Sterling Bancorp
Q2 2011 Earnings Call Transcript

Published: 26 Jul 2011

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Sterling Bancorp’s 2011 Second Quarter Conference Call. At this time, all the participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. (Operator Instructions). And also as a reminder, today’s teleconference call is being recorded. At this time, I’ll turn the conference call over to your host Investor Relations Advisor, Mr. Ed Nebb. Please go ahead, sir.

[Ed Nebb:]

Thank you Tony, and good morning, everyone. Thanks for joining us. The news release announcing Sterling’s second quarter 2011 results was issued today prior to the market open. We hope you’ve had an opportunity to review it. The release is also posted to the company’s website www.sterlingbancorp.com. Before turning to the discussion of our financial results, let me remind you that any comments made today about future financial results or other future events are forward-looking statements under the Securities Exchange Act of 1934. Actual results may differ substantially from the forward-looking statements. The amounts of any dividends in 2011 and beyond will depend on the company’s future results of operations, financial condition and other relevant factors. A discussion of the factors that could cause actual results to vary is contained in Sterling’s annual and quarterly reports filed with the SEC. We will have introductory remarks today from Mr. John Millman, President of Sterling Bancorp; and Mr. John Tietjen, Chief Financial Officer. After their remarks, we’ll open up the call for your questions. And with that, I’d like to turn the call over to Mr. Millman.

[John Millman:]

Thank you, Ed, and good morning, everyone. Welcome to our conference call for the second quarter ended June 30th, 2011. Strong business growth and solid asset quality were the two main themes for Sterling in the 2011 second quarter. Our performance clearly shows that we are gaining share in a resilient dynamic market leading to expanded business with existing clients and a significant number of new customer relationships. These market share gains are reflected in double-digit growth in loans, deposits and total assets. At the same time, we are experiencing strong asset quality metrics. Net charge-offs were $2.5 million for the second quarter, half the level of the year ago period. Our allowance for loan losses covered non-accruals by 323% as of June 30th, 2011. Now let me review some of the specific highlights of the 2011 second quarter. Net income was $3.9 million, an increase of 32% from the year ago quarter. This represents a continuation of the strong, positive momentum we demonstrated in the first quarter of this year. As you know, we fully redeemed the TARP preferred shares and warrants in the second quarter. This action was reflected in net income available to common shareholders, as we incurred accelerated accretion of $1.2 million or about $0.04 per share. Including the accelerated accretion, net income available to common shareholders was $2.5 million for the 2011 second quarter, an increase of 8% from the prior year. It is important to note that we had a sharply higher average share count this quarter with shares outstanding up $4.7 million or 18% due to our successful March 2011 common share offering. Including our previous common share offering in 2010, we have raised over $100 million in additional equity in the past 15 months and significantly to our already strong capital foundation. With the effect of the higher share count being partially offset by earnings growth, earnings per diluted share were basically stable with the year ago period, $0.08 for the second quarter 2011 versus $0.09 for 2010. We experienced strong asset growth across our business and set new record highs for loans, deposits and total assets. Total loans in portfolio were up over 10% to $1.4 billion. Total deposits rose 22% to $2 billion and total assets were up 13% to approximately $2.6 billion. Again, these were all historic highs for our company. The growth in our business shows that we are continuing to gain market share as we expand our existing client relationships and add new customers who have been underserved by competitors. Asset quality also has continued to be quite strong. Net charge-offs were $2.5 million for the second quarter, half the level of $5 million a year ago. Non-accrual loans were $5.7 million at June 30th, 2011 down from $18.7 million a year earlier. The ratio of non-accrual loans to total loans improved to 0.41% from 1.46% a year earlier. Non-performing assets were 0.30% of total assets of June 30th, 2011, down from 0.85% a year ago. The allowance for loan losses as a percentage of non-accrual loans was 323% at June 30th, 2011 compared to 110% last year. There are a number of key factors that give us confidence in Sterling’s ability to continue delivering strong growth and solid financial performance for the balance of the year. Sterling is uniquely positioned as a business bank in an attractive market place that is centered in New York, the New York Metro area and beyond, which is home to hundreds of thousands of small to mid size businesses. While a number of lending institutions seem to have rediscovered the middle market, we continue to differentiate ourselves by providing unique custom-tailored solutions. Our C&I lending sweet spot as the client whose credit needs are between $3 million and $10 million. Due to our broad range of products, including our strength and asset-based finance, we can offer custom-tailored financial solutions to clients, while also broadening and diversifying our income sources. Our strong balance sheet, which was enhanced by two successful share offerings in recent years, provides ample growth capital to support the continued expansion of our business. We recognize that a return to economic uncertainty and a continued lack of direction from Washington on debt and budget matters may affect the future borrowing plans of our customers. That said though, we do have a robust lending pipeline and look forward to building on our strength to deliver continued profitable growth and enhanced share holder value over the long-term. Now I’ll turn the call over to John Tietjen.

