Sterling Bancorp
Q1 2015 Earnings Call Transcript

Published: 30 Apr 2015

[Operator:]

Welcome to the Sterling Bancorp Earnings Conference Call. I will now turn the call over to CEO, Jack Kopnisky.

[Jack Kopnisky:]

Good morning everyone and thank you for joining us to discuss our results for the quarter ended March 31, 2015. You’ll note that with the change in our fiscal year, this is the first quarter of 2015. Joining me today on the call is Luis Massiani, our Chief Financial Officer. This is the first full quarter since we completed the merger between Legacy Sterling and Legacy Provident in October 2013. We are now able to review year-over-year results on a fully comparable basis. These results reflect our continued progress toward our goal of building a high performance regional, commercial bank that delivers strong growth, returns and profitability. Excluding the impact of merger related expenses and other charges, core earnings were $18.5 million and core diluted earnings per share were $0.21. This represents growth of 41.3% and 31.3% respectively over the same period a year ago. Our core return on average tangible assets was 107 basis points and core return on average tangible equity was 12.7%. This compares to 84 basis points and 10.73% respectively for the quarter ended March 31, 2014. Year-over-year our core total revenue grew 7.5% and core non-interest expense decreased by 1.4%. For the quarter, our core operating efficiency ratio was 56.4% which compares to 54% in the linked quarter and 61.4% in the same quarter last year. We are well positioned to realize additional revenue enhancements and cost savings. We continue to experience strong loan and deposit growth. As of March 31, 2015, total loans were $4.9 billion, which represented annualized growth of 10.2% over the prior quarter end and annualized growth of $695 million or 6.4% over a year ago. We showed $44 million of residential mortgages in the quarter. During the quarter, our commercial loan balances grew $161 million, which represented annualized growth of 16.3% over the prior quarter and 20.6% over a year ago. The commercial loan growth over the past year has been primarily organic and has been across multiple targeted asset categories. We also recently added new members to our commercial banking team serving the New York metro market. Deposits continue to be a strong low cost source of funding as 89% of our deposits are retail, commercial and municipal transaction, money market and savings accounts. Excluding municipal deposits, our base demand and money market deposits grew 17.4% on an annualized basis over the linked quarter. Our total cost of deposits was 23 basis points for the three months ending 3/31/2015. We continue to focus on diversifying in improving our revenue mix. For the quarter, non-interest income excluding securities gains was 17.5% of revenue. As we have stated in the past, our objective is to grow the percentage of non-interest income the revenue to 20%. During the quarter, we completed the acquisitions of Damian Services Corporation, a complementary payroll service company, and Green Campus Partners, a municipal finance company. Both companies will enhance the opportunity to grow fee income and we continue to see opportunities to acquire complementary fee based commercial finance companies along with the opportunity to grow existing fee businesses. Credit quality remain strong. Net charge-offs of $1.6 million represented 13 basis points of average loans. Non-performing loans declined by $200,000 to $46.4 million. Our capital position remain strong. During the quarter, we raised $85.1 million of common equity, which further augments our capital and liquidity to support organic growth and potential acquisitions. Finally, we are on track for a closing of our acquisitions of Hudson Valley Holding Corporation in the second quarter of 2015. The transaction was approved earlier this week by our requisite shareholder vote and we are making good progress toward obtaining regulatory approval. Now let me turn the call over to Louis to detail the financial performance.

[Luis Massiani:]

