Ed Nebb - IR
John Millman - President
John Tietjen - CFO
Alan Altman - Private Investor
Sterling Bancorp (STL) Q1 2008 Earnings Call April 24, 2008 10:00 PM ET
Welcome to the Sterling Bancorp first quarter 2008 conference call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference is being recorded today, Thursday, April 25, 2008.
I would now like to turn the conference over to our host, Mr. Ed Nebb. Please go ahead.
Thank you very much, Liz, and good morning, everyone. Thank you for joining us today. Our news release announcing Sterling's first quarter 2008 results was issued today prior to the market and we hope that you've had an opportunity to review it. The release has also been posted to the Company's website at www.sterlingbancorp.com.
Before turning to the discussion of the 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 such forward-looking statements.
The amounts of any dividends in 2008 and beyond will depend on the Company's future results of operations, financial condition and other relevant factors. A discussion of factors that could cost actual results to vary is contained in Sterling's annual and quarterly reports filed with the SEC.
Joining us today for the conference call are Mr. John Millman, President and Mr. John Tietjen, Chief Financial Officer. After our remarks we will open up the call to your questions. And so without further delay, I'll turn the call over to John Millman
Thank you, Ed. Good morning, everyone and welcome to our 2008 first quarter conference call. We're quite pleased to report that Sterling is off to a strong start for 2008. Our favorable results stand in rather sharp contrast to the turbulence that we're seeing in the economy generally and the challenges faced by many financial institutions in particular.
The growth of our business during the first quarter reinforces our confidence that Sterling is well-positioned to be a beneficiary of the current market environment. We continue to believe that our strong capital, liquidity and commitment to superior personalized service are significant competitive advantages at a time when many institutions in our market are growth-constrained.
Now let me highlight some of our key achievements for the 2008 first quarter. Our earnings per share increased by 22%, rising to $0.22 from $0.18 in the first quarter of 2007, net income was $4 million, up 15% from $3.5 million a year ago. The increase in profitability was the result of several factors including the growth of our lending activities, our efforts to maximize the net interest margin by carefully managing assets and liabilities, strict control of operating expenses and our sustained credit quality.
Loan growth was a strong 6.9% year-over-year, bringing total loans held in portfolio net of unearned discount to $1.16 billion at the end of the first quarter. Most areas of the business contributed to our solid growth. We are continuing to experience robust loan pipeline which remains about at the highest level that we've seen over the past several quarters.
We also continue to grow core demand deposits which increased by 7.1% to $494.3 million. Demand deposits represent 33% of total deposits which continue to be among the highest ratios of demand to total deposits in the industry. The net interest margin increased to 4.39% from 4.24% a year ago.
We were able to expand the margin at a time of sharply declining interest rates largely through the growth of our earning assets, as well as a highly disciplined effort to control our cost of funds. As a result, we have been able to achieve a relatively significant improvement in funding costs while moderating the impact on earning assets of the Fed's rate reductions.
To a large degree, our ability to control funding costs is a direct result of Sterling's longstanding commitment to superior customer service. Because customers often perceive the high value of our responsive attentive approach to their financial needs, they have generally been willing to maintain sizable deposit balances without our need to pay unrealistically high rates.
We are especially proud of our continued high asset quality which sets Sterling apart from many institutions in the current economic environment. Our ratio of non-performing assets to total assets was 0.42% at the end of the first quarter, a slight improvement over the 0.43% ratio a year ago. Annualized net charge-offs were 55 basis points of average loans held in portfolio for the most recent quarter versus 0.68% a year ago.
We did experience some valuation adjustments in the mortgage banking portfolio due to the prevailing illiquid market conditions and also recorded modest losses on sale of certain OREO properties. The stability of our loan portfolio reflects our stick-to-our-knitting approach to lending activities as well as prudent underwriting and risk management processes.
As we noted in the past, Sterling has minimal exposure to sub-prime mortgages, consumer debt, home equity loans, credit card receivables, auto loans and many other assets that have recently posed higher risks.
Sterling paid a cash dividend of $0.19 per common share on March 31, 2008. At a time when many financial institutions have been obliged to reduce or suspend their dividends, we have been consistent in our commitment to this important component of shareholder value. Our current dividend yield is approximately 4.8% and our track record of uninterrupted dividends now spans 249 consecutive quarters, over more than 62 years.
In summary, Sterling is in a unique position in the current market. While other financial institutions are paying for past mistakes, we are focused on future growth. We believe that our marketplace today offers exceptional opportunities for a company such as Sterling.
