Sterling Bancorp's Management Discusses Q2 2012 Results - Earnings Call Transcript

Jul.24.12 | About: Sterling Bancorp (STL)

Sterling Bancorp (NYSE:STL)

Q2 2012 Earnings Call

July 24, 2012 10:00 am ET

Executives

Ed Nebb - IR, Comm-Counsellors, LLC

John Millman - President

John Tietjen - EVP & CFO

Analysts

Mark Fitzgibbon - Sandler O'Neill

Timor Brizola - KBW

Collyn Gilbert - Stifel Nicolaus

Rick Weiss - Janney

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Sterling Bancorp 2012 second quarter conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ed Nebb. Please go ahead.

Ed Nebb

Thank you very much, [Chad Gray]. Good morning everyone and thank you for joining us here at the Sterling Bancorp’s second quarter 2012 conference call. Our results were issued today prior to the market open and we hope you had an opportunity to review the release. The release has also been posted to the company’s website at www.sterlingbancorp.com.

Before we turn to the discussion of the company’s financial results, let me remind you that any comments made today about future financial position or results, dividends, plans objectives or other 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 for the third quarter of 2012 and beyond will depend on the company’s future results of operations, financial condition and other relevant factors and 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.

This morning you will have some introductory remarks from John Millman, President of Sterling Bancorp and John Tietjen, Chief Financial Officer and after their remarks we will open up the call to your questions.

And so without further ado, I would turn the call over to John Millman.

John Millman

Thank you Ed and good morning everyone. Welcome to our conference call for the 2012 second quarter.

Today, we are reporting exceptionally strong operating and financial performance for the second quarter and first half of this year. Our strategy is to position Sterling for profitable growth and increasing shareholder value have produced very positive results. We have demonstrated continued and expanding core earning power driven by a robust loan volume and improving net interest margin of balanced revenue mix, well controlled expenses and solid asset quality metrics.

Let me highlight some of the positive factors that drove our solid performance during the quarter. We continue to deliver double digit loan growth with the portfolio increasing by 15% to approach$1.6 billion. Because we are headquartered in New York City and serve the Metropolitan area and beyond, we operate in one of the most attractive and dynamic regions in the country and we have benefited from positive economic trends in our market.

In addition, since Sterling offers a portfolio of financial products, we have been able to take advantage of a range of growth opportunities to serve the needs of small and midsized businesses. I will have more to say of our performance in the current lending environment in a few minutes, but first let me cover a few specific highlights of our second quarter performance.

Total deposits exceeded $2 billion. The real growth story here has been in the non-interest bearing demand deposits which increased 30% to $786 million. The high ratio of demand deposits which is approaching 40% contributes further to our extremely favorable cost advance which is among the lowest of our bank peers. We are experiencing an improving net interest margin even though we remain in a persistently low interest rate environment.

The NIM for the 2012 second quarter was up 14 basis points from the same period of 2011 to 4.04%. The improvement was largely due to our continuing strategy of shifting the asset mix from investments into loans driving higher yields as well as a growing cost effective demand deposit base and our ongoing control of deposit costs.

Sterling’s earnings power has also benefited from our balance of revenue mix, which includes a significant level of non-income generated by a range of financial products and services. The fact that our non-interest income is nearly 30% of total revenues helps to balance out the effect on loan yields from the low interest rate environment.

At the same time, we have maintained firm control on non-interest expenses, which were up $388,000 or less than 2% this quarter, versus an increase of about $1.4 million or 4% in total revenues.

Our credit metrics have continued to improve from an already solid base. Net charge-offs fell to $1.7 billion or 0.43% of loans for the 2012 second quarter, which is the lowest level of net charge-offs since the third quarter of 2008.

Non-performing assets at June 30, 2012 were just 0.28% of total assets. The allowance for loan losses as a percentage of non-accrual loans was 377% at June 30, 2012. The level of allowance to total portfolio of loans was 1.35% at the end of the 2012 second quarter, essentially even with the year ago. These factors led to impressive earnings growth for the 2012 second quarter.

