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Sterling Bancorp. (NYSE:STL)

Q3 2009 Earnings Call

October 27, 2009 10:00 a.m. ET

Executives

Edward Nebb - IR Advisor

John Millman - President

John Tietjen - CFO

Analysts

Damon Delmonte - KBW

Travis Lan - Stifel Nicolaus

Rick Weiss - Janney

Andrew Boord - Fenimore Asset Management

Presentation

Operator

Ladies and gentlemen thank you for standing by. Welcome to the Sterling Bancorp third quarter 2009 conference call. This time, all participants are in a listen-only mode. Later, we'll conduct the question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded. I'd now like to turn the conference over to Investor Relations' Advisor, Mr. Edward Nebb. Please go ahead sir.

Edward Nebb

Thanks Rich. Good morning everyone. Thank you for joining us. Our news release announcing Sterling's third quarter 2009 results was issued today prior to the market open. We hope you had a chance to review it. The news release has been posted to the company's website at www.sterlingbancorp.com.

Before turning to the discussion of our financial results, let me remind you that any comments made today about future financial results or other future events are forward-looking statements under the Securities Exchange Act of 1934. Actual results may differ substantially from such forward-looking statements.

The amounts 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 the factors that could cause actual results to vary is contained in Sterling's annual and quarterly reports filed with the SEC.

Now, we will have the introductory remarks from Mr. John Millman, President of Sterling Bancorp, and Mr. John Tietjen, Chief Financial Officer. After their remarks, we'll open up the call to take your questions, and so with that I'll turn the call over to John Millman.

John Millman

Thank you Ed and good morning everyone. Welcome to our conference call for the third quarter of 2009. Economic signals remain mixed at the best, as we head into the final quarter of the year. Gross domestic product has continued to decline although GDP has benefited to some extent from government spending. That effect has been offset by the continued weakness in most private sector investment.

For the small businesses that constitute much of Sterling's customer base, the environment remains challenging. With unemployment hovering at nearly 10% and a continued reluctance to spend among corporate consumers. Many small businesses are struggling, and these struggles are clearly outlined in our front page story in today’s Wall Street Journal. Overall, it is far too early to say for certain that the economy is returning to full health.

Our performance trends for the 2009 third quarter clearly demonstrate as we have said for some time that the current economic cycle offers many opportunities for a strong, secure and customer focused institution such as Sterling. We delivered growth in the net interest margin, non-interest income and loan origination. At the same time, we have strengthened key underwriting standards as we continue to move forward, while also keeping a disciplined grip on funding cost and non-interest expenses.

GAAP net income for the third quarter was $2.4 million or $0.13 per diluted share. Our pre-tax provision income was $10.5 million which was significantly in excess of our credit cost and whatever resulted in growth in capital.

Let me comment on some of the factors that contributed to our third quarter performance. The net interest margin rose to 4.53%, an increase of seven basis points. This is primarily due to our continued discipline approach to funding cost. Non-interest income was up approximately 25% after excluding security gains. This was driven by a higher accounts receivable management and factoring fees, as well as an increase in mortgage banking income.

Loan originations in the quarter totaled $60.6 million reflecting new quality borrowing relationships. We have been proactive in our business development activities as well, as acquiring the DCD factoring, import trade financing and accounts receivable management business earlier in this year.

Most of the new credits are firmly in Sterling's sweet spot of C&I secured lending. Credit pricing is also more favorable this time. The dislocation in the asset based financing market and continued tight credit availability overall, have also contributed to our loan growth. We continue to benefit from our longstanding practice relationships with accounting, legal and other professional fronts, their position to refer their clients to us for financing solutions. Their clear message is that Sterling is open for business, selective and prudently underwritten business to be sure, at a time when other sources of credit are not as receptive.

Demand deposits increased to $470.4 million at September 30, 2009 or 33% of total deposits. As you know, Sterling traditionally is one of the highest ratios of demand to total deposits in the industry and this is a key source of funding for us. The growth in loans has contributed to our solid core deposit base as virtually all of our borrowing relationships entail deposit balances.

Non-interest expenses remained well controlled, excluding the incremental cost of our recently acquired factoring business and higher pension expenses, non-interest expenses were virtually flat with the same quarter of 2008. All of our capital ratios continue to exceed well capitalized requirements. Our total risk based capital ratio was 12.66% at September 30, 2009. In terms of asset quality, we have continued to take prudent measures in responses to the difficult conditions in the lending market and we are seeing some improvement in certain key measures.

The level of non-accrual loans decreased to $19.8 million at September 30, 2009 from $20.6 million on June 30, 2009. Non-accrual loans were $6.8 million at September 30, 2008. Our ratio of non-accrual loans to total loans declined somewhat to 1.60% at September 30, 2009 from 1.69% at June 30, 2009. The ratio was 0.57% at September 30, 2008.

