Sterling Bancorp's CEO Discusses Q3 2012 Results - Earnings Call Transcript

| About: Sterling Bancorp (STL)

Sterling Bancorp (NYSE:STL)

Q3 2012 Earnings Call

November 2, 2012 10:00 AM ET


Edward Nebb – IR

Louis Cappelli – CEO

John Tietjen – EVP and CFO


Matthew Fergusson – Sandler O’Neill and Partners

Damon Delmonte – KBW Inc.

Rick Weiss – Janney Montgomery Scott

Oliver Brussard


Ladies and gentlemen, thank you for standing by, welcome to the Sterling Bancorp 2012 Third 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.

If you should require assistance during the call, please press star, then zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Edward Nebb. Please go ahead sir.

Edward Nebb

Thank you, Kinsom [ph], and thanks to all of you who are joining us this morning. Our news release announcing Sterling’s third quarter 2012 results was issued today prior to the market open and is available on the company’s website at

Before we turn to the discussion of Sterling’s 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 the forward looking statements.

The amounts of any dividends for the fourth quarter of 2012, 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 from the expectations or forward looking statements is contained in Sterling’s annual and quarterly reports filed with the SEC.

We will have introductory remarks today, from Mr. Louis is Cappelli, Chairman and Chief Executive Officer of Sterling Bancorp, and Mr. John Tietjen, Chief Financial Officer.

After management’s remarks, we’ll open up the call to take your questions. And so without further delay, I’ll turn the call over to Mr. Cappelli.

Louis Cappelli

Thank you, Ed. Good morning everyone. Welcome to our conference call for the third quarter of 2012.

Our President John Millman has a respiratory infection and is not in speaking voice today. I would like to begin by saying that our thoughts are with everyone in our area, whose lives, business, and communities were impacted by the storm.

We have had virtually no disruption of our ability to serve customers. In large measure, this is due to the exceptional dedication and efforts of our great Sterling team.

It’s still too early to tell how our clients and customers have been affected. We will accommodate them as needs arise from the storm’s impact.

Sterling has served this region for more than 80 years, and we have every confidence that the city and the region will recover and rebuild, and we will do our part to assist in this effort.

I am pleased to report that Sterling’s results for the third quarter continued the strong momentum that we have seen throughout this year.

Our targeted strategies to deploy our assets in a highly productive and profitable manner, all to meet the needs of small and mid size businesses in our dynamic market place, and to manage expenses and credit quality in a disciplined fashion, all led to a solid performance across virtually many of our businesses.

Our key accomplishments during the quarter included record levels of loans and deposits, double digit earnings growth, an expanding net interest margin, and advancing trends in return on assets and return on equity.

Now let me review some specific third quarter highlights.

Loan growth continued to be robust benefiting from our sharp focus on the needs of business customers and our portfolio of financial solutions.

Loans increased by nearly 13% from a year ago, approaching $1.7 billion, an all time high.

As of today, we continue to have a robust loan pipeline, and ample liquidity to support loan growth.

Deposits increased 9% to 2.2 billion, also a record. Non-interest bearing deposits continue to be a defining strength of Sterling’s business model, and a source of cost efficient funding.

Demand deposits represent over 37% of total deposits at quarter end. Net interest margin has continued to rise versus last year, this is in contrast in many banking institutions whose margins are being pressured by the persistently low interest rate environment.

Our net interest margin for 2012, third quarter, was 4.02%, which is up 12 basis points from the third quarter last year.

This increase largely reflects our ongoing strategy of shipping the asset mix from investments into loans, driving higher yields, as well as growing cost efficient, demand deposit based that I mentioned previously.

At the same time, our financial results have continued to benefit from a balanced and diverse mix of revenue sources so that we’re not dependent solely on net interest income.

Non-interest income generated by our range of financial products and services, was approximately 28% of total revenues this quarter.

We have continued to manage upgrading expenses in a disciplined manner. Non-interest expenses rose only 3% versus the year ago period.

Our credit quality matrix remain strong. Net charge-offs were approximately $900,000 which is less than half of the level of the year ago and represents the lowest volume of charge-offs since 2007.

Non-performing assets at September 30, 2012, was just 0.26% of total assets. The allowance for loan loss as a percentage of non-accrual loans, was 407% [ph].

The level of allowance, the total portfolio loans was 1.3% at the end of 2012, third quarter. Now let me provide some detail on our impressive earnings performance for the 2012 third quarter.

Net income available to common share holders was up 22% from a year ago, exceeding $5.3 million.

This also represented positive sequential trend increase in 10% compared with the prior quarter earnings of $4.9 million.

Diluted earnings for common share was $0.17, in quarter three of this year, compared with $0.14 a year ago. Return on average tangible equity has continued to trend upward.

