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Executives

Ed Nebb - Comm-Counsellors, LLC - IR

John Millman - President

John Tietjen - EVP & CFO

Analysts

Mark Fitzgibbon - Sandler O'Neill

Damon Delmonte - KBW

Dave Peppard - Janney

Collyn Gilbert - Stifel Nicolaus

Sterling Bancorp (STL) Q4 2011 Earnings Call January 31, 2012 10:00 AM ET

Operator

Thank you for standing by and welcome to the Sterling Bancorp 2011 fourth 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 like to turn the conference over to Mr. Ed Nebb, Investor Relations Advisor. Please go ahead, sir.

Ed Nebb

Certainly Calvin, thank you. Good morning everyone. Thanks for joining us. Our news release announcing Sterling’s full-year and fourth quarter 2011 results was issued today prior to the market opened and we hope you’ve had an opportunity to review it. The release has also been posted to the company’s website.

Before turning to the discussion of our financial results, let me remind you that any comments made today about future financial position or results, dividends, plans, objectives and 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 amount of any dividends for the fourth quarter 2011 and beyond will depend on the company’s future results, 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.

Today we’ll have the introductory remarks from Mr. John Millman, President of Sterling Bancorp; and Mr. John Tietjen, Chief Financial Officer. And after their remarks, we’ll be happy to open up the call to your questions. And so without further ado, I’ll turn the call over to John Millman.

John Millman

Thank you and good morning everyone. Welcome to our conference for the 2011 full-year and fourth quarter. Sterling’s business performed well and delivered solid results in 2011. We experienced robust loan demand throughout the year. Our double-digit loan growth in both the full year and the fourth quarter was a key factor driving the increase in net interest income at higher fee income from accounts receivable management and related activities. As a result of our attention to expenses, the increase in non-interest expense was 3% compared to the previous year.

These factors contributed to the risk in net interest income for the year while 2011 results also included certain items specific to the fourth quarter which John Tietjen will detail shortly. The strength of our business was the basis of our growing profitability. Let me highlight some of our specific accomplishments for 2011.

Full-year net income available to common shareholders was $15.5 million or 3.5 times to 2010 amount. Return on average assets increased to 0.07% for 2011 from 0.31% a year earlier. Return on average equity rose to 7.83% for 2011 from 3.30% in 2010 on a higher equity base due to our public offering and earnings retention.

Total loans in portfolio were up 12% to nearly $1.5 billion at 2011 yearend, which is an increase of $159 million from a year ago. Loan demand has been strong in our traditional C&I category and we have also seen an accelerated volume in the mortgage warehouse lending product that we introduced last year. The loan pipeline remained robust heading into 2012. Total deposits were up 14% to nearly $2 billion at yearend while total assets increased to nearly $2.5 billion rising 6%. Non-interest bearing demand deposits increased to 34% to $766 million.

Our credit metrics remained very sound. Net charge-offs were $10.2 million for the full year, down from $29.6 million in 2010. The allowance from loan losses as a percentage of non-accrual loans was 315% at December 31st, 2011, up from 275% a year ago. Non-performing assets were 0.33% of total assets at December 31st, 2011 compared to 0.29% a year ago. At the end of the fourth quarter, our Tier 1 risk-based capital ratio was 12.61%, total risk-based capital was 13.71% and Tier I leverage ratio was 9.20.

Our tangible common equity ratio was 8.01% at December 31st, 2011. We strengthened our capital base with a public equity offering in March, 2011 as well as our retention of earnings. As a result, we were able to fully redeem the TARP preferred shares and warrants while continuing to have a solid capital foundation to respond to growth opportunities.

Sterling’s performance in the past year benefited from our unique business model and focused growth strategies. And we believe these strengths will continue to drive profitable growth in the future. We have remained committed to providing financial solutions for our customers including many small to mid-sized businesses, their owners and employees.

This segment has consistently been Sterling’s target market for decades. As a result of this commitment, we have continued to build new customer relationships and expand our existing client accounts. Our growth, including double-digit increases in loans and deposits has benefited from our strong resilient market, which is primarily the New York Metropolitan Area and beyond.

While we have seen some increase in competition for our target market, the type of customers that we traditionally serve, should continue to be engines of economic growth and opportunity.

For example, the Independent Budget Office, a private research group estimates by the end of the 2013, the city and surrounding area will add 89,000 jobs, including over 19,000 jobs in professional and business services such as lawyers, accountants and technology workers. A recent US Conference of Mayors’ report supports this optimistic view projecting a gain of 1.7% in the New York market area jobs for the next year.

