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Sterling Bancorp. (NYSE:STL)

Q1 2010 Earnings Call

April 27, 2010; 10:00 am ET

Executives

Edward Nebb - IR

John Millman - President

John Tietjen - Executive VP, Treasurer & CFO

Analysts

Damon DelMonte - KBW

Lana Chan - BMO Capital Markets

Collyn Gilbert - Stifel Nicolaus

Rick Weiss - Janney Montgomery Scott

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Sterling Bancorp first quarter earnings conference call. During the conference, all participant lines are in a listen-only mode during that time. (Operator Instructions). As a reminder, today's call is being recorded. With that being said, I will turn the conference over to the Investor Relations advisor, Mr. Edward Nebb. Please go ahead, sir.

Edward Nebb

Thank you very much John, good morning and welcome to the Sterling Bancorp 2010, first quarter earnings conference call. Our news release announcing the first quarter results was issued today prior to the market opened. We hope you had a chance to review it. The release is posted to the company's website at www.sterlingbancorp.com.

Before turning to the discussion of the company’s 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 2010 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 is contained in Sterling's annual and quarterly reports filed with the SEC.

We will have introductory remarks today from Mr. John Millman, President of Sterling Bancorp, and Mr. John Tietjen, Chief Financial Officer. After their remarks, we'll open up the call and be happy to take your questions, and with that, let me turn the call over to John Millman.

John Millman

Thank you Ed, and good morning everyone. Welcome to our conference call for the first quarter at March 31st, 2010. I particularly want to welcome those new investors who participated in our recent stock offering and maybe joining our call today for the first time. Sterling’s progress during the first quarter has set a positive tone for the year and provides clear evidence that we are successfully pursuing strategies to grow our business profitably and deliver increasing shareholder value. We have clearly demonstrated that the company can weather a challenging economic cycle and emerge with these in greater strength and vigor, and we are well positioned to take advantage of the opportunities that lie ahead.

One of the most significant events to the quarter was our successful capital raise in late March, which generated gross proceeds of $69 million. In contrast to the financial institutions that we are compelled to raise funds to satisfy regulatory capital shortfalls or replenish losses, we sold the stock offering as a means of expanding an already strong capital base to support Sterling's future growth. The offering was substantially oversubscribed leading us to increase the number of shares offered to more than 8.6 million from an original estimate of 5.1 million. The proceeds contributed to an increase of 41% in shareholder equity since the end of 2009 to more than $228 million at March 31st, 2010.

All of our capital ratios were further enhanced and our tangible common equity ratio rose to 7.58% from 4.59% at December 31st, 2009.

In addition to providing consumable growth capital, the offering is consistent with our goals enhancing shareholder value. It expanded Sterling’s market capitalization by approximately $130 million to $275 million as of yesterday’s close. The average daily trading volume in our common stock has risen more than threefold to over 250,000 shares from about 82,000 shares before the offering.

Our shares have continued to perform well since the offering, closing yesterday at $10.25, an increase of $2.25 or 28% above the offering price last month. As we assessed the best use of increased capital base, one option maybe to repay part of the funds from our voluntary participation in the Treasury department’s capital purchase program. This possible use of proceeds was stated in the offering perspectives.

As you know, we received $42 million in so-called TARP money in December 2008. At that time, it appeared that obtaining an extra measure of capital security was a responsible action in the face of tremendous uncertainty in the economy. The company regularly evaluates alternatives with respect to this funds and we will consider repaying the Treasury when we determine that it is both physically prudent and in the best interest of our shareholders to do so.

Our management team is sharply focused on deploying the increased capital to grow the business, both organically and through acquisitions. Last week, we announced plans to launch a mortgage warehouse lending business known as Sterling Warehouse Lending Group. Warehouse Lending for the financing of residential loans for mortgage banking firms has historically been an excellent business, generating interest income, fees and deposit balances.

The Warehouse lines are secured mortgage assets and repaid as loans are sold, generally within 30 to 45 days. With the decline in the mortgage markets in the past few years, a number of warehouse lenders exited this business leaving something of a void in the competition. Because of our deep expertise to both asset-based lending and mortgage banking, this is a natural extension of Sterling's core competencies.