For the 2012 third quarter return on average tangible equity was 10.32% up from 9.68% for the prior quarter and 8.82% in the third quarter of last year.

I would like to provide further perspective on our loan growth which remains robust and is an important factor in our advancing earnings trend.

Commercial lending has been a primary driver of our loan growth, specifically, commercial real estate lending, is an area where we have selectively expanding, as competing institutions run up against regulatory concentration limits.

We have seen strong demand for commercial real estate lending, in our core metropolitan market place primarily on income producing properties.

We are not doing any land or development loans. Mortgage warehouse financing also continues to be a strong source of growth. We are seeing indicators demonstrating that housing has turned the corner. And our entry into this area has been well time, productive, and rewarding.

Payroll financing continues to benefit from an upturn in temporary employment. In addition to providing funding secured by payroll receivables, we differentiate this product by offering clients record keeping, and a range of other support services.

Our portfolio of business and financial solutions, has given us a variety of ways to benefit from loan growth opportunities that we see in the current environment.

As a result, while these continue to be more aggressive competition in some areas of traditional C&I lending, we have experienced strong loan growth without having to engage in pricing or underwriting practices that we would consider unacceptable.

Another positive development was our acquisition of the business of Universal mortgage in August of this past year, of this current year, excuse me.

Universal is a leading residential mortgage broker with offices in Brooklyn and serves affluent markets such as Brooklyn Heights, Park Slope, Caroll Gardens and the emerging community of Lidensberg [ph].

Its team has consistently been ranked among the highest mortgage producers in the industry. The acquisition complements our existing mortgage banking business and will generate additional mortgage production and mortgage banking fee income.

This transaction also provides our first fiscal presence in Brooklyn, and we have already begun to introduce other Sterling products beyond mortgages in this growing and attractive market.

The universal acquisition is the latest example of Sterling’s ability to capture opportunities in lines of businesses that create value from our existing core capabilities as we have done in payroll financing, mortgage warehouse financing, and other areas.

We are looking forward to continuing our momentum through the remainder of 2012 and beyond.

We are building our long term profitability on a foundation that combines a strong loan pipeline, growing deposits, diverse revenue generation sources, disciplined expense management, and solid credit quality.

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

John Tietjen

Thank you, Louis, and good morning to all on the call. I’d like to provide you with additional detail on our performance for the third quarter of 2012.

Once again, highlighting our earnings growth trend, net income available to common share holders, was up 22% to more than 5.3 million for the recent quarter from 4.4 million a year ago.

Diluted earnings per common share rose to $0.17 for the 2012 third quarter, from $0.14 a year ago.

Looking at some of the key elements of our performance in greater detail, net interest income was 23.8 million for the 2012 third quarter, up more than 5% from a year ago.

This increase primarily reflected higher average loan balances, the shift in our earning asset mix, and reduced funding costs.

Non-interest income represented over 28% of total revenues at $10.5 million for the 2012, third quarter.

We benefited primarily from an increase in residential mortgage banking income due to increased volume of loan sales.

This benefit was offset by decreases in commissions and fees related to accounts receivable management services and lower security gains.

As you note, that we had virtually no impact from the Universal mortgage acquisition in the third quarter, and we will begin to see the benefits of that transaction in terms of higher mortgage banking fees in the fourth quarter. Non-interest expenses were $24.5 million for the 2012 third quarter.

Due to our emphasis on managing expenses, the increase versus last year was only 3%.

This was primarily due to increased personnel and occupancy expenses related to the growth of our business including our Universal acquisition partially offset by lower professional fees. I like to point out that Sterling’s business model and our strategic management of assets and liabilities have positioned the company well in the current interest rate environment.

We have all seen articles, including a recent page one Wall Street Journal story about how margins at many banks are being funneled [ph] by the low rate policies of the US Treasury.

Facing margin pressures, some banks are striving to compensate by developing new sources of non-interest income.

In contrast, as we noted earlier, Sterling has the delivered an increasing net interest margin and has a well established focus on generating non-interest income.

Let’s take a minute to look at both of these areas in some greater detail.

The net interest margin was 4.02 for the 2012 third quarter, up 12 basis points from a year ago period.

Our margin is in the top third of all banks of our asset size. The quarter-to-quarter margin was drive by three key factors. First was the strategic redeployment of our assets in response to loan demand. Average loans were 67% of earning assets in the 2012 third quarter, up from 60 % a year ago.

The difference in yield between investments and loans results in a pickup of 213 basis points. Second, we have continued to be disciplined in deposit pricing. As a result, the cost of deposit dropped to 50 basis points from 62 basis points. Third, we have experienced a sizeable increase in non-interest bearing demand deposits which were $173 million higher on average for the 2012 third quarter versus a year ago.

