Sterling Bancorp (NYSE:STL)
Q1 2009 Earnings Call
May 11, 2009 10:00 am ET
Edward Nebb – Investor Relations
John C. Millman – President
John W. Tietjen – Chief Financial Officer
Damon Delmonte – KBW
Welcome to the Sterling Bancorp 's first quarter 2009 conference call. (Operator Instructions) I would now like to turn the conference over to your host, Mr. Edward Nebb, please go ahead.
Thank you. Good morning, everyone. Thank you for joining us today. Our news release announcing Sterling's first quarter 2009 results was issued today prior to the market open. We hope you have had an opportunity to review it. The release is available on the company's website at www.sterlingbancorp.com.
Before turning to the discussion of the financial results, let me remind you that any comments made today about future financial results or other future events are forwardlooking statements under the Securities Exchange Act of 1934. Actual results may differ substantially from such forwardlooking statements.
The amount of any dividends in 2009 and beyond will depend on the company's future results of operations, financial condition, and other relevant factors. A discussion of factors that could cause actual results to vary is contained in Sterling's annual and quarterly reports filed with the SEC.
We'll have introductory remarks today from Mr. John Millman, President of Sterling Bancorp, and Mr. John Tietjen, Chief Financial Officer. After their remarks, we would be pleased to take your questions. With that, I will turn the call over to Mr. Millman.
Thank you, Ed, and good morning everyone. Welcome to our conference call for the first quarter of 2009. Sterling delivered profitable results for the quarter, reflecting solid progress in a number of key drivers of our business, including asset growth and rising net interest income. Although weakening economic conditions have made it difficult to match, much less exceed, the results of prior periods, it's important to note that our earnings have remained remarkably stable.
Our 2009 first quarter EPS of $0.20 before preferred dividends and accretion is consistent with the highteens, low20s range that we have seen in recent quarters even though financial circumstances today are far more adverse. In fact, pretax income before the loan loss provisions and securities gains increased 8.5% versus the same quarter a year ago to $9.1 million.
Looking at the macro economic environment, it is clear that the financial climates in late 2008, early 2009 have been one of the most challenging since the great depression. The local, national, and global economies have deteriorated significantly; and virtually no industry sector has emerged unscathed.
According to the Commerce Department, the contraction in the U.S. economy was sharper than expected in the first quarter, marked by declining gross domestic product and a steep falloff in business investment. This comes on top of the depressed housing values and extreme volatility and lack of liquidity in the capital markets that we've experienced this last year.
Within the New York metropolitan region in particular, a recent Federal Reserve Beige Book report cited weakening manufacturing activity, sluggish retail spending, a further decrease in employment, and consumer confidence at our near record lows. Many of these forces have had an especially heavy impact on the small businesses that have been our traditional customer base.
While the government is taking a number of constructive steps to inject capital and liquidity into the financial system and to provide an economic stimulus, the positive results of these moves will not be widely evident for some time. Given the factors I have just described, credit quality is clearly foremost in the minds of most financial institutions' management and investors.
Throughout our history, Sterling has consistently and successfully applied rigorous underwriting criteria, and strong asset quality is the hallmark of our business. Few, if any, institutions have been immune to the recent economic pressures, however; and we have experienced an increase in nonperforming assets and net chargeoffs as compared with our traditional levels.
Let me review our key asset quality metrics in some detail. Total nonperforming assets were $17.6 million at March 31, 2009, compared with $8.7 million a year earlier. The ratio of nonperforming assets to total assets was .83% at March 31, 2009, compared to .41% a year ago. Net chargeoffs were $5 million for the 2009 first quarter versus $1.5 million a year ago. The provision for loan losses in the 2009 first quarter was $6.2 million compared to $2 million a year ago. The allowance at quarterend exceeded $17 million, or 1.45% of portfolio loans, compared to approximately $15 million or 1.31% a year ago.
It is most important to note that the majority of nonperforming assets in the 2009 first quarter, over 65%, were in the lease financing area. This has been traditionally a strong performing portfolio for us; but as I noted, the types of business that we serve have been particularly hard hit by the economic cycle. Chargeoffs and nonaccruals in the leasing portfolio were also affected by unusual turnover in our collection staff during the first quarter. Lease financing nonaccruals totaled $11.5 million at the end of 2009 first quarter compared to approximately $3 million a year ago. However, the leasing nonaccruals are smaller credits, mostly under $100,000, and are dispersed across 39 states.
