Sterling Bancorp's CEO Discusses F2Q 2014 Results - Earnings Call Transcript

May. 1.14 | About: Sterling Bancorp (STL)

Sterling Bancorp (NYSE:STL)

F2Q 2014 Earnings Conference Call

May 1, 2014 10:30 ET


Jack Kopnisky - President and Chief Executive Officer

Luis Massiani - Chief Financial Officer


Collyn Gilbert - KBW


Good morning, and welcome to the Sterling Bancorp Fiscal 2014 Second Quarter Earnings Call. My name is Brandy 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 the 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 - President and Chief Executive Officer

Good morning, everyone and thanks for joining us today to discuss Sterling Bancorp’s second quarter results. 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 direct you to Page 3, I will take you through the slides. During the quarter, we are seeing the results from our execution of our strategy and the integration of legacy Sterling Bancorp. We have made significant progress, which is evidenced by our strong results in the quarter, including a higher profitability, double-digit loan growth and a significant improvement in operating ratios. Excluding the impact of merger-related expenses and other charges, core earnings for the quarter were $13.2 million and core earnings per diluted share were $0.16. Our core return on tangible equity improved approximately 223 basis points to 10.8% and our core return on tangible assets improved 19 basis points to 85 basis points. The net interest margin improved by 18 basis points to 3.76%.

During the quarter, on a pro forma basis, revenue grew by approximately 1% and expenses declined by approximately 6% creating the level of operating leverage we have targeted. The efficiency ratio improved 340 basis points to 62%. We continue to make strong progress toward achieving our target of $34 million plus reduction in core operating costs by 12/31/2015. On an annualized core run-rate, costs are down $23 million from the operating baseline of $190 million. During the quarter, we continued to right-size our branch network by announcing a consolidation of 10 branches effective in the third fiscal quarter.

We experienced strong loan deposit and fee growth for the quarter. Total loans grew at an annualized rate of 11.4% over the prior quarter. Focusing on our commercial and industrial loans, commercial real estate loans and specialty lending businesses, loan balances grew by $145.4 million to $4.3 billion, which represented annualized growth of 17.7% over prior quarter end. We continue to have a significant pipeline of opportunities across all business lines.

Core deposits of transactions, savings and money market accounts grew to $3.7 billion, which represented annual growth of 7.2% over balances at December 31, 2013. Total core deposits, including muni deposits represent 90% of our total deposits. The cost of deposits was 19 basis points for the quarter. For the quarter, non-interest income was $12.4 million, or 18.6% of total revenue. We are focused on improving or raise that ratio to over 20% of revenue. As we continue to manage our mix of human capital, we hired 11 new relationship bankers during the quarter to increase the size of many of our 21 teams. Our team based strategy works and we continue to see opportunities to hire more teams and gain share.

Credit quality remains solid. In the recent quarter, we moved three acquisition development and construction credits to non-performing status, with two still paying current. This is consistent with our efforts to liquidate the ADC portfolio and we are confident in our valuation of the portfolio. Looking ahead, we see continued core earnings growth as our team based approach results in more loans, deposits and fee income, along with our drive to become more efficient through our merger-related cost reductions.

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

Luis Massiani - Chief Financial Officer

Thanks, Jack and good morning everyone. As a reminder, the financial results we are going to review today include three months on a fully combined basis for the second fiscal quarter, while the linked quarter included three months of legacy Provident and two months of legacy Sterling.

Reported net income was $10.3 million and diluted earnings per share was $0.12. Excluding certain charges that we will review on the following slide, core results for the quarter were a net income of $13.2 million and diluted earnings per share of $0.16. 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 million in the linked quarter as compared to 83.8 million for the quarter ended March 31. As of March 31, our total shares outstanding were 83.5 million.

From a net interest margin perspective, we are building on our first quarter results. Net interest margin on a tax equivalent basis was 3.76%, which represented an 18 basis point increase over the linked quarter. Net interest margin was positively impacted by the accretion of the fair value marks recorded – reported in the Gotham and legacy Sterling transactions of $2.6 million, which represented an impact of 18 basis points on NIM.

Going forward, we anticipate net interest margin will be in the range of approximately 370 to 380 basis points as the accretion of the fair value marks will begin to moderate over time and will be offset by the continued repositioning of our balance sheet including growing loans and increasing proportion of loans to total interest earning assets. We also continue to make progress towards achieving our core profitability targets. For the second fiscal quarter core ROTA was 85 basis points and core ROTE was 10.8% which are both well above the linked quarter performance and are heading in the right direction.