Sterling’s growth strategy is focused on maintaining a strong service and sales culture while expanding our range of financial solutions. As we have noted, our establishment of a mortgage warehouse financing product has continued to drive growth and our asset-based lending capabilities which we enhanced a few years ago by acquiring an accounts receivable management factoring in trade finance business remain a distinguished feature.

These offerings not only provide our customers with alternatives that are often not available from competitors, but also generates significant non-interest income for the company. Finally we feel confident that our solid capital base and rigorous commitment to asset quality are important sources of strength.

We continue to see excellent opportunities for the continued growth of our business by focusing on our target customer base, remaining dedicated to superior service and building on the abilities of our talented team. Now I will turn the call over to John Tietjen.

John Tietjen

Thank you, John and good morning everyone. I would like to provide you with additional detail on our performance for 2011 and particularly the fourth quarter. For the full-year 2011, net income available to common shareholders was $15.5 million. That is 350% of our 2010 earnings at $4.4 million.

Net income available to common shareholders on a diluted share basis decreased to $0.51 for 2011 from $0.18 per diluted share a year ago. For the 2011 fourth quarter, net income available to common shareholders was $5.3 million, up from $3.5 million in the 2010 fourth quarter.

Net income available to common shareholders per diluted share increased to $0.17 for the 2011 fourth quarter up from $0.13 per diluted shares in the 2010 fourth quarter. Both the full year and fourth quarter of 2011 benefited from our strong loan growth, which drove the increase in net interest income as well as well higher fees for lending services such as accounts receivable management and other related fees.

As we noted in our press release, the 2011 results also included certain items recognized in the fourth quarter. Specifically reflecting our loss mitigation strategy with respect to residential mortgage repurchase issues prevalent across the banking industry we recorded a charge of approximately $700,000 for incurred and probable repurchase obligations.

We also recorded an expense related to the settlement of certain litigation matters of about $900,000. We wrote down certain assets to net realizable value amounting to a charge of about 600,000 and we recorded a net tax benefit in 2011, primarily due to the completion of federal tax audits for the periods from 2002 through 2009 of approximately $1.9 million.

Overall our performance reflected the strength of our core operations and business model. Looking at some of the key factors that contributed to our performance in the 2011 fourth quarter, net interest income was $21.9 million for the 2011 fourth quarter, up from $20.3 million a year ago.

This increase primarily reflected higher average loan balances and reduced funding costs, partially upset by the impact of lower yields like interest earning assets and higher interest varying deposits balances. Provision for loan losses was $3 million for the 2011 fourth quarter that is unchanged from the run rate we’ve seen since the fourth quarter of 2010.

Non- interest income was $10.3 million for the 2011 fourth quarter, compared to $12.1 million a year ago driven by higher accounts receivable management and other fees. Residential mortgage banking income declined due to, the mortgage repurchase charge that I noted earlier, along with industry-wide conditions including lower volume and slower pace of funding by mortgage investors in the 2011 fourth quarter.

We also experienced a decreased in deposits service charges primarily due to higher demand deposits balances and a decrease in security gains. Non-interest income has remained an important component of profitability representing 29% of total revenue in the recent quarter. Non-interest expenses were at 24.7 million for the 2011 fourth quarter including the litigation and assets write down charges noted earlier.

Overall non-interest expense rose to $348,000 from a year ago period reflecting higher compensation related to the growth of our business, partially offset by lower deposit insurance premiums.

We recognized a net tax benefit of $864,000 in 2011 fourth quarter compared to a provision of $928,000 for the fourth quarter of 2010. The 2011 period was positively impacted by the net benefit from a completion of the federal tax audits noted earlier.

I would like to provide some perspective on our net interest margin. Net interest margin was 3.77% for the fourth quarter of 2011 compared to 3.98% for the fourth quarter of 2010. A major factor affecting the margin was the significant increase in interest-bearing deposits with the Federal Reserve Bank, which represented 9% of total earning assets in 2011 fourth quarter up from 2% a year ago. This reflected our strategy of maintaining substantial liquidity for future loan demand by investing in short-term instruments but has had a disproportionate impact on our margin as the yield was only 25 basis points.

We continue to see the potential to improve our yield as the excess liquidity is redeployed into loans and securities. And because the extremely low yield of these bank deposits, even a shift of relatively low yielding assets will still produce an improvement.

