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Sterling Bancorp (STL)

Q2 2010 Earnings Call Transcript

July 26, 2010 10:00 am ET

Executives

Edward Nebb – IR Advisor

John Millman – President

John Tietjen – EVP and CFO

Analysts

Damon Delmonte – KBW

Lana Chan – BMO Capital Markets

Rick Weiss – Janney

Collyn Gilbert – Stifel Nicolaus

Frank Barkocy – Mendon Capital

Tim Buckley – Evercore

Kyle Kavanaugh – Palisade Capital

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Sterling Bancorp 2010 second quarter conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Investor Relations Advisor, Edward Nebb. Please go ahead, sir.

Edward Nebb

Thank you, Bob. Good morning, everyone. Thank you all for joining us today. Our news release announcing Sterling's second quarter 2010 results was issued prior to the market open this morning. We hope you had an opportunity to review it. The news release is also available on the company's website, www.SterlingBancorp.com.

Before turning to the discussion of the company's 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 forward-looking statements. The amounts of any dividends in 2010 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. We’ll have introductory remarks today from Mr. John Millman, President of Sterling Bancorp and Mr. John Tietjen, Chief Financial Officer. And then after management's remarks, we’ll open up the call to take your questions.

So without further ado, I’ll turn the call over to Mr. John Millman.

John Millman

Thank you, Ed. Good morning, everyone. Welcome to our conference call for the second quarter ended June 30, 2010. Sterling's increased profitability for the 2010 second quarter clearly shows the positive effects of our strategies to grow our business and drive increasing shareholder value. We delivered $2.3 million or $0.09 per diluted share and net income available to common shareholders. This represents a significant increase over the year-ago period and brings our earnings to their highest level since the first quarter of 2009.

Assets reached $2.28 billion at June 30, setting an all time record. We are making progress in deploying the capital raised in our March 2010 stock offering to support further growth initiatives. Our strategies continue to focus on growing the business both organically and through acquisitions, deploying our capital in a disciplined manner while maintaining sound asset quality.

Turning to some key trends in our business, we are continuing to experience organic growth in our lending activities. Loan demand is strong and volume is accelerating. Total loans in portfolio increased nearly 15% from a year ago, excluding the leasing portfolio, where we have been intentionally reducing our volume. The growth in newly approved loan facilities shows that Sterling is winning customers from competing institutions that are no longer serving the market due to mergers, capital constraints and other factors.

In addition to our organic growth, we continue to benefit from our acquisition in the 2009 second quarter of an accounts receivable management factoring and import trade finance business, which has given us an entree into new customers and markets. Continuing a recent trend, accounts receivable management, factoring commissions and related fees were up 22.4% from the second quarter of last year.

Early in 2010 second quarter, we announced the formation of our Sterling warehouse lending group, a natural extension of our established capabilities in asset based finance and mortgage lending. This new group provides funding to highly qualified mortgage banking firms. We are very pleased with the progress of this business to-date. The warehouse lending team has established relationships with several mortgage banking counterparties and its volume in terms of funding commitments is in line with our objectives for this business. The results of our mortgage warehouse lending were not significant to our results for the second quarter, but will be an increasing source revenue in future periods.

Sterling's capacity to implement our strategic growth initiatives is supported by a strong capital base. Shareholders equity was further strengthened by our $69 million capital raise in the first quarter and shareholders equity stood at more than $229 million at June 30, 2010. Our tangible common equity rose to 7.33% at June 30, 2010 from 4.47% a year earlier. Book value per common share increased to $7.04 at June 30, 2010 from $6.51 at June 30, 2009.

In addition to rising earnings and strong capital, results for the second quarter demonstrated a continued improvement in credit quality. The loan loss provision for the 2010 second quarter was $5.5 million, the lowest provision in the past six quarters. Our progress in terms of asset quality is also reflected in a number of other key measures.

Net charge-offs for the second quarter were $5 million down from both a $5.6 million level of a year ago and $5.9 million for the 2010 first quarter. The level of non-accrual loans was $18.7 million for the 2010 second quarter down $1.9 million from the same period a year ago. Included in the 2010 amount is one commercial real estate loan of $2,400,000. We experienced decreases in non-accruals for C&I loans, leasing and residential mortgages as well as other real estate owned, comparing to the first and second quarters of this year.