Turning to Slide 5, we will review in more detail the reconciliation of reported GAAP earnings to core earnings. The starting point for the calculation is our reported net income for the quarter, which was $10.3 million and diluted EPS which was $0.12. Items that negatively impacted results included the following. We incurred merger related expenses of $388,000 related to final client communications, branding, relocation of personnel and professional fees. These items are recorded as a separate line item on our income statement. The second item was a charge of $678,000 which consisted of a charge for incremental severance compensation and a charge for expenses associated with our core banking systems conversion. These items are recorded in our income statement as other expenses.

The core conversion will allow us to fully integrate the IT systems of legacy Provident and legacy Sterling and will better position the company for sustained and profitable growth. Our target date for conversion is November 2014. We anticipate we will incur additional costs of approximately $3 million through the conversion date consisting mainly of early contract termination charges as we transition away from our current service provider. The third items is a charge of $1.5 million on the settlement of a portion of the legacy Sterling defined benefit pension plan and the legacy Provident ESOP plan. This item is recorded in our income statement in compensation and benefits and is the function of the integration of personnel and benefits of the two legacy companies. The fourth item represents the amortization of non-compete agreements, which was $1.5 million for the second fiscal quarter. We entered into these agreements with key senior personnel of legacy Sterling. As of March 31, the balance of these agreements was $7.8 million. We will amortize an additional $3 million of this intangible asset in 2014 and the remainder in 2015 and ’16. This item is recorded on our income statement in the amortization of other intangibles line item.

Let’s turn to Slide 6, which we believe is a good indicator of the success of the merger to-date. As of March 31, loans have increased $140 million as compared to the merger date which represents annualized growth of 7.6%. During the second fiscal quarter we grew total loan balances by 11.4% and our commercial balances at an almost 18% annualized rate. A significant portion of this growth was in the month of March, but we are nevertheless pleased with the volumes and activity our teams and business lines generated during the quarter and how they are positioned for further growth.

Deposits presented similar story. Deposits increased $291 million in the second fiscal quarter with core retail and commercial deposits increasing 7.2%. Since October 31, demand deposits were up $166 million, which is an annualized growth rate of 16.4%. Including our municipal deposits approximately 90% of our deposits are core and our total cost of deposits was 19 basis points. We continue to enjoy the benefits of an exceptional depositor base.

The pie charts on the bottom of the page show the diversification of our business mix as a combined company. Prior to the merger you would have seen a significant concentration in commercial real estate for legacy Provident and C&I 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. We intend to continue this mix of business going forward. The yield on loans was 5.05% in the quarter, which represented an increase of 17 basis points over the linked quarter.

On Slide 7, we will review in more detail our significant origination capabilities across a broad range of asset classes. We think this table summarizes our strategy well. We are focusing on growing our commercial businesses where we have the capabilities and opportunity to have full client relationships that include loans, deposits and fees. We are augmenting these commercial businesses with other businesses in consumer and CRE where we believe there is a good opportunity to generate attractive risk adjusted returns. In short, we are going where you want to while managing or reducing our exposure in select areas.

Turning to Slide 8, our diversified business lines and asset origination capabilities resulted in an attractive balance sheet that is well positioned for a raising rate environment. Our securities portfolio totaled $1.8 billion as of March 31 with the weighted average duration of approximately 4.4 years, which is below the linked quarter in which it was closer to five years. Our total yield on securities increased during the quarter by 20 basis points to 2.77%.

Looking at our combined loans and securities, we believe this represents an attractive and differentiated picture relative to most banks our size. As of March 31, approximately $1.9 billion of interest earning assets will mature or reprice within one year and close to $2.6 billion of assets will mature or repriced 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 $12.4 million excluding the impact of modest securities gains. This compares to $9.8 million excluding the impact of loss on sale of securities in the linked quarter. The majority of the increase is reflective of three months of legacy Sterling being included in our results. Non-interest income to total revenues was 18.6% compared to 17.5% for the linked quarter. Over the long-term, we are targeting this ratio to be 20% or more of total revenue. The main contributors to our fee income were service charges on deposits factoring, payroll and mortgage banking. Although mortgage banking results were impacted by seasonal factors, mortgage banking was – mortgage banking income was relatively unchanged relative to linked quarter adjusting for the merger date.

Our payroll finance and factoring businesses also experienced seasonality in the first calendar quarter. Year-over-year combined aggregate volumes and fee income in these business lines has increased slightly. We are seeing good opportunities in both of these businesses and anticipate that the addition of our commercial teams with a greater focus on cross selling will make a significant impact allowing us to grow these business lines.

On Slide 10, our core operating efficiency ratio was 62% for the quarter, which is a positive step relative to the long-term goals we have outlined and compared to the 65.4% ratio we reported in the linked quarter. This does not yet fully reflects the full impact on anticipated cost savings to be realized from the merger. As you will recall in connection with the merger announcement 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 an operating expense baseline of $190 million.

The table below shows the anticipated progression on the combined operating expense. 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 fiscal. For the 12 months ended December 31, 2014, we are targeting core operating expenses in a range of $165 million to $168 million. Our first quarter expense levels are in line with our target.

We have also restarted our team recruiting strategy. During the quarter, we hired 11 new relationship bankers in the New York City market. Recruiting and new hires will have an impact on expenses, but we are comfortable maintaining the guidance we have provided on efficiency targets as synergies will be realized in other areas and the new teams begin to generate revenues and results as they come on board.

Turning to Slide 11, our asset quality remained strong. During the second fiscal quarter, we moved three relationships to non-performing based on our overall assessment of the loans. As a result, our non-performing loans increased $16.8 million from the linked quarter. However, because these loans had already been identified as problem assets, you can see that the increase in substandard doubtful loans in the period was only $5.4 million. Two of these loans are current. However, we believe the best course of action is to move them to non-accrual to accelerate the reduction of outstanding balances and to provide greater flexibility for workout purposes.

In connection with the merger, we recorded a fair value adjustment of $25.4 million, which included a credit mark of approximately $31 million. When looking at our allowance for loan losses to total loans, we have included a ratio that excludes the impact of the loans acquired in the Gotham and legacy Sterling transactions which were recorded at fair value and carry no allowance. This ratio was 1.12% at March 31, which is within our expected range.

When reviewing our allowance for loan losses to non-performing loans ratio which was 58% at March 31, please remember that this ratio does not reflect the remaining credit marks associated with the loans acquired from Gotham and legacy Sterling.

Net charge-offs against the allowance were $3.6 million or 34 basis points compared to $1.3 million or 14 basis points in the linked quarter. Our provision for loan losses was $4.8 million, which in addition to replenishing our net charge-offs also provides for the growing portion of Gotham and legacy Sterling loans that are now part of our allowance and also for our loan growth. As we continued to reduce our problem ADC credits, our long-term target allowance to total loans ratio will be in the range of 1.1% to 1.2% of total loans.

Finalizing the presentation, we will quickly review capital and liquidity on Slide 12. We continue to be in a strong capital position with a consolidated tangible equity to tangible assets ratio of close to 7.7% as of March 31. Our liquidity position also remains strong and we have further enhanced it by reducing collateralization requirements under 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. As we announced yesterday, we will redeem the legacy Sterling Trust preferred securities on June 1, which will generate significant interest expense savings.

I will now turn it over to Jack.

Jack Kopnisky - President and Chief Executive Officer

Thanks, Luis. Let me summarize the quarter. Core earnings were $13.2 million, or $0.16 per diluted share. Our progress in executing our strategy is also reflected in strong improvement in net interest margin to 3.76%, core return on tangible equity to 10.8%, core return on tangible assets to 85 basis points, and efficiency ratio of 62%. We will continue to drive positive operating leverage through this model. We delivered solid growth in loans, deposits and fee income highlighted by a 17.7% annualized commercial loan growth, 7.2% core deposit growth, and fee income representing 18.6% of total revenue. The strong capital, ample liquidity, and solid credit quality with which we will support our growth objectives.

Finally, as we stated on a number of calls, we expect to improve earnings 10% to 15% per year with a ROTE greater than 12% and return on tangible assets greater than 1% driven by the creation of positive operating leverage. We have made significant progress and we continue to focus on driving the execution of this strategy.

Now, let’s open the line for questions.

Question-and-Answer Session


(Operator Instructions) You have a question from the line of Collyn Gilbert with KBW.

Collyn Gilbert - KBW

Thanks. Good morning guys.

Jack Kopnisky

Good morning.

Collyn Gilbert - KBW

Jack, maybe I will just – that was your comments around loan growth and the fact that you still see opportunities to hire more teams, tying that in, tying in also to, I don’t know, maybe I am reading into it, but the fact that you said that a lot of the loan growth came in, in March. Does that mean maybe growth slows in the second quarter or how should we kind of think about total loan growth and the momentum from here, if you could sort a quantify some of your comments?

Jack Kopnisky

Sure, sure. So, loan growth comes in varying times based on what the teams are processing. So, you can’t read anything into that January may have been slower than March is just a matter of – as loans get closed one of the great things about this – the diversity of this portfolio is that loan opportunities, lending relationships come from many different areas at many different times. So, we are very confident that we can continue at a clip of double-digit loan growth throughout the remainder of the year and into the foreseeable future highlighted by higher loan growth on the commercial side, which is where we are focused versus the total loan side as we look at what level of loans we want to put in portfolio on the mortgage side, for example, or the consumer banking side. So, our concentration and our focus are really around C&I, commercial real estate, and the specialty lending areas.

Collyn Gilbert - KBW

Okay, okay. That’s helpful. And then Luis, how much do you remind us again the dollar amount of accretable income that you have left?

Luis Massiani

This quarter was $2.6 million and we anticipate that’s going to stay close to – for the next couple of quarters, it’s going to be in that same range.

Collyn Gilbert - KBW

Okay, okay. That’s helpful. And then so just on the margin guidance of the 370 to 380 is a portion of still what’s driving that, do you anticipate continuing mix shift in terms of getting, putting securities in the loans, how should we think about the securities for lack of…

Luis Massiani

So that’s right. So, you are going to have a re-shifting and rebalancing of the earning asset side into more loans. And also as Jack alluded to, the places where we are focusing our most attention on growing are places where we think that we can – on the loan side are places where we think we can generate nice risk adjusted returns and nice yields. So, in the specialty business lines, those are by nature higher yielding types of loans. So, as we continue to rebalance from securities to loans and increase the proportion of our specialty business lines as a part of the total earning asset pie, that’s where you start getting a little bit more, little bit more juice on the margin side.

Collyn Gilbert - KBW

Okay, okay, that’s helpful. And just you had made the comment that 44% of the loans re-priced within three years or mature within three years and how much of that is tied to specifically the prime or LIBOR?

Luis Massiani

There is a good portion of it. I don’t have that exact number at the top of my head. I can get back to you on that, but it’s a good portion of it, because the vast majority of the specialty business lines do price off of three-month LIBOR time, right depending on specific contractual agreements and arrangements with each borrower, but it is a good portion of it. So, but then again, you also have a significant portion of our commercial real estate book, especially on the legacy Provident side that also rolls off over the course of the next one, two and three years. So, it’s a mix of both and I don’t have an exact number to give you, but there is a fair amount of that 44% that would also be long-term loans that are coming due at that point.

Collyn Gilbert - KBW

Okay, okay. And then just one final question and then I will hop out, how quickly do you think you can let that ADC portfolio can – will run off and is your intention to take it to zero or?

Jack Kopnisky

Yes, I mean pretty close to zero. I frankly don’t like the business. I have never liked the business. I think it is loudly cyclical. The only portion that there will be some remaining on – is on the C side, the construction side, because there are good opportunities to manage construction projects that turn into permanent loans, but we will not do the AMD side of this thing unless somebody secures with cash or some remarkable level of collateral. So, we have taken this portfolio in about 2.5 years from almost $300 million down to $90 million. And what we did for the quarter and why the non-performing loans went up, there are three credits in there. They are all long time customers. They have multiple projects within those three credits. We want to be very aggressive at liquidating those three credits. So frankly, half of the charge-offs that we took related to those credits and we wanted to be aggressive about getting them out of the company. They have been around for a long time and we feel very confident in the asset market evaluation. So that there won’t be additional losses coming out of these three credits, but long way to answer your question, we really want to liquidate this portfolio down to the C side of this into the $30 million, $40 million balance within the next two years.

Collyn Gilbert - KBW

Okay, that’s great. That’s great color. Alright, thanks guys.

Jack Kopnisky

Alright, thank you.

Luis Massiani

Thank you.


(Operator Instructions) There are no additional questions at this time. We will turn the conference back over to the management for closing remarks.

Jack Kopnisky - President and Chief Executive Officer

Yes, just thanks everybody for joining us. We look forward to some continued terrific results and moving forward in our strategy and the execution of our strategy. So, thanks for following the company and thanks for supporting us and look forward to continued improvement. Thanks.


Thank you. Ladies and gentlemen, this does conclude today’s conference call. You may now disconnect your lines.

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