Thank you Jack and good morning to everyone joining us today. Our GAAP diluted earnings per share were $0.19, which was up from $0.12 for the same quarter a year ago. On a core operating basis, our diluted earnings per share were $0.21 compared to $0.16 a year earlier. Our linked-quarter GAAP earnings were $0.20 and core earnings were $0.23. The linked-quarter comparison was impacted approximately by seasonality as the first quarter has two fewer days in the period and also by our capital rates of $85 million in common equity. The capital rates increased our weighted average diluted shares outstanding by approximately 4 million shares over the linked-quarter. We proactively raised capital to support growth including funding potential acquisitions of specially commercial lending businesses. Total assets increased $804 million over the last 12 months to $7.7 billion and increased $303 million over the linked-quarter. Commercial loans grew $161 million in the first quarter and $695 million from a year ago. The impact of our strategy of rebalancing earning assets from securities to higher yielding loans is evidenced by approved earning assets mix. Securities comprised 23% of our balance sheet at March 31 compared to 25.5% a year ago. On the bottom of the page, we detail our key performance metrics, which show continued strong operating momentum. Net interest margin was 3.6% for the quarter, which represented a 12 basis point decline from a year ago and 6 basis point decline from the December quarter. Included in interest income was $926,000 of the accretion of the credit mark on legacy acquisitions, which compares to $2.8 million of accretion a year ago and $1.2 million of accretion in the linked-quarter. Excluding the impact of the credit mark accretion, our net interest margin has held in over the last 12 months and was 358 basis points for this quarter compared to 362 basis points a year ago. Our core profitability ratio has improved significantly year-over-year. Core return on average tangible assets was 1.07% and core return on average tangible equity was 12.7%. Return on equity was impacted by our capital rates as we have not yet fully deployed the proceeds of the offering. We anticipate doing so by the end of 2015. We’re continued to make steady progress towards achieving our long-term performance goals. Turning to Slide 5, let’s review the reconciliation of GAAP to core EPS. Results in the first quarter of 2015 were impacted by various items, which included a $2.5 million merger related expense associated with the acquisition of Damian and the pending merger with Hudson Valley. And a charge of approximately $970,000 related to the consolidation of two financial center locations and asset write-downs. The amortization of acquired non-compete agreements was $660,000, which declined from the linked-quarter as several of the agreements acquired in connection with the Legacy Sterling merger expired in October of 2014. Turning to Slide 6, total loans reached $4.9 billion at March 31st and our mix of business continues to be diverse across C&I, CRE and consumer asset classes. Approximately 45% of our total loan portfolio consists of C&I loans, which includes our specialty business lines. We believe these asset classes provide attractive risk adjusted returns and position us well for rising rate environment. Yield on loans declined 39 basis points year-over-year and 8 basis points over the linked quarter to 4.6%. Our total deposits were $5.5 billion, which represented an increase of approximately 340 million on both the year-over-year and linked quarter basis. Our core deposit types increased during the quarter, which allowed us to reduce wholesale funding sources. As of March 31st, our retail, commercial and municipal deposits represented 89% of total deposit and our cost of deposits was 23 basis points. We continue to have a stable low cost deposit base to fund growth. Key to our strategies to continue growing our commercial and retail deposits. During the quarter, commercial and retail money market and demand deposit accounts increased by approximately 132 million over the linked quarter, which represents annualized growth of approximately 17%. We expect to drive meaningful growth in our commercial deposits as the number relationship teams continues to grow and the teams become more seasonal. On Slide 7, we provide greater detail on the growth and composition of our loan portfolio. Total loans grew $695 million year-over-year and $123 million over the linked quarter. During the first quarter, we sold $44 million in residential mortgage loans that were previously helped for investment as we continue to reposition our balance sheet and anticipation of the merger with Hudson Valley. In total, we have sold approximately $85 million in residential loans over the past six months. Year-over-year C&I loans have increased by over $400 million and CRE loans have increased by over $300 million. This represents growth of 22% and 18% respectively. Our pipeline of commercial loans is robust and we are focused on choosing credits with strong credit characteristics, attractive risk adjusted returns and where the opportunity to have a significant deposit relationship exists. On Slide 8, let’s look at our fee income. The figures on this slide excludes the impact of securities gained, which were $1.5 million for the quarter. Total fee income was $12.5 million, which was down from $14 million in the linked quarter. Our fee based specialty finance businesses are seasonal and the first quarter represents the low point. Factoring and payroll finance volumes for the quarter were $460 million, which compares to $540 million the linked quarter. This resulted in a decrease of approximately $600,000 in factoring and payroll finance fees. Other non-interest income decreased by approximately $600,000, which was mainly driven by a decrease in title insurance revenue and miscellaneous loan fees. Deposit fee income decreased by $600,000 relative to the linked quarter. We continue to see a meaningful uptake in mortgage origination volumes, which resulted in an approximate $300,000 increase in mortgage banking revenues over the linked quarter. Total origination volume was $228 million and total mortgage banking income was $3.2 million. We’re confident that overtime we’ll accelerate fee income growth and achieve our target percentage of 20% or more of fee income to total revenue. However, the timeline to achieve this goal will be extended as pro forma for Hudson Valley, the proposition of fee income to total revenue will initially decrease. On Slide 9, you can see the steady progress we have made over the past 12 months in driving operational efficiencies. Year-over-year total revenue growth was 7.5%, while expenses have decreased 1.4%. Our core operating efficiency ratio was 56.4% in the first quarter. Our core operating expense run rate is approximately $41 million per quarter or $160 million to a $165 million per year. This is in line with our prior guidance. We continue to invest in personnel systems and risk management as we prepare to cross $10 billion in assets. We estimate that approximately $1.2 million of this quarter’s core expenses were tied to increase personnel systems and consulting fees associated with crossing this threshold. We’re making good progress in confirming the cost savings opportunities we had initially identified with Hudson Valley, which will further accelerate our progress towards our long-term operating performance goals. Let’s review at the quality on Slide 10. This quarter’s performance shows continued progress and strong metrics across all credit quality indicators. Charge-offs against the allowance were $1.6 million versus charge-offs of $1.2 million in the prior quarter. Charge-offs represented 13 basis points of average loans. We continue to add to our allowance for loan losses and our provision expense was $2.1 million mainly driven by the need to provide to our organic loan growth. The allowance to total loans and the allowance to NPLs were 87 basis points and 92%. Please remember that these ratios do not include the impact of the fair value mark recorded in prior acquisitions. Our non-performing loans declined by $200,000 and criticized and classified assets decline by $5.8 million relative to the linked quarter. We’re working diligently to continue to reduce these balances. Jack?