We are therefore well-positioned to take advantage of the eventual recovery in the mortgage market and are entering the business at an advantageous time. Last week the Commerce Department reported that new home sales were 27% in March, the highest monthly increase in 47 years, beating economist expectations. These numbers appeared to validate our market timing in launching this business. We are however, approaching this business in a prudent manner, focusing on serving those qualified mortgage banking firms, primarily, lending against conforming products and building a team of season warehouse lending professionals to supplement our existing skills.

We also recently bid on an FDIC’s assisted sale of a bank in the New York metropolitan area. However, the bid was won by an institution that was willing to simultaneously absorb a second troubled bank that we believe was not consistent with our acquisition criteria. This experience is worth noting for two reasons, it demonstrates our willingness to participate in FDIC-assisted transactions, but also underscores our highly-disciplined acquisition standards.

As we considered future acquisition, I would like to emphasize Sterling’s abilities in integrating and growing acquired businesses. As you may know about a year ago, we purchased a factoring, receivable management in import trade finance business known as Sterling Trade Capital. This business is an excellent strategic fit with our established capabilities in this area.

Sterling Trade Capital also has helped broaden and diversify our customer base by introducing us to clients who do business with the thriving South Asian export community, reflecting our strategies to grow this business. Fees from accounts receivable management factoring and related activities were up 58% in the 2010 first quarter. Given our success in this regard, we believe that we have a model that we can replicate in future acquisitions of complementary businesses.

With respect to organic growth opportunities, Sterling is capturing market share in our core lending business in competing financial institutions.

Loans held in portfolio were up 11.3% from a year ago, excluding the lease financing portfolio. In the 2010 first quarter, we extended new credit facilities of more than $66 million and our pipeline is extremely robust. The vast majority of our pipeline represents former customers of competing institutions that are no longer serving the market due to mergers, capital constraints and other factors. By remaining a reliable source of financing for creditworthy borrowers during the downturn, we are winning business from other institutions that have shifted their focus away from our market.

We also continue to refine our products and services to broaden our customer base. For example, we introduced a new asset base lending product for the staffing industry, which has attracted clients with large credit requirements. We have also experienced strong growth in deposits with total deposits increasing 20% over a year ago. Demand deposits were $509.5 million at March 31st, 2010, representing nearly 32% of total deposits.

As you know, Sterling traditionally is one of the highest ratios of demand to total deposits in the industry and is the key source of our cost effective funding. In the area of asset quality, we are seeing a number of encouraging trends. Our provision for loan losses was $6 million for the 2010 first quarter, down from nearly $8 million in the 2009 first quarter and stood at the lowest level of the past five quarters.

The level of non-accrual loans was $17.2 million March 31, 2010 from a high of $20.6 million at June 30, 2009. Non-accruals have now decreased for three consecutive quarters. Net charge-offs were $5.9 million in the 2010 first quarter, down from $7 million in the 2009 fourth quarter. The allowance from loan losses as a percent of non-accrual loans was increased to 115.8% at March 31st, 2010 from 110.5% in December 31st, 2009. We have continued to make progress in the planned reduction of lease financing balances which have accounted for the majority of our non-accrual loans. These financing balances have decreased by some $67 million since the first quarter of last year. The leasing portfolio now represents less than 15% of total loans.

In summary, Sterling is well positioned to seize upon the opportunities we see in our marketplace. We have an expanded arsenal of dry powder in the form of capital to support our growth because we demonstrated stability and staying power during difficult economic conditions, we should gain market share from institutions that have been unwilling or unable to serve the marketplace. We have proven our ability to make accretive acquisitions and are actively seeking additional perspective purchases. And we have a management team that’s talented, experienced and committed to providing exceptional customer service.

We are off to a strong start in 2010 and we look forward to delivering growing shareholder value for the balance of the year and beyond. Now let me turn the call over to John Tietjen.

John Tietjen

Thank you, John. I would like to comment on key aspects of our 2010 first quarter results. Net income available to common shareholders for the 2010 first quarter was $1.9 million or a $0.10 per diluted share. The calculation of EPS reflected an increase in the average number of common shares outstanding to approximately 19.2 million from 18.3 million shares due to our recent stock offering. For the second quarter of 2010, we will have approximately 25.8 million average common shares outstanding.

