Sterling Bancorp Reports Fourth Quarter and Full Year 2019 Financial Results

Sterling Bancorp, Inc. (NASDAQ: SBT) (the "Company"), the holding company of Sterling Bank and Trust, F.S.B. (the "Bank"), today reported unaudited financial results for its fourth quarter and full year ended December 31, 2019.

For the fourth quarter 2019, net income totaled $14.0 million, or $0.28 per diluted share, based on 50.0 million weighted average diluted shares outstanding. This compares to third quarter 2019 net income of $13.9 million, or $0.28 per diluted share, based on 50.4 million weighted average diluted shares outstanding. For the fourth quarter of 2018, net income totaled $16.0 million, or $0.30 per diluted share, based on 53.0 million weighted average diluted shares outstanding.

"Overall, our financial results for the fourth quarter were in line with our expectations," said Tom Lopp, Chairman, CEO and President of Sterling Bancorp. "Our EPS for the quarter was consistent with the third quarter despite lower revenue and higher operating expenses as we benefited from a lower income tax rate. We continue to generate strong returns, as our annualized return on average assets was 1.70% and our annualized return on average tangible common equity was 15.62%.

"During the quarter, net interest margin improved, primarily due to lower deposit costs more than offsetting the decline in the yield on our interest earning assets. Our loan production was lower during the quarter primarily due to lower residential mortgage production, which was partially offset by higher commercial real estate and construction loan production. As a result, our total loans declined slightly during the quarter.

"As we previously announced, on December 9, 2019, we suspended our Advantage Loan program in connection with an ongoing internal review of the program's documentation procedures. As a result of this action, we expect our near-term total loan production to be below historical levels and adversely impact our portfolio loan growth rates. Our operating expense levels are also expected to be elevated as we 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-in-common lending efforts. In addition, we will continue to develop new residential loan products that we believe will meet the needs of our customers, as well as have a broader appeal in our served markets. We are committed to making the necessary investments in order to realize the bank's long-term growth potential," concluded Mr. Lopp.

Operating Results for the Fourth Quarter 2019

Revenue

Revenue, net of interest expense, was $32.3 million for the fourth quarter of 2019, a decrease of 3% from the third quarter of 2019. The decline was attributable to a $0.8 million decrease in non-interest income.

Revenue, net of interest expense, for the fourth quarter of 2018 was $36.7 million. The 12% year-over-year decrease was due to a $3.6 million decrease in non-interest income and a $0.7 million decrease in net interest income.

Net Interest Income

Net interest income for the fourth quarter of 2019 was $30.0 million, consistent with the third quarter of 2019. Average interest earning assets declined by $40.6 million, but the impact was offset by a 4 basis point increase in the net interest margin.

Relative to the fourth quarter of 2018, net interest income decreased 2% from $30.7 million. The decline in net interest income from the fourth quarter of 2018 was primarily attributable to a 16 basis point decrease in the net interest margin, partially offset by a $57.0 million increase in average interest earning assets.

Net Interest Margin

Net interest margin for the fourth quarter of 2019 was 3.74%, up 4 basis points from the net interest margin of 3.70% for the third quarter of 2019. Net interest margin was positively impacted by a 10 basis point decrease in the average cost of interest-bearing liabilities, partially offset by a 6 basis point decrease in the average yield on interest earning assets.

Relative to the fourth quarter of 2018, net interest margin decreased from 3.90%, primarily due to a 12 basis point increase in the average cost of interest-bearing liabilities and a 7 basis point decrease in the average yield on interest earning assets.

Non-interest Income

Non-interest income for the fourth quarter of 2019 was $2.4 million, a decrease from $3.2 million for the third quarter of 2019. The decline was primarily the result of a $1.9 million decrease in the gain on sale of loans due to less residential mortgages sold in the secondary market as compared to the prior quarter, as well as a loss on the sale of a CRA qualifying loan pool that was both purchased and sold in the fourth quarter. This decrease was partially offset by a $0.8 million increase in other income as a result of a final distribution payment on an equity investment (without a readily determinable fair value) in excess of its remaining book value and a mortgage servicing rights valuation allowance recovery taken in the fourth quarter as compared to the prior quarter's expense.

