Sterling Bancorp
Q4 2013 Earnings Call Transcript

Published: 30 Oct 2013

[Operator:]

Welcome to the Provident New York Bancorp Fiscal 2013 Fourth Quarter Earnings Call. 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 Kopnisky:]

Good morning, everyone and thank you for joining us today to discuss Provident Bancorp’s fourth quarter and fiscal year end results. Joining me today on the call is Luis Massiani, our Chief Financial Officer. So if I could start on Page 3, I am going to focus my comments on our year-over-year performance and Luis will highlight the quarter’s performance. We have made strong inroads into creating a high performing company as we continue to successfully execute our strategy and deliver results. Net income, excluding merger-related expenses of $25.3 million represents a 12.9% growth over 2012. EPS was $0.58 per share compared to $0.52 per share last year, an 11.7% increase. Net income, excluding merger-related expenses and securities gains was 34% greater than last year. The results were driven by the 11.5% year-over-year growth in revenue while expenses were up 2%, but we have focused on driving revenue at a 2 to 3 times multiple of expenses. We achieved a 5.75 times multiple year-over-year, which enabled us to drive the core efficiency ratio down to 62.6%, which represents a 579 basis point improvement in efficiency from 2012. Our commercial banking teams continue to deliver strong relationship focused results. For fiscal 2013, our relationship teams generated $1.2 billion of new loan volume, which represents 48% growth over 2012 originations. The new originations resulted in total loan growth of 13.8% and commercial loan growth of 21%. Our credit quality has continued to show positive trends across all of our portfolios. Year-over-year, non-performing loans decreased $12.9 million to $26.9 million. And our criticized and classified assets decreased by $56.3 million to $74.8 million. Our capital and liquidity positions remained very strong. Our Tier 1 leverage ratio was approximately 9.3% at Provident Bank and our consolidated tangible equity to tangible assets ratio was 8.1%. And finally, we expect to close the acquisition of Sterling Bancorp tomorrow. We have received all of the required regulatory and shareholder approvals to complete the transaction. We have developed a very detailed integration plan that will enable us to achieve the committed expense savings, enhanced revenue growth and most importantly, accelerate the process to deliver high-performance results. Now, let me turn the call over to Luis to discuss the detailed financial performance.

[Luis Massiani:]

