Sterling Bancorp's CEO Discusses F1Q 2014 Results - Earnings Call Transcript

| About: Sterling Bancorp (STL)

Sterling Bancorp (NYSE:STL)

F1Q 2014 Earnings Conference Call

February 05, 2014 10:30 AM ET


Jack Kopnisky - President and CEO

Luis Massiani - Chief Financial Officer


Matthew Kelley - Sterne Agee

Collyn Gilbert - KBW


Welcome to the Sterling Bancorp Fiscal 2014 First Quarter Earnings Call. My name is Victoria and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-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 as well as accompanying slides.

Forward-looking statements made during the course of the conference call are subject to 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 Sterling Bancorp. Please go ahead.

Jack Kopnisky

Good morning everyone and thank you for joining us on this very snowy and icy day in the Northeast. We’re going to discuss Sterling Bancorp’s first quarter results as a combined company. The results represent three months of legacy Provident New York Bancorp and two months of legacy Sterling Bancorp. Joining me today on the call is Luis Massiani our Chief Financial Officer. Luis is going to review the financial details of the quarter.

So if I could move you to page three for those of you following on the web. We are pleased with the progress thus far in integrating the companies. We are slightly ahead of schedule in the integration process in terms of results. We are very focused on executing our plan to create a high performing company one that grows earnings 10% to 15% per year or with return on tangible equity greater than 12% and return on tangible assets greater than 1%.

We expect to create positive operating leverage, where revenues are growing at a 2 to 3x multiple of expenses. Core net income excluding merger related cost was $9.4 million or $0.13 per share. We would expect quarterly earnings and earnings per share to rise steadily throughout the year as our cost savings are realized and as revenue synergies and tactics take hold.

We've already seen improvement in return on core tangible equity to 8.67% and return on tangible assets to 66 basis points. We have made strong progress toward achieving the $34 million plus cost reduction in core operating cost by December 31, 2015.

On an annualized core run rate basis, costs were down approximately $10 million from the operating expense baseline of $190 million. Since announcement of our transaction, full time equivalent individuals are down 17%. These cost savings will be reflected after the 90 day [warn] [ph] period ends for most of the initial reductions in March 2014. The core efficiency ratio of 65.4% will continue to improve.

We're also pleased with the manner in which the commercial relationship teams and revenue growth are positioned. On a combined basis, we have 21 relationship teams and are in the process of adding two new teams. Our pipeline of opportunities are very strong which will enable us to deliver planned volumes of commercial, consumer and mortgage loans in 2014. The portfolio mix of the combined company is very diverse.

The commercial product set has already enabled us to identify more than a $100 million of shared revenue opportunities in terms of loans that neither company could have provided as a standalone company. The core deposit base continues to be a low cost and growing. The deposit cost for the quarter was 17 basis points.

Non-interest bearing demand and interest-bearing demand deposits represent 32% of total deposits. Margins on a combined basis were 3.58% for the quarter and we would expect to have growth throughout the year in the margin.

Credit quality on a combined basis is strong. Charge-offs for the quarter were $1.3 million or 14 basis points. Non-performing loans are $38.4 million or 93% of total loans and reserves to total loans considering the marked acquired loans were 124 basis points.

Our capital and liquidity positions remain strong. Our Tier 1 leverage ratio was 10.58% at Sterling National Bank and our consolidated tangible equity to tangible assets ratio was 7.78%. The tangible capital ratio is expected to rise to approximately 8% by this calendar year-end.

We’re most excited about the future of this company. The opportunities are very clear in terms of revenue growth, expense savings and competitive positioning in the market.

Now let me turn the call over to Luis to detail the financial performance.

Luis Massiani

Thanks, Jack and good morning everyone. Given the successful closing of the merger with legacy Sterling, we did have a number of items that negatively impacted our results for the quarter. As a reminder, our financial results we are going to review today, include three months of legacy Provident and two months of legacy Sterling.