Turning now to the balance sheet; net loans held in the portfolio at December 2011 totaled $1.5 billion, up 12% from a year-ago. Investment securities were $678 million at the end of 2011 fourth quarter, down from $789 million a year ago. This partially reflected the shift from investments into loans as well as our strategy of maintaining substantial sums in interest-bearing deposits with banks for liquidity purposes. We will look to improve yield by opportunistically shifting to securities with relatively short-term maturities.

Total deposits at December 31, 2011 were just under $2 billion an increased 14% from a year ago. Non-interest bearing deposits increased to $766 million from $570 million a year ago. Demand deposits have grown principally as a result of our business development activities.

All of our regulatory capital ratios continue to exceed well-capitalized requirements. At December 31, 2011 Sterling’s Tier I risk-based capital ratio was 12.61%, total risk-based capital was 13.71% and Tier I leverage was 9.02%.

As noted earlier, the tangible common equity ratio rose to 8.01% at December 31, 2011 from 6.81% a year earlier. This is due in part to our public equity offering in March of 2011, which raised gross proceeds of $38.6 million.

Our liquidity remains strong and we will support further growth. The ratio of loans held in portfolio to deposits was approximately 74.1% at December 31, 2011. Coupled with the availability to redeploy investments in short-term and instruments this gives us ample capacity to increase our lending activities.

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

John Millman

Thanks John, let me conclude by saying that we are pleased with our solid performance throughout the past year. With our differentiated business model, dynamic market area and strong financial capacity, we are quite confident that Sterling is well-positioned for continued profitable growth as we go forward.

Now we would be pleased to respond to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from the line of Mark Fitzgibbon with Sandler O'Neill. Please go ahead.

Mark Fitzgibbon - Sandler O'Neill

First question I have of the charges that you took during the quarter, were those after-tax numbers that you mentioned in the press release?

John Millman

No, they were pre-tax.

Mark Fitzgibbon - Sandler O'Neill

Pre-tax, okay. Then secondly John, you gave us some good color on the margin. It sounds like you sort of think that the margin is stable to may be up as you redeploy that excess liquidity into loans. Is that a fair characterization?

John Tietjen

We would expect it to begin improving and as an indicator of that if you have an opportunity to look at the loan yield for the fourth quarter versus the third quarter of 2011, we’re actually up five basis points on loan yield and that’s because of the areas of growth that we’ve had in the loan portfolio.

Mark Fitzgibbon - Sandler O'Neill

And then, with respect to the pipeline, John I think you said it was robust. Could you help size that for us; is it sort of north of $200 million?

John Tietjen

Sure. Actually today, we looked at it and its north of $250 million. Actually, the numbers we put together indicate a pipeline of about $260 million to $265 million. Historically, we have seen a pull-through rate of about 25%, so we’re quite encouraged by that. It’s a dynamic pipeline. We view it every single month, but historically, we've pulled through more than 25%.

Mark Fitzgibbon - Sandler O'Neill

Do you think in the first quarter because you have some seasonal factors with the factoring business; do you think we’ll see loan balances down a little bit or do you think you are able to sort of hold them?

John Tietjen

Well traditionally, the first quarter has been a struggle for us as you point out. I would say that we have a good chance of holding our own or seeing a modest increase.

Mark Fitzgibbon - Sandler O'Neill

And then last question I had was on the expense front. Can you help us sort of think about what a good run-rate expense number is going forward. Is it sort of down around $24-ish million or is it lower?

John Millman

I would say that we are at a normal -- if I took out the items that I told you about earlier that will expenses maybe down around $93 million to $93.5 million. You know CPI is about 3%. We do have some factors in there including our expense management activities; so I would add roughly $3 million to that number.

Operator

And our next question is from the line of Damon Delmonte with KBW. Please go ahead.

Damon Delmonte - KBW

John, I guess could you just give us an update on the decline in period end CDs; were those some of the CDARS that were running off?

John Millman

Yeah, we have blocked on a program of running down the CDARS; it cost us more to fund and given the fact that we were constrained in finding acceptable investments; didn’t make any sense to pay, lets call it to a larger rate of 50 bps on the CDARS compared to earning 25 basis points of [that].

Damon Delmonte - KBW

Right, makes sense. And then with regards to the securities portfolio, you know period end balances were down much more than the average balance. Could you just, I may have missed your commentary and your outlook for the securities portfolio; are we going to see the average catch-up to the period end or are you looking to kind of recapture some of that run-off earlier in the first quarter?

John Millman

Well, we’re up against a couple of things Damon, one, we constantly as everybody else does, our pace with calls of our agency securities, so that’s an issue. And also, as I indicated, we’re opportunistically going into the investment portfolio here. We’re not looking to buy short-term securities further out than I’ll say three year as probably as far as we want to go.