Thanks, Jack. I will focus on reviewing the results for the fourth quarter. Our diluted earnings per share were $0.12. Excluding the impact of merger-related expenses and a charge for asset write-downs, earnings per share were $0.14. Our effective tax rate was approximately 38% for the quarter and 31% for the full fiscal year. The increase in the fourth quarter was largely due to merger-related expenses that are fully non-tax deductibles. This represented an impact of over $0.01 per share. For fiscal year 2014, on a standalone basis we anticipate our effective tax rate in the 30% to 32% range. However, given the merger with Sterling a greater portion of our earnings will be generated in New York City therefore our effective tax rate will increase and is anticipated to be in the mid-30s. Results for the quarter were impacted by increased interest expense associated with our senior – associated with our senior notes offering. Net interest margin decreased to 3.23% for the quarter, which represents a decrease of 23 basis points relative to the linked quarter. Total interest expense on the senior notes was $1.4 million, which represents approximately 16 basis points of the decline in NIM. Also the accretion of adopted loan discounts decreased NIM by 4 basis points. These two items account for substantially all of the change in net interest margin. We are seeing the benefits of our increased loan production and loan balances in our net interest income. Year-over-year net interest income has increased by approximately 16%. We have higher quality, more attractive loans today than we had a year ago. Our proportion of securities to total assets increased from 27.9% to 29.8% in the quarter. Our strategy of converting securities into higher yielding loans remains unchanged and we will continue to execute this strategy in 2014. The increase in securities for the fourth quarter was driven by the investments of the net proceeds of the senior notes offering and purchases of securities that we feel are going to better position the combined average Sterling balance sheet post margin. The ROA and ROE ratios at the bottom of the slide are based on a reported a GAAP net income, adjusting to exclude the impact of the merger expenses and the charge for asset write-downs. Our return on tangible equity was 8.6% and our return on average assets was 72 basis points for the full fiscal year. These metrics are not yet where we want them to be, but 2013 represents steady progress towards achieving the goals we have previously outlined. Turning to Slide 5, the progress in the execution of our strategy and the success that our commercial teams are enjoying is evident in the 2013 performance. Total originations for the fourth quarter were almost $318 million. This number is below the volume for the linked quarter, but as we mentioned the third quarter was exceptional and we were anticipating some drop off in volume in Q4. When compared to fourth quarter of last year origination volume increased by $112 million, which represents growth of 50%. The weighted average yield on commercial loan originations was 4.1% for the quarter and 4% for the full year. As we have mentioned before this represent a significant pickup over the yield on our securities portfolio which is the reason our strategy will continue to be focused on deploying a more efficient balance sheet with a greater proportion of loans relative to securities. Our long-term target of approximately 25% securities to total assets remains unchanged. Performance has been strong across our products and geographies. For the quarter approximately 75% of our origination were CRE and commercial and industrial loans. Both our legacy markets and the Net York City market are contributing to our growth. We are pleased with the performance of the teams to-date. On Slide 6, let’s review our deposit base. Overall total deposits were nearly $3 billion at September 30, 2013. This represented a decrease of $149 million year-over-year mainly due to lower the deposit balances in our municipal bank. The balance of core retail and commercial deposits, which excludes municipal deposits, wholesale deposits and CDs increased by $146 million, which represented 8.3% growth year-over-year. Focusing on core DDA accounts since the beginning of the year, our retail demand and commercial demand deposit account balances have increased by $80 million, which represents growth of 10%. As you can see on the bottom right chart we continued to have a strong deposit composition consisting mostly of non-interesting bearing demand and low cost demand money markets and savings accounts. Our certificates of deposit continued to runoff and now represents just 9% of our total deposits. Our deposit composition results in a low and attractive cost of funds. In the fourth quarter, our total cost of deposits was 15 basis points, which represents a decrease of 12 basis points year-over-year and a decrease of 2 basis points over the linked quarter. We are well positioned to continue driving core deposit growth through our teams and our financial centers. On Slide 7, we will review our operating efficiency ratio. Year-over-year our core operating efficiency ratio decreased by 579 basis points and was 62.6%. We continued our positive momentum towards achieving long-term efficiently goals we have previously outlined. Comparing the linked quarter the efficiency ratio was 63% compared to 59% for the third quarter. The change was a result of several factors including the increase in interest expense in our senior notes offering, as well as an increase in compensation and benefits of $1.1 million over the prior quarter. The increase in compensation and benefits was due mainly to accruals for compensation and additional temporary personnel expenses, which were improving connection with various merger and non-merger related projects. We had previously announced the target of $88 million in core operating expenses for 2013. Excluding the impact of merger-related expenses, amortization of intangibles, foreclosed properties and the charges for asset write-downs, our aggregate core operating expenses for the year were approximately $85 million. We intend to continue investing in building the number of banking teams in our commercial banking infrastructure. In order to do that, we will continue to execute our strategy of rationalizing expenses on the retail side of the business and reinvest in growing our commercial presence. We have identified several opportunities that we will pursue in 2014. Turning the page to Slide 8, our credit quality significantly improved during the fourth quarter and throughout the year. Although our loan book grew significantly during the year, the balance of special mentioned substandard and doubtful accounts decreased by $56.4 million to approximately $75 million. The balance of our past dues 90 days and non-accrual loans decreased from $39.8 million to $26.9 million. A main contributor to this improved performance has been our continued workout of the acquisition development and construction book. The beginning of the year, the ABC portfolio had approximately $144 million in outstanding loan balances. As of September 30, 2013, outstanding balances had decreased by nearly $42 million and were $103 million. We will continue to work through this portfolio in 2014. On the top chart, you can see the significant improvement across the board in our credit ratios. For the end of the year, our non-performing loans to total loans decreased to 1.1%. And most importantly, our reserve coverage ratio to non-performing loans increased to 107%. Our loan loss reserves to total loans were 1.2%. When you exclude the impact of the loans acquired through Gotham, which is not carrying allowance for loan losses, our loan loss reserves to total loans ratio was 1.3%. We are comfortable with our level of reserves. On Slide 9, we will review our capital and liquidity position, which both remains strong. Consolidated tangible equity to tangible assets ratio for the quarter ended September 30, 2013 was 8.1%. Our Tier 1 leverage ratio at Provident Bank was 9.3%. In connection with our pending merger with Sterling Bancorp, we issued 100 million of senior notes in July 2013. A portion of the net proceeds of the offering were contributed as capital to Provident Bank during the fourth quarter. Given the merger with Sterling, we will convert from a savings and loans holding company to a bank holding company. Therefore, we will begin reporting regulatory capital ratios at the bank and the holding company going forward. Our regulatory capital position at the holding company will be in excess of capital required to be considered a well-capitalized institution. As I mentioned before as of September 30, our securities to total assets ratio was 29.8%. And our loans to deposits ratio was 81.5%. We will continue to focus on redeploying this excess liquidity in the loans over the course of 2014. On Slide 10, we will review our pending merger with Sterling Bancorp. On October 21, 2013, we announced that we had received all required regulatory and shareholder approvals for the merger. From announcement to completion of the transaction, this process has taken a little over six months, which we believe is a tremendous accomplishment. We have dedicated a significant amount of human and capital resources to complete this process in an accelerated timeframe. Using Sterling’s financial information as of June 30, the pro forma combined entity will have approximately $6.8 billion in total assets and $5.2 billion in total deposits. The opportunities we have identified from a cost savings and revenue enhancements perspective are exceeding our initial expectations. We are comfortable with the long-term targets we have highlighted previously of greater than 1% ROA, 12% plus ROE and mid-50s efficiency ratio upon full facing of synergies and savings in 2015. The combined company will be larger and more efficient. And we will be focused on delivering superior customer service to our target markets of small and middle market commercial clients. Jack?