Residential real estate nonaccruals remained virtually unchanged at $3.3 million for the first quarter. This represents 20 loans, the largest being $620,000. The average LTV at inception of these nonaccruals was 73%.
Credit metrics improved substantially in certain areas of the portfolio. C&I nonaccruals were down to $1.4 million or half of the level of a year ago. OREOs decreased to $1.4 million at March 31, 2009, from $2.2 million a year earlier and consist of 13 properties in seven states, the largest of which is valued at $585,000.
Unlike many banks that we've read about recently in press, we want to point out that we have no credit card debt. Despite the trends in nonaccruals and chargeoffs, many of our credit quality ratios continue to compare favorably to industry peers for the first quarter. We have further strengthened our underwriting standards and credit criteria in response to the dramatic decline in economic conditions, and we have upgraded our collection staff. We will remain vigilant in preserving our asset quality, which has been and always will be a top priority for Sterling.
The industrywide credit quality challenges should not overshadow Sterling's vigorous performance in many fronts during the first quarter. We maintain an active lending staff and improved the average loan portfolio by more than 6% from a year ago to reach nearly $1.2 billion.
We maintained a solid base of core demand deposits, averaging over $435 million or 35% of total deposits. Our capital ratios are strong and exceed the well-capitalized requirements, and our abundant liquidity can support continued growth. We are actively pursuing the opportunities we see in our marketplace.
Most recently in early April, we acquired a factoring, import trade financing, and receivable management business that now operates as our Sterling Trade Capital Division. The acquired business is excellent strategic fit with our well-established factoring business. It has the potential to expand our business volume and broaden our reach to a more diversified customer base.
At the present time, we are continuing to pursue new and expanded business relationships, particularly in cases where we can gain share from financial institutions that are unable or unwilling to serve their customers in the current environment.
As we continue to seek to expand our team by attracting experienced and talented professionals who have strong business development skills and solid management ability and established customer relationships, we believe that Sterling's strength, stability, and track record of exceptional service are powerful competitive advantages in today's environment.
We will continue to build on those qualities to capture opportunities and create value for our shareholders. Now, let me turn the call over to John Tietjen.
Thank you, John, good morning everyone. I would like to comment on key aspects of our 2009 first quarter results. Net income before preferred dividends and accretion was $3.6 million or $0.20 per share for the first quarter of 2009. As you know, the preferred dividends and accretion are related to the preferred stock and warrants issued under the U.S. Treasury Capital Purchase Program.
Net income was $4.0 million and earnings per share were $0.22 for the first quarter of 2008. After preferred dividends and accretion, net income available to common shareholders for 2009 first quarter was $2.8 million or $0.15 per diluted share. The main factors affecting 2009 period results were higher net interest and noninterest income, offset by an increased provision for loan losses.
Net interest income on a tax equivalent basis was $21.5 million, an increase of $7.8 million from the same period a year ago. The increase primarily reflected higher average loan and investment security balances, lower interestbearing deposit balances, and lower funding costs. The net interest margin increased to 4.50 for the first quarter of 2009, up 11 basis points from 4.39 a year ago.
As we have noted in the past, Sterling has employed a strategy designed to deliver the lowest possible funding costs and the strongest margins using cost effective wholesale funding in lieu of higher cost CDs.
Interest earned on loans was $17.6 million for the first quarter of 2009, a decrease of $3.3 million. Average loan balances increased approximately $76 million for the quarter, while the yield on the loan portfolio decreased to 6.19% from 7.80 a year ago due to the lower rate environment and the mix of our lending businesses.
Income from investment securities increased slightly to $9.2 million on a tax equivalent basis versus a year ago. This was primarily due to the increase in the size of our investment securities portfolio which averaged over $750 million for the first quarter of 2009, up from approximately $720 million a year ago. The yield on investment securities decreased to 4.89% for the first quarter of 2009 compared to 5.03% a year earlier. The average life of the portfolio declined to 4.6 years from 7.4 years.
Interest expense on deposits decreased to $3.3 million for the first quarter of 2009 from $6.9 million a year ago. Again, reflecting our balance sheet management strategy, average balances of interestbearing deposits declined to approximately $912 million for 2009 first quarter, a decrease of nearly $105 million from the prior year. The average rate paid on interestbearing deposits declined 129 basis points from a year ago to 1.46%.