Reported net loss was $14 million and loss per share was $0.20. Excluding the number of charges that we will review on the following slide, core results for the quarter were net income of $9.4 million and earnings per share of $0.13. In connection with the merger we issued 39.1 million shares of common stock to legacy Sterling shareholders on October 31.

Therefore our weighted average diluted shares were approximately $70.5 million. As of December 31, 2013 our total shares outstanding were approximately $84 million. Results for the quarter were also impacted by a net loss on sales securities of 645,000. The loss was due to a repositioning of the investment securities portfolio in connection with the merger that had the objective of reducing specific credit concentrations given overlap between legacy Provident and legacy Sterling and to reduce the overall duration profile of the portfolio.

From a net interest margin perspective, we are already seeing the positive impact of the merger. Net interest margin on a tax equivalent basis was approximately 3.6% which represented a 35 basis point increase over the linked quarter. Net interest margin was positively impacted by accretion of the fair value marks recorded in the Gotham and legacy Sterling transactions of approximately $2 million.

Given our average interest earning assets for the quarters were $5.2 billion the accretable yield had a positive impact of approximately 15 basis points on NIM. Longer term we anticipate the net interest margin will be closer to or slightly above 370 basis points, as we fully integrate legacy Sterling results.

Turning to slide five, we will review in more detail the reconciliation of reported GAAP earnings to core earnings. As we previously mentioned, the loss for the quarter was $14 million and the loss per share was $0.20.

Items that negatively impacted results included the following. A $9.1 million merger-related expense incurred in connection with the legacy Sterling acquisition which was recorded on the effective date of the merger. These items are included as a separate line item on our statement of operations and included mainly professional fees, a portion of change in control payments and cost associated with changes in signage and other merger communications. The second item was a charge of $22.2 million for asset write-downs, retention and anticipated severance compensation. These items are related to the realization of anticipated cost savings from the merger.

Asset write-downs mainly include charges for the consolidation of office and financial center locations and the write-off of the Provident Bank ballpark naming rights. These items are recorded in our statement of operations on the other non-interest expense line item. The third item represents the amortization of non-compete agreements we entered into with key personnel of legacy Sterling.

As of December 31, 2013 the balance of these agreements was $9.3 million. We will amortize a little over half of this intangible asset in 2014 and the remainder in 2015 and 2016. This item is recorded on our statement of operations in the amortization of other intangibles line item.

The fourth item is a charge on the settlement of a portion of the legacy Provident defined benefit pension plan. We decided to take advantage of strong equity market performance in 2012 and 2013 which was reflected in the fair value of the pension plan assets to eliminate a substantial liability.

This item is recorded in our statement of operations in compensation and benefits expense. Please note that this charge represents the acceleration of future amortization of items that are recorded as accumulated other comprehensive loss, therefore this charge had no net impact on our tangible book value. We are currently in a process of evaluating a similar partial termination of the legacy Sterling defined benefit plan.

Let’s turn to slide six, which we think demonstrates the impact and full potential to be realized from the merger. First, there has been no client fallout to-date as a result of the merger. As of October 31, 2013, total loans have increased 24 million, even though we have experienced decreasing loan balances in our ADC portfolio.

Deposits present a similar story. Although total deposit balances are down since the effective date of the merger by approximately 45 million, this is due to seasonal factors associated with our municipal banking business. Since October 31st, demand deposits are up approximately 100 million. To-date, we have experienced no client attrition.

The pie charts on the bottom of the page show the impact of the merger and the diversification of our business mix as a combined company. If you were to review the balance sheet of each company on a standalone basis prior to the merger, you would see a significant concentration in commercial real estate assets for legacy Provident and commercial and industrial assets for legacy Sterling. As a combined company, we have approximately 80% of our loans evenly split between CRE and C&I. And we also have significant consumer lending capabilities as consumer loans represent 20% of our total loan portfolio.