And if we can’t find acceptable yields given the credits that we’re looking at, we might just leave the money at the Federal Reserve. The other side of it is, as John pointed out, if we’re able to even to some of that pipeline, we should have pretty good loan growth in the first quarter.

Damon Delmonte - KBW

And then, the rep and warranty charge you took for the mortgages; was that actually booked through the mortgage banking fee line item or was that in other expenses?

John Tietjen

No, it’s in the mortgage banking income line.

Damon Delmonte - KBW

So then if we exclude from your expense base the reported expenses were 24.7 kind of touching back on Mark’s question from before, I mean if you take out the litigation settlement and the outside OREO write-down; is the low $23 million range a good quarterly run-rate return?

John Tietjen

Well, yes. I would say that except that we’re going to have an increase in expenses and that’s why I was trying to indicate though, it was somewhere around 3% give or take a little bit.

Damon Delmonte - KBW

Okay.

John Tietjen

But yes, what you have just done would get us to a start point and then we would have an increase of that.

Operator

And our next question is from the line of Rick Weiss with Janney. Please go ahead.

Dave Peppard - Janney

It’s Dave Peppard filling in for Rick. I just want to ask an additional follow-up about the dance between expenses and revenue growth. Essentially, in terms of adding more expenses, is it revenue producers are not in the course of the next year and how much of the additional expenses is dependent on continued loan growth?

John Tietjen

The increase in the compensation expenses, virtually on – all is on the business development side.

Dave Peppard - Janney

So year-over-year personnel expenses of about 8%. So that’s total revenue is kind of flattish year-over-year; is it the right direction?

John Millman

Well, I think you need to look at the loan growth as opposed to looking at total revenues. I mean, these guys and women have nothing to do with what goes on in the treasury function and the treasury functional year has been hammered by what’s going on with the rate environment and our decision to stay short for liquidity. But if you look at it at what’s going on with the loan growth, that’s where you’re getting -- and deposit growth, excuse me, deposit growth; that’s where you’re getting the benefit.

Dave Peppard - Janney

What type of monthly cash flows are you getting from the investment securities portfolio and how much of that is able to be put in to new loan growth?

John Tietjen

You know, Dave, I really don’t know the run-rate on the cash flows anymore. I’ll have to get back to you on that. We’ve got maturities every month on the short-term so that’s usually and I just don’t want to give you the wrong number, right; I don’t know it at the top of my head.

Dave Peppard - Janney

And then just quickly, what’s the tax rate to use for next year?

John Tietjen

I would use the 29%-30% for the tax rate.

Operator

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

Collyn Gilbert - Stifel Nicolaus

Just on the non-interest bearing deposits the big jump that you saw at the end of the quarter, is there a stickiness to that or is that kind of a relationship that might have been during the year end sort of financial planning?

John Millman

We had some significant deposits come in at the end of the year from one customer in particular and that has resulted from the sale of some real estate assets. So that was a factor. But, I mean we’ve had pretty good demand deposit growth all year, so I think by and large that we would expect to see continued double-digit growth in demand deposits. Remember, looking at that road at the year end versus any other period is an issue for us because of what our customers do for their own balance sheet purpose.

Collyn Gilbert - Stifel Nicolaus

And then just thinking about the pipeline, John you used 260 to 265 or so; do you know how that compares to the third quarter, going into the third quarter and then also how that compares to the year ago period?

John Tietjen

I don’t remember a year ago, but it’s a bit higher than it was in the third quarter which is particularly encouraging for us.

Collyn Gilbert - Stifel Nicolaus

And then just on the yield front, John you had indicated that the year-over-year improvement in the loan yield, you know stems in part from improving mix; is that a similar dynamic as to what went on from the third to the fourth quarter, because I am just trying to reconcile the increase in security deal in the third to fourth quarter as well as the loan yield in the third to fourth quarter?

John Tietjen

The yields that I talked about earlier Collyn were fourth quarter versus third quarter of 2011. I didn't make any reference to the yields on a year-to-date basis.

Collyn Gilbert - Stifel Nicolaus

Well, I am, because they did go up from the third quarter to the fourth quarter. It looks like, both the loan yields and the security yields, assuming that the numbers in the third quarter press release were accurate, does that seem to make sense?

John Tietjen

And they are and they did go up, we were up 5 basis points, fourth quarter over third quarter of this year in the loan yield and that's just a function of the mix of the loans that are going in there. The increase in the securities yield is essentially we went out a little longer in some of the corporates that we've had. We were going out a year and a half to two years when we went out two to two and a half years on the basis of what we saw in the economic forecast and now with regard to what the Fed has said in terms of keeping rates low through 2014, we may go out as far as three years. We haven't done that yet, but we may.