With respect to the leasing portfolio, the migration of loans to non-accrual status has also been improving. Our ratio of non-accrual loans to total loans improved to 1.46% at June 30, 2010 from 1.69% at June 30, 2009. The allowance for loan losses as a percentage of non-accrual loans was 109.8% at June 30, 2010 an improvement in coverage from 88% a year earlier.

We are encouraged by Sterling's results for the second quarter and first half of 2010 and we believe that the company is poised for even stronger performance going forward. A variety of factors should contribute to our capacity to create and enhance shareholder value. We are still in the early stages of deploying the capital raised through our recent stock offering.

At this time our asset mix reflects a relatively high level of short term investment securities that by nature have lower yields. The difference in average yield between our investment securities and our loan portfolio is approximately 200 basis points. Over time, as we respond to the demand in our marketplace from quality borrowers, we should be able to shift our asset mix to a greater proportion of loans with a resulting improvement yield.

Our new mortgage warehouse lending business is showing solid promise and the fees, interest income and other revenues generated by this operation will begin to be reflected in our quarterly financial results beginning in the 2010 third quarter. Finally, we continue to see growth opportunities in our marketplace. We are aggressively taking actions to build new relationships with customers that have been disenfranchised by the traditional institutions during the economic downturn. In addition, we are actively seeking acquisitions of businesses, franchises and assets that are consistent with our expertise and we will complement our operations.

In summary, Sterling's results for 2010 to-date reflect a positive trend in earnings and continued progress in implementing our growth strategies. We believe the company's strong capital base, sharp focus on the opportunities in our marketplace and track record of exceptional service are powerful competitive advantages in today's environment. We will continue to build on those qualities to create value for our shareholders.

Now I’ll turn the call over to John Tietjen.

John Tietjen

Thank you, John. I would like to provide some additional detail on our strong performance for the second quarter. As we noted, net income available to common shareholders for the 2010 second quarter was 2.3 million or $0.09 per diluted share. This represents a sharp turnaround from the 138,000 or $0.01 per diluted share reported in the same period of 2009.

In addition to the current period factors mentioned by John, I would like to point out that in the year-ago period our results were affected by several factors associated with the economic slowdown. These included the industry wide FDIC assessment; an increasing pension expense due to the impact of a lower return on plan assets due to market conditions and higher credit related costs.

If we look at the trend since the third quarter of 2009, you will see that net income available to common shareholders has been between 1.8 million and $2 million. So we are particularly pleased to have broken out of this range with our latest results. Looking at some of the key factors that contributed to that performance, net interest income on a tax equivalent basis was 21.1 million for the 2010 second quarter compared to 21.5 million a year ago. This was primarily due to our asset mix coupled with prevailing interest rates.

The average yield on investment securities declined 98 basis points, while the yield on loans declined 32 basis points. This was partly offset by a 32 basis point reduction in average liability costs, primarily due to the cost of interest bearing deposits. Overall, the net interest margin remained one of the strongest among our peers at 4.12%.

Noninterest income was $11.4 million, up approximately 7% from a year ago when you exclude security gains. The major contributor was the growth in accounts receivable management, factoring commissions and related fees due to our expansion of that business through the acquisition John mentioned earlier as well as our organic growth. Service charges on deposit accounts also contributed to the rise in noninterest income. These factors were partially offset by lower mortgage banking income.

Turning to the balance sheet, average loans held in portfolio for the 2010 second quarter, net of unearned discount were 1.19 billion up from 1.15 billion a year ago. When comparing these amounts, please keep in mind that leasing balances are down by an average of approximately $66.3 million due to the planned reduction of our leasing portfolio.

Investment securities averaged 836 million for the second quarter, up from approximately 670 million a year ago. The major increase occurred in short term investment securities, reflecting the deployment of proceeds from our stock levering. Over time, we would expect to shift our asset mix from investment securities to loans.

Total deposits for the 2010 second quarter averaged 1.62 billion compared to 1.31 billion a year ago. The largest shift in interest bearing deposits occurred in time deposits, where the average balance rose nearly $258 million, primarily due to our participation in the CDARS program. At an average cost of 25 basis points, this has been particularly cost effective funding source.

Noninterest-bearing demand deposits continue to be an area of strong focus for us and a key contributor to Sterling's high net interest margin. Average interest-bearing demand deposits rose to 466 million for the 2010 second quarter from 418 million a year ago.