We intend to continue this mix of business. The yield on loans was 4.88% in the quarter which represented an increase of 18 basis points over the linked quarter. From a funding perspective, we continue to enjoy the benefits of an attractive low cost deposit base with approximately 62% of deposits consisting of demand and money market deposits. Total cost of deposits was 17 basis points for the quarter which was up 2 basis points over the linked quarter but continues to be an extremely attractive number on an absolute basis.

On slide seven, we will review in more detail our significant origination capabilities across a broad range of asset classes. We now have a portfolio of businesses that spread pretty evenly with the ability to originate short, medium and long-term maturity loans, floating and fixed rate loans and loans that have direct connectivity to significant fee income generation.

We will also be able to expand our target market as our capabilities in specialty lending business lines allow us to offer products to companies of varying sizes and stages of development. Given the nature of these businesses, there is also a direct opportunity to capture low cost core deposits as part of a full commercial relationship. We're also a larger company with larger balance sheet and more resources. This will allow us to grow with and better serve our customers as they grow their businesses.

Our strategy going forward is simple. The merger has created a company with diverse lending capabilities and a differentiated distribution strategy, a strategy that includes 21 commercial relationship teams and over 40 financial centers covering the greater New York metro area. We now have more teams, more products and have expanded target market of opportunities. We believe that over time, this will allow us to deliver substantial growth.

As you can see on slide 8, our diversified business lines and asset origination capabilities resulted in attractive balance-sheet position. Our securities portfolio totaled approximately $1.6 billion as of December 31st, with a weighted average duration of approximately 5 years, which remains unchanged relative to pre-merger. However, our total yield on securities increased during the quarter by 22 basis points to approximately 2.6%.

Looking at our combined loans and securities, we believe this presents an attractive and differentiated picture relative to most banks of our size. We are well positioned in the event of a rising rate environment. As of December 31st, approximately $1.8 billion of interest earning assets would mature or reprice within one year and close to $2.5 billion of assets would mature or reprice within three years. Combined with our large balance of demand deposit accounts, we believe this provides us with significant balance sheet flexibility and earnings potential going forward.

Turning to slide 9, let’s look at our fee income which was approximately $9.8 million for the quarter excluding the impact of the net loss on sales securities. As shown in the chart on the right, we anticipate that mortgage banking, payroll finance and factoring will be main drivers of our non-interest income going forward and will be supplemented by our other fee-based businesses. Excluding the impact of the securities losses, non-interest income to total revenues was approximately 17.5%. Over the long-term we’re targeting this ratio to be closer to 25% to total revenue.

Reviewing mortgage banking in more detail, we will focus on a combined three months view to provide a better guide of trends in the business. Please remember that our results only reflect two months of legacy Sterling so the combined company did not enjoy the full benefits of the numbers we will discuss here.

Total closings for the quarter were approximately $183 million which represented a decrease of approximately 25% relative to the linked quarter and a decrease of approximately 33% relative to the second calendar quarter of 2013. Even though total volumes are down, approximately 63% of total closings in the fourth quarter represented purchase transactions and the majority of originations continue to be in the tristate area with a specific concentration in New York City (inaudible). We believe this will provide us with some stability in origination volumes going forward.

On slide 10, our core operating efficiency ratio was 65.4%, which does not yet reflect the impact of anticipated cost savings to be realized from the merger. As you will recall, in connection with the merger announced in April 2013, we provided guidance regarding our anticipated level of cost savings and percentage of cost savings relative to operating expenses. These were $34.2 million and 18% respectively, which equaled in operating expense base line of $190 million.

The table below shows the anticipated progression in the combined operating expense base. Please note that to be consistent with the merger announcement information that we provided, this chart focuses on expenses for the calendar year 2014 and not this quarter. Over the next 12 months ending on December 31, 2014, we are targeting four operating expenses in a range of $165 million to $168 million.

Turning to slide 11, our asset quality remains strong and ratios continue to show improvement across the board. In connection with the merger, we reported a fair value adjustment of $25.4 million which included a credit mark of approximately $31.3 million.