[Jack Kopnisky:]

Thanks, Luis. Just to summarize our year-over-year performance, earnings increased 12.9% year-over-year. Without merger-related cost and securities gains, earnings were up 34% year-over-year. Revenue grew at 11.5% and expenses were up 2% resulting in a 5.75 times expense multiple. Efficiency ratios are in the low 60% range with significant opportunity for continued improvement. Loan growth was up 14% overall and up 21% in targeted commercial lending products. Credit metrics continue to improve across the board as NPLs were down 32% and criticized and classified loans were down 75% year-over-year. We have very strong levels of capital and liquidity further strengthened by our $100 million capital raise in early July. And finally, we are ready to begin the integration processes of Sterling Bancorp. We are very confident in our ability to deliver top performing results as a result of the merger of these companies. Detailed cost reductions are identified. Improved revenue opportunities are quantified. We are very focused on delivering strong results as a result of the execution of this integration plan. So now let’s open it up for questions.

[Operator:]

(Operator Instructions) Your first question comes from the line of Matthew Kelley from Sterne Agee.

[Matthew Kelley:]

Yeah, hi guys.

[Luis Massiani:]

Hi, Matt.

[Jack Kopnisky:]

Hi, Matt.

[Matthew Kelley:]

I was just wondering with the deal closing tomorrow if you could just update us on where you seem the pro forma margin coming in? And how much accretable yield benefit you will have beyond just the simple arithmetic average of the two companies kind of blending them together? How much the accretable yield will boost the full first quarter margin?

[Luis Massiani:]

It remains unchanged, Matt. What we have mentioned before, obviously, there is changes in some of the valuations that marks on the – from an interest rate perspective on the loan book, but the average or that you are just saying the arithmetic average has taken it – take you about 170 basis points or so. And we expect that there is going to be substantial accretion from sort of from that that discount being accreted in the income. So it’s going to be again sort of closer to the 380 and 390 or so closer to 4% that we have talked about in the past. So that remains largely unchanged.

[Matthew Kelley:]

Okay, got you. And then what’s the plan with kind of reducing the securities book that’s coming over from Sterling and where do you seek kind of the total securities book shaking out at the end of the first quarter?

[Luis Massiani:]

So it’s going to be around on a combined basis about a $1.5 billion to $1.6 billion combined. And we are going to move quickly to downsize specific buckets of the Sterling portfolio that for various reasons don’t – either don’t fit to the combined balance sheet going forward or just places where we have, for example, in the municipal side overexposures on both sides some of the perspective of. We have exposure to specific municipalities on both ends where we want to sort of move down a bit. So overall, it’s going to be about $1.5 billion to $1.6 billion on combined basis.

[Matthew Kelley:]

Okay, got it. And then just on – I think that was it for now. If you could just give us an update on what’s happening with Sterling’s mortgage banking operation, would it be similar to the trends that we have seen so far here in the September quarter down 40% or 50% sequentially?