Interest expense on borrowings decreased to $1.9 million for the first quarter of 2009 from $3.0 million for the first quarter of 2008. This largely reflects a decline of 199 basis points in the cost of borrowed funds, which fell to 1.64%. Average borrowings increased to approximately $477 million for the first quarter of 2009 from $331 million a year ago.
Noninterest income increased to $10.8 million for the first quarter of 2009, up from $8.7 million a year ago. The major factor was a security gain of approximately $3 million resulting from the sale of securities and a move to reduce the average life of the investment portfolio. This gain more than offset a decrease in mortgage banking income, which was affected by lower yield due to the mix of loans sold and the timing of certain commission payments.
Noninterest expenses were well controlled at $20.1 million for the first quarter of 2009, virtually unchanged from a year ago. The provision for income taxes was $2.3 million for the 2009 first quarter compared to $2.4 million for the same period in 2008.
Turning to the balance sheet, average loans held in portfolio for the 2009 first quarter increased more than 6% from a year ago to $1.15 billion. Investment securities as indicated earlier averaged $750 million for the first quarter of 2009 compared to $720 million a year ago, reflecting our asset liability management strategies.
Approximately 90% of the investment portfolio consisted of debt obligations of U.S. government corporations and GSEs. Obligations of states and political subdivisions comprised another 4% of the portfolio.
Total deposits for the 2009 first quarter averaged $1.4 billion compared to $1.5 billion a year ago. Again, this largely reflects our intentional shift away from highcost time deposits. Demand deposits continue to represent a strong 35% of total deposits at March 31, 2009, reflecting stability in our core funding.
Total borrowings for the 2009 first quarter were $477 million, up from $331 million a year ago, reflecting our balance sheet management strategies. The average cost of borrowings decreased 199 basis points to 1.64% from 3.63%.
Sterling capital ratios continue to exceed well-capitalized requirements. Our Tier 1 riskbased capital ratio at March 31, 2009, was 12.16. Total riskbased capital was 13.33 and Tier 1 leverage was 8.59. These ratios reflect the $42 million we received at December 2008 from the issuance of preferred stock under the U.S. Treasury Capital Purchase Program.
At that time, along with many other sound institutions, we believed the additional capital would offer an extra measure of assurance to our customers and investors in a period when confidence in the banking system was at a low point. Excluding the capital purchase program proceeds, our capital ratios would continue to exceed regulatory capital requirements for well-capitalized institutions.
Our liquidity remains strong. The ratio of loans held in portfolio to deposits at our banking subsidiary was approximately 86% at March 31, 2009.
To sum up, we have maintained our focus on serving customers and community and effectively managing our balance sheet and controlling operating expenses, as well as supporting our business through strong capital and liquidity. With that, let me turn the call back over to John Millman.
Thank you, John. We recognize that 2009 will be a year of challenges for our industry and our market. In response, we are redoubling our efforts to promote sound asset quality. We are also continuing the high touch service that has been a trademark of Sterling for 80 years. That is a distinct competitive advantage in today's uncertain environment, and we will continue to selectively pursue opportunities that may offer the potential of future profitable growth and value creation. Now, we would be pleased to respond to your questions.
(Operator Instructions) We do have a question from Damon Delmonte from KBW, please go ahead.
Damon Delmonte – KBW
I was wondering if you could tell us what the reserve is currently that you have against your leasing finance portfolio?
We don't segment the reserve on a regular basis. We did at yearend to comply with the SEC requirements. The reserve is looked at as a whole to satisfy all the requirements in the portfolio.
Damon Delmonte – KBW
If I look in the K, I will see what it was as of 12/31?
Damon Delmonte – KBW
Also, it looks like the 30 to 89day past dues for the [inaudible] portfolio were about $14.8 million this quarter. This is up from $5 million last quarter. Do you know kind of what the average is of that 14.8? Do we just assume that $9 million of it came on in this past quarter or?
I think there's movement in the portfolio, as you can understand. The turnover in the collection staff in the first quarter definitely impacted our collection efforts. It's going to take a while for us to get out of the hole that put us in. In terms of the metrics, I would say that we're looking at pretty much the same metrics that John described in terms of the size of the individual transactions that are in the 89day category.
At this time, there are no further questions. Thank you.
Thank you. We thank you for your interest and look forward to speaking with you again next quarter.
This conference will be made available for replay after 12:00 o'clock today until May 25 at midnight. (Operator Instructions) That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.
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