When looking at our allowance for loan losses to total loans, excluding the impact of the loans acquired in the Gotham and legacy Sterling transactions which were reported at fair value and carry no allowance, this ratio was 1.24% at December 31, 2013 which is right in our target range.

When reviewing our allowance for loan losses to non-performing loans ratio which was 78% at December 31st, please remember that this ratio does not reflect the credit mark associated with the loans acquired from Gotham and legacy Sterling.

Net charge-offs against the allowance were $1.3 million which compared favorably relative to the $2.2 million recorded in the linked quarter. Our provision for loan losses was $3 million which in addition to replenishing our net charge-offs also begins to provide for the growing portion of Gotham and legacy Sterling loans that are now part of our allowance calculation. Our long term target allowance to total loans ratio continues to be approximately 1.2%.

Turning to slide 12 and finalizing the presentation, we will quickly review capital and liquidity. We continue to be in the strong capital position with the consolidated tangible equity to tangible assets ratio of close to 7.8% as of December 31st. Our liquidity position also remains strong and we’re looking to further enhance it by reducing collateralization requirements in our municipal deposits. Our municipal banking business is an attractive source of low cost deposit funding and will be an efficient tool to continue funding loan growth going forward.

We anticipate redeeming of legacy Sterling Trust preferred securities by June 30, 2014, which will generate significant interest expense savings. I’ll now turn it over to Jack.

Jack Kopnisky

Thanks Louis. Let me summarize the quarter. First, core earnings of $0.13 per share are what we expected for the first quarter of the combined company. As cost saves occur and revenue enhancements are realized, we would expect the results to grow and improve quarter-over-quarter. Our integration process is working and we are pleased with how the two companies have come together. We've retained our clients through the process and have continued to grow core loans and targeted demand deposits.

Our pipeline of revenue opportunities is significant across all lending and fee income categories. The response from clients and prospects to the broader product offering and our team based relationship delivery has been significant. We have over a $100 million of new loan opportunities that neither bank could have provided as a standalone entity.

We recently [bleached] our commercial clients, these are existing clients using our executives with our relationship teams and have resulted in 127 calls on the clients. Yielded -- what's interesting is it yielded a new opportunity in virtually every call that we made, just one small snippet of the power of what we think we can do in the future. This opportunity -- the opportunity for growth is significant.

Our capital and liquidity positions remain strong and will enable us to grow the earnings of the company. Credit quality continues to improve as we have appropriately marked the book of the acquired company and have seen continued improvements in the legacy portfolio.

Finally, we are most focused on delivering strong results in the future. We are targeting earnings to grow 10% to 15% per year on a long-term basis with return on tangible equity greater than 12% and return on tangible assets greater than 1%, driven by the creation of positive operating leverage.

Now let’s open up the line for questions you may have.

Question-and-Answer Session


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

Matthew Kelley - Sterne Agee

Yeah, hi guys.

Jack Kopnisky

Hi Matt.

Matthew Kelley - Sterne Agee

I was wondering if you could just kind of go through the second quarter, second -- I guess your second fiscal quarter, your accretable yield impact, so the $2 million goes to what on a full quarter and where do you expect the margin on an FTE basis compared to the 3.58? I just want to make sure I am clear on that.

Jack Kopnisky

So to answer your first question Matt, the $2 million goes in the range of $2.5 million to $3 million or so as you will recall and we’ve talked about this in the past, there is various factors that go into that potential prepayments and so forth that might make that number move. But where we stand today, we think 2.5 to 3 is a good number to use. And sorry, what was your second question?

Matthew Kelley - Sterne Agee

Yeah. So just you were suggesting a full year FTE margin of around 3.70; is that kind of where you think it’s settled down now?