Net income available to common shareholders was almost double the year-ago level at $4.9 million. Earnings per share also doubled versus a year ago to $0.16 for the 2012 second quarter. Our return on average tangible equity for the 2012 second quarter approached 10% which compares very favorably to our bank peer group.

Now I would like to give you some additional perspective on our loan growth which remains extremely robust and this is an important factor in our expanding earnings capacity. As you know Sterling has a diverse portfolio of credit products and services, particularly in contrast of most of our bank peers. This breadth of products has served us very well in the current environment. We also have a track record of seeing and seizing upon opportunities that maybe overlooked by others.

As a result, while we have seen more competition in traditional C&I lending in the second quarter, we’ve been able to drive a high-level of loan growth across a range of other products. For example, our mortgage warehouse finance business continues to do very well. Since entering this field two years ago, we have take advantage of the opportunity that still abides to this type of lending.

Recently, we have been expanding our commercial real-estate lending activity while a number of other banks in our market have reached to lending amendments in commercial real estate, bringing both the capacity and the expertise to take advantage of this opportunity. Our interest in this type of lending also reflects the fact that loan-to-value ratios have come down to more reasonable levels and valuations have decreased from previous session highs.

In a related move, in late June, we purchased approximately $40 million of participations and seasoned high performing low loan-to-value commercial real-estate loans originated at favorable market rates by other banks in our market area; each participation was underwritten by us as though it was our own origination.

Within our C&I lending category, we are seeing a growth in payroll financing, caused by the improvement in temporary employment. As you know, companies typically turned to temporary employees as the economy improves rather than hire full time staff, so we see this as a positive leading indicator.

Reflecting the diverse opportunities I just mentioned our loan pipeline remains robust. I would add that because we have a range of products to offer we can sustain solid volume without coming to trade off price, we choose not to compete on price in the more competitive corners of the market.

In summary, the second quarter and first half of 2012 have been extremely strong for us. We expect our profitability continue to benefit from our expanding loan volume, stable net interest margin and continued discipline over expenses and credit quality.

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

John 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 second quarter of 2012.

Net income available to common shareholders was up 94% to $4.9 million for the recent quarter to $5 million a year ago. Net income available to common shareholders per diluted share rose to $0.16 for the 2012 second quarter from $0.08 per diluted share a year ago.

The 2011 results included dividends and accretion on preferred shares issued under the TARP Capital Purchase Program which were redeemed in April of 2011. Pretax pre-provision income grew significantly to $9.75 million for the recent quarter from $8.34 million a year ago, an increase of 17%.

As we have noted, the second quarter of 2012 results benefited from our loan growth which was driven by our business development activities and also reflects our strategy to shift the asset mix from investments to loans.

Looking at some of the key elements of our performance in greater detail, net interest income was $22.9 million for the second quarter, up 7% from a year ago. This increase primarily reflected higher average loan balances, the shift in our earnings asset mix and reduced lending costs. These benefits were partially offset by a lower yield on loans reflecting the mix of loans held in portfolio.

Total non-interest income represented a strong 29% of total revenues and rose to $10.7 million for the 2012 second quarter. This primarily reflected an increase in residential mortgage banking income primarily due to increased volume of loans sold, as well as higher deposit service charges. Lower fees related to accounts receivable, management and other factoring services and lower security gains also impacted non-interest income.

Non-interest expenses were $23.8 million for the 2012 second quarter. The modest increase which was less than 2% compared to a year ago was primarily due to increased personnel expenses related to growth in our business as well as higher professional fees. This was partially offset by lower deposit insurance.

Now I would like to provide some detail on the growth of our net interest margin. Net interest margin was 4.04% for the 2012 second quarter, up 14 basis points from the same 2011 period. The margin increase was driven by three key factors.