Demand deposits have grown as a result of balances maintained by our lending customers as well business developments activities in our professional banking area. Average borrowings for 2010's second quarter decreased approximately $215 million as more cost effective deposits as previously mentioned, including CDARS have comprised a greater proportion of our funding base.

All of our regulatory capital ratios continued to exceed well-capitalized requirements as of June 30, 2010. Our Tier 1 risk based capital ratio stood at 14.32%. Total risk based capital was 15.55% and Tier 1 leverage was at 10.76%. Our liquidity remains strong and will support further growth. The ratio of loans held in portfolio to deposits was approximately 75% as of June 30, 2010, giving us ample capacity to increase lending to our customers.

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

John Millman

Thanks, John. Sterling has navigated a period of economic hardship for our economy and our industry and has emerged as a strong, profitable and growing organization. We have used the recent challenging period to position the company well for the future and we are excited about our long term potential.

Now we would be pleased to respond to your questions.

Question-and-Answer Session

Operator

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

Damon Delmonte – KBW

How are you?

John Millman

Hi Damon, good morning.

John Tietjen

Good morning, Damon.

Damon Delmonte – KBW

Could you guys talk a little bit to the – what appears to be the leverage you guys put on this quarter? Looks like your borrowings increased on the quarter. Could you talk a little bit about that?

John Tietjen

What we did, Damon was try to deploy the capital in a profitable fashion. Because of the fact that we’re looking at temporary sources here, so we are in the investment portfolio generally speaking, we needed to go higher to offset the per-share impact of the capital raise.

Damon Delmonte – KBW

Okay. I understand. Regarding the growth in NPAs this quarter, did you say that there was a $2.4 million commercial related loan that went non-performing in this quarter?

John Millman

Yes, yes, that's correct.

Damon Delmonte – KBW

And can you tell us a little bit about that credit?

John Millman

Sure, sure. It is a $2.4 million commercial real estate loan; it's collateralized by commercial real estate in a major town in Westchester County. The real estate is actually adjacent to the city hall in this town. The city has a second mortgage subordinate to us. They are very interested in working with us to achieve a resolution of the problem. It is now current. We’re applying payment to principal and we are confident that there will be a resolution – a satisfactory resolution this one issue.

Damon Delmonte – KBW

Okay. Great. And then, I guess just, could you update us on your thoughts on the repayment of TARP?

John Millman

Yes, Damon. We constantly review the capital structure of the company, as you know. We take into consideration lots of things such as market conditions, opportunities we see in the market. And we’re also looking at the impact of the newly enacted financial legislation. We will make a decision on TARP which reflects consideration of all the relevant facts and we believe – which we believe will be in the best interests to the company and its shareholders, based upon the conditions then in effect.

Damon Delmonte – KBW

Okay. Great. That's all I have for now. Thank you.

John Millman

Thank you, Damon.

Operator

And next we’ll go to the line of Lana Chan, BMO Capital Markets. Please go ahead.

Lana Chan – BMO Capital Markets

Good morning.

John Millman

Good morning, Lana.

Lana Chan – BMO Capital Markets

Any way to quantify what you think the potential benefit or earnings accretion is from the mortgage warehouse business starting in the third quarter?

John Tietjen

I don't think that we’re in a position to project absolute results for the third quarter. We started out very strong, we had approximately $30 million in fundings at the end of the second quarter. We expect that – as I think John reported on an earlier conference call, that by the end of the year we should have approximately $100 million in lines out and we're expecting roughly 50% to 60% of fundings on those lines.

Lana Chan – BMO Capital Markets

Okay. Thank you. And then any guidance in terms of the margin going forward, assuming rates stay unchanged for an extended period of time, what would you expect to see with the margin going forward?

John Tietjen

I think as we’ve said in the past and I know this is not as specific as you might like us to be, but as we are able to grow the loan business and we are trying to do that in a prudent fashion, you will see the securities balances coming down. The yields are obviously much better in the loan portfolio. I would look for a continuation of growth at the 8% to 10% range in loans.

Lana Chan – BMO Capital Markets

And my last question with the redeployment of the capital this quarter into securities, what is your average duration now on the portfolio? And with the leverage that you put on, has that changed your interest rate sensitivity position?

John Tietjen

No, it hasn't dramatically changed it. What we have put on has been very, very short. I’m with – I'm looking here to see if I can find it very quickly for you. I don't think – if anything it shortened the duration of the portfolio, I’ll come back to you, Lana and give you a precise number.