[Luis Massiani:]

Without getting into too much detail, Matt, since we are not combined yet, but we will shortly. And again, we don’t want to comment on sort of specifics given we don’t want them yet, but that you can expect that there has been a sort of volume overall has held up better than what we have seen other folks announcing, but from a sort of margin and income perspective and on gain on sale, yes, there is – it’s similar to what numbers that you have seen for folks that have reported recently. So I would say that it’s pretty much in line with what you have seen in the marketplace.

[Matthew Kelley:]

Okay.

[Jack Kopnisky:]

It’s interesting about that, that business kind of going forward there are much of the strategic initiatives that folks from Sterling are going to execute against as a combined entity. So that will support that business, so whether it is hiring more teams when you – when the volumes are running down and capturing more of a market share or improving distribution channels, which is in essence of putting the branches together between the two organizations. There is greater distribution for their product set that will make all of a sense. All that said, yields will compress, because the mix of fixed product that was yielding high returns in sales will transition more to a variable rate or a jumbo rate mix. So there are a number of initiatives that are in line to make up some of the difference between the drop and where this has existed in the past, but it will be down overall.

[Matthew Kelley:]

Okay. And are we going to get a September earnings number or not?

[Luis Massiani:]

I do not believe so.

[Matthew Kelley:]

Okay. Alright, thank you.

[Operator:]

(Operator Instructions) Your next question comes from the line of Collyn Gilbert from KBW.

[Collyn Gilbert:]

Thanks. Good morning guys.

[Luis Massiani:]

Hi, Collyn.

[Jack Kopnisky:]

Good morning.

[Collyn Gilbert:]

Just a follow-up, so Sterling will not be reporting earnings, would you guys anticipate putting out some sort of 8-K following the close just to give a little bit of insight as to what they put up for the quarter?

[Luis Massiani:]

No, we are not – we won’t do that, but we will within 75 days of the close, we will have updated pro forma financial information that will have their balance sheet and income statement through September 30.

[Collyn Gilbert:]

Okay, okay. And then on the expense side, so Luis you are saying you guys kind of were guiding to an $88 million level in ‘13 you came in at $85 million excluding a lot of the sort of non-recurring items. Is that sort of the base run-rate we should be thinking about as we go into the merger or just can you give a little bit more color as to, if there has been expense pull forward that’s occurred already on the PBNY side that maybe there will be less than that $34 million on the Sterling side, but just give a little more color on sort of the expense trajectory you guys are thinking about now?

[Luis Massiani:]

No, the $85 million is good number. As you know, it does exclude a number of items and so that there are some items that are excluded that have some volatility in them. So foreclosed properties, for example, that might sort of that may change and sort of – and will be volatile from quarter-to-quarter. So when you look at our total non-interest expenses, they were up – there were $91.5 million or so, the $85 million excludes all those items that $85 million from the perspective of the core run-rate of sort of what we call the sort of the regular expense base is a good number to use going forward.

[Collyn Gilbert:]

Okay, okay. And you guys are still on track, any other updates to the $34 million of expense save that you expect to see, I don’t know?

[Jack Kopnisky:]

No, the $34 million is extremely solid. What you do in these things cut through all the stuff. We always ask people internally for higher numbers. So we feel very confident with the $34 million and we feel very confident that we are going to make this company more efficient.

[Collyn Gilbert:]

Okay. Okay, that’s helpful. And then just I wanted to confirm, Luis, so you said the tax rate going forward is going to be in the mid 30s for the combined institution?

[Luis Massiani:]

Yes, that’s what we are anticipating as of today, yes.

[Collyn Gilbert:]

Okay, okay. And then just a final question, just to make sure I heard you right, the loan yield, the current origination yield that you saw this quarter, did you say that, that was 4.1%?

[Luis Massiani:]

Yes, on the commercial side, yes.

[Collyn Gilbert:]

Okay.

[Luis Massiani:]

So both – that includes both CRE and C&I.

[Collyn Gilbert:]

Okay. And then what about just the blended overall portfolio yields?

[Luis Massiani:]

Well, if you give me one second, I have that in front of me. The total for the quarter was 4.02%.

[Collyn Gilbert:]

Okay. So the mortgages, the residential mortgages that you put on this quarter, those were – and if you said this in your intro comments, I apologize, but those are then – were those mostly fixed rate?

[Luis Massiani:]

No, those were 5 and 10.1 arms for the most part.

[Collyn Gilbert:]

Okay.

[Jack Kopnisky:]

Yes, maybe just and I am confused, my comment was an overall comment going forward about mix, not what it was going backward relative to mortgages.

