Sterling Bancorp
Q1 2013 Earnings Call Transcript

Published: 26 Apr 2013

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Sterling Bancorp 2013 First Quarter Conference Call. For the conference, all the participants are in a listen-only mode. There will be an opportunity for your questions. Instructions will be given at that time. (Operator Instructions) And as a reminder, today’s call is being recorded. With that being said, I will turn the conference now to Mr. Edward Nebb with Investor Relations. Please go ahead.

[Edward Nebb:]

Good morning. Thanks to all of you for joining us today. Our news release announcing Sterling’s first quarter 2013 results was issued today prior to the market open and is available on our website. Before turning to the discussion of the Q1 financial results, let me remind you that any comments made today about future financial position or results, dividends, plans and objectives 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 for the second quarter of 2013 and beyond will depend on the company’s future results of operations, financial conditions, and other 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. In addition, our earnings release includes information on certain non-GAAP financial measures that maybe referred to in the discussion. We will have introductory remarks today from Mr. Louis Cappelli, Chairman and Chief Executive Officer of Sterling Bancorp, and Mr. John Tietjen, Chief Financial Officer. And after their remarks, we’ll open up the call for few questions. And now, I would like to turn the call over to Mr. Cappelli.

[Louis Cappelli:]

Thank you, Ed and good morning everyone. Welcome to our conference call for the first quarter 2013. As we previously announced on April 4 of 2013, Sterling Bancorp and Provident New York Bancorp have entered into a definitive merger agreement. In the stock-for-stock transaction, Sterling Bancorp shareholders will receive a fixed ratio of 1.2625 shares of Provident New York Bancorp common stock for each share of Sterling Bancorp common stock. Upon closing, Provident Bank will convert to a national bank charter and adopt the Sterling name as will the holding company. The transaction is subject to approval by shareholders of both companies, regulatory approval, and other customary closing conditions. Subject to such conditions, the merger is anticipated to close in the fourth quarter of 2013. We are excited by the potential benefits of this transaction and the opportunities it will create for the combined institution in the future. Let me turn to the 2013 first quarter, which was a period of continued robust growth and strong earnings expansion for Sterling. During the quarter, we continued our successful strategy of redeploying assets from investments into loans, which help drive double-digit growth in loans and contributed to our higher profitability. We also delivered solid growth in deposits and maintained a strong net interest margin and we continued to carefully control expenses and to pursue our stringent credit quality standards. Looking at the highlights of the quarter in greater detail, the loan portfolio increased 19% from the year earlier quarter to $2.8 billion continuing our track record of mid-teens loan growth. Our comprehensive portfolio of credit products provided us with numerous avenues of growth. I want to highlight our outstanding growth in residential mortgage fundings which will more than double the year ago level. This reflected increases in volume, of course, both our regional mortgage banking operation as well as Universal Mortgage business that we acquired in the third quarter of 2012. As we had noted, the Universal Mortgage has a solid position in the Brooklyn market and accomplished high producing team and excellent business relationships. This timely acquisition was planned in advance of the rebound in the mortgage market and we have continued to experience increasing residential mortgage volume as a result. The Universal acquisition also has positioned Sterling extremely well to expand into the booming Brooklyn market where we will be opening a branch office shortly. Total deposits rose 15% from a year ago to $2.3 billion. We have continued to experience strong growth in non-interest bearing demand deposits, which are an essential component of our customer relationship model. Non-interest bearing demand deposits are reaching close to $900 million at March 31, 2013 or about 39% of total deposits. Our growth in demand deposits places us in the top 5% among banks with assets of $1 billion to $5 billion. Turning to our earnings performance, income before taxes increased by more than 19% to approaching $8 billion, contributing for the sharp earnings increased, gross revenues rose by $1.9 million. This partially reflected the growth in interest income driven by our redeployment of assets from investments into loans. In addition, we delivered higher non-interest income largely due to the growth in mortgage fees as a result of the loan volume increase that I noted earlier. Net interest income was up 8% reflecting our continued disciplined approach to funding cost and the strong growth in non-interest bearing demand deposits. Our credit quality metrics remain sound. We have continued our vigorous underwriting practices while at the same time expanding our loan activity with credit worthy borrowers. To sum up, we have continued Sterling’s positive growth momentum in 2013. We continued to experience robust demand for a range of financial products and services. The Universal acquisition should continue to build our mortgage volume and fee generation capacity and we are excited about our new opportunities in the exceptionally vibrant Brooklyn market. Our strong liquidity holds further potential to shift earning assets from investments into loans in line with our past success in implementing this strategy. And our performance should continue to benefit from our diverse revenue sources, expense discipline, and asset quality. I would like to thank the Sterling team for delivering another quarter of positive results. And now I’ll turn the call over to our CFO, John Tietjen. John Tietjen - Chief Financial Officer Thank you, Lou and good morning to all on the call this morning. I’d like to provide additional detail on our performance for the first quarter of 2013. Net income was $5.2 million, representing a 14% increase versus the same period a year ago. EPS increased to $0.17 from $0.15. Looking at some of the key contributors to our results, net interest income was $24.1 million for the 2013 first quarter, an 8% increase from a year ago. This increase primarily reflected the higher average loan balances, the shift in our earning asset mix and reduced funding costs due to deposit pricing discipline as well as continued growth in non-interest bearing deposits. Net interest margin remained above 400 basis points at 4.02% for the 2013 first quarter. We have continued to benefit from our ongoing strategic shift of earning assets into loans. Investment security balances at March 31, 2013 were down approximately $137 million from a year earlier, while loans in portfolio were up $228 million over the same period. Average loans rose to nearly 68% of average earning assets in the 2013 first quarter, up from 63% a year ago. The difference between yield on investments and loans averaged 253 basis points in the recent quarter. We also have continued to be disciplined on deposit pricing. As a result cost of deposits dropped by 8 basis points comparing first quarters of 2013 to 2012. Finally we benefited from an increase in non-interest bearing deposits which were $138 million higher on average for the 2013 first quarter versus a year ago. Non-interest income for the 2013 first quarter was $10.7 million. Excluding gains on sale of securities non-interest income was up $1.1 million or 12% from a year ago. Non-interest income continues to be a meaningful contributor to our financial performance and represents 29% of gross revenues in the 2013 first quarter. As noted we benefited in particular from an increase in residential mortgage banking income reflecting organic growth and the impact of the Universal Mortgage acquisition. These factors will offset decreases in gains on sale of securities, accounts receivable management and other related fees. Non-interest expenses were $24.8 million for the 2013 first quarter these expenses were essentially unchanged comparing the 2013 first quarter to the 2012 fourth quarter. The increase from the year ago first quarter primarily reflected higher personnel expenses due to investments in the growth of Sterling’s business development activities including expenses associated with the Universal Mortgage acquisition. Our asset liability management strategies have provided us with a robust level of liquidity that can support in our continued loan growth and that contributes to our earnings momentum. At March 31st, about $278 million of our investment portfolio or 42% was categorized as available for sale. This available for sale portfolio was invested in instruments that have a weighted average life of 3.4 years. This means that we have strong liquidity to fund loan demand. Our asset quality metrics remain strong, net charge-offs were $1.6 million for the 2013 first quarter. Non-performing assets at the end of the quarter were 0.26% of total assets. The allowance for loan losses was 431% of non-accrual loans and compared to the total portfolio loans was 1.34% at March 31 of ‘13. With respect to capital all of our regulatory capital ratios continued to exceed well capitalized requirements. At March 31, 2013 Sterling’s Tier 1 risk based capital ratio was 11.68%. Total risk-based capital was 12.81% and the Tier 1 leverage ratio was 9.16%. The ratio of tangible common equity to tangible assets was 7.58% at March 31, 2013. Book value per common share increased to 7.49% (sic) ($7.49) at March 31, 2013 from $7.29, excuse me a year earlier. With that, let me turn the call back over to Lou.