The first quarter results primarily reflected a lower provision for loan losses, sharply higher non-interest income before security gains and lower discount accretion on the Series A preferred shares. These benefits were offset by lower net interest income and security gains coupled with an increase in non-interest expenses largely due to the costs associated with the expansion of our business with the acquisition of a DCD in the second quarter of last year and higher FDIC insurance costs.

Net interest income on a tax equivalent basis was $20.4 million for the 2010 first quarter, compared to $21.5 million for the 2009 period. Net interest income benefited from lower funding costs, that benefit was offset by lower yields on loans and investment securities as well as lower investment security outstandings.

Net interest margin was 4.37% for the 2010 first quarter on a tax equivalent basis compared to 4.50% for the same period of 2009. Interest earned on loans was $16.5 million for the first quarter of 2010, a decrease of $1 million from the prior year. This was primarily due to a decline in the yield on the loan portfolio to 5.98% from 6.19% a year ago reflecting the mix of our lending business.

Income from investment securities decreased to $7.9 million on a tax equivalent basis, down approximately $1.3 million from the year-ago quarter. Average outstandings increased to $696 million for the first quarter of 2010 from $740 million a year ago, partially reflecting our strategy to shorten the average life. The yield on investment securities decreased to 4.52% for the 2010 first quarter, compared to 4.94% reflecting the strategy of reducing the average life as well as calls of higher yielding securities. The average life of our portfolio was 4.4 years at March 31st, 2010 versus 4.6 years at March 31st, 2009.

Interest expense on deposits decreased to $2.6 million for the first quarter of 2010 from $3.3 million a year ago due to decreases in the cost of funds, partially offset by higher balances. Average interest-bearing deposits were $1.05 billion for the first quarter of 2010, up from $912 million a year ago. The average rate paid on interest-bearing deposits declined 44 basis points from a year-ago quarter to 1.02%.

Interest expense on borrowings decreased to $1.5 million for the 2010 first quarter from $1.9 million a year ago, primarily due to lower balances and changes in the mix. Average borrowings decreased to $251 million for the first quarter of 2010 from $477 million in the prior year period reflecting a reduction in wholesale borrowed funds. Because of the change in the mix, the average rate or borrowed funds increased to 2.39% from 1.64%.

Non-interest income increased to $11.1 million for the first quarter of 2010 from $10.8 million a year ago. Key factor driving this increase was the higher fees from accounts receivable management, factoring in trade, finance business as we delivered on our strategy to grow, both our existing and acquired businesses in this category. This was partially offset by lower security gains and a decrease in mortgage banking income. Excluding security gains, non-interest income was up 24% from a year-ago period.

Non-interest expenses were $21.3 million for the 2010 first quarter basically unchanged from the 2009 fourth quarter and up from $20.1 million in the 2009 first quarter. The increase reflected the impact of the acquisition of the business now known as Sterling Trade Capital on April 6th, 2009 and higher employee benefit advertising and FDIC insurance cost. partially offsetting those increases was a reduction and incentive compensation expense. The provision for income taxes was $1.1 million for the 2010 first quarter compared to $2.3 million for the same period in 2009.

Turning to the balance sheet, average loans held in portfolio for the 2010 first quarter net of unearned discount were $1.16 billion, virtually the same level as a year ago. During the quarter, leasing balances decreased by an average of $64.3 million due to the planned reduction of the leasing portfolio.

Investment securities averaged $696 million for the first quarter of 2010, compared to $740 million a year ago. The composition includes approximately 70% in debt obligations of US Government Corporations and GSEs, 13% in obligations of states and political subdivisions essentially all New York State and 15% in corporate obligations, most of which are due within 18 months.

Total deposits for the 2010 first quarter averaged $1.5 billion, compared to $1.3 billion a year ago. Interest-bearing deposits averaged over $1 billion, up from $912 million. Average non-interest-bearing deposits rose to $464 million for 2010 first quarter from $416 million a year ago. Total borrowings for the first quarter of 2010 average $251 million, a decrease from $477 million a year ago. As previously mentioned, the average cost of borrowings increased to 2.39% from 1.64% primarily due to the change in the mix.