Overall, our cost of funds including both deposits and borrowings is in the bottom 20% of our peer group. Our diversified revenue base is also a key strength in today’s low interest rate environment. Sterling traditionally generated a substantial portion of our total revenue from non-interest income. We have expanded our range of revenue sources in the past few years with our entry into warehouse financing and just recently with the universal mortgage acquisition. Our solid ratio of non-interest income to total revenues places us in the top four of our peers in diversity of revenue.

In short, we have structured our business with a diverse mix of net interest income and non-interest income that produces balanced revenue base and has enabled us to deliver growing profitability.

Turning now to the balance sheet, loans net [inaudible] discount at September 30th, 2012 totaled $1.7 billion, up 13% from a year ago. Investment securities was $700 million at the end of the 2012 third quarter down from $800 million a year ago.

Again, this reflected the planned strategic shift from investments into loans. Our asset liability management strategies have provided us with a robust level of liquidity that can support our continued loan growth and that contributes to our earnings momentum. Of the $700 million investment pool portfolio that I just noted, approximately $300 million or some 40% is categorized as available to sell, and $200 million of the available for sale portfolio is an instrument with a weighted average life of 1.3 years. This means that we have strong liquidity to fund loan demand without having to sell down the held-to-maturity portfolio.

Total deposits at September 30th, 2012 were $2.2 billion, an increase of 9% from a year ago. The increase in non-interest variant demand deposit which I mentioned earlier was primarily due to our business development and cross selling activities including our policy of requiring demand deposits as part of our loan pricing model.

All of our regulatory capital ratios continued to exceed world capitalize requirements. At September 30th, 2012, Sterling’s tier one risk-based capital ratio was 11.69%, total risk-based capital was 12.82% and the tier one leverage ratio was 9.380%. The tangible common equity ratio was 7.84 % at September 30th, 2012, versus 7.3% a year ago. Book value per common share increased to $7.54 from $7.07 at September 30th 2011.

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

Louis Cappelli

Thanks, John. Let me conclude by saying that we are proud of the exceptional growth and profitability we have delivered for Sterling shareholders in 2012. We feel confident that we’re well positioned to end the year on a strong note and to continue our solid performance in the future.

Now, we will be pleased to respond to your questions.

Question-And-Answer Session


(Operator Instructions) One moment for the first question, please. We will go to the line of Matthew Fergusson [ph]. Can you please state your company and please go ahead.

Matthew Fergusson – Sandler O’Neill and Partners

Hi. I’m with Sandler O’Neill and Partners. Good morning, gentlemen. I’m just trying to wrap my head around the excess liquidity here. If you could, John, can you just repeat what you said, how much liquidity is on the balance sheet? And I think you said the incremental yield was 215 basis points. Is that correct?

John Tietjen

That’s the difference between the yield on the entire investment portfolio and the yield on the entire loan portfolio. If we look at just the, what I call, the highly liquid available for sale component, which is roughly about $100 million, we’re picking up 300 to 350 basis points for that deal.

Matthew Fergusson – Sandler O’Neill and Partners

Okay. Got it. Thank you. And then as far as the loan pipeline is concerned, can you give us a sense of how large it is and its complexion?

John Tietjen

It is about $300 million and it’s spread throughout all of our products.

Matthew Fergusson – Sandler O’Neill and Partners

Okay. And then just finally, I’m sorry, one modeling question, just on, I mean, expense base. It looks like the other expenses was up modestly link quarter and year on year, anything non-recurring in nature going on there?

Louis Cappelli

Not on that particular line. You will see a modest increase in the fourth quarter as we continue to roll in the Universal acquisition but you will also see revenue on the other side.

Matthew Fergusson – Sandler O’Neill and Partners

Thank you.


We will now go to the line of Damon Delmonte. Please state your company and go ahead.

Damon Delmonte – KBW Inc.

Hi. KBW. Good morning, guys. How are you?

Louis Cappelli

Good morning, Damon.

Damon Delmonte – KBW Inc.

Okay, a couple questions here. I think, first, we’ll start off with universal mortgage. Could you kind of help frame up first the expected impact from this acquisition, maybe in terms of what the quarterly volume is or loan originations and what the corresponding gain on sales, those mortgages is?

Louis Cappelli

I could have, Damon, until we had this recent storm, what’s going to happen in the fourth quarter is that all the loans that we have that are not yet funded are going to have to be re-inspected and recertified. So that’s going to slow down our ability to shift loans to investors and these are the investor requirements. And we’ll pick it up in the first quarter of next year but I would expect that we’re not going to see a significant increase in mortgage banking income in the fourth quarter simply because of the impacts and the new requirements of the reinspection brought about by the storm.

Damon Delmonte – KBW Inc.

Okay. That’s kind of understandable. How about from a historical standpoint? What kind of volume were they doing just so we have some idea as of for modeling in 2013?