[John Tietjen:]

Thank you, John and good morning to everyone on the call. I would like to provide additional detail on our performance for the 2011 second quarter. As we have noted, net income was up 32% before the effect of the accelerated accretion from the redemption of the TARP preferred shares and warrant. Net income available to common shareholders was $2.5 million increasing from $2.3 million a year earlier. The March 2011 share offering sharply increased our weighted average shares outstanding to $30.4 million in the 2011 second quarter versus $25.8 million a year earlier. With our EPS remaining basically unchanged at $0.08 for 2011 second quarter from $0.09 a year ago. Looking at some of the key factors that contribute to our performance, net interest income on a tax equivalent basis was $21.8 million for the 2011 second quarter up from $21.1 million reported a year ago. Net interest income also increased sequentially from $20.3 million in the 2011 first quarter. The improvement over last year reflected higher average loan and investment security balances and reduced funding costs, partially offset by the impact of lower yields on loans and sharply lower yields on securities along with higher interest bearing deposit balances. Provision for loan losses decreased to $3 million for the quarter from $5.5 million a year ago reflecting our continued strong asset quality trends. Non-interest income including security gains was $10.5 million about even with $10.6 million a year ago. We experienced growth in residential mortgage banking income during the quarter, partially offset by lower service charges. Total non-interest income was $10.9 million for the 2011 second quarter compared to $11.4 million a year ago due to a decrease in the 2011 period security gains. Reflecting strong contribution from our fee generating products, non-interest income represented 31.1% of total revenues in the current quarter. Non-interest expenses were $23.4 million for the 2011 second quarter compared to $22.1 million a year ago. This increase was primarily due to additional compensation and occupancy expenses related to the continued growth and our ongoing business development activities. Now I would like to provide some perspective on the net interest margin. As indicated in the release, the net interest margin for the second quarter increased to 3.85% compared to 3.84% in the first quarter. The second quarter margin benefited from higher loans, securities and demand deposit balances coupled with lower funding costs. These benefits were partially offset by the impact of lower yields on loans and securities and higher interest bearing deposit balances. The higher loan and demand deposit balances reflect the success of our business development activities while the slightly lower yield on loans was primarily due to changes in the loan mix. Higher security balances and lower yields reflect the continuation of our strategy to maximize liquidity by investing short, coupled with the impact of changes in general market rates. Lower funding costs were primarily the result of changes in our deposit mix. The margin for the second quarter of 2010 was 4.12%. When analyzing the 27 basis point decrease for the 2011 second quarter, the impact of many of the factors discussed earlier were similar. Higher loan and security and demand deposit balances along with lower funding costs benefited the margin with the impact of lower yields and securities and higher interest bearing deposit balances reducing those benefits. Turning now to the balance sheet, net loans in portfolio at June 30th, 2011 were $1.4 billion up 10% or $127 million from a year ago. Investment securities were $880 million at the end of the 2011 second quarter from approximately $819 million a year ago. As I’ve just mentioned, this was largely due to an increase in short-term investment securities reflecting our strategy for the deployment of the proceeds from our share operatives. Total deposits in June 30th were $2 billion compared with $1.6 billion a year ago. We continue to build our solid core of non-interest bearing demand deposits, which increase nearly 15% to $602 million for the 2011 second quarter. Demand deposits are primarily related to our commercial loan accounts and have grown as a result of our business development activities. All of our regulatory capital ratios continue to exceed the well capitalized requirements. At June 2011, Sterling’s Tier 1 risk-based capital ratio was 12.33%, total risk-based capital was 13.34% and Tier 1 leverage capital was 9.47%. Tangible common equity ratio rose to 7.67% at June 30th, 2011 from 7.33% a year earlier. Book value per common share increased to $7.09 at June 30th compared to $7.04 a year earlier. Our liquidity remains strong and will support future growth. The ratio of loans held in portfolio to deposits was approximately 68.2% at June 30th, 2011, giving us ample capacity to increase our lending activities. With that, let me turn the call back over to John.

