the end of the last quarter for loans held for sale. It would give you good indication, but we don't due to competitive reasons disclose exactly what we've sold..

Okay, has the premium or the gain on those sales been relatively consistently - have you seen change in that?.

Yes, Aaron. It's been very consistent. We've been pretty pleased even with the increasing rates, our premiums have held very steady..

Okay, terrific. I appreciate you guys taking my question. Have a good afternoon..

[Operator Instructions] the next question comes from Anthony Polini with American Capital Partners. Please go ahead..

I like that profitability.

One question I had to do with the brokered CD rates and it sounds like you did 24 months at around 2.5% would that be the most recent put on?.

That's retail. We've actually lowered our brokered CD portfolio..

Like $17 million..

And we have relatively immaterial brokered CDs on the balance sheet at this time..

Okay and if I heard you right, you have $80 million as far as loans repricing a month at 150 basis points higher..

Yes, on average for the remainder of the year that's correct. Yes..

Now the competition that you're seeing on the pricing for the resi, which competitors are aggressively pushing that price down?.

There's a fair broad array of competitors between East West, HSBC, Café [ph] and a number of the other institutions that we see competition. I don't think there is one particular, but most of the mainstay within the markets that we are focused on have been relatively competitive in that space..

Were you guys surprised by the renewed competition on the pricing side especially given the fact that the feds seems to be signaling a couple of more hikes?.

Yes actually given the rising rate, we were surprised as competitive as some of the competition got to garner volume. So we're keeping a close eye on it, but we think we're priced for the volumes that we're looking for to mature deposit growth..

Okay, as far as Seattle, what kind of expectation should we have for the second half of the year?.

Well new markets are always interesting Anthony, we have good ideas of what we think we'll be able to do with surveyed competition in both loan side which we've been operating in Seattle for a while now on and also on the deposit side.

So it's hard to say exactly, but we're ready, we're hoping to open our first branch there this week and if all the inspections go well, we'll be able to report some results at the end of the quarter. But we have some strong expectations will be very competitive on the deposit side there..

Yes, Anthony I would add that with opening the retail presence what we saw in LA when we first did that, was a big difference in hiring success and ultimately production volumes and deposit gathering, really until you open that first retail presence. It can be a little challenging, whereas Michael [indiscernible] to the branch open..

Okay, that's good. Except for the margin you guys are pretty much in line. I hope that every time you guide down for margin, you stay flat, things will work out real well..

We agree..

Thank you guys..

Ladies and gentlemen. This concludes our question-and-answer session. I would like to turn the conference back over to Gary Judd for any closing remarks..

Again thank you for joining us today and we will look forward to speaking with you next quarter. Have a great afternoon and we appreciate your time..

And thank you sir, the conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines..