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Sterling Bancorp (NYSE:STL)

Q1 2012 Earnings Call

April 23, 2012 10:00 am ET

Executives

Edward Nebb – Investor Relations, Comm-Counsellors, LLC

John C. Millman – President

John W. Tietjen – Executive Vice President & Chief Financial Officer

Analysts

Mark Fitzgibbon – Sandler O’Neill

Collyn Gilbert – Stifel Nicolaus & Co.

Richard D. Weiss – Janney Montgomery Scott LLC

Damon Delmonte – Keefe, Bruyette & Woods, Inc.

Lana Chan – BMO Capital Markets

Operator

Ladies and gentlemen, thank you for standing by and welcome to Sterling Bancorp 2012 First Quarter Conference Call. At this time, all participants are in a 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’d now like to turn the conference over to our host Investor Relations Advisor, Mr. Ed Nebb. Please go ahead.

Edward Nebb

Thanks Brad. Good morning everyone. Thanks for joining us. Our news release announcing Sterling’s first quarter 2012 results was issued today prior to the market open. The release is posted on the sterlingbankcorp.com website, if you need a copy.

Before turning to the discussion of our financial results, let me remind you that any comments made today about future financial position or results, dividends, plans, and objectives, 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 for the first quarter 2012 and beyond depend on the company’s future results, financial condition, and other relevant factors. A discussion of the factors that could cause actual results to vary is contained in the Company’s annual and quarterly reports.

We’ll have introductory remarks today from John Millman, President of Sterling Bancorp; and John Tietjen, Executive Vice President, Chief Financial Officer. After their remarks, we’ll be open to your questions. And so without further ado, I will turn the call over to Mr. Millman.

John C. Millman

Thank you Ed and good morning everyone. Welcome to our conference call for the 2012 first quarter. I’m pleased to report that we saw strong trends in virtually every key area of Sterling’s business during the first quarter, as we successfully executed our strategies to drive profitable growth.

Our accomplishments during the quarter included substantial increases in loans and deposits, higher total revenues or wider net interest margin, and well controlled expenses, while asset quality metrics remained sound. As a result of our progress in these areas, we started 2012 with a solid increase in net income. This clearly demonstrates the revenue and earnings power of our business model, the value of our franchise and the effectiveness of our customer service.

Our performance was a direct result of the strategies that we have been implementing for the past several quarters, as discussed on previous conference calls. Specifically, we have been actively engaged in growing our loan volume. We positioned our balance sheet for this expected increase in lending by maintaining a sizable pool of liquidity through our securities portfolio and other short-term assets.

The benefits of this strategy were clearly evident in the recent quarter, as we experienced robust credit demand. We have shifted our mix of earning assets into loans from investments, leading to an increase in yield.

At the same time, we have carefully managed the liability side of the balance sheet taking a disciplined approach to deposit pricing, while also increasing our level of non-interest bearing demand deposits, which led to a decrease in funding cost during the first quarter. These positive factors along with firm control of non-interest expenses in continued solid asset quality metrics powered our strong results.

Let me highlight some of our specific accomplishments for the 2012 first quarter. Net income available to common shareholders was up almost 40% to $4.6 million. Earnings per share increased to $0.15 on a diluted basis, up 25%. The rate of increase included the impact of $3.3 million more average shares outstanding, due to our March 2011 equity offering.

Total revenues for the 2012 first quarter were $35.7 million, an increase of $1.5 million from the prior year. In contrast non-interest expenses increased only $744,000 or 3%, due to our rigorous expense management process. Net interest income was up 13%.

As I noted earlier, our yield benefited from the increase in loans in our asset mix, while funding cost declined, due to our liability management efforts. This led to an 18 basis points increase in the net interest margin to 4.07%. Loans and portfolio were up 13% approaching $1.5 billion.

I believe many lending institutions will be pleased to be able to report our pace of loan growth. Loan demand has been strong across our product range, including the mortgage warehouse lending product that we recently introduced. We are seeing increased economic activity among our existing clients and are also actively acquiring new customer relationships.

The loan pipeline remains robust, considering that our loan growth is usually somewhat muted in the first quarter, due to seasonal factors. This strong start to the new year is encouraging. Total deposits were up 15% to about $2 billion at year end, while total assets approached $2.5 billion rising 4%. Non-interest-bearing demand deposits increased to $816 million from $562 million.

Our credit metrics have remained sound. Net charge-offs were $2.9 million for the 2012 first quarter, improving by about 10% from a year ago. The allowance for loan losses as a percentage of non-accrual loans was 314% at March 31, 2012, versus 257% a year ago.

Non-performing assets were 0.32% of total assets at March 31, 2012 about even with a year ago. At the end of the first quarter, our Tier 1 risk-based capital ratio was 12.08%, total risk-based capital was 13.15% and the Tier 1 leverage ratio was 9.77%.Our tangible common equity ratio was 8.17% at March 31, 2012.

In summary, we’re off to a strong start this year. Our business is performing exceedingly well, reflecting significant loan and deposit growth. We have the capital and liquidity to respond to the robust demand for our products and services within our New York metropolitan marketplace and beyond.

And our commitment to serving the needs of businesses and our clients and a track record of providing exceptional service and our portfolio of financial solutions should enable us to continue to gain market share and to deliver profitable growth and increased shareholder value.

Now, I will turn the call over to John Tietjen.

John W. Tietjen

Thank you John, and good morning to everyone on the call. I would like to provide you with additional detail on our performance for the first quarter of 2012. Net income available to common shareholders for the recent quarter rose approximately 40%, compared to a year ago to $4.6 million.

Net income available to common shareholders per diluted share increased to $0.15 for the 2012 first quarter from $0.12 per diluted share a year ago. The 2011 results included dividend and accretion on preferred shares issued under the TARP Capital Purchase Program, which were redeemed in the second quarter of 2011.

As we have noted, in the first quarter of 2012, results benefitted from our strategies to position our balance sheet over growth in loans and to continue to manage deposit costs. At the same time, non-interest expenses were well controlled.

Looking at some key elements of our performance in greater detail, net interest income was $22.4 million for the 2012 first quarter, up 12.8% from a year ago. This increase, primarily reflected higher average loan balances and reduced funding costs.

Total non-interest income was $10.4 million for the 2012 first quarter, compared to $11 million a year ago. This primarily reflected increases in residential mortgage banking income, principally due to increased volume of loan sales, which partially offset decreases in other fees related to accounts receivable management services and lower security gains.

Non-interest income remained an important component of profitability and represented 29% of total revenues in the recent quarter. Non-interest expenses were $23.2 million for the 2012 first quarter. Overall, non-interest expenses increased only $744,000 or 3% from the year ago period, primarily due to increased personal expenses related to the growth of our business, partially offset by lower deposit insurance premiums.

Now, I’d like to provide a perspective on the net interest margin. Net interest margin was 4.07% for the 2012 first quarter, up 18 basis points, compared to 3.89% in the 2011 first quarter.

The margin increases were driven principally by three key factors. First, the yield on earning assets moved higher with the growth in our loan portfolio. Loans were 63% of earning assets in the 2012 first quarter, up from 58% a year ago. And we reclassified interest income from non-interest income. Revenues related to one of our lending products, thereby more appropriately reflecting the characteristics of that product.

Second, we have been disciplined in our deposit pricing. As a result, the cost of deposits declined to 57 basis points from 71 basis points, an improvement of 14 basis points or about 20%. Third, we have experienced a sizable increase in non-interest-bearing demand deposits, which were $254 million higher than in March 2012 versus a year ago.

Turning now to the balance sheet, loans in portfolio at March 31, 2012 totaled $1.5 billion, up 13% from a year ago. Investment securities were $802 million at the end of 2012 first quarter, down from $892 million a year ago. This reflected the shift from investments into loans.

Total deposits at March 31, 2012 were about $2 billion, an increase of 15% from a year ago. Non-interest-bearing demand deposits increased to $816 million from $562 million a year ago, largely due to business development activities that focus on building these types of deposits.

As previously stated, all of our capital ratios continue to exceed well-capitalized requirements. At March 31, 2012 Sterling’s Tier I risk-based capital ratio was 12.08%, total risk-based capital was 13.15%, and Tier I leverage ratio was 9.77%. Tangible common equity ratio rose to 8.17% at March 31, 2012.

Our liquidity remains strong and will support further growth. The ratio of loans held in portfolio to deposits was approximately 73% at March 31, 2012. Coupled with the ability to redeploy investments in short-term investments, this gives us significant capacity to increase our lending activities.

With that let me turn the call back to John Millman.

John C. Millman

Thanks John. Let me conclude by saying that we have all the ingredients in place to continue our strong performance during the balance of this year and beyond. Our strategies are focussed on growing both our loan portfolio and our base of cost effective demand deposits.

We are benefiting from the demand for our products and services from both existing clients and new customers. Our business is supported by solid capital base, and our team of talented professionals is highly motivated to deliver superior service, and build market share.

Now we would be pleased to respond to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question will come from Matt Forgotson with Sandler O’Neill. Please go ahead.

Mark Fitzgibbon – Sandler O’Neill

Hi guys, it’s Mark Fitzgibbon here, how are you?

John W. Tietjen

Great Mark.

John C. Millman

Good morning Mark.

Mark Fitzgibbon – Sandler O’Neill

First question I have for you is about that reclassification, I’m wondering if you could detail for us what the difference was from the fourth quarter to the first quarter, what kind of impact it had, and also if that reclass negatively impact the accounts receivable on factoring fee line.

John W. Tietjen

Yes, it did negatively impact that line. What we have is a product that we call money only product, and the revenue from that product is more appropriately shown as interest on loans not in the accounts receivable fees line. The impact in the first quarter of this year was approximately $900,000. First quarter last year was approximately $300,000 and the fourth quarter amount was approximately $800,000.

Mark Fitzgibbon – Sandler O'Neill

Okay, great and then secondly I know you said, you have a robust pipeline, could you share with us how large that is, and what the mix of loans in that looks like?

John W. Tietjen

Mark, presently the pipeline runs in excess of $300 million. It is really across many of the lines, the warehouse line, our core C&I lending business, our asset-based lending business. So it’s, you know we’re quite encouraged across the full range of our products. Our pull-through rate runs 25% approximately, so we’re talking from the existing pipeline, it is not unreasonable to expect $60 million in growth in loans.

Mark Fitzgibbon – Sandler O'Neill

Okay. And then lastly, how should we be thinking about that mortgage banking income line, is it likely do you think it would be a touch lower in the second quarter?

John C. Millman

I would think that if history holds it would probably be stronger, because the second and third quarters are where we start to see the impact of people, more actively looking for houses.

Mark Fitzgibbon – Sandler O'Neill

Thank you.

Operator

And our next question will come from the line of Collyn Gilbert with Stifel Nicolaus, please go ahead.

Collyn Gilbert – Stifel Nicolaus & Co.

Thanks, good morning gentlemen.

John W. Tietjen

Good morning Collyn.

Collyn Gilbert – Stifel Nicolaus & Co.

John, just a follow up on the pipeline comment, so it’s about $300,000 million now, I think it was just north of $250,000 in the first quarter, and I know you had commented before about that 25% pull rate, so the loan growth didn’t materialize in the first quarter with that formula, did you guys see a higher than expected level of pay downs coming in the first quarter or was it a timing issue?

John W. Tietjen

First of all, the first quarter historically, you may remember, slower then the successive quarters in the year. We did have some meaningful pay downs, but we are very encouraged by the capacity to continue growing the loan book through the successive quarters.

