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Sterling Bancorp (NYSE:STL)

Q3 2011 Earnings Conference Call

October 20, 2011 10:00 AM ET

Executives

Ed Nebb – IR

John Millman – President and CEO

John Tietjen – EVP and CFO

Analysts

Lana Chang – BMO Capital Markets

Damon Delmonte – KBW

Dave Peppard – Janney

Aaron Bran – Stifel Nicolaus

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Sterling Bancorp’s 2011 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. (Operator Instructions). And as a reminder, this conference is being recorded.

And I would now like to turn the conference over to your host Mr. Ed Nebb, Investor Relations for Sterling Bancorp. Please go ahead.

Ed Nebb

Thank you, Ruth and good morning everyone. Our news release announcing Sterling’s third quarter 2011 results was issued today prior to the market open. We hope you’ve had the opportunity to review it. The release is available on the company’s website at www.sterlingbancorp.com.

Before turning to the discussion of 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 such forward-looking statements.

The amounts of any dividends in fourth quarter 2011 and beyond will depend on the company’s future results of operations, financial condition and other relevant factors. And 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.

This morning we will have introductory remarks from Mr. John Millman, President of Sterling Bancorp; and Mr. John Tietjen, Chief Financial Officer. After which, we’ll be happy to open up the call for your questions.

And with that, I’ll turn the call over to Mr. Millman.

John Millman

Thank you, Ed and good morning everyone. Welcome to our conference call for the third quarter ended September 30, 2011. In the third quarter, we continued the strong financial and operational performance that is distinguished Sterling throughout 2011. This was our best quarter of the year in terms of earnings and was also noteworthy for double digit growth in loans, deposits and total assets.

Let me highlight some of our key accomplishments for the 2011 third quarter. Our earnings performance has trended in a positive direction as compared to both the 2011 second quarter and a year ago third quarter. Net income available to common shareholders was $4.4 million a sequential increase of 74% from the 2011 second quarter. This growth was driven by higher revenues and unchanged provision for loan losses and the elimination of dividends and accretion no preferred shares related to the TARP Capital Purchase Program. Our recent earnings performance also represents a substantial improvement over the third quarter of 2010 on our decision to accelerate the resolution of certain non-accrual loans resulted in a net loss for that period.

Unlike some banking institutions our earnings growth was not dependent on recapturing loan loss reserves. Our allowance at September 30, 2011 was $19.5 million or about $1.4 million higher than a year ago. We have continued to grow our business and expand our share of the market once again setting records for loans, deposits and total assets. Total loans in the portfolio were up 13% to nearly $1.5 billion, which is an increase of $167 million from a year ago. Loan demand has been strong in our traditional C&I category and we have also seen accelerated volumes in the mortgage warehouse lending product that we introduced last year.

Total deposits were up 24% to over $2 billion. Deposit growth is clearly linked to loan growth since as you may recall we generating prior deposit relationship from our borrowing customers. Total assets grew more than 15% to approach $2.7 billion. Asset quality has continued to improve net charge offs were $2 million for the third quarter, the lowest level since the 2008 fourth quarter. The ratio of non-accrual loans to total loans decreased to 0.38% from 0.47% a year ago. Non-performing assets were 0.28% of total assets to September 30, 2011 down from 0.30% a year ago.

The allowance for loan losses as a percentage of non-accrual loans was 347% at September 30, 2011 up from 290% a year ago.

At the end of the third quarter our Tier I risk-based capital ratio was 12.14%. Total risk-based capital was 13.18% and the Tier I leverage ratio was 9.08%. Our tangible common equity ratio was 7.43% at September 30, 2011. We recognize the concerns of resurface about the state of the economy that said I like to highlight the factors that reinforce our confidence, Sterling’s ability to continue delivering strong growth and solid financial performance for the balance of this year.

We are continuing to experience vigorous loan demand with the growth driven primarily by improved market share and demand through new products. The region that centers on the New York Metropolitan areas home to more than 500,000 small to mid size businesses, which represent our sweet spot in terms of customer relationships. And this has been a resilient market, the tristate region according to the U.S. Bureau of Labor Statistics actually gained over 90,000 jobs in the six months from March to August 2011 while both office and industrial vacancies declined.

We have spent the past few years building a balanced and diversified revenue generating engine by expanding areas such as accounts receivable management, factoring and trade finance and introducing a mortgage warehouse financing product. This allows us to provide customers with a grown range of products and also promotes stability and consistency in our financial performance by producing significant non-interest income as a compliment to our net interest income.

Although such products must be tailored to the needs of each customer and thus require more resources this strategy leads to significant revenue opportunities. We feel confident that our solid capital base and rigorous commitment to asset quality are important sources of strength in uncertain economic times. Finally, we have a talented and accomplished team that is sharply focused on expanding our client relationships and market share providing unparallel service to our customer base and continuing to grow the business prudently and profitably.