First as we've mentioned was the low growth of our loan portfolio. Loans were 64% of earning assets in the 2012 second quarter up from 58% a year ago. The plan shift to loans from investments resulted in a pick up of approximately 300 basis points.

Second, we have been disciplined in our deposit price. As a result, the cost of deposits declined to 53 basis points from 64 basis points the same period a year ago.

Third, we have experienced a sizeable increase in noninterest-bearing demand deposits which were $214 million higher on average for the 2012 second quarter versus a year ago.

I should point out that we have performed very well in the prevailing low rate environment. The balance sheet remains asset sensitive and our earnings would benefit significantly from higher rates.

Turning now to the balance sheet, loans and portfolio at June 30, 2012 totaled $1.57 billion, up 15% from a year ago. Investment securities were $7.27 million at the end of the 2012 second quarter down from $900 million a year ago. This reflected the plan shift from investments in large.

Total deposits at June 30, 2012 were over $2 billion, an increase of 2% from a year ago. As we mentioned, noninterest-bearing demand deposits increased to $786 million from $602 million a year ago.

This was largely due to our business development and cross selling activities including our policy of requiring demand deposits as a result of our loan pricing model that focuses on building interest free deposits.

All of our regulatory capital ratios continue to exceed well capitalized requirements. At June 30, 2012 Sterling’s tier one risk based capital ratio was 11.81%, total risk based capital was 12.89% and tier one leverage ratio was 9.58%. Tangible common equity ratio was 8.09% at June 30, 2012 versus 7.67% a year ago. Our liquidity remains strong and will support further growth. The ratio of loans held in portfolio to deposits was approximately 76.6% at June 30, 2012.

Coupled with the ability to redeploy investments in short-term categories, this gives us a significant capacity to continue to increase our lending activity. With that, let me turn the call back to John Millman.

John Millman

Thanks John. Let me sum up by saying that we feel very confident in Sterling’s prospect as we enter the second half of 2012.

Our earnings however continue to be driven by our balanced loan mix, stable margin, cost discipline and solid credit metrics. We remain as always committed to serving our clients and customers, growing our business and building shareholder value.

Now, we would be please to respond to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Mark Fitzgibbon from Sandler O'Neill. Please go ahead

Mark Fitzgibbon - Sandler O'Neill

First couple questions I had related to the loan pipeline. First, could you tell us how big the pipeline and is that the strength in the pipeline is mostly from taking market share or is it existing customers really growing their lines?

John Millman

Mark, today, the pipeline is about $320 million, probably in excess of that. Most of the pipeline opportunities overwhelming majority are new relationships. You have to constantly keep in mind the various small market share we have and compare that to the [debt] of the market. So a great percentage of our growth is always in new relationships and the pipeline is representative of that opportunity.

Mark Fitzgibbon - Sandler O'Neill

Okay. And then of the loan growth you had this quarter, what did the mix of that look like from a sort of whether it’s C&I or what was sort of the mix of the loan growth?

John Millman

The mix primarily was in loans to non-depository financial institutions and commercial real estate.

Mark Fitzgibbon - Sandler O'Neill

Okay. And then on the pool of participations you mentioned at the end of the call, how big is that pool and is that multifamily or traditional commercial real estate and did you buy the loans at par or a premium or discount?

John Millman

We bought participations, they are all participations. It’s a conditional portfolio of commercial real estate and average life of five years or less. Some multifamily pricing we thought was represented an extraordinary opportunity because of the pressures in some institutions we see in the marketplace, but they were all participations all at par obviously.

John Tietjen

Little more on that Mark. The range of loans was $1 million to $5 million and the range on pricing was 4.5 to 6.25.

Mark Fitzgibbon - Sandler O'Neill

Okay. And then one last question on expenses, how should we be sort of thinking about expense growth going forward, do you have sort of bogie in mind for 2012 and beyond?