As we mentioned earlier, our capital base was further strengthened by our successful common stock offering. At March 31, 2010 after the offering, our Tier 1 risk based capital ratio was 15.73%, total risk-based capital ratio was 16.98% and the Tier 1 leverage ratio was 11.74%. Liquidity also remained strong, the ratio of loans held in portfolio to deposits was approximately 74% at March 31, 2010 giving us ample capacity to increase our lending to customers. To sum up, our strategies continued to deliver one of the highest net interest margins in our industry, a prudently managed balance sheet and strong capital and liquidity to support our continued growth. With that let me turn the call back over to John Millman.

John Millman

Thank, John. Let me conclude by saying that Sterling is well positioned to take advantage of opportunities to expand our business organically and through acquisitions. We have a strong capital base, a diverse business base and a sharp focus in delivering profitable growth and building shareholder value for the long-term. We would be pleased now to respond to your questions.

Question-And-Answer Session

Question

(Operators Instructions). And first from the line of Damon DelMonte with KBW. Please go ahead.

Damon DelMonte - KBW

I was wondering if you could talk a little about the mortgage warehouse business. I guess where are these brokers located geographically and roughly how much capital are you contributing or allocating towards this business?

John Millman

Okay first of all, Damon, let me tell you that the business is a natural extension of what we already do. We do asset based lending for decades, run a mortgage banking business. Business is going to be located here in Manhattan, at one of our locations down at 42 Broadway. It’s a business that we believe can move the needle, we have internal models that show that by the end of this year we could have outstanding commitments of the area of a $100 million. We expect usage in this business to run about 50% of that. So clearly in a short period of time, it could be an impactful business.

John Tietjen

We haven’t run all of the models on the allocation of capital yet, Damon, but the reality of the situation is that as John pointed out, this is going to be a significant contributor to our lending business, we expect it to have a positive impact on the margin and it is the primary driver or why we are going into this business.

Damon DelMonte - KBW

Are you able to quantify any type of impact to the margin at this time?

John Tietjen

We are going to start this business relatively slowly, so, I would not expect a significant change in the margin in the second quarter. we should start to see some significant benefit in third and the fourth quarter. in terms of the absolute impact, the pricing on these loans are going to be at base plus. So, we expect that it will accretive to the margin.

Damon DelMonte - KBW

Can we talk a little bit about the deposit growth this quarter, it looked there was a meaningful increase in CDs?

John Tietjen

Yes, part of that is the result of increased participation in the SEDAR's program. We are up about $150 million in our participation in that program.

Damon DelMonte - KBW

Then I guess lastly just with regards to TARP and potential repayment. If you look at the banking sector, it looks like most companies results have shown an improvement, if not quarter-over-quarter definitely year-over-year comparison wise, seems like we have some stability back in the marketplace. You know, your tangible capital has received a nice boost from the common equity offering during the quarter. How should we think about the timing of the process to repay TARP for you guys?

John Millman

I would think sometime this year, you’ll see partial repayment of TARP.

Operator

Now we’ll go to Lana Chan with BMA Capital Markets. Please go ahead.

Lana Chan - BMO Capital Markets.

I know there tends to be some seasonality in your loan numbers from fourth to first quarter. Could you talk about what you see in terms of demand out there are, particularly on the commercial business side? What are you are hearing from your customers?

John Millman

We are seeing Lana an enormous inflow of new relationships almost exclusively from other institutions in our market place. we no longer are active in lending to the middle market. We continue in the organic portfolio to see some reluctance to borrow in the first quarter. Traditionally your first quarter borrowings have been rather modest, that trend is continuing but it’s more than offset by new business coming in.

Lana Chan - BMO Capital Markets

And how about pricing? What are you seeing on pricing with a new loan originations?

John Millman

Pricing is held up very well. We are finding more flexibility in pricing than we have seen in a while.

Lana Chan - BMO Capital Markets

Okay. And just a follow up on that, what the expectations for the (inaudible) margin outside of the mortgage warehouse impact going forward? How much of the margin decline from the fourth quarter was related to some excess liquidity from the capital raise and some of the deposit growth and what would we expect for the margin over next two quarters.