Collyn Gilbert – Stifel Nicolaus & Co.

Okay, so because I know year-over-year loans are up 12% this quarter, which is about where they were in the fourth quarter, so you are seeing some good growth, do you think that would just mean, well let me ask you…

John C. Millman

Go ahead, I am sorry.

Collyn Gilbert – Stifel Nicolaus & Co.

No, no. I thought that – do you think that you can continue with that pace? Do you think 2012 loans can grow, you know you can end the year at 12% higher or even 10% higher than where you were last year?

John C. Millman

Yeah, we have every expectation that the loan growth will continue at double digits.

Collyn Gilbert – Stifel Nicolaus & Co.

Okay that’s helpful. And then John, just on the margin comment, one dynamic I know that occurred in the fourth quarter was the shifting from sort of, some of the warehouse loans, which were carrying a lower yield than the commercial loans, did that same phenomenon happen this quarter?

John C. Millman

I’m sorry. Collyn, I’m not sure I understand what you just said. We didn’t shift the loans into commercial loans. They’re shown in loans to non-depository financial institutions in the queue, but I’m not sure I understand.

Collyn Gilbert – Stifel Nicolaus & Co.

I think that part of the dynamic, if I recall correctly, the yield improvement, the loan yield improvement in the fourth quarter was that you carried more commercial loans than you did mortgage warehouse loans, which carry a higher yield?

John C. Millman

Well yes. That’s true. The commercial outstandings do yield higher than the warehouse lending outstandings.

Collyn Gilbert – Stifel Nicolaus & Co.

So, I just didn’t know, because without seeing the loan breakdown kind of the loan segmentation in the first quarter, I just didn’t – I guess my question is more about the mix, is the similar change in mix occurring in the first quarter to see that kind of loan yield improvement, and I know – aside from the comments that you had just said as to what drove that.

John C. Millman

Yeah, I don’t have the comparison to the fourth quarter. I do have a comparison over the March quarter, but not in the room with me at this point, in terms of the balances.

Collyn Gilbert – Stifel Nicolaus & Co.

Okay. That’s fine. And just on the securities front, are you still – is your appetite to still go a little bit longer on the duration there to pick up some yield?

John W. Tietjen

No. Quite the contrary, we are everyday telling ourselves that we’re going to continue to stay short. And we recognize the price, that we’re paying to do that, but we feel the benefit that it gives us to be able to respond to loan growth outweighs the price that we’re giving up.

Collyn Gilbert – Stifel Nicolaus & Co.

Okay. And then, just one final question on the service charges on deposits. Do you have a sense of how much income you guys are giving up now because of carrying higher non-interest-baring deposits through service fees?

John W. Tietjen

Well, I’ll tell you the – because the balances are up clearly that impacts the levels of services charges, but another factor that goes into that is the earnings credit that we give to those deposits is also reflective of the current interest rate environment. So, the balances are up yes, but it’s somewhat offset by a lower earnings credit.

Collyn Gilbert – Stifel Nicolaus & Co.

Okay. That’s helpful. That’s all I had, thanks.

Operator

And our next question is from Rick Weiss with Janney. Please go ahead.

Richard D. Weiss – Janney Montgomery Scott LLC

Good morning.

John W. Tietjen

Good morning Rich.

Richard D. Weiss – Janney Montgomery Scott LLC

I was wondering, you’ve talked a little bit about your core deposit growth, would that be an effect of the resulting loan growth. I guess is that’s what driving such high deposit growth?

John W. Tietjen

Yes. The one other thing that impacts the growth in demand deposits this March versus March last year is that in March of last year we had, our factoring products were in a separate subsidiary and because of that they were not – the funds that were held for clients were not permitted to be shown in deposits. Whereas that business is now done in the bank and they are shown in deposits and that’s about $90 million of the growth of demand deposits. But having said that, the growth of demand deposits is substantially higher than that based on business development activities.