John Tietjen

Well I think the level that we have for expenses as we have indicated is been moderate in terms of increase. As a matter of fact, the increase in professional fees for this quarter was about 6000 hrs 400 of that was the result of an expense that we had from a legal firm on a loan that we collected out. So we wouldn’t expect necessarily to see that recurring every quarter, but having said that we continue to invest in people that will help us develop business. So I would say that $23 million to $24 million rate on expenses is probably where we are going to be for a while.

Operator

Your next question comes from the line of Damon Delmonte from KBW. Please go ahead.

Timor Brizola - KBW

This is actually Timor Brizola with KBW. Just a couple of follow-up questions on the purchase participations, how many loans comprise that $40 million balance?

John Tietjen

It was about 16.

Timor Brizola - KBW

And then on the loan growth this quarter, was it concentrated in any particular industry or is it kind of spread across?

John Tietjen

No it spread across all the different industries that we have in the portfolio.

Timor Brizola - KBW

Okay, next on the mortgage warehouse business. What's the current balance of that business right now?

John Tietjen

Current balance is about $205 million.

Timor Brizola - KBW

And how has that changed from the first quarter?

John Tietjen

On average it's up about 10% from the first quarter. I don't have a period in the first quarter balance, but on average it's up about 10%.

Timor Brizola - KBW

Okay, and then for the entire portfolio you are still comfortable with the guidance of double-digit growth for 2012.

John Tietjen

Yes, we are.

Timor Brizola - KBW

Okay. Lastly just on the mortgage banking pipeline, can you maybe compare that to where it was at the first quarter and just maybe talk a little bit about the sustainability of mortgage banking fees going forward?

John Tietjen

Well, we believe that based on what we are seeing now that the level of mortgage banking income for the second quarter should be able to be sustained for the third and fourth quarter of this year. I don't have exact pipeline numbers.

Operator

Your next question comes from the line of Collyn Gilbert from Stifel Nicolaus. Please go ahead.

Collyn Gilbert - Stifel Nicolaus

Just wanted to, most of my questions kind of surround the margin. The growth that you saw this quarter, the balance sheet growth or loan growth, did that come more late in the quarter?

John Millman

Well, the participations were June, late June, so that's certainly late in the quarter.

Collyn Gilbert - Stifel Nicolaus

Okay, so that $40 million was, at least that tranche was late in the quarter, okay. And then John do you happen to have a monthly margin for June?

John Tietjen

It's approximately what it was for the first quarter, Collyn, it's about 4.06. Yeah 4.06.

Collyn Gilbert - Stifel Nicolaus

So the monthly margin was actually higher than for the quarter.

John Tietjen

Yes, but you know again, I don’t believe you can actually look at any one month because of what happens in a particular month for the mix of loans. Having said that, we do have this approximately $40 million of loans that went on at the end of the quarter which should have a beneficial impact on the margin in the third quarter.

Collyn Gilbert - Stifel Nicolaus

Do you happen to have what you are -- if we look at the commercial and the resi, what new (inaudible) versus what's rolling off?

John Tietjen

No, I am sorry. I don’t have it.

Collyn Gilbert - Stifel Nicolaus

Okay, so when you talk about, John, if I heard you correctly, 300 basis point tick up from the shifting from investments to loans, that's what you saw this quarter?

John Tietjen

Yes, we’re coming ahead of a relatively short corporates with the yields on a blended basis of around 2%, a little bit higher and moving into loans with the blend of 5 and change.

Collyn Gilbert - Stifel Nicolaus

Okay, so do, you still anticipate that shift continue at least through the balance of the year or how should we think about how low you could bring that securities portfolio, looks like securities and cash now comprise about 35% of your earning asset base. Do you anticipate or could you see that dropping to 20% or just trying to understand how long this balance sheet dynamic could go?

John Tietjen

We have almost $200 million of corporates and about another $50 million of other treasury type loans that are in the loan portfolio actually, which could be shifted out in to the traditional types of lending that we do. So we've got plenty of capacity to do that.

