Sterling Bancorp
Q2 2013 Earnings Call Transcript

Published: 26 Jul 2013

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Sterling Bancorp 2013 Second Quarter Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Edward Nebb with Investor Relations. Please go ahead, sir.

[Edward Nebb:]

Thank you very much, Jack, and good morning to all of you, who are joining us today. Our news release announcing Sterling’s second quarter 2013 results was issued today prior to the market open as you know. The release is available on the company’s website. Before turning to the financial results, let me remind you that any comments made today about future financial position or results, dividends, plans, objectives or other future events are forward-looking statements under the Securities Exchange Act. Actual results may differ substantially from the forward-looking statements. The amounts of any dividends for the remainder 2013 will depend on the company’s future results of operations, financial conditions, and other relevant factors. A discussion of these factors that could cause actual results to vary is contained in Sterling’s filings with the Securities and Exchange Commission. In addition, our earnings release includes information on the calculation of certain non-GAAP financial measures that maybe referenced in this discussion. Today, we’ll have introductory remarks 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 your questions. Now, without further ado, I’d like to turn the call over to Mr. Cappelli.

[Louis J. Cappelli:]

Thank you, Ed, and good morning, everyone. Welcome to our conference call for the second quarter of 2013. Sterling’s performance for the second quarter reflected our core strengths; a business model built on diverse revenue sources, solid franchise serving the robust New York metropolitan region and beyond, a well established asset liability management strategy, and a talented team of professionals. These factors along with expense control and continued sound asset quality drove higher gross revenues and a double-digit increase in recurring income for the 2013 second quarter. Looking at the highlights of the second quarter in greater detail, net income from recurring operations increased 15% to $5.6 million or $0.18 per diluted share. We are focusing on recurring earnings in order to present our results excluding merger-related professional fee expenses associated with the merger of Sterling and Provident New York Bancorp, which we announced in April. Contributing to the sharp earnings increase net interest income increased by 7%, as we continue to benefit from our strategy of redeploying assets from investments into loans. We also have paid down higher cost borrowings and continued to grow non-interest bearing demand deposits. As a result, net interest margin increased to 4.10%, which was higher than both the second quarter of 2012 and the first quarter of 2013. Non-interest income continued to provide a meaningful contribution to our results with the mortgage banking business being a strong component. Our credit quality metrics remains sound. Net charge-offs, non-performing assets and the provision for loan losses, all decreased as compared to a year ago. Reflecting the continuing growth dynamics in our business, total loans increased 12% from the earlier quarter to $1.8 billion. Our comprehensive portfolio of credit products provides us with numerous avenues of growth. Total deposits were up 10% from a year ago to over $2.2 billion. We have continued to experience strong growth in non-interest bearing demand deposits, which represents 42% of total deposits at the end of this quarter. The ratio of demand to total deposits has consistently been among the highest in the industry. Sterling recently opened a new branch office on Court Street, Brooklyn, which is also a production center for residential mortgages and other products. Our expansion into the blooming Brooklyn market, which has experienced dynamic growth in both residential population and businesses, builds upon last year’s Universal Mortgage acquisition. We are excited about the opportunity to use this new branch as a platform to offer our full range of financial solutions to an attractive and lucrative market. I would like to comment on the possible impact of higher interest rates, which is on the minds of many of us and investors as well. Federal Reserve Board continues a gradual taping of its economic stimulus programs. Sterling is very well positioned for a rising rate environment. Residential mortgage volume may decline nationally from the high levels over the past few years. That said, mortgage banking should continue to be a meaningful contributor to our revenue stream. At the same time, the Fed has stated that any tapering would be linked to an improving economy, which would help to drive demand for our other financing products. Of course, we’ll offer a diverse range of products. We have numerous ways to benefit from rising economic activity. Sterling’s business model and asset liability management strategies have resulted in an asset-sensitive balance sheet with approximately $1.3 billion of assets were about half of our total assets that would reprice upward as rates increase. With respect to the merger with Provident, we continue to be extremely enthusiastic about the transaction. The enormous opportunity is to create a premier $7 billion high performing banking institution serving the needs of small-to-middle market businesses and consumers in the New York metropolitan area and beyond. Those teams from each company are working energetically, our integration planning to ensure that we deliver the full benefits of top line growth, expense savings and continued exceptional customer serving starting day one. The merger is anticipated to close in the fourth quarter of 2013, subject to approval by the shareholders of both companies, regulatory approvals and other customary conditions. We will make an announcement when we have scheduled the Special Meeting of Sterling shareholders to vote on approval of the merger. I would like to thank the Sterling team for the continued strong performance on behalf of our customers and shareholders. and now, I’d like to turn the call over to CFO, John Tietjen.