Therefore, we believe Sterling is well positioned to enhance shareholder value for the long-term. Now I will turn the call over to John Tietjen.

John Tietjen

Thank you and good morning to those on the call. I would like to provide you with additional detail on our performance for the 2011 third quarter. We delivered our strongest quarterly earnings for this year driven primarily by growth in our business. As we reported, net income available to common shareholders for the 2011 third quarter was up 74% sequentially from the 2011 second quarter to $4.4 million or $0.14 per diluted share. Comparing recent results to the third quarter of 2010, as you may recall we took action at that time to accelerate the resolution of certain non-accrual loans primarily in the leasing portfolio. This resulted in an additional provision for loan losses and lead to a net loss available to common shareholders in the 2010 third quarter of $3.3 million or $0.12 per diluted share.

Looking at some of the key factors that contributed to our strong performance. Net interest income on a tax equivalent basis was $22.7 million for the 2011 third quarter up from $21.6 million as we reported a year ago. Net interest income also increased sequentially from $21.8 million in the 2011 second quarter. The improvement over a year ago period reflected the benefit of higher average loan and investment security balances and reduced funding costs partially offset by the impact of lower yields on loans and securities and higher interest bearing deposit balances.

Provision for loan losses decreased to $3 million for the quarter from $14 million for the same quarter of 2010, which reflected the accelerated resolution of certain non-accrual loans in the year ago period. Non-interest income excluding security gains was $11 million a sequential increase from $10.5 million in the 2011 second quarter compared to $11.9 million in the third quarter last year. Compared to the year ago period we benefited from growth in accounts receivable management and factoring fees offset by lower residential mortgage banking income and service charge income.

Total non-interest income was $11.5 million for the 2011 third quarter compared to $13.1 million a year ago with the difference due to lower security gains this year. Reflecting strong contribution from speed generating products, non-interest income represented 31.3% of total revenues in the recent quarter. Non-interest expenses were virtually unchanged at $23.8 million for the third quarters of both 2011 and 2010. We experienced lower deposit insurance premiums and decreases in occupancy and equipment costs which were offset by higher compensation expenses primarily due to the growth in our business and ongoing business development efforts.

Now I would like to provide a perspective on the net interest margin. The net interest margin was 3.81 for the 2011 third quarter compared to 3.85 for the second quarter of 2011 and 4.11 for the third quarter of 2010. I should point out that our net interest margin is affected by our strategy of maintaining considerable liquidity to fund future loan growth. Specifically, we are keeping sizeable balances of short-term investment securities and interest bearing deposits with other banks. Considering that our short-term investments and interest bearing deposit with other banks yield about 175 basis points this has near term effect of reducing our net interest margin.

We believe this strategy is appropriate given our anticipated loan demand and the potential to earn higher yields as we redeploy these funds in loans. The impact of shifting funds from short-term investments to loans would be an improvement of approximately 375 basis points.

Now turning to the balance sheet, net loans held in portfolio at September 30, 2011 were a record $1.5 billion, up 13% or $167 million from a year ago. Investment securities were $778 million at the end of 2011 third quarter up slightly from a year ago. As I have just mentioned, this was largely due to our strategy of maintaining sizeable holdings in short-term investment securities for liquidity purposes.

Total deposits at September 30, 2011 were $2 billion an increase of 24% from $1.6 billion a year ago. We continue to build our solid core of non-interest bearing demand deposits which increase 10% from a year ago to $594 million. Demand deposits have grown as a result of our business development activities. All of our regulatory capital ratios continue to exceed well capitalized requirements. At September 30, 2011 Sterling’s Tier I risk-based capital ratio was 12.14% total risk-based capital was 13.18% and the Tier I leverage ratio was 9.08%.

Tangible common equity ratio rose to 7.43% at September 30, 2011 from 7.05% a year earlier. Our liquidity remained strong and will support further growth. The ratio of loans held in portfolio to deposits was approximately 71.5% as September 30. Coupled with the ability to redeploy investments from short-term instruments this gives us ample capacity to increase our lending activities.

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

John Millman

Thanks John. Let me conclude by saying that we recognized that the inherent uncertainty in the current economic environment calls for a cautious measured approach. That said we believe that our solid performance will continue through the balance of the year supported by strong demand for Sterling’s products and services from customers in our marketplace.

Now we would be pleased to respond to your questions.

Ed Nebb

Operator, we will take questions as soon as you can open the line.

Question-and-Answer Session

Operator

(Operator Instructions) and the first question comes from the line of Mark Fitzgibbon with Sandler O'Neil. Please go ahead.

