Sterling Bancorp in New York is counting on high-rate loans and cross-sales to rev up earnings dampened by tight margins, high expenses, and flat fee income.
"We'll continue to be challenged by the interest rate environment, but we are confident that we'll be able to drive future earnings by increasing loan volume - particularly higher-yielding loans - and adding new accounts," Sterling president John C. Millman said in an interview Friday.
The $2 billion-asset Sterling has long made asset-based loans, but now plans to buy specialty finance companies to boost volume. It added $60 million of asset-based loans in April when it bought PL Services LP in Woodbury, N.Y., which specializes in financing temporary staffing agencies. Mr. Millman said PL Services' loans are yielding around 9%.
Sterling's strategy also includes branch openings, and it has applied with regulators to open a branch in PL's Woodbury office. In June, Sterling plans to open a branch adjacent to a courthouse in Jamaica, N.Y., to attract loans and deposits from local law firms - a key slice of its customer base.
Sterling has also stepped up marketing efforts to generate referrals from customers.
Sterling executives are hoping these initiatives will jump-start earnings growth. Like many banks, its earnings continue to be hit by margin compression, higher expenses, and a reduction of noninterest income. Moreover, last month five of its loan officers left it for the $4.5 billion-asset Signature Bank in New York.
On Thursday, Sterling said its first-quarter earnings rose 11%, to $6.4 million. However, after subtracting a $2.2 million tax credit, pretax earnings were actually 50% lower than a year earlier. Core earnings per share without the tax benefit were about 14 cents, far below the analysts' estimate of 31 cents.
Margin compression was the main culprit. Deposits repriced faster than loan yields, causing net interest margin to contract 30 basis points, to 4.58%. As a result, net interest income was relatively flat, at $20.5 million, even though loans grew 12.2%, to $1 billion.
A reduction in noninterest income and higher expenses also ate into earnings. In the first quarter, noninterest income from the sale of mortgages in the secondary market fell 43%, to $2.2 million. Noninterest income dropped 27% over all, to $5.9 million.
Some analysts were skeptical of Mr. Millman's strategy to pull Sterling out of its earnings funk.
"With the flat shape of the yield curve and the intense competitive environment in their marketplace, margin compression remains an issue," said Kevin Timmons, an analyst at CL King & Associates Inc. in Albany, N.Y.
Sterling will also have to grapple with expense control and possible further declines in its revenue from mortgage sales in the secondary market, he said.
Jared Shaw, an analyst in Hartford, Conn., for Keefe, Bruyette & Woods Inc., agreed. "Buying PL will definitely help get income, it's just that the negative things that have happened will offset that."
After the earnings announcement Thursday, he lowered his 2006 earnings per share estimate to $1.17 from $1.42, and his 2007 estimate to $1.25 from $1.36. (Sterling's 2006 earnings estimate includes the tax benefit.) In 2005, earnings per share fell slightly from a year earlier, to $1.25, and overall earnings were flat, at $24 million.
Mr. Millman insisted Sterling can easily replace the loan officers who defected, but Lana Chan, an analyst at Bank of Montreal's Harris Nesbitt Corp., say she is not convinced of that.
"This group apparently had some of their top producers, so it's going to create some headwind for them," said Ms. Chan, who slashed her estimate for 2006 earnings per share to 89 cents from $1.16 and her 2007 estimate to 90 cents from $1.33.
But Chris Stulpin, a bank equity analyst at Cohen Brothers & Co. in Philadelphia, agreed with Mr. Millman that loan growth may counter these difficulties in upcoming quarters.
And, Sterling still has a margin higher than many banks its size, as Sterling National Bank is successful at getting low-cost core deposits from its borrowers, mainly small and midsize businesses. According to FDIC data, Sterling National ended 2005 with a net interest margin was 4.79%, far above the 3.86% average for commercial banks with $1 billion to $10 billion of assets. For New York banks that size the average was just 2.89%.
Mr. Timmons also sounded an optimistic note.
"This company has an underlying real value - being able to maintain relationships with their business customers," he said. "Many have banked with them for decades, and that's fairly unusual for any banking institution these days."
