Sterling Bancorp
Q3 2013 Earnings Call Transcript

Published: 24 Jul 2013

[Operator:]

Welcome to the Provident New York Bancorp Fiscal 2013 Third Quarter Earnings Call. My name is Paulette and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a questions-and-answer session. Much of the information to be discussed is included in the earnings announcement that was released yesterday afternoon, which is available on www.providentbanking.com in the Investor Relations section as well as accompanying slides. Forward-looking statements made during the course of the conference call are subject to the risks and uncertainties described in the company’s filings with the Securities and Exchange Commission, including the press release filed on Tuesday as well as the Annual Report on Form 10-K. I would now like to turn the call over to Jack Kopnisky, President and CEO of Provident New York Bancorp. Please go ahead.

[Jack L. Kopnisky:]

Good morning, everyone, and thanks for joining us today to discuss our third quarter results. Joining me today on the call is Luis Massiani, our Chief Financial Officer. If I could ask you to turn to our slides on Page 3 in our results, we had a solid third quarter as we continued to execute our strategy. Excluding merger-related costs for our anticipated merger with Sterling Bancorp, net income was $7.4 million or $0.17 per share, representing a year-over-year earnings growth of 13.6%. Cap earnings were $6.4 million or $0.15 per share. Our teams are delivering results as demonstrated by our strong loan originations this quarter, which were nearly $350 million. This level of loan origination is 69% higher than third quarter last year and 38% higher than last quarter, and represents the highest level of production in the history of the bank. As a result of our production on a year-to-date basis, we increased loan balances by $486 million, which represents a 26.2% growth in loans over June 30, 2012. We continue to increased operating efficiency during the quarter and have focused on driving growth and revenue while controlling expenses. For the quarter, our core efficiency ratio was below 60%. Our year-over-year growth in core revenues was 10.6%, while we held core operating costs at the same levels as a year ago. To position ourselves for growth in the lock-in funding at favorable rates, we raised $100 million in capital through senior notes offering in early July. We are working closely with Sterling Bancorp to plan for the effective integration of the two companies. We continue to see the expected level of cost synergies and meaningful upside in revenue enhancements. Now, let me turn the call over to Luis to discuss the details of the quarter.

[Luis Massiani:]