John Millman

I would expect as we try to find lending opportunities to deploy the funds, where leveraging up the balance sheet in the investment portfolio given that we are going relatively short in that I would expect to see further pressure on the margin. We could be in the second quarter 420ish. As we migrate into deployment of funds into the lending areas, I would expect that that to start to come back.

Operator

And our next question is from Collyn Gilbert of Stifel Nicolaus. Please go ahead.

Collyn Gilbert - Stifel Nicolaus

John, do have a specific period end balances for the loan segments?

John Millman

I do. Okay, I’m going to give you the balances and net upon our discount as you would see them in the balance sheet. Our C&I is approximately $600 million, leasing is approximately $180 million, factor receivables about $150 million, residential real-estate approximately $150 million, commercial mortgage and construction and land development approximately $120 million and loans to individuals about $13 million.

Collyn Gilbert - Stifel Nicolaus

Can you just walk through again, I understand the impact to the margin this quarter given what was going on obviously with the capital rates, but I guess I’m still trying to figure out why such a significant drop in the net interest income. And what's the strategy, I think you said in your opening comments your shortening duration, but just kind of walk through again the rationale as to why we saw such a sizable drop in net interest income in the first quarter?

John Millman

Well, I’m comparing this against the first quarter of last year and to the yield on the investment portfolio is down approximately 20 basis points.

Collyn Gilbert - Stifel Nicolaus

Looking at it from the fourth quarter, the sizable drop from the fourth quarter order, maybe talk to the dynamics there?

John Millman

I don't have the documentation I would need to address that at this point in time.

Collyn Gilbert - Stifel Nicolaus

Okay, and you gave us basic average share count would be for the second quarter. But what were the end period shares this quarter?

John Tietjen

Got it here some place. Give me a second to find it, when I find it I will. It's about $25 million to $26 million, and we have got treasury shares, here it is26.9 million roughly.

Collyn Gilbert - Stifel Nicolaus

Could you give the guidance on the tax rate going forward?

John Tietjen

Yes, we don’t anticipate much change to the tax rate from where it is in the first quarter.

Operator

(Operators Instructions). And we have Rick Weiss with the Janney Montgomery Scott.

Rick Weiss - Janney Montgomery Scott

You're talking about the bidding run on an FDIC assistant transaction, kind of curious why that make sense and I guess what are the parameters that you would look at in terms of geography going forward?

John Millman

Rick, first of all we'd be primarily interested in our market in the tri-state area maybe going as far as Cherry Hill or the Philadelphia suburbs. For us it's market opportunity. The institutions we looked at, operated in markets that we would like to be in. One of the institutions had branches, both of them did in Brooklyn. We don't have a presence in Brooklyn. It was a very sound and match to our core business plan.

Rick Weiss - Janney Montgomery Scott

You seem to be taking lending opportunities away from other banks, are there loan officers that you know, looking for a new place to keep the customers. Do you see any possibility of attracting new lending opportunity?

John Millman

Absolutely, Rick. Always when there is a rollup and I don't think it's necessary to name it now, but they are institutions. They were very active middle-market lenders and they rolled up into large national institutions who have different agendas, who may no longer be interested in middle market lending, but see the franchise they acquired as an opportunity to gather deposits. So lending officers who served as many middle-market customers very often are disenchanted and we do see lots of opportunities bringing key people that we have.

Rick Weiss - Janney Montgomery Scott

Have you brought any number to date?

John Millman

Yes.

Rick Weiss - Janney Montgomery Scott

In terms in mortgage warehousing business and it sounds like a lot of other opportunities. What sort of expense runrate would we be using, going forward?

John Millman

We don't anticipate a large increase in the expense line as a result of the mortgage warehouse business, there will be some movement but we're not looking at a large increase here and we believe as John pointed out earlier that it's going to be accretive to earnings so that the income will be there to offset it. I mean right now if you used a runrate of $85 million to $86 million for the year, you are pretty close.

Operator

And with no further question in queue, I'll turn it back to you Mr. Millman for any closing comments.

John Millman

Thank you operator and we thank you for your interest in Sterling and we look forward to speaking with you next quarter.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.

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