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Sterling Bancorp (NYSE:STL)

Q4 2012 Earnings Conference Call

January 24, 2013 10:00 ET

Executives

Edward Nebb - Investor Relations

Louis Cappelli - Chairman and Chief Executive Officer

John Tietjen - Chief Financial Officer

Analysts

Mark Fitzgibbon - Sandler O’Neill

Operator

Ladies and gentlemen, thank you for standing by and welcome to Sterling Bancorp 2012 Fourth Quarter Conference Call. At this time, all participants are in a 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, today’s teleconference is being recorded.

And at this time, I will turn the conference call over to your host, Investor Relations Advisor, Mr. Ed Nebb. Please go ahead sir.

Edward Nebb - Investor Relations

Thanks very much, Johnny and thanks to all of you who are joining us today. Our news release announcing Sterling’s fourth quarter and full year 2012 results was issued today prior to the market open. We hope you had an opportunity to review it. The release is posted to the company’s website if you would like to see it.

Before turning to the discussion of our 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 from such forward looking statements. The amounts of any dividends for the first quarter of 2013 and beyond will depend on the company’s future results of operations, financial conditions, and other relevant factors.

A discussion of factors that could cause actual results to vary from the forward-looking statements is contained in Sterling’s annual and quarterly reports filed with the SEC. In addition, our earnings release includes information on a calculation of certain non-GAAP financial measures that maybe referenced in this discussion.

We’ll have introductory remarks today from Mr. Louis Cappelli, Chairman and Chief Executive Officer of Sterling Bancorp, and Mr. John Tietjen, Chief Financial Officer.

After their remarks, we’ll open up the call for your questions. And so without further adieu, I will turn the call over to Mr. Cappelli.

Louis Cappelli - Chairman and Chief Executive Officer

Thank you, Ed and good morning everyone. Welcome to our conference call for the fourth quarter and full year 2012. Our President, John Millman is recuperating from an illness and could not be with us this morning.

2012 was a year of strong positive momentum for Sterling. We benefited from our traditional focus on serving customers in the robust New York City metropolitan marketplace and beyond, as well as from our diverse revenue sources, our disciplined expense control, and continued solid asset quality. As we have noted for the past quarters, a cornerstone of our strategy has been to redeploy assets from lower yielding investments into higher yielding loans. It has been reported by that many financial institutions today are a wash in excess cash, which they have not been able to redeploy profitably into the prevailing climate of low interest rates.

In contrast, our strategy has resulted in an increase in our total loan portfolio to an all-time high of $1.8 billion at year end. This represents substantial growth in our percentage of loans to earning assets, which increased to over 65% for 2012. We also expanded the net interest margin by 16 basis points for the year to 4.17%. We still have considerable liquidity as reflected in our $287 million of short-term investments, and we currently intend to continue to redeploy these assets into higher yielding loans.

Now, looking at our performance for 2012 in greater detail, the increase in our loan portfolio was 17% comparing year end 2012 to ‘11. As I noted earlier, our total loan portfolio of $1.8 billion now stands at an all time high. We benefited from Sterling’s comprehensive portfolio of credit products, which provided multiple avenues of growth including commercial and residential real estate lending, mortgage warehouse financing, middle market lending, payroll financing, and equipment leasing and financing. At this time, we continued to have a robust long pipeline of around $325 million. Total deposits increased 14% from a year ago to a record $2.3 billion. We have experienced especially growth in non-interest bearing demand deposits, which are an essential component of our customer relationship model.

Non-interest bearing demand deposits totaled $924 million at year end or more than 40% of total deposits, which we believe is one of the highest levels in our peer group. Our earning performance for 2012 was outstanding as our profitability benefited from the strong growth of our business as well as higher net interest income and non-interest income driven by our asset liability management strategy. We also enhanced our positive operating leverage due to ongoing expense discipline and continued to demonstrate solid asset quality metrics. Pre-tax income for the 2012 fourth quarter was $7.1 million or an increase of 58% over the year ago period. The pre-tax income comparison is particularly noteworthy as net income in 2011 period reflected a tax benefit of approximately $1.9 million.

Our net income available to common shareholders was $5.2 million in the 2012 fourth quarter. In the 2011 fourth quarter after the effect of the tax benefit, net income applicable to common shareholders was almost equivalent. For the full year 2012 net income available to common shareholders was up 29% to more than $20 million and pre-tax income rose 31%.

Our ability to control non-interest expenses during the past year is especially worthy of mention. Although we invested in some additional personnel to support the growth in our business and we made an acquisition that increased mortgage production personnel, we have the increase in non-interest expenses to about 2% for the full year and even less than 2% for the 2012 fourth quarter. The rate of the expense increase was outpaced by our 4% increase in gross revenues.