Non-interest income decreased $3.6 million from $6.0 million in the fourth quarter of 2018, primarily as a result of a $4.6 million decrease in the gain on sale of loans due to less residential mortgages sold in the secondary market as compared to the prior year period, as well as the loss on the sale of a CRA qualifying loan pool that was both purchased and sold in the fourth quarter. This was partially offset by a $0.3 million increase in net servicing income due primarily to an improved mortgage servicing rights valuation allowance taken in the fourth quarter as compared to the prior year fourth quarter and the $0.8 million increase in other income discussed above.

Non-interest Expense

Non-interest expense for the fourth quarter of 2019 was $14.6 million, an increase from $13.4 million for the third quarter of 2019. The increase was primarily attributable 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 Small Bank Assessment Credits applied during the quarter.

Relative to the fourth quarter of 2018, non-interest expense increased 7% from $13.7 million. The increase was primarily due 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, advertising and marketing expenses, FDIC assessments and other expenses.

The Company's operating efficiency ratio was 45.1% in the fourth quarter of 2019, compared with 40.5% in the third quarter of 2019 and 37.3% in the fourth quarter of 2018.

Income Taxes

The effective tax rate for the fourth quarter of 2019 was 19%, down from 29% for the third quarter of 2019 and from 27% for the fourth quarter of 2018. The lower tax rate in the fourth quarter of 2019 was due primarily to changes in state tax estimates for 2019.

Loan Portfolio

Total gross loans, which includes those held for investment and held for sale, were $2.91 billion at December 31, 2019, down slightly from September 30, 2019. The Company had a $28.4 million decrease in residential mortgage loans held for investment, a $22.8 million increase in construction and commercial real estate loans and a $6.6 million decrease in commercial lines of credit. The decline in residential loans held for investment was primarily due to lower production combined with a modest increase in payoffs. The lower production of residential loans was partially due to the Company's decision to suspend its Advantage Loan program, which occurred in early December.

During the fourth quarter of 2019, the Company originated $281.7 million in loans, which included $200.6 million in residential mortgage loans, $58.8 million in construction loans, $20.8 million in commercial real estate loans and $1.5 million in commercial lines of credit.

The Company sold $51.4 million in residential mortgage loans during the fourth quarter, including $25.7 million of Agency loans and a $25.7 million CRA qualifying loan pool that was both purchased and sold in the quarter, down from $76.1 million of loans sold in the third quarter. In the near-term, the Company will likely undertake minimal loan sales and rather retain the majority of its new loan production on its balance sheet.

Deposits

Total deposits were $2.50 billion at December 31, 2019, compared with $2.57 billion at September 30, 2019. The $76.4 million decrease was primarily attributable to a $62.9 million decrease in time deposits and a $13.7 million decrease in money market, savings and NOW deposits. Brokered CDs were unchanged at $25.0 million.

Credit Quality

Nonperforming assets totaled $13.3 million, or 0.41% of total assets, at December 31, 2019, compared with $12.3 million, or 0.37% of total assets, at September 30, 2019. The increase was primarily due to a $4.4 million increase in residential nonperforming loans, offset in part by the full payoff of a $3.5 million construction loan that was previously classified as nonperforming.

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 $0.5 million for the fourth quarter of 2019, compared to $0.3 million for the third quarter of 2019. The larger provision was primarily attributable to increases in required reserves on commercial real estate and construction loans.

The allowance for loan losses was 0.75% of total loans and 198% of nonperforming loans at December 31, 2019, compared with 0.72% and 213%, respectively, at September 30, 2019.