Jack Kopnisky

Yeah it’s going to be -- we think that full year, once we start and finalize the redemption of the trust preferred securities, it’s going to be slightly above 3.70. You will see a steady progression towards that number on long-term. So for the second quarter, I would that sort of that 3.58 that we had is probably going to be in the 3.65-ish to 3.70 range. And then as we continue to do various things and reposition the securities portfolio which we still have a little bit of work to do there and we redeem the trust-preferred securities, you'll see another slight bump.

You do have to remember when you think about our NIM, Matt that there is two -- sort of there is two parts of the year given our municipal bank business for we have higher or elevated deposit, [muni] [ph] deposit balances and therefore a higher cash balance at the Fed. And that happens at September 30 and in the first part of this quarter as well. So, sort of the second fiscal quarter of this year isn't the best indicator what the long-term run rate of NIM is. So, you'll see a little bit of a steadier increase as we go forward through 2014.

Matthew Kelley - Sterne Agee

Okay, got it. And then the mortgage banking operation acquired from Sterling, what is the pipeline looking like and what do you expect for fiscal 2Q gain on sale activity compared to the 1.6?

Jack Kopnisky

We had, so $183 million was the total combined originations for the first quarter, but the vast majority of that production came from the legacy Sterling side of the business. We anticipate that we're going to be sort of flat to that number to slightly maybe potentially up. We're working on a number of things; we're hiring some additional folks in that area.

And when you think about the mortgage business for us on a combined basis is very much focused on the tri-state area and specifically in New York City and the Boroughs with a high concentration in purchase versus refi volume. So, I think that you're going to see us have a little bit more stability there than what you would see for other folks. But that 100 and sort of that we're seeing from the January run rates, we think that we’re going to be generally flat to where we were in the fourth quarter. I'm sorry in the first fiscal quarter and fourth calendar quarter.

Matthew Kelley - Sterne Agee


Luis Massiani

Yeah, what we're transitioning in the model, actually in the mortgage business, we're actually transitioning the model to be much more of a team-based model rather than taking tons of refinance volume off of brokers. We're concentrated on purchase volume. And frankly we're hiring and supporting teams of folks that really are high value-added high quality originators of purchase volume and relationship. So, the Sterling mortgage team has done a very good job of repositioning the business to look more like that.

Matthew Kelley - Sterne Agee

Got you. And then just two last ones; what are you current yields on the pipeline for both C&I and then commercial real estate and then what should we use for tax rate?

Jack Kopnisky

Tax rate, 30% to 33%, 32% to 33% for the remainder of the year is our current estimate for effective tax rate. From the yields on the pipeline, varies by geography, but on average sort of for our traditional commercial real estate book it’s slightly above 4%. For the C&I book is below that, but shorter duration and floating rate in a lot of cases so that’s actually not a bad place to be. So, if you’re looking at our CREs it’s 4 to 4.25 depending again on city, in the city versus outside of the city and sort of the competitive landscape in the geography that we are talking about.

Luis Massiani

It’s pretty interesting even from a volume standpoint that towards the end of the year it was a little bit flat in terms of volume. At the beginning of the year it has picked up significantly in terms of activity, deals that we’re working on of now come to bear. And frankly the pricing in certain sectors still is a little bit tough like multi-family, but in our sectors commercial real estate have firmed a little bit, still competitive as it always will be. But I think pricing kind of hit bottom probably six months ago and have started to firm up a little bit.

Matthew Kelley - Sterne Agee

Got it. Thank you.


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

Collyn Gilbert - KBW

Thanks, good morning, guys.

Jack Kopnisky

Hi Collyn.

Collyn Gilbert - KBW

Jack, just to follow-up on your comment there about pricing and the fact that maybe you know it’s bottom six months ago. Do you -- how much of an impact does this move in the tenure have do you guys think on loan pricing? I mean it’s pulled back now obviously they are like 2.60. Do you think that flows through to loan pricing eventually or is it just competitive factor than demand that’s going to keep loan pricing more stable than what the tenure may or may not do?