Richard D. Weiss – Janney Montgomery Scott LLC

Okay, that $90 million that would be in the non-interest-bearing deposit?

John W. Tietjen

Goes into non-interest-bearing deposits that’s correct.

Richard D. Weiss – Janney Montgomery Scott LLC

Okay. And the other question has to do – I guess with capital management you’re well in excess of the ratios, is this like – I guess tangible capital ratio level are you comfortable with and also with the trust preferred does it make sense to redeem that at this time?

John W. Tietjen

Our feeling on capital continues to be what it’s been in the past. We don’t feel that the economy is on solid footing yet. We are growing our loan portfolio. The switch from the investment portfolio could be into loans, could be higher risk-weighted asset levels. So, our thinking is that capital continues to be very, very important to our business plan. And yes we like to get rid of the trust preferreds, but we haven’t yet come upon a more effective way to replace that capital.

Richard D. Weiss – Janney Montgomery Scott LLC

Okay, thank you very much.

Operator

And our next question is from Damon Delmonte with KBW. Please go ahead.

Damon Delmonte – Keefe, Bruyette & Woods, Inc.

Hi, morning, guys. How are you?

John W. Tietjen

Good morning Damon.

Damon Delmonte – Keefe, Bruyette & Woods, Inc.

John a quick question for you, if you could circle back to the margin, what was the actual fourth quarter margin with the reclassification impact?

John W. Tietjen

With the reclass impact, we recorded $377 million, on a restated basis it goes to $390 million.

Damon Delmonte – Keefe, Bruyette & Woods, Inc.

$390 million okay. And as we look out for the next couple of quarters, how sustainable is a plus 4% margin for you guys? Do you think you can maintain above the 4% level or you expect to take on a drift back down?

John W. Tietjen

I wouldn’t expect it to change on a downward way, significantly. Obviously, the benefit of growing the loans has a dramatic impact on it, as does the increase in the non-interest-bearing deposits. So, I would not expect it to go down significantly.

Damon Delmonte – Keefe, Bruyette & Woods, Inc.

Okay, that’s helpful. And then with respect to expenses, the price in seasonal factors in this quarters result, how should you look at the expense base going forward?

John W. Tietjen

I think the expense on a going forward basis, I would look for slight increases as we continue to bring on people that should generate business for us and help continue that loan growth and demand deposit growth.

Damon Delmonte – Keefe, Bruyette & Woods, Inc.

Okay and then tax rate still good on that 30% level?

John W. Tietjen

Still around that same level, yes.

Damon Delmonte – Keefe, Bruyette & Woods, Inc.

Okay great that’s all I had, thank you.

John W. Tietjen

Thank you.

Operator

(Operator Instructions) Our next question comes from Lana Chan, with BMO Capital Markets.

Lana Chan – BMO Capital Markets

Hi good morning.

John W. Tietjen

Good morning Lana.

Lana Chan – BMO Capital Markets

Most of my questions have been answered, just the last one was on professional fees that came down nicely from the fourth quarter, what kind of a level would you assume going forward and is that sustainable?

John W. Tietjen

I think where we are at, based on what we see right now, we would probably be at pretty sustainable level.

Lana Chan – BMO Capital Markets

Okay. Thanks John.

John W. Tietjen

You’re welcome.

Operator

(Operator Instructions) And no further questions from the phone line, I’ll hand the call back to management.

John C. Millman

Thank you operator. As always, we thank you for your interest in Sterling and we look forward to speaking with you in the future.

Operator

Thank you. And ladies and gentlemen this conference will be made available for replay after 12 o’clock today, running through Monday, May 7 at mid-night. You may access AT&T Executive playback service at anytime by dialing 1-800-475-6701 and entering the access code 245048. International parties may dial 1-320-365-3844. Those numbers again 1-800-475-6701 or 1-320-365-3844 with the access code 245048. That does conclude our conference for today. Thanks for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.

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