Thank you, Jack, and good morning. Some additional details on key financial and operating metrics are shown on page four. As Jack mentioned, we had a strong quarter with solid loan growth as our gross loans grew by $132 million over the linked quarter. Our originations in the third quarter had a yield of approximately 3.8%, which represents a significant pickup relative to the yield on our investment securities. As we have mentioned on prior calls, a key component of our strategy is to reduce the proportion of security than the percentage of our total earning assets and replace those securities with higher yielding, high quality loans. Suggesting for the change in the market value of our AFS securities portfolio of $31.8 million, securities balance has decreased by an incremental $31 million in the quarter and represented approximately 20% of our – 28% of our assets. We will continue to focus on executing this rebalancing strategy going forward. Our net interest margin for the period was 346 basis points, which is five basis points higher than we reported in the linked quarter. Interest accretion on the loans acquired in the Gotham transaction contributed nine basis points to our net interest margin. Through nine months, our net interest margin was 341 basis points. We feel comfortable with our prior guidance of a net interest margin in the range of 335 basis points to 340 basis points for the full year of 2013. Our provision expense increased by $1.3 million over the linked quarter, we continue to workout of several ADC relationships, which negatively impacted our charge-offs. However, the majority of the increase in the provision is related to the strong growth in loan balances we had during the quarter. On the bottom of the page, we show our return on assets and return on equity metrics, both of which are presented on an as reported basis. Excluding merger-related expenses, our return on assets was 80 basis points and our return on tangible equity was 9.2% for the quarter. We are gaining momentum towards reaching our near-term goal of greater than 10% return on tangible equity on a standalone basis. Turning to Slide 5, growing our presence in the greater New York City metro area has been one of our top priorities and our expansion into the New York City marketplace is going to accelerate substantially through our merger with Sterling. We continue to grow loan balances in New York City on an organic basis. For the quarter, outstanding loan balances grew by $61 million reinforcing that our standalone strategy is working. When you combine our business with Sterling, total loans in the greater New York City market are in excess of $1.6 billion and total deposits are in excess of $2.5 billion. Both companies have significant positive momentum and are growing loans, improving credit and increasing profitability. We are working closely with Sterling on all areas of integration and planning, and continue to view this as a great opportunity to accelerate growth, create a high performance [and buying] company in an attractive banking market and ultimately deliver value for shareholders. On Slide 6, we provide a little more detail on our originations for the quarter and the composition of our loan portfolio. Our total originations were $348 million, which represented an increase of 38% over the linked quarter and 69% over the same quarter a year ago. Our commercial teams are executing, as you can see commercial loan originations, which includes our commercial and industrial and commercial real estate portfolios, were $286 million, which represented an increase of 51% over the linked quarter and 70% year-over-year. Our teams are also delivering across all of our markets and asset classes. The spilt in origination volume between our legacy markets and the New York City market was approximately 60%-40%. The split between commercial and industrial and commercial real estate classes was approximately 55% C&I, 45% CRE. The result of the strong origination volume is an increase year-over-year of $486 million in total loans, which were $2.3 billion as of June 30, 2013. Focusing on the commercial and industrial and commercial real estate asset classes, our loan growth year-over-year has been $549 million or 49%. Our commercial teams are performing as planned and are on track to achieve high-teens loan growth for fiscal 2013. As I mentioned before, loans originated in the quarter had a weighted average yield of approximately 3.8%. Looking at our commercial and industrial and commercial real estate origination, the weighted average yield was approximately 4%. The increase in loans as a percentage of total earning assets was a factor in allowing us to slightly increase our yield on total earning assets by one basis point over the prior quarter to 3.97%. We expect to see a greater impact on yield on total earning assets as we hold these new loans for the [full] quarter. Turning to Slide 7, we provide details on our deposits. Our total cost of deposits decreased by five basis points to 17 basis points during the quarter. As you can see on the bottom right chart, we continue to have a strong deposit composition consisting mostly of non-interest bearing and low cost NOW, money market and saving accounts. Our certificates of deposit continued to run-off and now represent just 13% of our total deposits. Overall, total deposits were approximately $2.7 billion at June 30. This represented a decrease of $61 million over the prior quarter. This was mainly due to lower deposit balances in our Municipal Bank. Our total cost of interest bearing liabilities for the quarter was 66 basis points. Including non-interest bearing deposits, our total cost of funding was a very attractive 53 basis points. On Page 8, we review another key component of our strategy, which is the management of expenses and improvement in operating efficiency. Core revenues have grown approximately 11% year-over-year, while our expenses have remained essentially flat. As we have mentioned in the past, we make an upfront investment in commercial banking teams as the expenses for growing the number of teams hits our P&L immediately, and it takes some time for the teams to settle in and start to deliver. Our non-interest income, although, we have not yet achieved the run rate revenues, we have targeted in our new investment management and title insurance initiatives, we are starting to gain momentum. For the quarter, the aggregate revenues in these initiatives were $678,000, which represented an increase of $256,000 over the linked quarter. We will continue to make progress on this front. We reduced core operating expenses in the quarter. Excluding merger-related charges, core non-interest expense was $20 million, which represented a decrease of $1.5 million. This was mainly the result of reduction in compensation and benefits, and professional fees. We are tracking slightly better than our expense goal of $88 million that we outlined for fiscal 2013 and anticipate that our efficiency ratio will be in the low 60s for the full fiscal year. Turning to Slide 9, our asset quality has continued to improve. Although, our total non-performing loans increased slightly during the quarter by $184,000, the aggregate amount of special mention and substandard loans continued to decline. Since the year ago quarter, these criticized and classified assets have decreased from $126 million to $86.5 million, which represents a decrease of close to 31%. Our percentage of non-performing loans and total loans also decreased and is 1.35%, and the level of reserves to NPLs increased and is 90% as of June 30. We continue to work through our ADC portfolio and the decline in non-performing ADC loans has been significant. Overall, loan balances in this asset class have decreased $38 million during the year. As of June 30, 2013, total ADC loans were $106 million and we will continue to liquidate this portfolio. We are comfortable with our level of reserves doing the reduction in our non-performing assets as well as the declines in classified assets. The allowance for loan loss as a percentage of the loan portfolio decreased to 1.21% from 1.25% in the linked quarter. We also provide data on the bottom of the page on our allowance ratios excluding the acquired Gotham loans, which as you know, carry no allowance. Turning the page to Slide 10, this chart highlights the trend in the risk ratings of our commercial loan portfolio. The average risk rating in our commercial portfolio continued to improve. At June 30, 2013, 89% of our loans are risk-rated between 1 B and 5 B, which are all good pass rated loans. We continue to see opportunity to originate high-quality loans and based on these metrics, we are confident that our loan originations will be a platform for profitable growth. On Slide 11, our capital position remained strong at both the consolidated and bank level. As of June 30, our Tier 1 leverage ratio at the bank was 8.49%. On a consolidated basis, our tangible equity decreased by approximately $14 million driven by the changes in the market value of our AFS securities portfolio. Our consolidated tangible equity to tangible assets ratio was 8.5%. We successfully completed the capital raise that we announced in connection with our pending merger. On July 2, we raised $100 million through our senior notes offering to qualified institutional buyers at an interest rate of 5.5%. We intend to use approximately $17 million of the net proceeds of the offering to fund the capital contribution to Provident Bank. This capital raise will allow us to redeem Sterling's trust preferred securities, which will represent a significant pick up in interest expense ratings. We believe we continue to have ample capital and liquidity to support our business plan and future growth. Turning to Page 12, this provides an overview of our securities portfolio and interest rate sensitivity. Our securities portfolio is weighted towards agency and mortgage-backed securities. During the third quarter, we began to invest in corporate securities, which totaled approximately $90 million as of June 30 and represented 9% of our portfolio. We will continue to diversify our portfolio going forward. Our portfolio duration increased from 4.5 years in the second quarter to approximately 5 years as of June 30. The main driver of this increase was our agency portfolio as the duration of most of these securities extended from the call dates till their maturity dates given the rise in interest rates. The impact of the extension risk in our agency securities is already reflected as of June 30. in an up 300 scenario, the duration of our portfolio was estimated to change from 5 years to 5.8 years. Overall, we’re well-positioned for rise in interest rates. As we have an asset sensitive balance sheet and approximately 55% of our loan portfolio is floating rate. We will be even better positioned for rising rate of one event after our merger as Sterling’s mix of businesses provide significant diversity in asset classes, pricing and maturities relative to our CRE and C&I businesses. Given, we will mark-to-market Sterling’s investment portfolio as part of purchase accounting. we will also have an opportunity to transition the combined investment portfolio to best support the combined balance sheet. Jack?

