Sterling Bancorp

Jack Kopnisky - CEO Luis Massiani - CFO

David Darst - Guggenheim Securities Collyn Gilbert - Keefe, Bruyette & Woods

Thank you. Good morning, everyone, and thanks for joining us today to discuss our quarterly results.

Joining me today on the call is Luis Massiani, our Chief Financial Officer. Before we start, going to our results, let's begin by discussing our fiscal year-end.

We will be changing our fiscal year-end from September 30th to December 31st effect of as of this fourth calendar quarter. We will file a file a transition 10-K in March 2015 which will include audited financial results for the quarter ended December 31, 2014.

We believe this change will assist shareholders, investors and analysts in reviewing our financial results and evaluating our performance. Now let's discuss this quarter’s results.

We continue our progression of delivering strong core operating results driven by solid revenue growth and expense control. Excluding the impact of merger related expenses and other charges core earnings were $19.6 million and core earnings per diluted share were $0.23, representing an 8% increase over last quarter’s earnings.

Core revenue growth was 3.2% and core expenses increased 1.9% over the linked-quarter. The improvement in our core operating and profitability ratios was significant and again to position us a high performing company.

Our net interest margin was 3.7%, compared to 3.77% in the linked-quarter and 3.58% in the fourth quarter of 2013. Our core return on tangible equity improved 62 basis points to 14.42% and our core return on tangible assets improved by 7 basis points to 113 basis points over the linked-quarter.

Core efficiency ratio improved by 70 basis points to 54% and we continue to drive positive operating leverage in this model. We continue to experience strong loan growth across notable commercial asset classes.

Commercial loans grew $94.4 million for the quarter, representing a 9.6% annualized growth; year-over-year commercial loans have grown by almost $700 million which represents growth of 20.5%. Please note that our total loan balances in the quarter were impacted by the sale of approximately $43 million of residential mortgage loans which Luis will discuss further.

As of December 31, 2014, total deposits were $5.2 billion. We continue to enjoy the benefits of a great deposit base with close to 90% core deposit balances and a weighted average cost of deposits of 21 basis points.

Non-interest income excluding security gains was $14 million, which represented approximately 18.9% of total revenue. We are very focused on diversifying and improving our revenue mix and continuing to invest in specialized lending businesses there are also fee income generator.

We are completing the acquisition of a specialized payroll finance service provider by February 2015. Luis will talk a bit about this opportunity in a second.

Credit quality continues to improve, charge-offs were 10 basis points for the quarter. Non-performing loans declined by $4.3 million to $46.6 million.

During the quarter, we announced a merger with Hudson Valley Holding Company. Hudson Valley provides us with a terrific opportunity to create significant positive operating leverage by putting their excess liquidity and cost effective funding into work while reducing the expense space.

We're on target for a second quarter 2015 closing. We're excited about the opportunity to take the combined the company to the next level of performance.

Hudson Valley is a very terrific franchisee that we look forward to leveraging our class of competencies that will result in a $10 billion mid-tier regional bank metropolitan New York marketplace. Now let me turn the call over to Luis to detail the financial performance.

Thank you, Jack, and good morning everyone. Our GAAP diluted earnings per share were $0.20 for fourth calendar quarter, up from $0.19 for the linked-quarter.

On a core operating basis, our diluted earnings were $0.23 compared to $0.22 for quarter ended September 30. I will discuss the reconciliation of our GAAP and core result on the next slide.

Total assets increased $87 million to $7.4 billion at December 31. Based on ended of period balances total loans grew $55 million in the fourth calendar quarter.

Based on average balances the increase in total loans was $175 million. On the top right of the chart you can see the impact of our strategy of rebalancing earnings assets from securities to higher yielding loans.

Year-over-year total loans have grown by over 16% while securities have grown by 3.1%. We continue to focus on making our balance sheet more efficient.

On the bottom of the page, we detail our key performance metrics, which showed strong progress across the board. Net interest margin was 3.7% for the December quarter, which represented a 7 basis point decline from September.

Included in interest income was $1.2 million of the accretion of the credit mark on the legacy Sterling Bancorp and Gotham acquired loan portfolios. This compares to $1.7 million of accretion in September.

Excluding the impact of the credit mark accretion, net interest margin was 363 basis points for the December quarter compared to 367 basis points for the September quarter. The main driver of the decrease in organic NIM was a higher average cash balance as the seasonal peak in our municipal deposit balances resulted in higher cash balances in the beginning of the fourth quarter.

