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. At this time, all participants are in a listen-only mode.

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..

Thank you, Allison, 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?.

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 a $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.

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 originations, 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 U.S.

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 a 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 and an ongoing loan 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?.

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 30, 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 some 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 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 the 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 non-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 one-time 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.

Nonperforming 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 30, 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 to 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..

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..

Hi. Good afternoon, everyone. I apologize for the background noise. Quick question on the margin outlook. It 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 payoff benefit that you had, tend to like there’s maybe – that I hear 5 basis points of benefit from early payoffs in the margin in the second quarter.

How does that affect your guidance?.

That is part of it, 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..

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?.

We are evaluating that. Currently, we do have some pools 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’re in the first part of this quarter in terms of deposit growth what we actually sell.

But I would tell – say, it would be down from the first quarter levels..

Okay, great. Thanks for taking my questions..

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

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

Hey, good afternoon..

Good afternoon, Matt..

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?.

Yes. 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’s a little bit of lag, if you will, before we start to see that net decrease..

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

Hey, guys. Nice quarter..

Thank you, Anthony..

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 C&I, 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?.

Well, certainly there – Anthony, this is Michael Montemayor. Certainly, there is a lot of competition on the 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 are teed up here for the third quarter. So a bit of a timing issue. But I’d say, most of the down was on the construction payoff post..

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

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..

Pipeline?.

Our pipeline there is probably the largest we’ve had in recent memory, yes, several years currently. So we’re pleased with the prospects of the coming quarter or two. As we closed out loans, they’re in process..

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

I will hope so..

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

Yes, 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..

Where did you pick up that New York lender from?.

He 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..

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

I can follow-up with you, Anthony, let you know. But….

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 Difficulty] going?.

It kind of cut out a little bit on the second-half of your question, Anthony.

Could you repeat that?.

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

Yes. 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..

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?.

Right..

Yes..

And we’re maintaining that 70 to 75 basis point type of outlook..

And the tax rate came in a little lower.

Should we still use 29.5% for the back-half of the year?.

Yes, I would say so. Yes..

All right. Nice job, guys. Thanks, again..

Thanks, Anthony..

Thank you..

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

Hey, sorry about that.

Did you quantify the payoffs in the quarter and the amount of loan sales?.

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

Up $40 million from….

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

What was the second part of the question, Matt?.

Loan sales, how much you had this quarter?.

Is in the – right around $70 million..

Well, that’s for the Q2, right?.

Q2, $70 million..

Every quarter, you know – go ahead, Matt..

Is that up from the $48 million last quarter?.

Correct..

Okay..

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..

Okay. And Gary, did you speak to the loan growth guidance for the year? I think you guys have previously looked to achieve, high single-digit, low double-digit.

I don’t know, again, based on the year-to-day performance, whether or not that’s still?.

Yes. I think that’s still our expectation. The unknown obviously is what the Fed does and whether that triggers any further acceleration and payoffs. 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..

Okay. And then any update on the efficiency gains as well, mid to high-30s.

Is that still okay with BSA expenses, or is it the high-end of that range?.

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..

Okay. Thank you..

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..

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..

The conference is now concluded. We thank you for attending today’s presentation and you may all now disconnect your lines..