Collyn Gilbert - Stifel Nicolaus

Okay, this margin should, I mean, if you gave guidance, I didn’t hear you, but the margin should, you think you should be able to keep the margin elevated at this 405, 406, 407 level?

John Tietjen

I would say that margin will be relatively unchanged from where it was in the second quarter with a slight bias to a slight improvement.

Collyn Gilbert - Stifel Nicolaus

Okay, and then just one final question, what's going on in the other income line that it is running so much lower this year than it was last year, these last two, it was 22,000 this quarter, it was a loss of 62,000 in the first, but then the first two quarters of last year was 700 and then 300?

John Tietjen

Well, I think if you look at the income statement that we have with the financials that we just released, the other income line there which is different than the one that’s in the 10-Q, we’re down about 200,000 in other income and that could be a single item that came in last year that we don’t have this year.

Collyn Gilbert - Stifel Nicolaus

Okay, it’s just running a fraction of where it was prior. I am just trying to, it’s a big number, so I am just trying to figure out if, thinking about it going forward, if this is a line item that would contribute that 200,000 or so of income or so I guess what you are saying is maybe it’s more normalized at the $200,000 level than what we have seen in the last two quarters?

John Tietjen

Well, that's it for instance. In the press release we break out income on life insurance and in the 10-Q we don’t break that out and the difference there is 400,000 year-to-date basis. I am looking at a drift of the Q and the other income for the second quarter of this year that will be in the Q is up 200,000 for the quarter and it’s down about 200,000 for the six months. So maybe we can talk off line.

Collyn Gilbert - Stifel Nicolaus

Okay. That’s fine.

John Tietjen

Which one you are looking at?

Operator

(Operator Instructions) The next question comes from the line of Rick Weiss from Janney. Please go ahead.

Rick Weiss - Janney

Just wondering if you can talk a little bit about the bank deposits and the non-interest bearing, where are they coming, from new customers?

John Millman

Yes, they come from business development efforts. So as you know we do a lot of business with service-oriented firms, with law firms, with accounting firms, with real estate management firms and these are all very substantial sources of demand deposits and we also in every borrowing relationship, we acquire demand deposits. So as you see loans growth and deposits will grow and independent of that we have a very strong effort to raise demand deposits as part of our business generation efforts.

John Tietjen

Rick, the other thing that I would remind everybody on the call about is that in the fourth quarter last year we moved the factoring into the bank and as a result of that reclassified certain balances up into demand. The impact looking at June versus June is about $90 million as a result of that. So it's in June of this year, it's not in June of last year because the factoring business was not in the bank in June of last year.

Rick Weiss - Janney

Okay I see and still impressive growth, are you still, is it still the lending side that drives the deposits and if you establish the relationships that come with it, is that a way of looking at it?

John Millman

The meaningful part that is a, the meaningful but in addition to that we have bankers who are focused on generating demand deposits from very specific sources and we constantly work those sources.

Rick Weiss - Janney

And John, what do you think will happen if and when interest rates go up, will those demand deposits stay there?

John Tietjen

That's a great question. My personal view is that there will be more sensitivity on the part of clients and you will see them take advantage of interest lending opportunities. So it will be little bit harder for demand deposits although you know for the various rate cycles, we have a history of having a very high level of demand deposits. But they may not grow as rapidly in a rising rate environment as we are seeing now.

Rick Weiss - Janney

And I guess my other question is in terms of model, what tax rate would you willing to use in the foreseeable future?

John Millman

I would use the tax rate for the second quarter which is about 29%.

Operator

And at this time there are no further questions.

John Millman

Thank you, operator. We also thank you for your interest in Sterling. We look forward to speaking with you again in the future.

Operator

Ladies and gentlemen, this conference will be available for replay afternoon Eastern Time today through August 7th. You may access the AT&T teleconference replay system at anytime by dialing 1-800-475-6701 and entering the access code 254258. International participants dial 320-365-3844. Those numbers once again are 1-800-475-6701 or 320-365-3844 with the access code 254258. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!