Our asset quality performance was strong, with charge-offs against the allowance of $1.2 million versus charge-offs of $1.1 million in the prior quarter. For the quarter charge-offs represented just 10 basis points of total loans.

We continue to add to our allowance for loan losses and our provision expense was $3 million driven by the need to provide for the organic loan growth we had during the quarter as well as loans included in the allowance that used to be covered by the credit market. Our core profitability ratios continue to improve.

Core return on average tangible assets was 1.13% and core return on average tangible equity was 14.4%. We are making steady progress towards achieving our long-term performance goals.

Turning to Slide 5, let’s look at our core EPS metrics in more detail. We continue to make progress on the three key strategic initiatives we have previously outlined.

These are the integration of legacy Sterling Bancorp, the consolidation of our financial centers and other real-estate locations and the conversion of our core banking systems For the quarter, our reported GAAP earnings per share were $0.20 and core earnings per share were $0.23. Results were impacted by the following pretax items charges associated with our banking systems conversion of approximately $1.4 million, a $610,000 charge for the closure and disposal of certain facilities.

A charge of approximately [$455,000] for the change in our fiscal year end, merger related expense of approximately $500,000 related to the Hudson Valley merger and a pre-tax charge of $859,000 million for the amortization of non-compete agreements recorded in connection with the legacy Sterling merger. This amount declined from the linked-quarter have some of these agreements have now expired.

We completed the conversion of our banking systems on November 8, and the incremental expenses associated with this significant undertaking are now largely behind us. This new operating platform really positions us well for long-term sustainable growth.

On Slide 6, let’s look at our loans and deposits. Total loans grew $55.2 million in the quarter and on an average basis increase by $175 million or just over 15%.

We continue to have the business spread across C&I, CRE and consumer asset classes. The yield on loans declined 9 basis points to 4.74%, largely the result of lower accretable yield in the quarter.

Our total deposits were $5.2 billion; we continue to maintain significant balances in non-interest demand accounts which represent 30% of our total average deposit base. The total cost of deposits was 21 basis points.

Going forward, our strategy will be to continue growing our commercial and retail transaction deposits. The addition of Hudson Valley will provide us with immediate significant excess liquidity and further augment our ability to capture low cost deposits to fund our loan growth.

Turning to Slide 7, we provide greater detail on our loan portfolio, which experienced continued good growth. The table includes data for end of period balances for each of our loan categories.

Total C&I loans increased by $70 million even though stock balances experienced a decrease in warehouse lending and factoring due to seasonality. Total commercial real-estate loans increased by $30 million over the linked quarter.

Year-over-year CRE loans grew by almost $275 million which represents approximately 17.5% growth and is in line with the targets we have set. Our pipeline of commercial loans is robust and we will obviously continue to choose credit with higher margins and strong credit characteristics.

Regarding consumer assets, total balances decline by 44 million mainly driven by the sale of 43 million in residential mortgage loans which were previously held for investment. We have started to reposition our balance sheet and anticipation of the merger with Hudson Valley and we’ll continue to identify opportunities to trim consumer balances that can be redeployed into commercial relationships.

On Slide 8, let's look at our fee income. Total fee income was 14 million, which represented an increase of 1.7 million relative to the prior quarter.

Mortgage banking income increase 698,000, we realize an increase of 320,000 in factoring and payroll finance fees, a 353,000 increase in title insurance income and a 233,000 in bank owned life insurance. Mortgage banking close 2014 with a strong quarter with total close commercial of approximately 170 million.

Mortgage banking income also benefited from the sale of 43 million in residential mortgage loans. After divesting sales commissions and to further origination fee, the net gain on sale was approximately 400,000.

Our specialty finance business is our key differentiator for us, I don’t believe these assets, these are asset classes that allow for more attractive risk adjusted return and position us well from an interest rate risk prospective given their shorter duration. Consistent with their strategy of investing in these businesses, we anticipate we will complete the acquisition of the specialty payroll finance provider by February of 2015, which will allow us to grow a very attractive business for us.

Although, this transaction is small in a relative basis, we anticipate it will be accretive to earnings upon four phases in a cost savings and its internal rate of return significantly exceeds our hurdles. We have a significant opportunity to continue to grow these businesses.

On Slide 9, you can see the steady progress we have made on driving organic growth through our commercial teams and the integration of legacy Sterling Bancorp and the positive impact these have had on our revenues and expenses. Total revenue growth was 3.2%, while expenses increased 1.9%.

The core operating efficiency ratio was 54%. This ratio excludes the impact of the gains and charges we detailed on Slide 5.