[John Millman:]

Thanks John. Let me conclude by saying that we expect continued growth in our business for the balance of this year. We will continue our efforts to gain market share by building on Sterling's well-established focus on high-touched service. Our broad portfolio of specialized financial solutions for small to mid size businesses and our strong base of growth capital. Now we would be please to respond to your questions.

[Operator:]

Thank you. (Operator Instructions) And our first question in queue will come from Mark Fitzgibbon with Sandler O'Neil. Please go ahead.

[Mark Fitzgibbon:]

Good morning gentlemen. Thanks for taking my question.

[John Millman:]

Hey Mark, good morning.

[Mark Fitzgibbon:]

First, I'm wondering if we could just talk about the NIM perspectively. Given the liquidity you have and sort of how the balance sheet is positioned from a rate sensitivity standpoint. It sounds like we would expect to see a little bit of NIM pressure going forward. Am I thinking about it at the right way?

[John Tietjen:]

Actually Mark, I believe that if we are able to sustain the loan growth that we had in the second quarter, we should be able to see modest improvement in the margin.

[Mark Fitzgibbon:]

Okay, great. And then secondly, you mentioned that the pipeline was robust. Could you perhaps size that for us?

[John Tietjen:]

Sure Mark. First of all, we review the pipeline very often. We add names and we take names out. It's presently running about $200 million. We historically see a pull through rate of the current pipeline of about 25%. So that gives us some idea of what we expect to see in loan production going forward for the next quarter or two.

[Mark Fitzgibbon:]

Okay. And then lastly, on the expense front, do you have a target in mind, either short-term or long-term for the efficiency ratio or G&A to assets?

[John Tietjen:]

Now our efficiency ratio has always been higher than peers, because of the way we deliver our service and some of the products that we offer requiring more handholding with clients than traditional C&I lending. Having said that, we constantly look at the expense numbers, we are attempting to spend money in areas that are going to be revenue producing. I would say in the second quarter, we didn't have any significant increases in non-revenue producing expenses.

[Mark Fitzgibbon:]

Thank you.

[Operator:]

Thank you. And our next question in queue that will come from the line of Damon Delmonte with KBW. Please go ahead.

[Damon Delmonte:]

Hi, good morning guys, how are you?

[John Tietjen:]

Good morning Damon.

[Damon Delmonte:]

I was wondering if you could provide a little detail on the loan growth this quarter. I don't think there is a breakout by category and the recent growth is pretty substantial. Could you help us kind of delineate that?

[John Millman:]

Damon, the growth is largely in core middle market lending. So that really we find very encouraging, it's coming in the sweet spot and the core of what we do in our business. John you can add some.