[John W. Tietjen:]

Thank you, Lou, and good morning to all on the call. I would like to provide additional detail on our performance for the second quarter of 2013. Net income for the recent quarter was $4.5 million or $0.15 per diluted share. That compares with $4.9 million or $0.16 per diluted share for the same period of 2012. As we have noted, the results for 2013 second quarter included professional expenses related to the merger with Provident of about $1.1 million after-tax. Excluding these merger-related fee expenses, income from recurring operations was up more than 19% on a pre-tax basis. Looking at some of the other key factors driving our results, net interest income was $24.4 million for the 2013 second quarter, a 7% increase from a year ago. This increase primarily reflects 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 of non-interest bearing demand deposits. The net interest margin expanded to 4.10%, a pick up of six basis points from a year ago and eight basis points from Q1 this year. We have continued to benefit from our ongoing strategic shift of earning assets into loans. Investment security balances at June 30, 2013 were down approximately $52 million from a year earlier, while loans in portfolio were up $176 million over the same period. Average loans rose to nearly 69% of average earning assets in the 2013 second quarter versus about 64% a year ago. The yield on loans in Q2 was virtually double the yield on the investment securities at 5.37% versus 2.86%, which underscores the value of our strategy to shift assets from investments into loans. On the liability side, we paid down $21 million in high cost borrowings, principally Federal Home Loan Bank advances, while growing our cost effective core deposit funding base. Non-interest bearing demand deposits were $107 million higher on average for the 2013 second quarter versus a year ago. As a result of these factors, the cost of deposits dropped seven basis points, comparing the second quarter of 2013 to the second quarter of 2012. Non-interest income for 2013 second quarter was $9.8 million compared to $10.5 million a year ago. Non-interest income remained a major component of gross revenues at 27% for the 2013 second quarter. As Lou noted, mortgage banking income was a strong performer for the quarter. The decrease in accounts receivable management and other related fees along with lower security gains offset the increase in mortgage banking income. Non-interest expenses were $25.8 million for the 2013 second quarter, but included $1.4 million of merger-related professional fees. Non-interest expenses excluding merger-related fees were up about 3% from last year. That increase primarily reflected investments in the growth of Sterling’s business as well as expenses associated with the Universal Mortgage acquired in the 2012 third quarter. Our asset liability management strategies have provided us with a robust level of liquidity that can support our continued loan growth and that contributes to our earnings momentum. At June 30, 2013, approximately $292 million of our investment portfolio or 43% was categorized as available for sale. Approximately $223 million of the available for sale securities were invested in instruments with a weighted average life of 1.6 years. This means that our strong liquidity is available to fund our loan demand. Asset quality metrics remains strong. net charge-offs were $1.4 million or 0.32% of portfolio loans in the 2013 second quarter. Non-performing assets at the end of the quarter were 0.24% of total assets. The allowance for loan losses was 1.3% of portfolio loans at June 30 2013. With respect to capital, all of our regulatory capital ratios continued to exceed well capitalized requirements. At June 30, 2013, Sterling’s Tier 1 risk-based capital ratio was 11.54%, total risk-based capital was 12.65% and Tier 1 leverage ratio was 9.36%. The ratio of tangible common equity to tangible assets was 7.75% at June 30 of 2013 and book value per common share increased to $7.54 at June 30 of 2013 from $7.36 a year ago. With that, let me turn the call back to Lou.