Lease financing continues to account for the majority. Nearly 67% of the non-accrual loans, as the recession has had a disproportionate impact on the types of small to mid-sized businesses certify our leasing group. In response to these conditions, we have intensified our collection activities during the year, especially with respect to the lease financing receivables, and we have further strengthening our underwriting standards and enhanced credit evaluation criteria. We have reduced the lease financing balances by $44 million or 17% since the beginning of the year. Overall, we are pursuing a well established and prudent approach to lending distinguished by disciplined underwriting and an emphasis on strong asset quality.

The provision for loan losses increased to $7 million for the third quarter versus $6.8 million in the second quarter. Net charge-offs of $5.7 million for the 2009 third quarter compared to $5.6 million for 2009 second quarter. The 2009 third quarter provision exceeded net charge-offs period by approximately $1.0 million.

The allowance for loan losses has increased to $19.1 million or 1.58% of loans held in portfolio at September 30, 2009, up from $15.7 million or 1.33% a year earlier. We believe that third quarter results demonstrate that Sterling is well positioned for the opportunities that may arise in the prevailing environment. We have been distinguished in the market places the bank that is ready, willing and able to lend to qualified customers.

With an 85.7% ratio of portfolio loans to deposits at Sterling National Bank, we have ample liquidity to support further prudent loan growth and our strong capital base gives us the resources to pursue other initiatives such as possible FDIC assisted acquisitions of banking franchises, should the right prospects arise. In summary, we continue to manage the business in a discipline manner at what remains an uncertain economic environment. We're actively seeking outstanding opportunities for profitable growth. Now let me turn the call over to John Tietjen.

John Tietjen

Thank you, John. I would like to comment on some key aspects of our 2009 third quarter results. As we have reported, pre-tax, pre provision income increased 45% over the same period last year to a total of $10.5 million.

GAAP net income was $2.4 million or $0.13 per diluted share. The main factors affecting the 2009 results for an increase in net interest income and a sharply higher non-interest income along with higher loan loss provision and increased interest expenses.

Net interest income on a tax equivalent basis was $22.3 million for the 2009 third quarter up from $21.8 million for the 2008 period. Net interest income benefited from higher average loan balances, lower interest barring deposit balances and lower funding costs. At the same time, we experienced lower yield on loans and investment securities due to market rates, lower investment security balances and higher borrowed fund balances.

The net interest margin increased to 4.53% for the third quarter 2009, up from 4.46% a year ago. As we have noted in the past, Sterling's asset liability management strategy is designed to deliver the lowest possible funding cost and strong margins using cost effective wholesale funding in lieu of higher priced deposits. Interest earned on loans was $18 million for the third quarter 2009, a decrease of $2.4 million.

Average loan balances increased approximately $16 million for the quarter, while the yield on loans decreased to 6.25% from 6.99% a year ago due to the lower rate environment and the mix of our lending businesses, Income from investment securities decreased to $8.8 million on a tax equivalent basis, down approximately $600,000 from a year ago.

Average outstanding decreased to $727 for the third quarter of 2009 from $755 million a year ago, reflecting our strategy to sell securities to shorten the average life of the portfolio. The yield on the investment securities decreased to 4.87% in the third quarter of 2009 compared to 5.01% a year earlier and the average life in the portfolio declined to 4.6 years from 7.1 years.

Interest expense on deposits decreased to $2.8 million for the 2009 third quarter from $5.1 million a year ago. Reflecting on balance sheet management strategy, average balances of interest bearing deposits declined to approximately $904 million for the 2009 third quarter versus $977 million a year ago. The average rate paid on interest bearing deposits declined 84 basis points from the year ago to 1.23%. Interest expense on borrowings decreased to $1.9 million for the third quarter of 2009 from $3.2 million a year ago. This largely reflected a decline of a 107 basis points in the cost of borrowed funds which averaged 1.58%. Average borrowings increased to $491 million for the third quarter of 2009 from $482 million a year ago.

Non interest income increased to $11.7 million for the third quarter this year, up from $7.2 million a year ago. Excluding security gains in the 2009 period and security losses a year ago, non-interest income rose 24.9%. Major factors driving the increase were higher income from accounts receivable management and factoring as a result of our DCD acquisition and increased mortgage banking income.

Non-interest expenses totaled $23.2 million for the third quarter of 2009. This includes additional compensation and overhead cost associated with the acquisition of our factoring business, increased FDIC insurance cost and higher pension expenses. Including these items non-interest expense increased only 0.3% from the same period last year. Provision for income tax was $1.2 million for the third quarter this year compared to $1.5 million for the same period in 2008.