[Collyn Gilbert:]

Okay, okay.

[Luis Massiani:]

And we have mentioned to you before Collyn, we sort of the long-term 30-year fixed rates and sort of 15-year fixed rates is not the place where we want to invest on the mortgage side.

[Jack Kopnisky:]

On a portfolio basis.

[Luis Massiani:]

On a portfolio basis, on a portfolio basis. So we are seeing good opportunities out there for generating good mortgage loans to folks that are in footprint that give us the opportunity to have that individual as a customer and generate more product sales and other sort of synergies from having that mortgage on the books, but sort of long-term fixed rate mortgages, that’s not where we are going to play.

[Collyn Gilbert:]

Okay. Okay, I think that was all I had. Thanks guys.

[Jack Kopnisky:]

Thanks.

[Luis Massiani:]

Great, thank you.

[Operator:]

(Operator Instructions) Your next question comes from the line of Matthew Kelley from Sterne Agee.

[Matthew Kelley:]

Yes, just a follow-up, how do envision the deal charge is going to playing out in the next two quarters, two or three?

[Luis Massiani:]

So the – we have mentioned a 32 – sorry $33 million restructuring charge on aggregate Matt. We are finalizing the details around that but our current estimate is that we are going to take the majority of that should have upfront in the first quarter sort of in the first fiscal quarter 2014. Something just by the nature of our GAAP accounting works will come in sort of in the second and third quarter depending on sort of how we get more clarity around some of the savings and restructurings of facilities and that we will have going forward. So the vast majority of it will be in the first quarter.

[Matthew Kelley:]

Okay, got you. And then when do you anticipate achieving that 25% securities to asset ratio?

[Luis Massiani:]

Two to three quarter post merger. So second I will say is end of the first quarter, the second calendar or end of the first calendar quarter or the second calendar quarter of next year that’s what we are targeting to get those ratios where we wanted to be.

[Matthew Kelley:]

Got it. And then the reserves to originated loans, you are sitting at a 127 basis points right now, how low would you – do you think that might be able to go?

[Luis Massiani:]

How low?

[Matthew Kelley:]

Yes.

[Luis Massiani:]

1.2 to 1.25 where we wanted to be.

[Matthew Kelley:]

Okay, just kind of holding this level then?

[Luis Massiani:]

Yes, it’s going to hold this level. There is sort of a lot of what we are doing today is slightly larger loans on the commercial side. So we feel that will be appropriate place to be. The credit quality is great. At the same time we do realize that there is a – now there is a shift when you do business in the city to larger more – sort of larger clients that do larger loans, therefore you have to hold a little bit more reserves against it. So that’s where we want that number to be and we feel good about it.

[Matthew Kelley:]

Okay, thank you.

[Luis Massiani:]

Sure.

[Operator:]

Your next question comes from the line of Collyn Gilbert from KBW.

[Collyn Gilbert:]

Sorry guys. Just one quick follow-up, is there any hope at all of you changing your fiscal year?

[Luis Massiani:]

Yes, (indiscernible). It depends on who is answering your question. So the short answer to that Collyn is that we are exploring that possibility for 2014. We will, we have the full intention of changing the fiscal year. We just don’t know what’s going to be in 2014. We will provide you with updates in guidance as we go along, but we are still exploring that possibility.

[Jack Kopnisky:]

Yes we’ll tell you once that happen, just there are some mechanical things we just want to make sure that we can do it obviously the right way and make sure that the core systems all work quite well when we combine.

[Collyn Gilbert:]

Okay. Okay, that’s helpful. Thanks.

[Luis Massiani:]

Great.

[Operator:]

Thank you. There are no further questions. I will now turn it back over to Jack for closing remarks.

[Jack Kopnisky:]

I just want to thank everybody for the terrific work that was done in putting these companies together and frankly terrific work from a Provident standpoint in producing results and putting us on a path to really be a high achieving organization. We are not there yet, but we know fully intend to get there in short order. We have had people from an employee standpoint worked their tails off this past year. I really appreciate that and especially given that as we put these two organizations together, folks have gone above and beyond the call duty to do that. And I think we have – we will have created a very smart focused performance oriented company coming out of that. And that also applies for the advisors and counselors that we use. So my appreciation for everybody’s hard work on this and we look forward to closing the deal tomorrow and executing against our plan. So thank you.

[Operator:]

Thank you. That concludes today’s conference call. You may now disconnect.