[Louis J. Cappelli:]

Thank you very much, John. And now, we would be pleased to respond to any questions you may have.

[Operator:]

(Operator Instructions) Our first question will come from the line of Collyn Gilbert. Please go ahead.

[Collyn Gilbert:]

Thanks. Good morning, gentlemen.

[Louis J. Cappelli:]

Good morning

[John W. Tietjen:]

Good morning, Collyn.

[Collyn Gilbert:]

I was wondering if you could give us a little bit more color as to where the loan growth was coming this quarter, also some color around the Warehouse Lending business as well?

[John W. Tietjen:]

It was pretty much across the total portfolio, factors was perhaps the one area or a softness as the mix of business in that particular area is away from our full service product there, more towards volume only product in that particular area. The Warehouse Lending Group continues to be a significant contributor to the loan growth, and those numbers will be available Collyn, when we issue the kit.

[Collyn Gilbert:]

Okay. So you didn’t see a shortfall or a decline on a linked-quarter basis in that business?

[John W. Tietjen:]

No.

[Collyn Gilbert:]

Okay, okay. And then John, do you think given what your – the dynamics within the lending portfolios, do you think that loan yield can stay at least where it is, if not migrate higher?

[John W. Tietjen:]

I think that if we look at, as a pipeline it’s spread pretty nicely through all the lending products, and it continues to be at the $275 million, $300 million that we’ve reported in past quarters. So yes, I would expect that the loan yield would be approximately kind of the same is what you are seeing now.

[Collyn Gilbert:]

Okay. Okay, and just kind of how are you thinking about mortgage banking from here and where you think you might be able to find offsets to the decline in that business and at the same time other areas of expenses that you can cut to offset kind of the drop in that business?

[John W. Tietjen:]

Yeah, well we are not looking at a major drop in mortgage banking revenues and let me put some more flavor on that. With the current six months, the closings have been about 55% purchase and are clearly with what’s happened with rates, reprice are going to slowdown. But during our penetration into the Brooklyn market, we think that much of that drop will be offset by purchase volume. So for the third quarter of 2013, we expect that mortgage banking income will be up over the third quarter of 2012 with respect to the third quarter of 2013 versus second quarter of 2013. We think it will be about flat compared to the second quarter as I said, but we may see some lower numbers in the fourth quarter.

[Collyn Gilbert:]

Okay. How is the gain on sale margin changed in the last two quarters?

[John W. Tietjen:]

We think that what is going to go on principally in the fourth quarter what is there will be some compression in the margins on loans sold into the secondary market. But as I indicated, we are not looking for a major drop in the third quarter. If there is any compression at all, we think it will be made up with improved volumes.

[Collyn Gilbert:]

Volumes, okay, that’s helpful, and then, just one last question. Are there any, maybe, just kind of your outlook for expenses, is there anything that you guys are doing on the operating expense side ahead of the merger that we can see that line item fall further over the next couple of quarters?

[John W. Tietjen:]

I wouldn’t look for anything significant in the non-merger related expense area reason being, we are continuing to run our business as if we are standalone here and we are hiring people that are revenue producers that will generate revenue. So I wouldn’t look for a major change in the non-merger related expenses.

[Collyn Gilbert:]

Okay. Okay, that’s great. Thank you very much.

[Operator:]

(Operator Instructions) It looks like we have no further questions from the phone. Please proceed.

[Louis J. Cappelli:]

Thank you, operator, and thank you all for your interest and we look forward to speaking with you all in the future.

[Operator:]

Ladies and gentlemen, this conference will be available for replay after 12 PM today through August 9, 2013. You may access the AT&T executive replay system at any time by dialing 1800-475-6701 and entering the access code 298680. International participants dial 320-365-3844. Those numbers again are 1800-475-6701 and 320-365-3844, access code 298680. That does conclude the conference for today. Thank you for your participation and for using AT&T Executive TeleConference. You may now disconnect your lines.