[Jack L. Kopnisky:]

Thanks, Luis. Just to summarize the quarter, this is on page 13, and a bullet point if you would, earnings increased 13.6% year-over-year. We had very strong loan growth year-over-year of 26.2% with record levels of originations in the third quarter. Operating leverage, which is really what we’re really very focused on is improving with an efficiency ratio of 59.1% for the quarter, driven by 10.6% revenue growth and flat expenses, compared to last year. Our overall credit metrics continue to improve as we continue to run-off the ADC legacy portfolio, non-performing loans to total loans are down more than 100 basis points from June 2012. We have had very strong levels, we have very strong levels of capital liquidity as we move into the merger with Sterling and we are on track to close the merger with Sterling in the early fourth calendar quarter. In the bottom line here, the strategy is working, this strategy works and we will continue to focus on the execution of this strategy to deliver stronger financial results. We are really focused on building this company; so that it has strong consistent earnings and EPS growth with ROAs greater than 1%, return on tangible equity of over 10% and efficiency ratios in the 50% and we’re working everyday to make those things come above. Execution is my favorite word as most of the people know around here, because I believe the strategy is the right strategy for the time and the platform that we have and the anticipated merger with Sterling. But it’s all about getting done with what we said we’re going to do. And our teams are really starting to accelerate on that and day-by-day making a difference. So we appreciate all their hard work. So let’s now open the line up for questions.

[Operator:]

Thank you. (Operator Instructions) And our first question comes from Collyn Gilbert from KBW. Please go ahead.

[Collyn Gilbert:]

Thanks, good morning, guys.

[Jack L. Kopnisky:]

Good morning Collyn.

[Collyn Gilbert:]

So, just a question on the loan growth what were the – I apologize, the yields on your new C&I originations that you put on this quarter?

[Luis Massiani:]

For the commercial loans, it was close to 4% and 3.97% exactly.

[Luis Massiani:]

And that’s all commercial.

[Jack L. Kopnisky:]

That’s commercial and real estate and C&I.

[Collyn Gilbert:]

That’s about it, okay, okay. And the average size of the question you put on this quarter, average loan size? Sorry.

[Luis Massiani:]

You know what we don’t have that. So let us – we’ll come back to on the average size.

