Good afternoon and welcome to the Sterling Bancorp Incorporated fourth quarter and year end 2019 earnings conference call. My name is Sean and that 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 February 12, 2020 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, Investor Relations for the Company. Please go ahead, Mr. Clark..

Thank you Sean and good afternoon everyone. Thanks for joining us today to discuss Sterling Bancorp’s financial results for the fourth quarter in year ended December 31, 2019.

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

Tom and Steve will discuss the financial results and then we will open the call to 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 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 discussing the Company's SEC filings which are available on the Company's website, the Company disclaims any obligations 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 to be discussed 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 Tom Lopp. Tom..

Thank you Larry. Good afternoon everyone and again thank you for joining us today. Now let me begin with a brief overview of the year and our fourth quarter and then Steve will continue the discussion in more detail. Our financial results for 2019 were generally in line with our expectations.

Our full-year performance reflected relatively stable net interest income, lower non-interest expense, higher operating expenses and ongoing excellent credit quality. We reported net income of $57 million or $1.11 per basic and diluted share, which translated into a return on average assets of 1.74% and a return on tangible equity of 16.38%.

Again, putting us at the upper end of our small cap community 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 year with an increase in time deposits partially offset by a decline in money market, savings and now accounts.

Net interest margin for the year declined 16 basis points despite a 21 basis point increase in average loan yields, as the average cost of our interest bearing deposits increased 47 basis points due to both rate and mix.

Non-interest income declined for the year primarily due to fewer loans sales as we decided to retain more of our loan production on our balance sheet. Non-interest expenses were up moderately in 2019 driven by higher salaries and employee benefits, occupancy and equipment costs and professional fees.

A substantial portion of which related to increased spending on regulatory compliance and internal review initiatives. Our asset quality remains solid, during 2019 we experienced net recoveries for the seventh year in a row and they are non-performing assets only modestly increased representing 41 basis points of total assets at year 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.

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 to be adversely impacted by this action. Specifically, 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 as we expect to retain the vast majority of our new loan production on our balance sheet. In addition, 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 lending and tenant and 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 served 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 base of clients.

All three of these loan products are similar in approach to the advantage loan program and that the target underserved customers and yet will require a higher level of documentation. The first product would appeal to customers who live in higher cost areas, enabling them to access home ownership.

The second product focuses 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 assets, 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 the setback with our advantage loan program, we are committed to making the necessary investments in 2020 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 Huber.

Our recently appointed CFO and Treasurer, as this is his first time participating in our earnings 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 24 years ago and look forward to benefiting from his leadership and experience moving forward. Steve..

Thank you, Tom. I appreciate the opportunity to take over your former position as CFO. I look forward to continue to working closely with you and supporting you in your new roles as chairman and CEO. I also look forward to continuing to meet with our investors and analysts to help them understand our business and long-term prospects.

Now turning to the results for the quarter. Starting with the income statement, for the fourth quarter, total revenue and net of interest expense was $32.3 million, a decrease of 3% from the third quarter, which was primarily due to a decrease in non-interest income of $0.8 million.

Net interest income was stable at $30 million in the fourth quarter, as a 1.3% decrease in average running assets was substantially offset by a higher NIM. Our four quarter NIM of 3.744% increased by four basis points from the third quarter.

The NIM expansion is stem mainly from a reduction of 12 basis points in our costs 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 costs to continue declining near-term, providing some support to our NIM.

However, lower levels of loan production in 2020 and associated one-offs in our comparatively high yielding loan programs is likely to pressure our NIM this year. With less balance sheet grows in the near-term, there may be more opportunity to reduce deposit cost.

Our total non-interest income decreased by $0.8 million from the third quarter to $2.4 million. The decline was attributable to lower gains on seals of loans of 1.9 million, which is only partially offset by $0.8 million increase in other income as a result of a final distribution on equity investment and in mortgage servicing valuation recovery.

Given our plan to keep more of our loan production on our balance sheet this year, we don't expect any gains on bulk loan sales in the near-term.

Our total non-interest expense increased by $1.2 million from the third quarter to $14.6 million due mainly to higher professional fees, a substantial portion of which related to increased spending on regulatory compliance and internal review initiatives as well as higher occupancy and equipment expenses.

Partially offsetting these increases were lower salaries and employee benefits and other expenses. In addition, we again did not incur any FDIC assessments due to a small bank assessment credit supply 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 OCC, complete our internal review and invest in our compliance infrastructure. Our effective tax rate for the fourth quarter of 2019 was 19% down 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 seven year trend of no recoveries and showed stable credit metrics in the portfolio.

Non-performing assets increased by $1 million 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.

The increase was primarily due to a $4.4 million increase in residential non-performing loans offset in part by the full payoff of a $3.5 million construction loan that was previously classified as non-performing. At year end the average LTV on our MPLS is 55%.

Recoveries for the fourth quarter of 2019 were $76,000 and there were no charge offs during the quarter. The Company recorded a provision for loan losses of $450,000 for the fourth quarter compared to 251,000 for the third quarter.

The larger provision was primarily attributable to increases and required reserves on 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 500,000 shares of common stock at an average price of $9.93 per share. For the full year 2019 we repurchase approximately 3.1 million shares at an average price or $9.68 cents per share given our substantial excess capital position in near term organic growth headwinds.

