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Executives

Ed Nebb – IR

John Millman – President

John Tietjen – CFO

Analysts

Mark Fitzgibbon – Sandler O'Neill

Damon Delmonte – KBW

Collyn Gilbert – Stifel Nicolaus

Rick Weiss – Janney

Sterling Bancorp (STL) Q1 2011 Earnings Conference Call April 26, 2011 11:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Sterling Bancorp first quarter 2011 conference call.

For the conference, all the participants are in a listen-only mode. There will be an opportunity for your questions. Instructions will be given at that time. (Operator Instructions). And as a reminder, today’s call is being recorded.

With that being said, I’ll turn the conference now to Mr. Ed Nebb. Please go ahead, sir.

Ed Nebb

Thanks very much, John, and good morning, everyone. Thank you for joining us.

Our news release announcing the first quarter 2011 results was issued today prior to the market open. We hope you’ve had an opportunity to review it. If you need a copy, it’s posted to the Sterling Bancorp website.

Before turning to the discussion of our 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 2011 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.

Today, we will have introductory remarks from Mr. John Millman, President of Sterling Bancorp; and Mr. John Tietjen, Chief Financial Officer. After their remarks, we’ll open up the call for your questions.

And so without further ado, I’ll 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 ended March 31st, 2011. Our results for the 2011 first quarter clearly demonstrate that Sterling is off to a strong start for the year. The company’s performance reflected a sharp focus on understanding [inaudible], diversifying our income sources, further strengthening our capital base, and reinforcing our sound asset quality. Thanks to these efforts, we believe Sterling is better positioned than ever for long-term profitable growth.

Let me review some of the highlights of the first quarter. Net income available to common shareholders was $3.3 million for the 2011 first quarter, an increase of over 71% from the previous year. Earnings per diluted share were up 20% for the 2011 first quarter, rising to $0.12 from $0.10 a year earlier. The increase in EPS is a significant achievement, considering that the average number of shares outstanding rose more than 42% due to our two common share offerings in the past 12 months. We experienced continued growth across our business.

Total loans in portfolio rose 8% to $1.3 billion as we continue to meet the credit needs of both existing and new customers, leading to significant new lending activity. We’d like to remind you the seasonality of our loan business which typically accelerates in the third and fourth quarters.

Total deposits increased 7% to $1.7 billion and total assets were up 9% to nearly $2.4 billion. We significantly added to our supply of growth capital and enhanced our financial flexibility through a common share offering in March 2011. This was our second capital raise in a 12-month period and it generated gross proceeds of $38.6 million. It is worth noting that the present offering was priced 20% higher than our 2010 equity offering. We are gratified by the positive reception that our business strategy has received among investors as indicated by the success of both share offerings. And we are pleased to have delivered growing shareholder value over the past year.

As we noted in the offering prospectus, the proceeds may be used among other purposes to repurchase the company’s TARP capital purchase program preferred shares separately or together with the warrant for the common shares. We have applied for permission in the US Treasury Department to redeem the entire $42 million of preferred stock issued by Sterling to the Treasury under our capital purchase program in December of 2008 and we do expect to have a formal approval for the redemption in the near future, and we will expect that we will be in a position to make an announcement shortly.

Asset quality has continued to be one of Sterling’s distinguishing strength. This is reflected in a continued decrease in credit cost during the 2011 first quarter, as the provision for loan losses declined to $3 million or one-half the level of a year-ago.

Net charge-offs decreased by $2.7 million from $5.9 million a year-ago. Non-accrual loans were $7 million at March 31st, 2011, a decrease from $17.2 million a year earlier. The ratio of non-accrual loans to total loans improved to 0.53% from 1.42% year earlier.

Nonperforming assets were 0.30% of total assets at March 31st, 2011, down from 0.83% a year-ago. And the allowance for loan losses as a percentage of non-accrual loans was 257% at March 31st, 2011 compared to a 116% last year.

Going forward, we are optimistic about Sterling’s ability to continue delivering strong operating and financial performance. The company has a distinct business banking model that has well suited to meet the needs of customers in a newly attractive marketplace, the New York metro area and beyond.

We have consistently demonstrated a commitment to provide high-touched service, which has enabled us to increase our business with existing clients and to add new relationships. When focusing on growing our range of products, we have expanded the financial solutions available to our customers while also broadening and diversifying our income sources.