Lana Chan – BMO Capital Markets

Okay. Thanks, John. And then the interest rate sensitivity position?

John Tietjen

Is going to still be very asset sensitive.

Lana Chan – BMO Capital Markets

Okay. Thanks, John.

John Tietjen

Okay.

Operator

And next we’ll go to line of Rick Weiss of Janney. Please go ahead.

Rick Weiss – Janney

Hey, I was wondering if you could just give a little bit more color on the commercial loan growth as conditions changed, kind of, at the end of the quarter versus the beginning of the quarter. Also, is the business coming at the expense of others or are you seeing some new activity in metropolitan New York?

John Millman

Rick, hi. Good morning.

Rick Weiss – Janney

Hi, John.

John Millman

Almost all of the business comes from existing institutions that we compete within New York City. Institutions for one reason or another are less interested in serving middle market companies. We have seen – in terms of conditions, we have seen much more activity, much, much more robust pipeline. We’re seeing activity across industry lines, but you remember, one of the areas of interest to us is the staffing industry. Staffing industry is often an indicator of economic activity and we have seen rather a dramatic pickup in the borrowings in our staffing lines. And we have seen some outstanding new prospects in that industry coming to us as well. So we’re quite encouraged about the outlook for the C&I lending book.

Rick Weiss – Janney

Okay. And with regards to the accounts receivable and the factoring businesses, is this typical in a recession that those businesses – you see increased activity for you for Sterling?

John Millman

Yes, it is.

John Tietjen

Yes, it is.

Rick Weiss – Janney

Okay. And let me follow up a question I guess Damon asked about the TARP preferred stock. I had thought before that you were more inclined to pay back some at the beginning of this or at some point of it during this year. But today it sounded like now you're just going to review it in general.

John Millman

Well, we want to take a look and see what the impact is from the newly passed financial legislation. We’re not sure what the impact is and we want to evaluate that and we’ll make a decision based upon that and other market conditions.

Rick Weiss – Janney

Okay, fair enough. Okay. That's all I have. Thank you.

John Tietjen

Lana, if I can, I’ll give you the information on the securities portfolio. We’re under three years on a blended basis in the securities portfolio now, compared to slightly over four years in June of last year.

Operator

And next we’ll go to line of Collyn Gilbert of Stifel Nicolaus. Please go ahead.

John Millman

We are not hearing, Collyn at all.

Operator

Collyn, your line is open.

Collyn Gilbert – Stifel Nicolaus

Yeah, I am trying to talk. Are you guys there?

John Millman

Yes, we are now.

Collyn Gilbert – Stifel Nicolaus

Okay. Sorry. I don't know what was going on there. Okay, sorry about that. So I just wanted to follow up on Rick's question in terms of the discussion on the loan demand. And John, you had mentioned the staffing company, targeting the staffing companies. Can you just give a little bit more detail in terms of kind the size of these loans, sort of the terms and structures that you are seeing?

John Millman

Typically, lending in this area is multimillion dollar loans of between – let's say $5 million and $12 million. They are priced off of the prime rate. I mean the yield is well above prime rate. We also require compensating demand deposits. So you're talking about a couple hundred basis points over prime rate.

Collyn Gilbert – Stifel Nicolaus

Okay. Okay. That's helpful. And then in your discussion, John, you had mentioned in terms of the NIM discussion. Obviously, we can see where the opportunity comes on the asset side and you guys have really aggressively dropped on the deposit side. Do you think you are kind of now at a bottom and if so, do you see the ability sort of to sustain that deposit pricing?

John Tietjen

We absolutely see the ability to sustain it in this current rate environment. On a weekly basis, we look at the pricing on our deposit book with particular emphasis on the CDs as they continue to roll through the maturities. So I wouldn't look for a dramatic additional drop. But as far as being able to maintain it, I think we will be able to do that. A significant part of the deposits now are the CDARS and we are borrowing there at 25 and 30 basis points for – in some cases up to 26 weeks. We have begun to look at slightly longer CDAR borrowings, generally out a year.

Collyn Gilbert – Stifel Nicolaus

Okay. That's great. That's helpful. Then would you mind – and it was in that release I missed it, what were the period-end diluted shares?

John Tietjen

Diluted shares?

Collyn Gilbert – Stifel Nicolaus

Yes.

John Tietjen

I don't have period-end diluted. We only have the average.