[John Tietjen:]

Yeah, if we look at in the portfolio, the C&I lending which includes, the asset-based group is up approximately $24 million, residential real estate is up about $20 million and loans to non-depository financial institutions are up about $17 million, that principally represents the Warehouse Lending that we are doing, the Mortgage Warehouse Lending and those increases are comparing June 30th to December 31st.

[Damon Delmonte:]

To December 31st, not last quarter, okay. And could you talk a little bit about on the pricing of what you're seeing. We've heard kind of anecdotally that there is increased competition in the market place for new loans. The overall demand for new loans has been weak, so there has been a lot of market share taking, so to speak, and with that has come increased pricing pressures. Can you talk a little bit about that?

[John Millman:]

Yeah, I think what you are hearing is accurate. We are seeing pricing pressure, there is no question about that. There are more lenders who have rediscovered the middle market and there is a tendency to compete very aggressively on pricing and we certainly sense it and feel it.

[Damon Delmonte:]

Okay, so with that then, kind of going back to the question regarding the margin, wouldn’t that have a negative impact on the margin going forward, you are still getting loan growth, but you are getting, it is coming at much tighter spreads, more of a volume situation where the dollar amount on loans being added will kind of outweigh the impact?

[John Millman:]

It is coming at tighter spreads Damon, but they are still higher than the margin, so for every loan that we put on the books, we got a yield that is higher than what the margin is and a substantial portion of it is funded by low interest bearing borrowings and demand deposits. So, I would expect that as we move from securities into loans that the margin would in fact increase, we don’t yet have the numbers on the increase that we will get with a 100 basis point rise, but I suspect with the change in the balance sheet and the growth of loans, for the first quarter we said 100 basis points would give us $1.7 million and additional net interest income, I believe that when we get the results in for the second quarter that number will be higher.

[Damon Delmonte:]

Okay, great. And then lastly on the funding side of the balance sheet, it looks like you had a reduction in borrowings and you obviously had really, really strong deposit growth, but part of that growth was in CDs. Is this more of just a function of going away from short-term borrowings and using CDs as a funding mechanism?

[John Millman:]

Yeah the CEDAR’s program and other lending, listing services provide very inexpensive funding relative to traditional borrowings. We are able to get inexpensive money at 25 basis points where we are not seeing that if we were going out in traditional borrowing areas.

[Damon Delmonte:]

And those CEDAR’s, as you are putting out those deposits, what is the average length of those?

[John Millman:]

I would say it is laddered, but generally speaking, under a year probably.

[Damon Delmonte:]

Okay, thank you very much.

[Operator:]

Thank you. And our next question in queue comes from the line of Frank Barkocy with Mendon Capital. Please go ahead.

[Frank Barkocy:]

Hi guys.

[John Millman:]

Hello Frank.

[Frank Barkocy:]

Yeah, my question on the NIM was answered, so I appreciate that. Could you address other than using the short-term investments, you eventually fund loan growth, what are your considerations regarding dividends and share buybacks and potential acquisitions as well?

[John Millman:]

Okay, three questions. We don’t presently see anything that would indicate a change in the dividend level. We do not have any plans to buyback capital and we are always looking at acquisition opportunities to deploy capital.

[Frank Barkocy:]

Okay and what areas would you be looking to acquire?

[John Millman:]

Specialty finance companies, whole banks and perhaps assisted transactions, but I think it would be whole banks and specialty finance companies, it would be most likely, portfolios as well.

[Frank Barkocy:]

Good, thank you John.

[Operator:]

Thank you. Our next question in queue that will come from the line of Rick Weiss with Janney. Please go ahead.

[Rick Weiss:]

Good morning.

[John Millman:]

Hi Rick.

[Rick Weiss:]

With regards to the loans, are there any constraints within Sterling in terms of number of loan officers that you are facing today or do you have capacity to take what is out there?

[John Millman:]

I’m sorry, is the question, do we have capacity to grow the loan book with the existing question, Rick is that your question?

[Rick Weiss:]

Yes.