We continued to explore further means of increasing our operating leverage through the use of technology, improved processes, disciplined use of outside vendors and of course continued strong revenue growth. Our credit quality metrics have remained strong. We have continued our traditional sound underwriting practices, while at the same time expanding our loan activity with credit worthy borrowers. Net charge offs were under $2.3 million in the 2012 fourth quarter. Non-performing assets at 2012 year end were just 0.27% of total assets.

The allowance for loan losses was 377% of non-accrual loans and the allowance to total portfolio loans was 1.35% at December 31, 2012. It is also significant that in contrast to a number of other banking institutions, our earnings growth did not benefit from any reductions in the allowance to loan losses. In addition to our strong organic growth, we completed an acquisition that has extremely positive implications for our current business and future potential.

During the third quarter, we acquired Universal Mortgage, a mortgage brokerage business with a solid position in the Brooklyn market. Universal has an accomplished team with an exception to loan production track record and well-established business relationships. The acquisition was planned in advance of the current rebound in the mortgage market, which continues to gain momentum.

Existing home sales in 2012 increased over 9% from the prior year and reached the highest level in 5 years according to a recent report by the National Association of Realtors. The National Association of Homebuilders, another organization, also reports that the confidence level of homebuilders in the market for new housing has increased steadily for the last eight consecutive months and is now higher than at anytime since April of 2006.

Given these strong indicators of a continued recovery in the housing market, we believe that the addition of Universal Mortgage, along with the strength of our established mortgage banking operations positions us for significant expansion of our mortgage volume. At the same time, Universal Mortgage has provided us with an excellent platform from which to expand into Brooklyn, which we believe is an extremely attractive market for all of our financial services. We are pursuing this opportunity with a new office in Brooklyn, which we expect to open this quarter and which will serve as both a branch and it has expanded facilities for Universal Mortgage.

In summary, we believe the positive momentum that drove our growth and profitability in 2012 can be sustained in 2013. We continued to experience robust demand for our range of financial products and services. The Universal acquisition should enable us to grow our mortgage volume and fee generation capacity and we are excited about the new opportunities in the booming Brooklyn market.

Our strong liquidity holds further potential to shift earning assets from investments into loans in line with our past success and in implementing this strategy going forward. And our performance should continue to benefit from our diverse revenue sources, expense discipline, and asset quality.

And now, I would like to turn the call over to our CFO, John Tietjen.

John Tietjen - Chief Financial Officer

Thank you, Lou and good morning to everyone on the call. I would like to provide you with further detail on our performance for the fourth quarter of 2012.

As we noted, net income available to common shareholders was $5.2 million. This compares to $5.3 million, including the $1.9 million tax benefit for the same period last year. Pre-tax income increased 31% to $7.1 million from $4.5 million for the same period last year.

Looking at some of the key elements of our performance, net interest income was $24.8 million for the 2012 fourth quarter, up nearly 9% from a year ago. This increase primarily reflected higher average loan balances, the shift in our earning asset mix and reduced funding costs. Non-interest income for the 2012 fourth quarter was up more than 4% to $9.6 million and represented 26% of total revenues. We benefited in particular from an increase in residential mortgage banking income reflecting both organic growth and the Universal acquisition, partially offset by a decrease in accounts receivable management and other related fees.

Non-interest expenses were $24.9 million for the 2012 fourth quarter. As was noted due to our disciplined focus on managing expenses, the increase versus last year was less than 2%, despite increases in business development activities and the Universal acquisition. The net interest margin was 4% for the 2012 fourth quarter, up from 3.90% a year ago. Our margin is in the top 25% of all banks in our asset size. The margin increase was driven by three key factors.

First, as we have discussed our ongoing deployment of earnings assets into loans. Average loans were nearly 70% of earning assets in the 2012 fourth quarter, an increase from approximately 60% a year ago. The difference in yield between investments and loans averaged 242 basis points for the full year of 2012. Second, we have continued our disciplined deposit pricing. As a result, the cost of deposits dropped by 12 basis points comparing 2012 to 2011. Third, we have experienced a sizable increase in non-interest bearing demand deposits, which were $138 million higher on average for the 2012 fourth quarter versus a year ago.

Now, let’s take a look at the effect of our asset liability management strategies on the balance sheet. For the year ended December 31, 2012, average loans were $1.6 billion, up 15% from a year ago. Investment security balances averaged $755 million for 2012, down 11% from $851 million a year ago, again reflecting the planned shift from investments into loans.

These strategies have also provided us with a robust level of liquidity that can support our continued loan growth and that contributes to our earnings momentum. At December 31, 2012, about $297 million of our $683 million investment portfolio was in the available for sale category. Approximately $150 million of these securities mature within two years. This means that we have strong liquidity to fund loan growth without having to sell out of the held-to-maturity portfolio.