We have continued to maintain a prudent credit underwriting and emerged from the economic downturn and a strong position with regard to asset quality. We have enhanced our capital base, which gives us ample dry powder to support investments in organic growth and to consider other business opportunities that may arise. And we have a talented and experienced team that is dedicated to providing exceptional service and growing our franchise. We look forward to building on these strengths to deliver continued profitable growth and enhance shareholder value.

Now, I’ll turn the call over to John Tietjen.

John Tietjen

Thank you, John. Good morning, everyone. I’d like to provide additional detail on our performance with the 2011 first quarter.

As we have noted, net income available to common shareholders for the first quarter of 2011 was $3.3 million or $0.12 per diluted share. In the first quarter of 2010, net income available to common shareholders was $1.9 million or $0.10 per diluted share. We had 27.4 million weighted average shares outstanding in the 2011 first quarter versus $19.2 million a year earlier, reflecting the impact of the two common share offerings.

Looking at some of the key factors that contributed to our performance, net interest income on a tax equivalent basis was $20.3 million for the 2011 first quarter, roughly equal to the $20.4 million we reported a year-ago. This reflects the benefit of higher average loan and investment security balances and reduced funding costs offset by the impact of lower yields on loans and securities and higher interest bearing deposit balances.

Noninterest income excluding security gains increased by $1.1 million or 11.6% compared to the first quarter of 2010. This primarily reflected growth in fees from accounts receivable management factoring trade finance and mortgage banking products. Total noninterest income was $11.4 million for the first quarter of 2011, up from $11.1 million a year-ago, as our higher fee income was partially offset by a decrease in the security gains in the 2011 period. Reflecting the strong contributions from our fee generating products, noninterest income represented 33.5% of total revenue for the current quarter.

Noninterest expenses were $22.5 million for the 2011 first quarter compared to $21.3 million a year-ago. The increase was primarily due to additional compensation expenses and occupancy costs related to our business development activities.

Now I’d like to provide a perspective on the net interest margin. As we have discussed, our business model plays a strong emphasis on fee generating products. For this reason, it’s important to emphasize that if fee income associated with our accounts receivable management factoring in trade finance products were included in the net interest margin, it would add approximately a 100 basis points to the margin. Overall, the net interest margin was 3.84% for the 2011 first quarter on a tax equivalent basis compared to 4.37% for the first quarter of 2011.

Breaking the margin into key components, the net interest margin on the loan portfolio was 4.90% for the 2011 first quarter compared to 5.03% a year earlier. This was largely due to the impact on interest income of the shift of the loan portfolio mix as planned reduction in the leasing portfolio receivables was offset by growth in loan categories with lower yields.

The net interest margin on the investment portfolio was 2.55% for the 2011 first quarter compared to 3.57 a year earlier. This primarily reflected a sharp rise in liquidity as we temporarily deployed the common share offering proceeds in short-term securities during a period of declining yields. For example, in the first quarter, we had an average of $265 million invested in various instruments with maturities of less than two years at a blended rate of 1.93%. For the first quarter of 2010, we had invested approximately a $160 million with similar duration at 3.24%. We expect the excess liquidity to dissipate as we continue to fund loan growth with a resulting improvement in yield.

Turning now to the balance sheet. Net loans held in portfolio at March 31st were $1.29 billion, up $94 million from year-ago. Please keep in mind that the net increase in the loan portfolio reflects the impact of the planned reduction in our leasing portfolio, which declined $39 million from March 31st, ’10 to March 31st, ’11.

Investment securities were $872 million at the end of the first quarter up from approximately $763 million a year-ago. As I’ve just mentioned, this largely reflects an increase in short-term investment securities, reflecting on a strategy for the deployment of proceeds from our share offering, coupled with the implementation of other asset liability management initiatives.

Total deposits at March 31st, 2011 were $1.73 billion compared with $1.61 billion a year-ago. We continue to build our solid core of noninterest bearing deposits which increased 10% to $562 million for the first quarter of 2011. Demand deposits had grown as a result of our business development activities and business strategy.