Collyn Gilbert – Stifel Nicolaus

Okay.

John Tietjen

I could tell you what the June 30 outstanding shares – you could get off the bottom of the balance sheet. It is roughly 27 million shares.

Collyn Gilbert – Stifel Nicolaus

Okay, okay. And then just one final question. Are you all anticipating much of an impact from the Reg E implementation and on the NSF charges?

John Millman

It might be – I know they are retail-oriented banks. I don't think to us it will be significant.

Collyn Gilbert – Stifel Nicolaus

Okay. That's what I figured. Okay. That was all I had. Thanks.

John Millman

Thank you, Collyn.

Operator

(Operator Instructions) And we go to line of Frank Barkocy of Mendon Capital. Please go ahead.

Frank Barkocy – Mendon Capital

Johns, a quick question. Are there any opportunities whatsoever with the FDIC-assisted deal, or is that unlikely to be a factor for you guys?

John Millman

I don't think that will be a factor. We look at those opportunities. There are very few left in the New York area. Pricing is less advantageous than it was a while back, so I don't expect that it will be a major factor for us.

Frank Barkocy – Mendon Capital

And also, could you give a little color on the Dodd-Frank? Not specifically what the cost might be, but what areas are most likely to be a factor for you as we go forward?

John Tietjen

As with everyone else, I think we are still trying to learn all the ins and outs of Dodd-Frank. I think capital is clearly going to be an issue. You've got Basel III coming into it also. And whether trust-preferred are in or out, are something that we are looking at. I would say, for us it would be particularly in the capital area.

Frank Barkocy – Mendon Capital

Thank you.

Operator

And next, we go to Tim Buckley, Evercore. Please go ahead.

John Tietjen

Tim, we are not hearing you.

Operator

Mr. Buckley, your line is open.

Tim Buckley – Evercore

Just wondering, what your lease balance is at the end of the second quarter and what the outlook is for when that stabilizes. Thanks.

John Tietjen

The leasing balances are approximately $165 million and we are continuing to let some of that run off. We see opportunities to book good business there. But I think you would expect to see it continue to run off, perhaps not as fast as it has been in the past though.

John Millman

But I think your question refers to asset quality and I think as we indicated the migration to nonaccruals has moderated rather substantially. We do expect the nonaccruals to continue to drop in that portfolio going through 2011 and to see much more moderation in asset quality issues there.

Tim Buckley – Evercore

Okay. Thanks.

Operator

And we go to Kyle Kavanaugh, Palisade Capital. Please go ahead.

Kyle Kavanaugh – Palisade Capital

Hi, good morning, gentlemen.

John Tietjen

Good morning, Kyle.

Kyle Kavanaugh – Palisade Capital

I had a question. I heard there was a – the restrictions on paying interest on commercial checking accounts was removed on the financial regulatory reform. Does that affect you and if so, how does it affect you?

John Tietjen

It has the potential to affect us. The result will likely be, though, that when the money is free we will make a decision as far as the imposition of service charges. As we start to pay interest on those balances, we would need to reevaluate the decision of whether to impose service charges or not. And I don't think that is specific to us. I think that is going to be throughout the industry.

Kyle Kavanaugh – Palisade Capital

Does it increase competition or does it stay the same because the rule applies to everybody?

John Tietjen

Well, I think each bank will make their own decisions as to whether they are going to pay interest or not pay interest I think. You have a depositor education that needs to go on here. I think many of our business customers understand that if they are going to get interest on these deposits that they are going to have to pay for services that maybe they haven't had to pay for in the past because the balances were not accruing interest.

Now, if you look at the rates, in this rate environment what is the benefit to the depositor to get – pick a number – 25 basis points on their deposit balances, if that means they're going to have to start paying some level of service charges?

Kyle Kavanaugh – Palisade Capital

Okay. Thank you.

Operator

And there is no one else in queue at this time. Please continue.

John Millman

Thank you. Thank you, operator. Thank you for your interest in Sterling. We look forward to speaking with you again next quarter. Thank you.1

Operator

Ladies and gentlemen, this conference will be made available for replay after 12 p.m. today running through Monday, August 9, 2010, at midnight. You may access the AT&T executive playback service at any time by dialing 1-800-475-6701 and entering the access code of 164601. International participants may dial 1-320-365-3844. Again those numbers are 1-800-475-6701 and 1-320-365-3844, with an access code of 164601.

That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.

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