Total deposits at December 31, 2012, were $2.3 billion, an increase of 14% from a year ago. The increase in non-interest bearing deposits which we mentioned earlier was primarily due to our business development activities and cross selling activities, including our policy of requiring demand deposits as part of our loan pricing model. All of our regulatory capital ratios continued to exceed well-capitalized requirements.

At December 31, 2012, Sterling’s Tier 1 risk-based capital ratio was 11.49%, the total risk-based capital was 12.58%, and the Tier 1 leverage ratio was 9.14%. The ratio of tangible common equity to tangible assets was 7.50% at December 31, 2012. Book value per common share increased to $7.37 from $7.14 a year ago.

With that, let me turn the call back over to Lou.

Louis Cappelli - Chairman and Chief Executive Officer

Thanks, John. Let me continue by saying that, we are well positioned for 2013. While record low interest rates have compressed margins across our industry and have made it challenging for many financial institutions to deploy their assets productively. Sterling has generated a more profitable asset mix, continued loan growth, and a rising margin. We have been conscientious towards of expenses and asset quality. And we have successfully expanded our business through both organic means and a well-timed and accretive acquisition. We look forward to continuing to drive shareholder value.

And now, we would be pleased to respond to your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will take our first question in queue from Mark Fitzgibbon with Sandler O’Neill. Please go ahead.

Mark Fitzgibbon - Sandler O’Neill

Good morning, gentlemen.

Louis Cappelli

Good morning.

John Tietjen

Good morning Mark

Mark Fitzgibbon - Sandler O’Neill

The first question I had related to your accounts receivable and factoring fees in the quarter, I was wondering was there anything unusual in there that maybe depressed those fees a little bit and how should we be thinking about them moving forward?

Louis Cappelli

The biggest impact on those fees, Mark, was the reduction of letter of credit volume for factoring clients, those fees, the loss of those fees pretty much accounted for the entire decrease. Factoring volume is down, but the volume in payroll finance is up, but the single largest item is the couple of clients that don’t need letters of credit any longer to being able to conduct their business.

Mark Fitzgibbon - Sandler O’Neill

Okay. So, we should sort of expect it to sort of start at a lower level going forward?

Louis Cappelli

I would expect it would be at this level. Having said that as we pointed out in the call, our payroll finance group is growing very well, and that will definitely have a positive impact going forward.

Mark Fitzgibbon - Sandler O’Neill

Okay. Secondly, I wondered if you could share with us what the mortgage banking pipeline is, I know you gave us the loan pipeline, but maybe the mortgage banking pipeline?

Louis Cappelli

The mortgage banking pipeline is approximately $240 million.

Mark Fitzgibbon - Sandler O’Neill

Okay.

Louis Cappelli

That’s impacted by the fact that the investors are having difficulty keeping up with the volume, so that the funding is not as rapid as it was without the volume increases and also of course the positive impact as a result of increased business in both our traditional mortgage banking business and the Universal group that we just acquired.

Mark Fitzgibbon - Sandler O’Neill

Okay. And then on the cost of the new branch, are any of those costs already sort of running through the fourth quarter expense numbers or should we look for those to kick up and if so roughly how much for the new branch in the first quarter?

Louis Cappelli

It won’t be great. This is not the kind of branch that you see for many of the large institutions. It’s not a street level branch it will be on an upper floor. So, the costs will not be that great.

Mark Fitzgibbon - Sandler O’Neill

Okay. And then in the tax rate, the effective rate was 26.5% in the fourth quarter, I assume some truing up there, the normalized rate going forward probably still around 31.5% do you think?

Louis Cappelli

I would 30% to 32%.

Mark Fitzgibbon - Sandler O’Neill

Okay. And last question is as it relates to the margin, assuming rates hold here I know you are doing some great remixing with the balance sheet, but we are likely to see maybe a little bit of additional compression in the margin in coming quarters?

Louis Cappelli

We believe that for the entire year we will be above 4%. It is possible in a particular quarter we might dip under, but it won’t be by a lot. And as I said for the year, we expect that will be above four.

Mark Fitzgibbon - Sandler O’Neill

Great, thank you very much.

Operator

Thank you. (Operator Instructions) I am showing no additional questions in queue, please continue.

Louis Cappelli - Chairman and Chief Executive Officer

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

Operator

Thank you. And ladies and gentlemen, this conference will be available for replay after 12 PM Eastern Time today running through February 7 at midnight. You may access the AT&T Executive playback service at anytime by dialing 800-475-6701 and entering the access code of 279219. International participants may dial 320-365-3844. Once again, our telephone numbers are 800-475-6701 and 320-365-3844 using the access code of 279219. That does conclude your conference call for today. We do thank you for your participation. You may now disconnect.

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