All of our regulatory capitals continue to exceed well capitalized requirements. At March 31st, 2011 Tier 1 risk-based capital ratio was 15.50%, total risk-based capital was 16.53%, and the Tier 1 leverage ratio was 11.90%. The tangible common equity ratio rose to 8.30% at March 31st, 2011 from 7.58% a year earlier and book value per common share increased to $7.10 at March 31st, 2011 compared to $7 a year earlier.

Our liquidity remains strong and will support future growth. The ratio of loans held in portfolio to deposits was approximately 75% at March 31st, 2011 giving us ample capacity to increase our lending activities.

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

John Millman

Thanks John. To sum up, we’re entering a period in which the economy can be regarded with cautious optimism. We have the proven business models, strong capital base and commitment to exceptional service to make the most of the opportunities that may arise in this environment.

Now we would be pleased to respond to your questions.

Question-and-Answer Session

Operator

(Operator Instructions). And first in the line, we’ve Mark Fitzgibbon with Sandler O'Neill. Please go ahead.

Mark Fitzgibbon – Sandler O'Neill

Good gentlemen.

John Millman

Hi, good morning, Mark.

John Tietjen

Good morning, Mark.

Mark Fitzgibbon – Sandler O'Neill

A couple of questions on the loan side of things. First, I wondered if you can share with us how big the line pipeline is and what the percentage of the pipeline that typically makes it on to the balance sheet is.

John Millman

Well, the pipeline is in excess of $200 million, and that’s a short-term pipeline, and we would expect to see about 25% of that to translate into closings.

Mark Fitzgibbon – Sandler O'Neill

Okay. And then, secondly, how long do you think it will take to sort of run the – redeploy that excess liquidity into loans? Is it a multiyear process?

John Tietjen

It’s certainly multi-quartered, Mark, at $25 million on a quarterly basis. We’re expecting 10% growth in the loan portfolio. Having said that, as we get closer to the end of the year, the impact of the leasing runoff will become less. If you recall on the call I made at year-end, the comment that we had the leasing portfolio at about the level we thought was appropriate for us as we looked forward. And once we get closer to the fourth quarter, the impact of the leasing will minimize, so that 10% growth with start to be real.

Mark Fitzgibbon – Sandler O'Neill

Okay. And then, with respect to the margin, it sounds like we should anticipate the margins slowly rising from this 3.84 level. Is that accurate?

John Tietjen

I would think that certainly by the end of the second quarter and beginning of third that would be the case. We’re still going to have a temporary impact in the beginning of the second quarter, because of the share offering that we just completed. There will still be some impact on the margin for that.

Mark Fitzgibbon – Sandler O'Neill

When do you say impact, do you –?

John Tietjen

I wouldn’t expect a dramatic change in the margin from the 3.84% that we’re at.

Mark Fitzgibbon – Sandler O'Neill

Thank you.

Operator

Our next question is from Damon Delmonte with KBW. Please go ahead.

Damon Delmonte – KBW

Hi, good morning, guys. How are you?

John Millman

Good morning.

John Tietjen

Good morning, David.

Damon Delmonte – KBW

At the time of the capital raise, you guys seem pretty optimistic or bullish on your trends for the first quarter. And as I look at the quarter-over-quarter average loan balances, it looks like you saw about a 7% decline. I’m just wondering kind of what happened from when we spoke with you during the quarter to the end of the quarter?

John Tietjen

John touched on it earlier, Damon, that the fourth quarter for us tends to be, if you will, somewhat a distortive quarter, because the nature of our customers are such that the loan growth in the fourth quarter is contingent on what they’d like to do with their balance sheets and what’s going on with their businesses. So comparing any quarter to the fourth quarter is probably not a good thing to do. There is seasonality in our balance sheet.

John Millman

I think also, Damon, if you go back historically, you take a look at the sequential progress from Q4 to Q1, you’ll see typically we’re flat or down as always – that typically has been the case with us.

Damon Delmonte – KBW

All right, okay. So with that in mind, are you still confident that you can get double-digit growth from – on a year-over-year basis by the end of the fourth quarter?

John Millman

We full expect to see double-digit earning – double-digit growth in loans.

John Tietjen

Just again to give you some flavor on that Damon, at period end, the leasing portfolio at March 31st to March 31st was down $39 million. On average for the first quarter, it was down $48 million. So if you put that into the numbers we’ve got, we’re pretty close to double digit.