[Jack Kopnisky:]

Thanks, Luis. Let me summarize the quarter. We continue to have strong momentum in earnings and profitability. Core earnings are up 41.3% over the same time last year. Core return on average assets has expended by 23 basis points and core return on average equity by a 193 basis points from last year same quarter. Operating leverage continues to prove as revenue has grown 7.5% from last year and expenses have contracted by 1.4%. We expect to close the Hudson Valley Holding Company acquisition in the second quarter. We have completed the integration planning process and we expect to realize significant operating leverage from the merger of the two companies. We will continue to invest in growing complementary fee generating commercial finance businesses to supplement our traditional commercial bank business, and we have strong levels of capital and ample liquidity for profitable growth. We are well positioned to deal with a competitive, but still dynamic market. Our strategy is working and there are a number of terrific opportunities to appropriately grow the company. Now, let’s open the line for questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of David Darst from Guggenheim Securities.

[David Darst:]

Good morning.

[Jack Kopnisky:]

Good morning.

[Luis Massiani:]

Hi, David.

[David Darst:]

Hi, Jack. So, Jack, maybe you could sort of give us an update on the current accounts receivables factoring businesses as that revenue is flat year-on-year and then what should we expect in revenue from Damian and Green Campus?

[Jack Kopnisky:]

Yes, so on the accounts receivable management businesses, they are seasonal remember a lot of the companies in the factoring business specifically are Consumer Goods Company, so they peak in the fourth quarter and they decline in the first quarter. So, we would expect a good growth throughout the year in those businesses along with the payroll finance business. So basically payroll finance we’ve added about $250 million worth of flow in – from Damian into a business in payroll finance that produces about a billion dollars worth of accounts receivable flow into the future. So, we are – we think these businesses are well positioned to grow. The factoring business is going through a bit of a transition in the industry and we’ve brought in a couple of new people to make those changes in the factoring side of it. We’re very confident in the payroll finance side of the businesses and those will continue to grow as we see more and more opportunities coming to us.

[David Darst:]

So what’s the revenue impact from say [indiscernible] million of flow of quarter.

[Jack Kopnisky:]

So the overall revenue impact is between $6 million and $8 million…

[Luis Massiani:]

$7 million to $8 million in fee income that – I am sorry of total revenues and then there is a split as we’ve talked about before, David, of about 60%, 40% between fee income and then yield. GAAP forces you to bulk a portion of these – of this flow business as a loan and therefore generate interest income on it, but overall – if you just look at it from a revenue perspective, it’s an incremental – the 200 million of volume is about $8 million in revenue.

[Jack Kopnisky:]

And just to be clear that’s $8 million of annual revenue.

[Luis Massiani:]

Of annual revenue.

[Jack Kopnisky:]

Yes.