Jack Kopnisky

Yeah, I actually think competitive factors do that. I think more so than the tenure bouncing around, tenure is going to bounce around for whatever period of time. But I think it’s really more of the competitive pressures. And frankly one of the opportunities that we have as a company is we are seeing many, many more opportunities across all these business lines. So if there are deals that are frankly thin priced and below our hurdles and non-relationship oriented, we will pass on because there are opportunities in other sectors that we have.

One of the great things about -- with this company looks like now is a series of levers in terms of geography and from a product standpoint that you can pull and push on. So, the best example is the multi-family side brokerage and the multi-family. We are not going to play in an area where the rates are in the low threes versus places like factoring or payroll finance or some of the CRE, other CRE mechanisms where the prices are firmer and are obviously higher with greater yields.

Collyn Gilbert - KBW

Okay. And then to that point, how should we think about loan growth this year? I mean what’s your targeted growth rate, specifically in each of those two categories, C&I and CRE?

Jack Kopnisky

Yeah, I can give you the overall. We expect low double-digit, low-teen commercial loan growth. And that's across the whole portfolio. And where there is probably higher loan growth are going to be higher than the low it will be kind of the commercial real estate and C&I across the board. Obviously where it’s lower are things like multi-family and the mortgage business for example; mortgage warehouse for example will not enjoy that type of growth rate. So, it’s going to be low double-digit teen growth rate.

Collyn Gilbert - KBW

Okay, that's helpful. And then what about -- you had mentioned sort of what you are doing on the mortgage side to stimulate additional growth there? What about factoring? How do you think you can grow that business or what is your targets for growth on the factoring side?

Jack Kopnisky


Collyn Gilbert - KBW

And I believe you got that from a feed perspective, not any tiny rate?

Jack Kopnisky

Right, so like factoring and payroll are more fee-oriented than they are kind of loan outstanding growth rates. But what's interesting is we already are seeing the relationship teams -- so the issue with factoring in legacy Sterling has been throughput. So there is not been enough deals that have come through the system that we have a magnificent back office that can process payroll, factoring even ABL, but we need more volume. Part of what the relationship teams are tasked to do is to identify specific opportunities in addition to the sales areas of factoring within that group. We have the relationship teams tasked with identifying factoring opportunities.

The $100 million that I identified with, it’s actually more than $100 million of loans that we've identified. Actually our wins identified generally from the relationship teams for areas like factoring and payroll and ABL. So, that’s how we expect to grow. It’s not -- it’s really more of an issue of distribution and having more of our team’s touches more clients. We had one specific deal that’s about ready to close, Jim of around $27 million that one of the relationship teams identified early on. And so a perfect deal for factoring. The factoring folks may not have seen that in prior times because of the contacts that the relationship teams have.

Collyn Gilbert - KBW

Okay, that’s helpful. And then just one last question, Luis; can you just give a little more color to your plans on sort of the repositioning of the securities portfolio?

Luis Massiani

There is specific buckets of the portfolio that sort of that we inherited as part of the merger that we’re not enamored with. There is no sort of securities that have sort of a lower yielding profile, but significant extension risk. Given this recent sort of back up in rates again over the last couple of weeks we are seeing, we believe and anticipate that there is going to be good opportunity for us to potentially sort of sell out some of those positions and replace them with things that I think better fit the combined profile of the company and better position the portfolio for a rising rate environment. So, specifically some of those buckets include agencies and some [annuities] where we are not -- where we just have to continue working to a little bit as we go through the course of the year.

Collyn Gilbert - KBW

Okay. Alright that’s helpful. Thanks.

Jack Kopnisky



And there are currently no further phone questions. I will now turn the call back over to Mr. Kopnisky for any closing remarks.

Jack Kopnisky

Yeah, thanks for joining us on the call today. We look forward to a terrific next quarter and following quarters with the opportunities before us. So, we are very excited about the opportunity and look forward to providing great results in the future. Thanks a lot for everybody.


Again, thank you for your participation. This concludes today's conference call. You may now disconnect.

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