Damon Delmonte – KBW

Okay. Okay, great. And then on the fee income side, we also look at the first quarter as a period of seasonality and that’s kind of what was reflective in the decline from the fourth quarter and we can expect a rebound as we go out through the year.

John Tietjen

Well, in the mortgage banking business, I think the second quarter tends to be a little software, but the accounts receivable and factoring starts to pickup and get strong in the third quarter and then falls off a little bit in the fourth quarter. So there is some seasonality to that line item also.

Damon Delmonte – KBW

Okay. That’s all I had for now. Thank you.

Operator

And next, we’ll go to Collyn Gilbert with Stifel Nicolaus. Please go ahead.

Collyn Gilbert – Stifel Nicolaus

Thanks. Good morning, gentlemen.

John Millman

Good morning, Collyn.

John Tietjen

Good morning, Collyn.

Collyn Gilbert – Stifel Nicolaus

John, I hate to do this to you, but it’s not in the press release, so could you just give us the period end loan balances for the loan buckets, C&I leasing, resi, teri [ph]?

John Tietjen

Okay. This is going to – this will include loans held for sale.

Collyn Gilbert – Stifel Nicolaus

That’s okay.

John Tietjen

All right. If we look at true commercial and industrial, we’re about $590 million this year. We were $572 million last year. We have leasing is a $140 million versus a $179 million. Factoring is a $154 million versus $151 million. Now, these are period end numbers, these are not averages.

Collyn Gilbert – Stifel Nicolaus

That’s fine, yes.

John Tietjen

Okay. Residential mortgage portfolio, $132 million versus a $127 million. Loans held for sale is $24 million versus $21 million. Commercial mortgage including construction – well let me not do that – the commercial mortgage is $98 million versus $97 million. Real estate construction land development is $23 million versus $22 million. Loans to individuals don’t – didn’t change very much, very small balances.

And then, because these items are separate items on a call report, we break them out, but they’re really in the C&I lending – additions to the C&I lending that I’ve already given you. Loans to depository institutions are $25 million this year and we had none last year. And loans to non-depository institutions are a $110 million this year and it was $34 million last year.

Collyn Gilbert – Stifel Nicolaus

Okay. That’s very helpful. And then just on – sticking on the loan side for a minute, John you had mentioned the pipeline was just under $200 million. Do you know how that compared to last year – this quarter last year?

John Tietjen

It’s larger than last year.

Collyn Gilbert – Stifel Nicolaus

Okay, okay. And then just on the – I know, John you mentioned about the dynamic of the NIM and probably you’re expecting it to be flat or so, but just within that, are we getting close – trying to sort of reconcile the dynamics specifically on the loan yield side? Are we getting to the point now where the loan yields will have plateaued and those declines should now slow a bit?

John Tietjen

Well, let me – let me just come back. The comment I made about the NIM was for the second quarter, reflecting what you just stated yes. As we move through the year, the impact of the runoff on the leasing portfolio is going to become less and I would expect that the loan yields will stabilize and actually begin to grow a little bit.

Collyn Gilbert – Stifel Nicolaus

Okay, okay. I think that was – that was all – and just one thing. One the – on the TARP, can you just tell us when you’re actually put in for the application?

John Tietjen

Shortly after we completed the stock offering.

Collyn Gilbert – Stifel Nicolaus

Okay. Okay, that was all I had. Thanks.

John Tietjen

Well, thank you.

Operator

(Operator Instructions). We’ll go to Rick Weiss with Janney. Please go ahead.

Rick Weiss – Janney

Hi, good morning.

John Millman

Good morning, Rick.

John Tietjen

Good morning, Rick.

Rick Weiss – Janney

On the noninterest expense is there anything unusual about the run rate of about $22.5 million for this quarter. Is that – this is the number to use going forward?

John Tietjen

I would expect that that number will increase moderately. The run rate, we were about $91 million, $92 million in expenses the last year. We’ll be around that number for this year.

Rick Weiss – Janney

And then turning just to asset quality, would – is your sense is that things have stabilized from here or anything particularly worrying you?

John Millman

Rick, as of now, we don’t see any change in the [inaudible] requirement going forward. So that should give you an indication.

Rick Weiss – Janney

Okay, great. Thank you.

John Tietjen

Great, thanks.

Operator

And, gentlemen, there are no further questions in queue.

John Millman

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

Operator

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

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