Capital

At December 31, 2019, the Bank exceeded all regulatory capital requirements under Basel III and was considered to be a ??well-capitalized'' financial institution, as summarized in the following tables:

Share Repurchase Program

During the quarter, the Company repurchased approximately 0.5 million shares of common stock at an average price of $9.93 per share. For the year, approximately 3.1 million shares have been repurchased at an average price of $9.68 per share.

Conference Call and Webcast

Management will host a conference call today at 5:00 p.m. Eastern Time to discuss the Company's financial results. The conference call number for U.S. participants is (833) 535-2201 and the conference call number for participants outside the U.S. is (412) 902-6744. Additionally, interested parties can listen to a live webcast of the call in the "Investor Relations" section of the Company's website at www.sterlingbank.com. An archived version of the webcast will be available in the same location shortly after the live call has ended.

A replay of the conference call may be accessed through February 12, 2020 by dialing (877) 344-7529, using conference ID number 10138163.

About Sterling Bancorp, Inc.

Sterling Bancorp, Inc. is a unitary thrift holding company. Its wholly owned subsidiary, Sterling Bank and Trust, F.S.B., has primary branch operations in San Francisco and Los Angeles, California, New York City and Bellevue, Washington. Sterling offers a broad range of loan products to the residential and commercial markets, as well as retail and business banking services. Sterling also has an operations center and a branch in Southfield, Michigan. Sterling was named as the top performing community bank in the United States with total assets between $3 billion and $10 billion in 2018 by S&P Global Market Intelligence for the second year in a row (in 2017 the asset range was $1 billion to $10 billion). For additional information, please visit the Company's website at http://www.sterlingbank.com.

Non-GAAP Financial Measures

Some of the financial measures included in this press release are not measures of financial performance recognized in accordance with accounting principles generally accepted in the United States ("GAAP"). These non-GAAP financial measures include "Average Tangible Common Equity," and "Return on Average Tangible Common Equity," each of which are common metrics in the banking industry. Our management uses these non-GAAP financial measures to assess the Company's capital strength and business performance. These non-GAAP financial measures are supplemental and are not a substitute for any analysis based on GAAP financial measures. Not all companies use the same calculation of these measures; therefore, this presentation may not be comparable to other similarly titled measures as presented by other companies. For further information see "Return on Average Tangible Common Equity Reconciliations (non-GAAP)" in the Financial Data section that follows.

Forward-Looking Statements

Readers should note that in addition to the historical information contained herein, this press release includes "forward-looking statements," within the meaning of the federal securities laws, including but not limited to statements about the Company's expected loan production, operating expenses and future earnings levels. These statements are subject to many risks and uncertainties, including the effects of the suspension of our Advantage Loan program, our ability to comply with regulatory agreements, increased scrutiny of regulatory agencies, recent departures of loan producers, changes in interest rates and other general economic, business and political conditions, including changes in the financial markets; changes in business plans as circumstances warrant; and other risks detailed from time to time in filings made by the Company with the Securities and Exchange Commission. Readers should note that the forward-looking statements included in this press release are not a guarantee of future events, and that actual events may differ materially from those made in or suggested by the forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "will," "propose," "may," "plan," "seek," "expect," "intend," "estimate," "anticipate," "believe" or "continue," or similar terminology. Any forward-looking statements presented herein are made only as of the date of this press release, and we do not undertake any obligation to update or revise any forward-looking statements to reflect changes in assumptions, the occurrence of unanticipated events, or otherwise.

Return on Average Tangible Common Equity Reconciliations (non-GAAP)

Average tangible common equity and return on average tangible common equity are non-GAAP disclosures. Sterling's management uses these non-GAAP financial measures to assess the Company's capital strength and business performance. Average tangible common equity excludes the effect of intangible assets. This non-GAAP financial measure should not be considered a substitute for those comparable measures that are similarly titled that are determined in accordance with U.S. GAAP that may be used by other companies. The following is a reconciliation of average tangible common equity to the average shareholders' equity, its most comparable GAAP measure, as well as a calculation of return on average tangible common equity as of December 31, 2019 and 2018, and September 30, 2019.