Collyn Gilbert - Stifel Nicolaus

And then just on the OREO writedown, what was the basis for that, what led to that writedown in the quarter.

John Tietjen

It wasn’t an OREO writedown. It was a writedown of other asset, other receivable base assets and we've got a situation where we’ve got an asset that's secured by accounts receivables, it’s not alone and based on the latest input we’ve got from the people collecting for us, we took a writedown of roughly 500,000 on that one particular asset.

Collyn Gilbert - Stifel Nicolaus

Okay, so that most likely will not be recurring, any form of that type of charge. Okay and then just finally maybe just kind of a big picture question here. You know you guys talk about you know the drain here sort of on the overall profitability because of the increased liquidity that you have, but you all have kind of carried a high level liquidity over the years.

How do you think about that as we go forward? I mean the intention, obviously it sounds like is to redeploy that in the loans currently. But it seems like the bias has always been to kind of carry a higher liquidity position, I mean do you see that, I think it’s what, like 35% or 36% of your earning asset base seems to be in securities and cash. Do you see that migrating lower overtime and just trying to draw that into reconciling you know what seems to be kind of a lower ROA and a higher efficiency ratio relative to where I think you would given kind of what seems like the core profitability of business?

John Millman

Collyn, our goal certainly would be to reduce the liquidity, also to reduce the loan-to-deposit ratio. This can only be accomplished, if we are able to continue growing the loans. We’re certainly going to focus on return on assets as we go forward in return on equity and we recognize we pay a price for this high level of liquidity and we need to manage that. Let me put just a little bit different skin on that. For the fourth quarter, our deposits with the other banks on average now, were over $200 million. Compared to the third quarter, we just had about $67 million and the reason for that is because as we got calls on maturities in the investment portfolio, we just couldn’t get the yields that we wanted in the investment portfolio. So the money was in effect, now if you look at it the yields on investment portfolio for the fourth quarter is lets call it 3.4, and for the third quarter it was 3.1.

So clearly, if I can move even $100 million out of the deposits with banks, now only to the investment portfolio, I am picking up over 300 basis points. If we can move it into loans, we’ll pickup 500 basis points. But it’s that move and we need to find acceptable yields in the maturity ranges that we want and we have seen some of that to move it into the investment portfolio and then we got the funding of the loan growth.

Collyn Gilbert - Stifel Nicolaus

To that point, John you mentioned acceptable yields at the maturity ranges of one in the securities portfolio. What are the maturity ranges looking like now within the loan book in terms of the types of loan that you put on versus what’s writing off; like how has the duration changed in the core loan book?

John Tietjen

It hasn’t changed at all. I would say, we are still very much asset sensitive in the loans; virtually, the only one that’s that need to turn it all is the leasing book and that’s still running between two and a half years to three years in average life. But everything else is relatively short.

Collyn Gilbert - Stifel Nicolaus

Okay.

John Tietjen

Looking at the mortgage banking, we did have a slowdown in the fourth quarter with the funding, so that translated into our mortgage warehouse business also. We had loans that sat in the warehouse longer, because the investors slowed down their funding. But we think that that’s something that will work itself out over the next quarter so that we’re not troubled by that. But even that’s short, I mean, we’re talking instead of 20 days, we’re talking 30 days in the warehouse business.

Operator

And our next question is from the line of [Brett Wakaki with Minden Capital]. Please go ahead.

Unidentified Analyst

To question with your excess capital; could you prioritize between organic growth, M&A, dividend increases and share buybacks?

John Millman

I think the first priority is organic growth. You know, we have such small market share; the market opportunity is very substantial. We constantly look at the dividend; we review the dividend, apply it to the earnings and the capital requirements of the company going forward. So the dividend is always under consideration. I do not see buybacks at this time as being very high on the agenda.

Unidentified Analyst

And M&A?

John Millman

We’re always looking; as you know we’ve done a couple of specialty financed companies in the last couple of years. I do not think it is likely that we would do a whole bank transaction; given the fact that the organic growth opportunities in this market are so great.

Operator

(Operator Instructions) And we have no lines in queue. Please continue gentlemen.

John Millman

No questions though, so thank you operator. As always, we thank you for your interest in Sterling and we look forward to seeing, speaking with you in the future. Thank you.

Operator

And ladies and gentlemen, that does conclude our teleconference call for this morning. Thank you very much for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.

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