Turning to the balance sheet, average loans held in portfolio for the third quarter of 2009 net of unearned discount were $1.14 billion. Investment securities average $727 million for the third quarter of 2009 compared to $755 million a year ago, reflecting our asset liability management strategies.

Approximately 70% of our investment portfolio consisted of debt obligations of US government corporations and GSEs. Obligations of stats and political subdivisions comprised over 9% of the investment portfolio. Corporate obligations, most of which are due within approximately 20 months, represented 20% of the portfolio.

Total deposits for the 2009 third quarter averaged $1.3 billion compared to $1.4 billion a year ago. Interest-bearing deposits averaged nearly $904 million down from $977 million largely reflecting our intentional shift away from higher cost deposits. Demand deposits continue to represent a strong 33.4% of total deposits at September 30, reflecting stability of our core funding.

Total borrowings for 2009 third quarter averaged $491 million up from $482 million a year ago, again reflecting our balance sheet management strategies. The average cost of borrowings decreased 107 basis points to 1.58%.

Sterling's capital ratios continue to exceed well capitalized requirements. Our tier one risk base capital ratio at September 30 was 11.40%. Total risk based capital was 12.66% and the tier one leverage ratio was 8.28%. These ratios reflect the $42 million received in December 2008 from the issuance of preferred stock under the treasury capital purchase program. Excluding the capital purchase program proceeds, our capital ratios would continue to exceed regulatory requirements for well capitalized institutions. Our liquidity remains strong as John Millman noted. The ratio of loans held in portfolio to deposits at Sterling National Bank was approximately 86% at September 30, 2009.

To sum up, our third quarter performance reflected solid growth in net interest margin, non-interest income and loan production while we maintain strong capital liquidity and a disciplined approach to funding cost and overhead. With that, let me turn the call back over to John.

John Millman

Thanks John. As we look to the balance of the year and beyond, we will continue to be cautious with respect to overall economic environment. At the same time, we are well positioned to pursue capitalize and additional opportunities to drive growth and value for our shareholders. Now, we would be pleased to respond to your questions.

Question-and-Answer Session

Operator

(Operator Instructions). And we will go to the line of Damon Delmonte with KBW. Please go ahead.

Damon Delmonte - KBW

I was wondering if you could talk a little bit about your net charge-offs this quarter and what they are comprised of?

John Tietjen

Yes. The majority of them are in the leasing portfolio. Charge-offs were $5.87 million for the quarter, $4.5 million it was in the leasing portfolio.

Damon Delmonte - KBW

Okay. And what is the total balance in leasing portfolio or quarter net?

John Tietjen

$238 million.

Damon Delmonte - KBW

Okay. And what percentage of that is non-performing right now?

John Tietjen

I don’t have that number at this point, Damon.

Damon Delmonte - KBW

Okay. Let’s see, how about as far as, if you look at what your non-performing loans were this quarter, they are pretty much flat quarter-over-quarter. So, if we take out the charge-offs, could you talk a little bit about the NPA or NPL formation during the quarter?

John Tietjen

Could you say that again?

Damon Delmonte - KBW

If you look at your non-performing loans in absolute numbers, they are still around $20 million right, quarter over quarter? But you did have $7.5 million as charge-offs. So, could you describe any of the new non-performing loans that moved into the non-performing status this quarter?

John Tietjen

Again, the largest part of it is going to be in the leasing portfolio.

Damon Delmonte - KBW

Okay. So, the leasing portfolio is contributing to both charge-offs and a rise in non-performing loans then.

John Tietjen

Correct.

Damon Delmonte - KBW

Okay, great. And then with regards to some mortgage banking, could you just give a little color on sustainability of this quarter's level?

John Tietjen

This quarter was very high with an increase in volume, approximately 80% higher than where we were in the third quarter last year. I think rates have started to move upward a little bit, so I would expect that the volume in the fourth quarter would be impacted by that and certainly the first quarter of next year.

Damon Delmonte - KBW

Okay. Great, and then lastly, with respect to TARP in the timeframe to repay that, could you give us a little color on your thoughts as to, would it be something you’d like to maybe do in conjunction with a capital raise, would it be something you would just like to apply to do and just repay it from cash or how do you view that?

John Tietjen

Well, I believe we are looking at all alternatives at this particular point Damon and I wouldn’t want to grade one more than the other at this particular point.

Operator

We’ll now go to line of Travis Lan with Stifel Nicolaus. Please go ahead.

Travis Lan - Stifel Nicolaus

Could you guys give us a little bit of detail on your expectations for loan growth?