Let’s review asset quality on Slide 10. Total net charge-offs against the allowance were 1.2 million, which represented 10 basis points of total loans.

Provision for loan losses for the quarter was 3 million, based on loan growth and additional Gotham and legacy Sterling loans that are now coming into our allowance. The allowance for total loans and the allowance to NPLs were 88 basis points and 91%.

Please remember that these ratios do not include the impact of the fair value mark recorded in the legacy Sterling Bancorp and Gotham acquisitions. Non-performing loans declined by 4.3 million, and criticized and classified assets declined by 6.5 million relative to the linked-quarter.

This shows strong results and continued improvement in our credit metrics across the board. I’ll just hand it over to Jack.

Thanks Luis. Let me summarize the quarter.

Quarter core earnings were $19.6 million or $0.23 per diluted share, representing an 8% increase in earnings over the linked-quarter. On a linked-quarter core, return on tangible equity improved 62 basis points to 14.42%, core return on tangible assets improved 7 basis points to 113 basis points, and our efficiency ratio improved 70 basis points to 54%.

Core revenue grew by 3.2% and core expenses increase by 1.9%. Revenue was enhanced by solid commercial loan growth and increases in non-interest income areas of mortgage, accounts receivable management and service charge income.

Expenses were up generally due to higher bonus accrual on increase data processing cost associated with the crossover to our new banking system. We continue to have improving credit metrics and solid levels of capital.

Our integration of legacy Sterling has been largely completed. We’ve met or exceeded all the objectives we have prescribed at the time of the merger announcement.

We have started our integration planning process in Hudson Valley and look forward to receiving the regulatory and shareholder approvals. Most importantly with our organic growth model along with these two mergers, we have positioned ourselves to be a high performing company and a meaningful commercially focused financial institution in the metropolitan New York City market.

There are significant opportunities before us to create strong positive operating leverage by growing commercial loans and fee income businesses, attracting low cost deposits, controlling expenses and showing strong levels of credit and capital. We’re looking forward to another terrific year in 2015.

Now let's open the lines up for questions.

As we're thinking about the acquisition, should we think about it being -- closing in the first part of the second quarter, or at the end of the quarter?

The mid of the quarter is the target that we have at the moment.

Okay. And then as you think about timing, and going over $10 billion with this transaction -- so you have identified branches you are consolidating and closing.

Have you considered maybe selling anything that's kind of in the periphery of that franchise? Because it feels like you're trying to concentrate really more into the metro market.

We're looking at all options, David. Overall we're trying to create a more efficient and effective and very focused company.

So as we go through this process we look at all the areas of cost and revenue and again really focused on creating that positive operating leverage that we have talked ad nauseum about. So kind of everything is on the table when we consider all those things as we move forward.

Okay. And then as your path to get the expense saves, could you maybe give us what you expect, day one?

And then I'll assume the 50% efficiency ratio you think you can get for the full year of 2016, or latter 2016.

Latter part of 2016, so the phasing is going to be similar to what we saw in this legacy Sterling transaction. So 75% of that coming in the first -- by the end of the first 12 months post close and then by the end of 2016 at that point we should have -- at that quarter we should be fully realizing the 100% of the safe targets outlined.

Okay, got it, okay. And then is anything changing in your commercial loan pipeline or your expectations for growth, and then remixing the balance sheet?

No, it's what we've said before we really are trying to keep a very balanced book on the loan side between C&I and commercial real-estate. The pipelines are very strong, a very good mix of all those things I mean again that's one of the advantages to what we have created is we have created a very diverse both asset and liability portion of the balance sheet.

So there are opportunities at different interest rates cycles in different times in different asset categories. So we are not married to any single one and we're trying to kind of balance that with the opportunities that are out there.

Could you just give us a little more color, how this payroll finance acquisition came to light? And I know you both said in your comments, I think, that you expect further opportunities there.

If you could just give a little more color and background as to what's driving that.

Yeah, so maybe I will start and then I will have Luis burn into this thing. So we have -- the business mix that we have there a number of businesses that we want to continue to reinforce and invest in, payroll finance would be one of them.

Payroll finance a business that provides services both on the finance side and the fee based side to temporary companies -- temporary employment companies, we basically factor the receivables -- high quality receivables. So it's a very high yielding business generally fee driven and a very efficient business.

So we have a fairly significant business today in payroll finance and this particular acquisition we have a letter of agreement on but have not closed yet are very complimentary and very supplementary to that. We do have several other of those types of businesses, other types of commercial finance businesses that we're evaluating as we have plenty of opportunity to create better economies of scale and efficiencies in areas that will drive the revenue mix to become more fee oriented than it is today, so that's what we're trying to do.