[David Darst:]

Got it, correct, okay. And then just as we think about the integration of Hudson Valley, how are you planning to manage their liquidity into the back half of the year. Should we expect you to kind of immediately begin to deploy that securities portfolio and the year of loan growth or…

[Luis Massiani:]

Yes, so the short answer to that is – so, yes, David, the short answer to that is that we are going to do that and we’re going to do it in quickly thereafter which we’re going to see initially, I’ll say the day after we closes that we are going to draw down and payoff FHLB borrowings initially. We’re going to be in an excess funding position with the excess liquidity that we’re going to get from Hudson Valley and then over time we would continue to build that up very, very quickly thereafter. So you’re going to see us repositioned and do a lot of trades on the security side as well as reposition their portfolio into something that looks more or like what we have today from the same types of securities that we have. We’re probably just going to diversify and increase a couple of the various buckets that we invest in today. And then over time you’ll see a – when you think about from a loans to deposit ratio, the transaction itself – we’re at about low 90s today, the transaction takes us to low 80s about 80% to 82%. So initially you’re going to see a decrease in the loans to deposit ratio and over time you’ll redeploy both their excess funding as well as excess securities into the loan portfolio to get closer to the numbers that we are – closer to the numbers that which we are today, so net 90% to 95% range.

[Jack Kopnisky:]

So just to be – just also to supplement what Luis said, we are not going to go out and just buy loans in the market. We are building a company that is relationship oriented, full service. So we are going to each quarter kind of uptick the amount of loan volume that we have but it’s going to be relationship oriented when we want – we want this to be organic loan growth rather than purchase loan growth. And there maybe some supplemental pieces of purchase loan growth, but the vast majority of this is organic loan growth. So it will take us several – a number of quarters to deploy the liquidity.

[David Darst:]

Okay. And then – parts of their loan portfolio you would like to runoff?

[Jack Kopnisky:]

There are parts of the loan portfolio we will runoff, yes.

[David Darst:]

Okay. And so should we expect you to go over $10 billion at June 30 or will the repositioning keeps you under $10 billion for now?

[Jack Kopnisky:]

We will be above $10 billion.

[David Darst:]

Okay, got it. Okay. And then just maybe you could talk about the pace of getting the cost saves out of their expense base…

[Jack Kopnisky:]

Yes, so we have just confirmed part of the integration process that we use as we confirm the numbers that we did in due diligence upfront and we are confidence in the $34 million plus cost savings that we will take out of the businesses. And we are very much on pace to be able to deploy those cost savings over between if we – if it happens to be June 30 close through 2015 and then finalize it by the end of 2016. And as we have said previously, it’s kind of 75

[David Darst:]

Okay, great. Okay that’s all from me for now. Thank you.

[Jack Kopnisky:]

Thank you.

[Luis Massiani:]

Great, thanks David.

[Operator:]

[Operator Instructions] Our next question comes from the line of Collyn Gilbert from KBW.

[Collyn Gilbert:]

Thanks, good morning guys.

[Jack Kopnisky:]

Good morning. Yes.

[Collyn Gilbert:]

Let me start – I have a handful of questions. Let’s start on the expense side. So Luis you had mentioned kind of that $41 million a quarter or so of a targeted run rate. I assume obviously that’s for standalone Sterling. How do you see that number changing with Hudson Valley?

[Luis Massiani:]

So if you take the – if you add our core operating expense base in theirs today, you get to a run rate of about $230 million in core operating expenses. And then from that number you’re going to subtract about $42 million, $34 million of that being the cost savings that we’ve identified. And then remember that there is about $7 million of operating expenses that were associated with their investment management business and here I’m talking about run rate over 12 months. They’re also going to – they’re already gone because that business has already been sold. So the $230 million less $34 million or less the $42 million get it – what is going to be steady state.

[Collyn Gilbert:]

Okay, okay that’s helpful. And then I recognize there is movement in the NIM, day count issues and then just average earning asset balances. Do you have a target for what you think the core NII growth, the net interest income growth could be for standalone sterling in the second quarter?

[Luis Massiani:]

So from a net interest income – so from a net interest margin perspective, our guidance continues to be that 355 to 365 range that we’ve been talking about for a while. And the loan growth target that we’ve established out there of that low to mid teens, so that double-digit loan growth continues to be the same as well. So giving you the exact number is difficult to pinpoint from just as overall growth perspective because there are things from a rate perspective that we don’t control, right. The mix of business is going to be important in that. Remember that as the factoring and payroll finance business is starting coming into higher volumes in the second and third quarter. Those are higher margin businesses. So you see kind of a disproportionate impact from that perspective. So we feel good about the 355 to 365 NIM target. And from a loan growth perspective still that 10% to 15%, so mid teens is continues to be our target and we feel good about hitting those numbers.