John Millman

I think corrected for the leasing brokerage as you know, is coming down. I think that there is an opportunity to grow the C&I portfolio between 5% and 8% over the next 12 months. So we're seeing real opportunities there.

Travis Lan - Stifel Nicolaus

And then, can you just give us a little bit of help on your margin outlook?

John Tietjen

In this quarter we continue to get some benefit from our reducing of funding costs, principally as it relates to the CDs rolling down. I wouldn’t expect a significant difference in margin on a go forward basis.

Travis Lan - Stifel Nicolaus

And then just finally, given you, the balance of 30 to 89 day delinquencies, at the end of the quarter?

John Tietjen

No, I don’t have that at this point.

Operator

We'll now go to line of Rick Weiss with Janney. Please go ahead.

Rick Weiss - Janney

I was wondering traditionally I looked at Sterling's growth on especially loans, year-over-year, but I am wondering in this environment, is it starting to make sense to look at the nice pick up that you had between the second and third quarter, is may be the beginning of a trend?

John Millman

Rick, I think that we're seeing real opportunities as we have told you over the last couple of quarters. The C&I book in particular offers substantial opportunities to grow the core business. On the other hand, that’s offset and mitigated by the fact that many of our existing financials are less than a full availability. We are picking up many new quality borrowing relationships. I would expect the loan growth in that sector to exceed 5% and perhaps be close to 8% [Technical Difficulty] is uncertain and we don’t want to be overly optimistic.

John Tietjen

Now, one of the things Rick without painting too rosy a picture, I mean we had $60 million in new origination in the quarter mostly towards the end of the quarter, but if you were to annualize that number, I don’t think if you should do that, but as that we don’t measure of what John is making reference to.

John Millman

And Rick I think we have talked to you and you have noted in past years, most of our loan growth does occur during the third and fourth quarter. It tends to be strong quarters for us in terms of loan growth.

Rick Weiss - Janney

Now as to loan growth, and what industry are you seeing the growth coming from?

John Millman

It's diversified. It's across the full spectrum of the kinds of clients that we deal with distributors, wholesalers, small manufacturers, service firms.

Rick Weiss - Janney

And let me ask you, like much business is tied to the government industry? Whether it's through the factoring or your lending program, do you still have a good relationship there and what's happening with respect to that business?

John Millman

Yeah, factoring is an important part of our business. It’s been a little bit soft in the last couple of quarters, but we think they'll continue to be real opportunities there.

Rick Weiss - Janney

And I was not going to (inaudible)

John Millman

One area you will not see real growth in is commercial real estate

Operator

(Operator Instructions). We go to the line of Andrew Boord with Fenimore Asset Management. Please go ahead.

Andrew Boord - Fenimore Asset Management

Forgive me, if this has been asked in past calls or what not, but I am just curious on the leasing portfolio, just to beat the dead horse some more. If you can tell me a little more about their concentration, are these bad leases turning up in any one geography or any one industry or?

John Tietjen

No. No.

Andrew Boord - Fenimore Asset Management

Really across the board?

John Tietjen

I think what they have in common is these are small businesses, but we do the leasing business on a national basis where we do the business and probably more than 35 states, typically they are small entrepreneurial businesses at of our market unlike most of our loan, these are not relationship businesses. If you have (inaudible) business in Ireland, Nebraska and the only relationship they have with Sterling is a small lease, they tend probably to pay that lease before they pay other obligations.

As we have told you, historically this business was a credit score business, for many, many years that we've been this business for 40 years. For many of the years, the credit score business functioned very well. With the abrupt downturn in the economy, it became very clear that the methodology built into the scoring modules did not accommodate the dramatic turndown in the economy. About a year ago, we discontinued credits scoring, we have discontinued lending and providing lease financing in many industries, healthcare, we have limited anything having do with construction trades. So, the criteria’s change very dramatically and we think it will normalize.

John Millman

I would suggest that if you haven’t had an opportunity to look at our June Quarter, that around page 39, don’t hold me to the exact page, you’ll see a description of the kinds of leases and the number of states that are in non-accrual.

Operator

Not have any further questions in queue at this time gentlemen. Please continue.

John Tietjen

All right, thank you operator. We thank you for your interest in Sterling, and we look forward to speaking with you next quarter.

Operator

Ladies and gentlemen this conference will be available for replay after 12 noon today through November 10 at midnight. You may access the AT&T teleconference replay system at anytime by dialing 1800-475-6701 and entering the access code of 120744. International participants may dial 1320-365-3844. Those numbers again are 1800-475-6701 or 1320-365-3844 with an access code of 120744.

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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Source: Sterling Bancorp Q3 2009 Earnings Conference Call
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