[Louis Cappelli:]

Thank you, John. I’d like to conclude by saying that Sterling team remained sharply focused on delivering profitable growth, expanding the business, providing exceptional service to customers and continuing to produce solid value for shareholders. We are also working diligently to bring our merchant with profit and to a successful conclusion. Now, we will be pleased to respond to your questions.

[Operator:]

(Operator Instructions) And we’ll go to line of Collyn Gilbert with KBW. Please go ahead.

[Collyn Gilbert:]

Thanks. Good morning gentlemen.

[Lou Cappelli:]

Good morning.

[John Tietjen:]

Good morning, Collyn.

[Collyn Gilbert:]

First question, I guess John on the mortgage banking side, could you just breakout what the difference was in terms of revenue coming from just share volume and then what the gain on sale trends were this quarter versus what you guys saw in the fourth quarter?

[John Tietjen:]

I don’t have the breakout Collyn. The income for this quarter was higher than it wouldn’t early be expected given the fact that we have the impact in the fourth quarter of all the extra things we had to do relative to Sandy. So, there was some overflow of sales into the first quarter.

[Collyn Gilbert:]

Okay, okay and what do you think your – you should be able to do from here, I mean, do you see revenues sort of sustaining this level or gradual drop-off and I guess part of that may be would be driven in the split that you are saying between refi and purchases?

[John Tietjen:]

Yeah, we do think that it will be some softening of mortgage banking income in future quarters partially due to seasonality, the second quarter had some seasonality built into it which would bring ordinarily bring down the revenue in that quarter. And also when you are comparing the first quarter, you are not going to have the impact of the overlap from last year. The other part of it is the purchase sale mix as that changes not only with us, but industry wide that will have an impact.

[Collyn Gilbert:]

Okay, okay and the – what was driving the loan yields on a quarter-to-quarter basis?

[John Tietjen:]

Principally the mix of what’s in the portfolio.

[Collyn Gilbert:]

Okay, which lead to my final question, no, actually not my final question, next question is can you give us and I guess round numbers will do what the loan buckets were in the first quarter in terms of breaking now between C&I, I mean kind of how you do in your regulatory data just a rough idea of may be where the growth was?

[John Tietjen:]

Yeah, well, virtually all of the significant components of the portfolio increased comparing March 31st of ’13 of March 31st of ’12. C&I is up, loans to the non-depository financial institutions which is a core report breakout and this is essentially C&I that was up, equipment financing was up, commercial mortgage was up, so, it’s pretty much across the entire spectrum.

[Collyn Gilbert:]

Okay. Is it usually your better loan quarters sort of the second and third quarters from the seasonal perspective?

[John Tietjen:]

Yes.

[Collyn Gilbert:]

Okay.

[John Tietjen:]

Usually that’s the case and we hope that will continue in this year.

[Collyn Gilbert:]

Okay, okay and then just a final question. Is there any either sort of balance sheet changes or sort of expense changes that we should anticipate in advance of the Provident merger?

[John Tietjen:]

Well, we’ll start to see the impact of some of the merger related expenses in P&L, but other than that I don’t think there will be any significant balance sheet increases other than the ongoing shift into loans and our continued efforts to increase deposit levels.

[Collyn Gilbert:]

Okay. Okay, great. That was all I had. Thanks very much.

[Operator:]

And with no additional questions, I will turn it back to the presenters for any closing comments.

[Louis Cappelli:]

Thank you, operator. And as always, we thank you for your interest in Sterling and then we look forward to speaking with you in the near future.

[Operator:]

Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.