Many financial institutions that would normally compete for our traditional customer base aren't able to do so now, either because of asset quality programs, or the distraction of recent mergers.
In contrast, we have strong capital and liquidity to support our customers' financing needs; we have never lost our focus on serving the businesses in our market. We are pleased with our performance in the first quarter, and we are confident in our ability to provide the new opportunities in our market in the months to come.
Now I'll turn the call over to John Tietjen who will discuss the key developments for the first quarter ended March 31, 2008.
Thank you, John. Clearly a key factor affecting all financial institutions has been the Fed's action to reduce interest rates which are 300 basis points lower than at the end of last year's first quarter. Sterling has carefully managed its balance sheet to mitigate the effect of this change on our assets, while taking advantage of opportunities to lower our cost of funds.
Looking specifically at the key components of our increase in earnings for the first quarter, net interest income on a tax equivalent basis was up 13.1% to $20 million. The increase in net interest income primarily reflected the growth of interest income generated by higher loan and investment securities balances, coupled with lower funding costs due to the Fed's action on interest rates. And the Company's decision to employ to wholesale funding rather than relying on higher priced certificates of deposit.
Interest earned on loans was $20.8 million for the first quarter of 2008, a decrease of $4.2 million. Average loan balances increased 4.9% to $1.1 billion for the quarter primarily due to our business development activities. However, due largely to the Fed's action to reduce interest rates, the yield on the loan portfolio decreased to 7.80 in the first quarter of 2008, compared to 8.66 for the same period of 2007.
Income from investment securities increased 32% from a year ago to $9.1 million. This largely reflected the growth in average outstandings to $720 million from $579 million. The yield on the investment securities was 5.03 for the first quarter of 2008, compared to 4.73 a year ago.
Interest expense for deposits decreased approximately $2.5 million, primarily due to the steep decline in market rates as well as our strategy to control funding costs by relying on relatively economic gold borrowed funds rather than high cost CDs.
Average balances of interest-bearing deposits were essentially flat at $1.0 million for both periods. The average rate paid on interest-bearing deposits was 2.75, down 100 basis points from the year ago period.
Interest expense on borrowed funds increased $800,000, from 2007 first quarter, again reflecting our funding strategy. This reflected a $160 million increase in average borrowings to $330 million, largely offset by a 159 basis point drop in the cost of borrowed funds.
Non-interest income was $8.7 million for the first quarter 2008 decreasing from $9.2 million for the same period last year. The decrease principally resulted from lower mortgage banking income due to valuation adjustments caused by current market conditions, lower volume of loans sold and higher losses on sales of other real estate owned.
Non-interest expenses for 2008 were $20.2 million, an increase of just $2.7 million year-over-year reflecting higher salaries, benefits and occupancy expenses. It's important to note that this number compares to $20.5 million for the fourth quarter of 2007.
With that I would like to turn the call back over to John Millman for some concluding remarks.
Our solid performance for the first quarter reinforces our belief that, notwithstanding today's challenging financial market, there are significant opportunities for an institution such as Sterling. In particular we note that many customers in our market are facing a credit vacuum as their traditional financing sources have withdrawn from active lending, either because of capital constraints, or a change in priorities due to a merger.
In contrast, Sterling has maintained our traditional high-level of personalized customer service and has remained a dependable source of funding for our customers. This has translated directly into the ability to grow our business, control our funding cost and reserve a high level of asset quality.
Strong capital liquidity and a culture of superior service, we are not merely seeking to manage through the current challenging period, but rather to grow and to thrive. We look forward to capitalizing on the opportunities presented by the current environment and to reporting continued progress in the months ahead.
Now we would be pleased to respond to your questions.
And our first question comes from the line of [Alan Altman], which is a private investor. Please go ahead.
Alan Altman - Private Investor
Alan Altman - Private Investor
I had a question about your trust capital securities issued February 2002 for 8.375%, and they were callable as of March 31, 2007. And I know that you bought back $196,000 in the market in 2007. Do you have any plan to call on the rest of them?
At this point, I think that many other institutions, including us are looking at the preservation of capital as a prudent step in managing their business. So I think I would answer your question by saying that our current plans do not include any repurchases.
Alan Altman - Private Investor
Are you buying back any in the open market this year?
At this point, I think we're looking to preserve capital and probably will not be buying any back.
Alan Altman - Private Investor
Okay. Thank you very much.
And we have no further questions. Please continue.
Thank you, operator. Ladies and gentlemen, it appears there are no further questions, so we really want to tell you we appreciate your time and look forward to speaking with you again at the end of the next quarter.
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