Unidentified Participant

Hi good morning everybody this is actually Matt filling in for Mark.

John Millman

Good morning Matt.

Unidentified Participant

Good morning. So you are seeing in the release that the pipeline is robust would you be able to please share with us the current capacity?

John Millman

I’m sorry the question was the pipeline. The pipeline continues to be exceedingly strong. We anticipate seeing the level of growth that we’ve recorded through the first three quarters continue in the fourth quarter traditionally we go back and look at the company over the last several years fourth quarter has always been a particularly strong quarter among our client base for borrowing activity. So we are quite optimistic about the balance of the year.

Unidentified Participant

Okay and in terms of a dollar value I know that you said last quarter that it was about $200 million can we assume that it’s right around that level now.

John Millman

Yes, yes you can.

Unidentified Participant

Okay. Great, just another quick question here. How much do you have in or do you think you have in excess liquidity and how long do you expect it to take to deploy it?

John Tietjen

Got roughly $250 million of short-term liquidity. I would say that that would take couple, three quarters to use up.

Unidentified Participant

Okay, great. And then you know I think that’s actually, that’s it for me. Thank you.

John Tietjen

Thank you.

John Millman

Thanks.

Operator

We do have a question from the line of Lana Chang with BMO Capital Markets. Please go ahead.

Lana Chang – BMO Capital Markets

Hi, good morning.

John Millman

Good morning, Lana.

Lana Chang – BMO Capital Markets

One question on the loan growth and pricing it’s I saw the average loan yields were down this quarter by I think it was about 13 basis points from last quarter. Could you talk about the pricing competition and would you expect that pressure to continue going forward?

John Millman

I think it’s a more a combination of mix in the portfolio Lana the warehouse lending was particularly strong in this quarter. In terms of component of the loan portfolio but if you look at the, if you look at the margin on the loans from period to period we are down. Well it’s down only 14 basis points so we are getting some benefit on the reduction of the funding, which offsets any pricing issues that we could have and the change in the mix because of the warehouse lending product.

Lana Chang – BMO Capital Markets

Okay, did you say how much the mortgage warehouse loan volumes were or did I miss it?

John Tietjen

We didn’t say but it’s approximately 55% of the loan growth at period end let’s call it 42%, 43% on an average basis.

Lana Chang – BMO Capital Markets

Okay, and then just a question on the tax rate you know it’s a little; it was a little higher than I expected this quarter. What would be a good number to use going forward any kind of guidance on that?

John Tietjen

At this stage the best guidance I could give you is to use roughly at 28% range.

Lana Chang – BMO Capital Markets

Okay, but this quarter always been a little bit about 33% is that correct.

John Tietjen

It was a little higher yes.

Lana Chang – BMO Capital Markets

Was there a reason for that?

John Tietjen

It’s just the mix of taxable versus tax exempt income that could swing into the rate that we can use.

Lana Chang – BMO Capital Markets

Okay, thank you.

John Tietjen

And excuse me and the benefit that we still get from REIT.

Lana Chang – BMO Capital Markets

Okay, thanks John.

Operator

And we do have a question from the line of Damon Delmonte with KBW. Please go ahead.

Damon Delmonte – KBW

Hi, good morning guys how are you.

John Millman

Good morning Damon.

Damon Delmonte – KBW

I was wondering John if you could provide a little insight on the CDs balances this quarter. It looks like the end of period CDs were running $146 million versus the average balance of closer to $800 million did you see a big inflow towards the end of the quarter or there is some sort of promotion you had running or.

John Millman

No it’s the impact of our funding the balance sheet with SEDARs and deposits from other listing services as it relates to time deposits. The growth of money market and demand deposits were more as a result of development activities.

Damon Delmonte – KBW

What’s the rate that you guys are paying on the SEDARs?

John Millman

On a blended basis it’s about 55 basis points.

Damon Delmonte – KBW

Okay and then with the total balance of those?

John Millman

You know I don’t have that available with me right now Damon.

Damon Delmonte – KBW

Okay.

John Millman

I will back you on that.

Damon Delmonte – KBW

Okay, fair enough. When they come your line is there any seasonal impacts or seasonality in your fee income we should be on the lookout for in the fourth quarter.

John Tietjen

Yeah, the factoring area in the accounts receivable management third quarter is stronger usually than second quarter. Fourth quarter not quite as strong as third but still stronger than second.

Damon Delmonte – KBW

Okay, that’s all I have for now. Thank you.

Operator

(Operator Instructions) and the next question comes from the line of Rick Weiss with Janney. Please go ahead.

Dave Peppard – Janney

Hi guys. This is Dave Peppard from Janney. How are you?

John Millman

Good morning Dave.