Okay. And did this specific opportunity, did it come from contacts that had already been made within the bank?

Or is somebody bringing these to you? I'm just curious as to how that pipeline is evolving.

Good question, actually both. So we have our business leaders are all looking at folks that may want to join us and we have many folks that are bringing ideas to us.

So we have many opportunities and again these are huge deals, these are great additive deals that are enhancing and they are accretive frankly very straight forward in terms of gathering the revenue from x amount of clients and reducing the cost because we have an infrastructure to support that.

Okay, that's very helpful. And then along those lines, Luis, do you, by any chance, have a breakdown as to what percent of the factoring pick-up you saw in the fourth quarter was seasonal, versus just new customer activity?

I don't have that breakdown for you of the top of my head. But true to form as we've talked about in the past the latter part of the third quarter and the early stages of the fourth quarter are always from seasonal perspective the better month out of the year for the factoring business, as retailers and so forth gear up for the holiday season.

A good guide and proxy that you could use is that you just look at the progression of outstandings over the course of the year that gives you the amount of the seasonality that comes from and I would say that about half of that is seasonal versus half of that being new clients if I had -- you know had this lot of numbers on the top of my head.

Okay. Okay, that's super helpful.

And then, Luis, you had mentioned -- so obviously -- well, I shouldn't say obviously -- I'm assuming that the $43 million of the resi mortgages you sold this quarter is part of your comments you had made about restructurings ahead of the HVB deal. Is that correct?

Yes. So that’s correct.

So, we’re going to be -- so Hudson Valley had invested in some call three to five different pools that they bought from various originators on the residential mortgage side over the course of the last 12 months to 18 months or so. So, when you look at what they are going to bring to the table which is about $600 million or so and resi outstanding plus what we had that was going to take us closer to 1.3 billion in residential mortgages which is more than we wanted to have ion a combine basis.

I think we’ve been pretty consistent in the past; we are not interested in just holding residential mortgage loan. We want to hold the residential mortgage loans where there is the ability and the opportunity to have a deposit relationship, wealth management relationship with that borrower.

So these were loans where we did not have that opportunity and we think it will better serve using that funding and liquidity to redeploy into the commercial side of the business and we’re going to continue exploring those opportunities over the course of the next couple of quarters and really trying to position the mix of business that we want pro forma for the Hudson Valley there.

Okay. Do you have a sense yet of Hudson Valley's $600 million, how much of that would be considered relationship borrowers versus single product borrowers?

I mean, you [track gauge] how much more you want to sell. Or maybe asked differently, the $1.2 billion, $1.3 billion is higher than what you wanted.

What's the ideal level that you want to hold?

We’re going to be evaluating that as we go. The majority of what they -- the majority what we’re going to be inheriting is probably non-relationship because again they bought -- these were loans that were originated by third-parties who have invested in by the folks at Hudson Valley.

So, it's too early to tell exactly what that number is, but the mix of business that we have today which is 15% to 20% consumer and then the balance of that 80% to 85% being split between C&I and CRE what we were trying to maintain longer-term. And when you think about next two to three years, the portion of that consumer asset classes is going to continue to wind down as we invest in specialize business client, as Jack was mentioning and growing to commercial real estate side as well.

Okay. Okay, helpful.

And then one just really quick last question. Luis, you said the provision part of the provision was obviously gross, but then also some of legacy Gotham and loans moving from covered to now needing reserve.

Do you have a sense of how that flow is going to look in the next few quarters, or how we should be thinking about the provision over the next few quarters?

So, it's the 3 million that we had this quarter assuming credit and as you’ve seen creditors performing very well from a perspective of NPLs and criticizing classified that progression continue to be positive for us, it's going to be about 2.5 million to 3 million going forward. So, as we have talked about in the number of calls in the past, obviously the accretion on the yield, the accretable yield starts to where off, but that reduce is the reserve requirement.

So a lot of the reserve requirement when we were provisioning $5 million for in the second quarter and the third quarter was driven by the fact that we’re providing for the incremental loans coming into the allowance count. The 2.5 million to 3 million which is about 50% to 60% that what we were doing previously, the difference between those two is that there is significantly less loans coming into the allowance now because the accretable yield and purchase adjustments have now -- from to P&L.

So that’s working exactly how we had anticipated it would 2.5 million to 3 million is a good target going forward.

Sounds like no more questions. We really appreciate all your support and following and look forward to again a great 2015.

So thank you very much for your participation on the call. Thanks.