[Collyn Gilbert:]

Okay.

[Luis Massiani:]

In general, these loans are in the kind of $3 million to $7 million to $9 million range. I mean, these are not big chunks. We have tried to make sure that we control the risk and we get these four relationships. So we clearly had loans over that and under that, but that’s kind of the general size range.

[Collyn Gilbert:]

Okay, okay, and can you just remind us how the expense flow works in terms of the timing of the commissions paid to these lenders and how we should be thinking about that expense rate going forward?

[Luis Massiani:]

Yeah, so that – let me take the teams, so the teams come on board. It takes about a year for them to break-even. In the third to second year, they start to create. In the third year, they really start to create very high returns. The commissions, the contribution margin that we use on this, which is in essence, a pseudo P&L statement that includes everything from interest income, interest expense to fees to capital charges for capital and risk based capital charges and their direct and some portion of their indirect expenses, gets paid at the end of the year. So we have to go a full cycle to do that and depending on their level, it gets paid in both cash and stock. So there are cash payments and stock payments, and we try to keep a kind of the house gets 89% of this, the teams get kind of 10% to 20% of this.

[Collyn Gilbert:]

Okay, so as, when you say end of the year, the end of your fiscal year or calendar year?

[Luis Massiani:]

The fiscal year.

[Jack L. Kopnisky:]

Fiscal.

[Collyn Gilbert:]

Okay. So probably, what will – sorry, go ahead.

[Jack L. Kopnisky:]

We’ve accrued those bonuses throughout.

[Luis Massiani:]

So we do count on it that we track the performance on a monthly and quarterly basis, and we track their performances. As you know we set a base line of where they should perform and then payout based on how rational performance measures up to that baseline that we created. So we can track on an annual basis. We will have a true-up sort of in some respects sort of for the end of the fiscal year, but we have a good estimate of where those numbers are coming in and we started [going forward] over the course of the year. So you won’t see a – there won’t be a big pop in the expense base based on that in the fourth quarter because we have, sort of, we have [good spot] over the course of the year.

[Collyn Gilbert:]

Okay. So essentially, the performance that these teams have brought is kind of been in line with what your expectations were more or less?

[Luis Massiani:]

Yes.

[Collyn Gilbert:]

Okay.

[Luis Massiani:]

Very much so, yeah

[Collyn Gilbert:]

Okay. All right, and then just quickly on the – if you think about the asset yield, I mean, you are sitting at 3 or am I 3.83 in the quarter. You are putting loans on a 4% I mean, that should – I would imagine then that asset yield should still go higher?

[Luis Massiani:]

So we will start, well, our yield on loans, our yield on total loans is what will – so the new originations on – the yield on new originations from a loan perspective are lower than our total yield on loans, but if the secret and the sort of key component of rebalancing those securities into the loans. So yes, the extent that we continue to originate these loans and replace with the $2 or with the 2.38% sort of securities yield that we have. Yes, you are going to see a pick up in total yield on earning asset as we go forward plus the production that we’ve had this quarter, we booked at – we’ve booked it over the course of the quarter. So this will be a quarter we have a full higher loan balance of $132 million, so all that will add up into slightly higher yield on earning assets as we go forward.

[Collyn Gilbert:]

Okay.

[Jack L. Kopnisky:]

What’s happening in the market also from a pricing standpoint, short rates are still remaining relatively low, so the short originations are what they have been it’s really the 5 year in out loans that are starting to increase in price. So, we have basically flowed out the longer-term asset originations in terms of pricing in our view and those will start to accelerate. The short rates will end up catching up. So we are starting to see a little more sanity in pricing in the market, there is still somewhat crazy pricing out there for certain categories, but it’s the loan rates based on obviously the yield, the steepness of the yield curve that is starting to bring some more logic in the pricing.

[Collyn Gilbert:]

Okay. That’s helpful and then just one last question, Luis what is the monthly cash flows that the securities portfolio is kicking off.

[Luis Massiani:]

No, Collyn, I don’t have that number in front of me, but I’ll get back to you on that.

[Collyn Gilbert:]

Okay. Okay, that was great, thanks guys.

[Jack L. Kopnisky:]

Thank you.

[Operator:]

(Operator Instructions) And we are showing no further questions.

[Jack L. Kopnisky:]

Great. So we really appreciate everybody’s time and interest in the company. I think we are making a lot of terrific progress, but more to go. So thanks for your interest. That’s all.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.