John Tietjen

I think we’ve indicated in the past that their volume was approximately $300 million, which was about 50% of what our existing volume is in our mortgage division. So it was going to be a fairly significant contributor.

Damon Delmonte – KBW Inc.

Okay. And do you happen to have a gain on sale of what you would expect?

John Tietjen

No, we don’t.

Damon Delmonte – KBW Inc.

You don’t have that. Okay. And then – so, I guess, to kind of follow-up on that expense question. So you said in the other non-interest expense line item this quarter, there was nothing really one time in nature that we would remove but rather, we can expect a little bit higher level of expenses as you fully integrate the Universal Group. So would you say that low $25 million quarterly run rate is fair for the fourth quarter?

John Tietjen

At this particular point, I think that would probably be an accurate number. We have all the fourth quarter adjustment of accrual items and things like that that we deal with. So $25 million would be realistic.

Damon Delmonte – KBW Inc.

Okay. Great. And then my last question is quickly on the margin. On the good days you were able to sustain very minimal compression this quarter, do you think maintaining above foreign [ph] extent level is doable going into the end of the year?

John Tietjen

We do and it will be about the four or three range, I would say is where we expect to come in.

Damon Delmonte – KBW Inc.

Okay. Great. Thank you very much, guys.


(Operator Instructions) We will now go to the line of Rick Weiss. Please state your company and go ahead, sir.

Rick Weiss – Janney Montgomery Scott

Janney. Good morning.

Louis Cappelli

Good morning.

Rick Weiss – Janney Montgomery Scott

I guess, let me start out with the investment securities. It’s 25% of total assets, where would you be comfortable keeping that level at. Would it like in the 15% range, is that enough?

John Tietjen

I would say that if we were around $400 million that would give us enough to be able to satisfy the fledging requirement we have for public deposits and federal home loan bank advances.

Rick Weiss – Janney Montgomery Scott

I see. Okay. And let me go on your margin and specifically with the loan yields. I mean, it’s amazing really how you’ve been able to keep those more or less at all last year. Are you making different kinds of loans or are they riskier or maybe are they longer in term or how do you explain like how you guys are able to do this?

John Tietjen

I think the answer to your question is that they’re definitely not riskier. What we do have is that the mix in the loan portfolio has changed. So if you were to look at the yield on the loan portfolio versus second quarter, we’re down about 13 bips. And the reason for that is because the growth in particularly the warehouse lending product, while on a business basis produces a yield that’s above 5%, on an accounting basis, because many of the fees don’t go into the calculation of the yield, it will actually result in a decrease in the yield.

But the areas of growth in the loan portfolio from third quarter of last year were about $40 million in residential mortgage, and that includes health of sale. About $70 million in commercial real estate and about $130 million in warehouse lending. And again, as I said, the warehouse lending product on an accounting basis will cause the yield on the loans to be lower. But it’s a hell of a lot better that we’d be getting on the investment portfolio.

Rick Weiss – Janney Montgomery Scott

Okay. That’s for sure. Let me just ask on Hurricane Sandy. First, I guess, I hope you guys are okay for that but where do you see the impact this quarter and also longer term?

John Tietjen

Well, as Louis indicated in his remarks, I mean, we believe that we’ll be able to address all the concerns from our customers to the extent that they are reasonable. But the other side of it is that clearly in the mortgage banking area, it will have an impact of deferring some of the revenue that we would have realized in the fourth quarter into the first quarter of next year.

Having said that, we have a strong pipeline. We expect to be able to continue to grow loans. We anticipate that we’ll have double digit loan growth in the fourth quarter consistent with what we’ve done pretty much all year.

Rick Weiss – Janney Montgomery Scott

Okay. And in terms of expenses, are there going to be any added cost for any of the branches. Hopefully, they weren’t flooded out.

John Tietjen

No. We don’t anticipate.

Louis Cappelli

Yes. We were pretty lucky there, Rick. We lost power, we lost some connectivity but no flooding.

Rick Weiss – Janney Montgomery Scott

All right. Well, that’s great. And I guess, my final question is with regards to the low rates, you’ve done a great job in terms of positioning for it. Are you still would be better off if rates do go up eventually?

John Tietjen


Rick Weiss – Janney Montgomery Scott

Okay. All right. That’s all I had. Thank you very much.


We will now go to the line of Oliver Brussard [ph]. Please state your company and go ahead.

Oliver Brussard

[Inaudible] Capital Markets. Just another follow-up on the margins. Do you happen to have the margin by month? Sometimes you guys give it month by month.

John Tietjen

No. I don’t have that with me at this particular point in time.

Oliver Brussard

Okay. Yes. That’s my only question. Thanks.


And speakers, there are no more questions in the queue. Please, go ahead.

Louis Cappelli

There are no more questions?


There are no more questions, sir. Please go ahead.

Louis Cappelli

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


Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and using the 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 All other use is prohibited.


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