Dave Peppard – Janney

I have two questions. The first one relates to the net interest margin you guys were asset sensitive at the end of the second quarter could you tell us a little bit about how your asset sensitivity has changed quarter over quarter and kind of where you are now versus then?

John Millman

I would say that it’s not substantially changed but I don’t have the absolute numbers at this particular point we are still cranking to our models. But I don’t think it will be a substantial change.

Dave Peppard – Janney

So the great state where they are today where would you expect the margin and interest income to be over the next few quarters.

John Tietjen

Well you know there is a couple of ways of looking at this. Clearly by moving out of investment portfolio into the loan portfolio you would expect that the margin would go up. It didn’t go up this quarter because a significant portion of our growth was from the mortgage warehouse product, which has a yield lower than the blended yield on the rest of the portfolio. But to give you some idea of what we could look at if we totally eliminated the investment portfolio and just shrunk the balance sheet didn’t even grow loans just shrunk the balance sheet the margin would go up to 4.82%. So the yield on the investment portfolio and the other temporary investments are at clearly a drag on the margin. But they are accretive to earn it.

Dave Peppard – Janney

Got you. Also looking at expenses one item that every other bank is highlighting as it’s the one item truly may control attacking non-credit expenses where things like yours has been kind of trending higher. I was wondering if this was something you guys have looked at or have plans in your back pocket to go after and cause maybe long growth doesn’t materialize like you think it will, there was something that you guys just know strongly about being able to take market share but you are going to have higher comp expenses and you are going to attack the efficiency ratio at a little higher revenue and not whole expenses.

John Millman

Well our efficiency ratio for the quarter actually improves I’m not bragging about it, it’s still high. But we did improve and there was a combination of higher revenues and our expense control efforts. The issue that we have here causes that I don’t believe that we are going to win this battle on the expense side. We are going to win the battle on the revenue side, which comes back to your market share comment. However, that does not mean that we are unmindful of the expenses and we do monitor them on a regular basis. The increases in comp expenses almost totaled our attributable to business production people. So it’s front office kinds of increases in comp I suppose to support people.

Dave Peppard – Janney

I see the occupancy and equipment expense is down by 12% to 13% in the quarter is there something going on there, you have rate going forward there.

John Millman

That’s just a function of principally the accounting treatment on some of our leases but also the timing of some of the occupancy related things that we have to recognize.

Dave Peppard – Janney

Tell how to revert back to the first and secondary level.

John Millman

I would say it will probably stay more in the run rate for the year-to-date basis.

Dave Peppard – Janney

Okay, thank you for your time.

Operator

(Operator Instructions) and we do have a question from the line of Collyn Gilbert with Stifel Nicolaus. Please go ahead.

Aaron Bran – Stifel Nicolaus

Good morning gentlemen it’s actually Aaron Bran calling in for Collyn this morning. How are you doing?

John Millman

Good morning.

Aaron Bran – Stifel Nicolaus

Just a few questions the first is it looks like though your security shield ticked up a little bit during the quarter was this notice of a product of a change in the duration of those assets or there is something else going on.

John Millman

No, I don’t think it’s definitely not the duration we are still very, very sure I think it’s probably more than result of the mix of what’s in the portfolio.

Aaron Bran – Stifel Nicolaus

Okay and I guess have you been able to pull out some of those liquidity assets into loan growth is that process yielded much in the last quarter.

John Tietjen

Well the loans, the loans on average for the quarter third quarter versus the second quarter are up about $130 million. Roughly, $40 million of that came out of the investment portfolio the rest of it was funded by lower yielding deposit sources.

Aaron Bran – Stifel Nicolaus

And was the -- you talked about C&I being strong and you talked about mortgage warehouse being strong. Was the loan growth really centered in those two categories or some of the other segments that you talked about in the past?

John Millman

It was centered primarily in our core C&I lending area along with the warehouse product.

Aaron Bran – Stifel Nicolaus

Okay and my final question is what, it appears from the reconciliation of the statement of shareholders equity that they may have been a reversal of unrealized gains this quarter, is there anything that we should be aware of.

John Millman

No.

Aaron Bran – Stifel Nicolaus

Okay, well that’s all I had. I appreciate your time this morning.

John Millman

Thank you.

Operator

And at this time there are no further questions. Thank you.

John Millman

Okay, 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

And as that conclude your conference then I will do a closing statement. Ladies and gentlemen this conference will be made available for replay after 12:00 PM today and until November 3, 2011 at midnight. You may access the AT&T executive playback service at anytime by dialing 1-800-475-6701 and entering the access code 220223. International participants may dial 1-320-365-3844 and again those numbers are 1-800-475-6701, international participants dial 1-320-365-3844 and entering the access code 220223. And that does conclude your conference call for today. Thank you for your participation and for using AT&T Executive Teleconference service and you may disconnect.

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