[Collyn Gilbert:]

Okay. And just to confirm that 355 to 365 that’s for full year 2015 on the NIM?

[Luis Massiani:]

That’s right.

[Collyn Gilbert:]

And that assumes some modest accretion benefit from Hudson Valley in the back half of the year as well or no?

[Luis Massiani:]

That’s right. So there is going to be – no, so the – that is where – that is on a standalone basis pro forma for Hudson Valley. You would see a significant – there will be significant accretable yield that will flow through in the first – four to six quarters post merger.

[Collyn Gilbert:]

Okay.

[Jack Kopnisky:]

Just be super clear, this is – you asked a question about Sterling standalone…

[Luis Massiani:]

Yes…

[Jack Kopnisky:]

Those are Sterling standalone numbers.

[Luis Massiani:]

We haven’t transitioned yet – we have internal target pro forma for Hudson Valley until we get this finally approved and close. We’ll continue to talk about Sterling standalone.

[Collyn Gilbert:]

Okay, that’s super helpful. And then just – how – without you guys giving kind of financial detail as these smaller especially finance acquisitions get announced and not really having a definitive breakout, how do you think we should really measure their success or kind of their contribution on a go forward basis as you guys do these deals?

[Jack Kopnisky:]

Yes, so kind of in general, these deals are kind of in the $10 million to $40 million price range and they’re obviously stock deals. And each of them yields anywhere from $0.02 to $0.05 a share fully implemented. So, I think what we said when we raise the equity that the...

[Luis Massiani:]

So the math is – the math that we talked about was if you were to just take our – the number that we had announced pro forma for Hudson valley, we would have incurred about $0.08 of dilution relative to those. If we were to do nothing with the capital and just go raise the equity and leave it, sitting there in cash. Now with this Damian acquisition and some of the other things that we have in the pipeline, we’re anticipating $0.12 to $0.15 of overall accretion. So the difference between that $0.12 to $0.15 and the $0.08 of dilution that’s how we’re going to measure success. We’re seeing $0.06 to $0.07 or we’re anticipating in our target as $0.06 to $0.07 of accretion on these transactions. More importantly, these transactions – what we really like about them is that they continue to diversify the asset side of the equation and they are going to be business that have significant fee income component associated with them. So again, we’re thinking about this from a – it’s going to be $0.06 to $0.07 overall accretive to 2016 earnings, they’re going to diversify the asset side and continue to diversified our commercial lending businesses and they’re going to increase fee income. Those are three things that we’re really focused on accomplishing here in 2016.

[Collyn Gilbert:]

Okay, that’s great. That’s really helpful. And then, just one last final question. Jack, you mentioned transition in the industry going on within the factoring business and forgive my ignorance, but what is that, what’s going on in the industry?

[Jack Kopnisky:]

Yeah, so in the factoring business, it’s always been an odd line consumer finance business or consumer products finance business. So, right now, you can apply factoring to all kinds of different receivables. So one great example is in around the way, our payroll finance business is a factoring business because you’re basically taking temporary employment agencies and factoring those receivables. So, there are a bunch of niches like that that are out there where industries where it was really focused on consumer products. It’s now expanding to different types of industry sectors.

[Collyn Gilbert:]

Okay. And that that transition is going on it’s just sort of a reallocation of resources, the way the business has been run and…

[Jack Kopnisky:]

That’s right…

[Collyn Gilbert:]

Okay.

[Jack Kopnisky:]

That’s right…

[Collyn Gilbert:]

Okay.

[Jack Kopnisky:]

You could also argue that it’s a little bit of asset based lending. So as people trying to move into more secured, more leverage companies, but secured by the nature of factoring receivables, it touches the asset base side too.

[Collyn Gilbert:]

Okay. Okay, thanks very much guys.

[Jack Kopnisky:]

Sure, great thank you.

[Operator:]

And there are no more questions at this time. I hand the call back over to our presenters.

[Jack Kopnisky:]

Once again thanks for supporting the company. We have a lot of great opportunities in front of us and we’re very excited about the future and the opportunities moving forward. So thanks for your interest and thanks for the call. Take care.

[Operator:]

This will be end of today’s call. You may now disconnect.