We just like 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..

Thank you. We will begin the question and answer session. [Operator Instructions]. At this time we will pause momentarily to assemble our roster. Our first question today will come from Aaron Deer with Piper Sandler. Please go ahead..

Good afternoon everyone..

Good afternoon..

Good afternoon..

I guess just kind of just focus some of the forward expectation items. One is on the um, the net interest margin guidance.

If I understood correctly, it sounds like you actually expect the margin to trend lower this year, but obviously we saw a lift up in this quarter and it seems like the trends ought to be similar in terms of continued downward deposit pricing, less need for that additional liquidity.

And so I guess I would have thought that maybe we could see some margin lift through the year, not further pressures. Maybe if you can give some additional color there..

Yes, I think, this is Tom, Aaron. You know, part of the driver there is the loans that are are-pricing, you know labors come down quite a bit. The new production yields are lower as well.

I like to think we tend to guide conservatively, we may have more opportunity, with the deposit pricing, especially on the money markets that you know, we haven't really built into our forecast at this point, but we are going through that process right now..

I would also add Tom, just also the payoffs tend to put some pressure with those drop in interest rates in the low interest rate environment right now, we tend to see the higher yielding loans pay off quicker, which could put some pressure what we built into our assessment..

Yes. This is Steve. I would also add during Q4 the NIM was lifted four basis points by interest recaptures during the quarter and also four basis points by fee income, particularly prepayment fee income..

I'm sorry, there was four basis points of interest recapture and what was the second?.

Four basis points of additional fee income compared to Q3..

Prepayment penalties..

Particularly prepayment penalties..

Understood. Okay. And then it sounds like you have got some new loan programs under development and I know you are pushing hard round some of the commercial categories as well. Given that and the fact that you are not planning to sell any production at this point, what is your outlook for portfolio loan growth for 2020..

I would say the first quarter year. We are certainly going to see some pressure with the lower loan volumes. Aaron, 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 are having more focus on our existing loan programs, but I believe the first quarter will be down potentially given the loan values that we expect in the first quarter..

Okay. So initially it sounds like kind of regular flow of payoffs is going to be a little too strong to offset that..

Yes. And with the lower loan production, we are expecting first quarter production, which is really all we have vision into and we will try to guide as best we can quarter-to-quarter, but we would expect loan volume be down in the $150 million to $180 million range for Q1..

Okay. Got it. Okay. And then in the non-interest income, I just want to understand particularly the other line, it seemed like there was some noise there.

Can you maybe give a little bit additional color on what caused the increase there?.

Yes. We had a investment property that we settled on and collected 800,000..

Legacy loan. This is Michael Aaron. A legacy loan that we worked out a partnership for some property we took back 10 plus years ago..

Got it. Okay. Could you give some color behind the CRA purchase and sale, that seemed a little unusual.

What was the thinking there?.

Just our need to purchase some CRA qualifying assets in different markets to meet certain thresholds that we have set for ourselves. Once we purchased them and booked them then we make some decisions on ultimate resolutions in this case, we purchased them, booked on them and then ultimately sold them for various reasons within the quarter..

Yes. Aaron we have done this historically, but it hasn't been as obvious because of bulk loan sales and getting mixed in with that. It is more noticeable this quarter. And you know, the reason for them in general is most of the markets we are in, you know, less opportunity for low to mod income type profiles..

Okay. And then what was the MSR valuation adjustment in the actual dollar amount in the third and the fourth quarter? Just wanting to try to better understand the variance was there..

For the third quarter we had to take evaluation adjustment at 99,000. In the fourth quarter, we were able to recapture evaluation adjustment of 321,000..

Okay..

And then..

Sorry, go ahead..

Go ahead. .

We still have 1.1 million on the balance sheet as valuation adjustments. So, you know, we will deal with them in the future as rates fluctuate. .

Okay. And then the [indiscernible] credit in the quarter that was what 240,000.

Is that about right?.

About 230,000 quarter-to-quarter, we are able to recapture the entire amount and 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 are expecting to..

Okay. Perfect. And then also sticking with the expense, the professional fees obviously elevated given some of the initiatives that are underway.

Just trying to get a sense though 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 might drop back down to something more normalized..

Yes, I would say that Q4 was definitely very high. Q1 I think could be comparable, but then I think you could see that start to drop meaningfully..

Okay. Good. And I'm sorry to keep going, but I will put in a - on this call from other analysts.

I did have - and then just with these new products that are under development, what kind of expenses might be associated with that and diversifying your business lines and new hires to support any new products?.

I don't think there will be a significant amount of initial expense really existing staff time, energy focus. It would be what I would say our investment is on it. And it really support our lending staff and their abilities to go out and offer different product, unique product that helps expand credit to the markets we serve..

Yes, that would be some, a little on training, but mostly with existing staff. I would add, Tom, but I do believe that there will not be a tremendous amount of additional expense other than what was currently occurring as operational cost..

I agree..

Okay. And then just finally on the tax rate, just wondering if the full-year 2019 effective rate is a good proxy for 2020..

I will roughly want to use between 27 and 29% going forward..

Okay. Alright, perfect. Thank you for taking my questions guys..

Thank you Aaron..

[Operator Instructions] 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 would 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..