[John Millman:]

Absolutely, we could do substantially more business with the platforms that we have in place and with the staff that we have in place.

[John Tietjen:]

Having said that though, we are constantly looking for business development people that we feel can supplement the loan growth.

[Rick Weiss:]

Okay and most of the growth that you are seeing right now is taking business away from others rather than new business?

[John Millman:]

Well, every new piece of business probably comes from another institution, so I would say that roughly 80% of the loan growth represents new account relationships, the remaining 20% represents additional borrowing from existing clients.

[Rick Weiss:]

Okay, and when you are making the loans John, are you able to get deposit balances as well?

[John Tietjen:]

We never make loans without deposits. Deposits are a critical part of every lending relationship and every lending relationship requires demand deposits, not interest bearing but demand deposits. And that’s one of the reasons you are seeing a very strong level of demand deposit growth.

[Rick Weiss:]

Okay, and just to follow up Frank’s question with regard to dividends, you have a pretty high dividend payout ratio at the moment. Are you hearing anything from your regulators about that?

[John Tietjen:]

No, not at all Rick.

[Rick Weiss:]

Okay, great. Thank you.

[Operator:]

Thank you. (Operator Instructions). Our next question in queue will come from Aaron Bran [ph] with Stifel Nicolaus. Please go ahead.

[Aaron Bran:]

Good morning gentlemen.

[John Millman:]

Good morning Aaron.

[Aaron Bran:]

I guess I have two questions, the first relates to non-interest income, which is I guess from the last couple of quarters if we exclude the security schemes, it is generally stagnated or trended down a little bit, is there anything that you can account that to in particular or how should we be thinking about that going forward?

[John Tietjen:]

I wouldn’t attribute it to anything in particular. Mortgage banking is one of the contributors in that area and there has been some volatility in the mortgage banking revenue generally following what’s going on in the industry, so I don’t think we are unique there. As our demand deposit balances increase, you would expect that service charges on deposit balances are going to go down. The accounts receivable management and factoring commissions, those are up slightly. We see there the same pricing issues that John talked about and we addressed them as we do with loan pricing, looking at the relationship and determining whether we can lower commission rates or not.

[John Millman:]

Also, as you take a look at our business historically there is always been seasonal components to the business. The first couple of quarters have generally been slow and then we see an acceleration of build up in our business historically third and fourth quarters and I would expect to see that spill over into the generation of non-interest income in the third and fourth quarter.

[Aaron Bran:]

Just a quick follow up on one point made that as your demand deposits grow, you would expect your service charges to trend up?

[John Tietjen:]

No, no trend down.

[Aaron Bran:]

Okay.

[John Tietjen:]

Yeah, because they have got balances offsetting the service charges and lower levels of charges can impose.

[Aaron Bran:]

Okay. And my second, I guess it’s actually my third question now. The non-interest expense; that has also I guess generally trended up. I have realized that you have had certain business development investments that have been going on over the last year, but do you see that stabilizing or do you see the trend that we have observed over the last year continuing?

[John Tietjen:]

We are looking at a modest increase over last year in non-interest expenses for the full year and we were about $88 million, if I remember correctly, for the full year. A modest increase off that for the entire year.

[Aaron Bran:]

And that’s principally for business development purposes or is there anything else?

[John Tietjen:]

With the result of our business development activities and as we go into new areas, for instance, we have for a full six months this year, the impact in income and expenses of our mortgage warehouse business. Last year we only had it at this point for about a month and a half, so there’s a slight distortion there.

[Aaron Bran:]

Okay. Well, I appreciate your time in answering my questions.

[John Tietjen:]

Thank you.

[Operator:]

(Operator Instructions). I’m showing no additional questions in queue. Please continue.

[John Millman:]

Okay, thank you operator. As always, we thank you for your interest in Sterling, and we look forward to speaking with you in the future. Thank you.

[Operator:]

Thank you and ladies and gentlemen, this conference will be available for replay after 12