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STL > SEC Filings for STL > Form 10-Q on 8-Nov-2012All Recent SEC Filings

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Form 10-Q for STERLING BANCORP


8-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following commentary presents management's discussion and analysis of the financial condition and results of operations of Sterling Bancorp (the "parent company"), a financial holding company under the Bank Holding Company Act of 1956, as amended by the Gramm-Leach-Bliley Act of 1999, and its subsidiaries, principally Sterling National Bank. Throughout this discussion and analysis, the term the "Company" refers to Sterling Bancorp and its subsidiaries and the term the "bank" refers to Sterling National Bank and its subsidiaries. This discussion and analysis should be read in conjunction with the consolidated financial statements and supplemental data contained elsewhere in this quarterly report and the Company's annual report on Form 10-K for the year ended December 31, 2011 (the "2011 Form 10-K"). Certain reclassifications have been made to prior years' financial data to conform to current financial statement presentations. Throughout management's discussion and analysis of financial condition and results of operations, dollar amounts in tables are presented in thousands, except per share data.

OVERVIEW

The Company provides a broad range of financial products and services, including business and consumer loans, commercial and residential mortgage lending and brokerage, mortgage warehouse lending, asset-based financing, factoring/accounts receivable management services, deposit services, trade financing, and equipment financing. The Company has operations principally in New York and conducts business throughout the United States. The general state of the U.S. economy and, in particular, economic and market conditions in New York, New Jersey and Connecticut (the "New York metropolitan area") have a significant impact on loan demand, the ability of borrowers to repay these loans and the value of any collateral securing these loans may also affect deposit levels. Accordingly, future general economic conditions are a key uncertainty that management expects will materially affect the Company's results of operations.

For the nine months ended September 30, 2012, the bank's average earning assets represented approximately 99.2% of the Company's average earning assets. Loans represented 64.6% and investment securities represented 32.6% of the bank's average earning assets for the first nine months of 2012.

The Company's primary source of earnings is net interest income, and its principal market risk exposure is interest rate risk. The Company is not able to predict market interest rate fluctuations, and its asset-liability management strategy may not prevent interest rate changes from having a material adverse effect on the Company's results of operations and financial condition.

Although management endeavors to minimize the credit risk inherent in the Company's loan portfolio, it must necessarily make various assumptions and judgments about the collectibility of the loan portfolio based on its experience and evaluation of economic conditions. If such assumptions or judgments prove to be incorrect, the current allowance for loan losses may not be sufficient to cover loan losses and additions to the allowance may be necessary, which would have a negative impact on net income.

There is intense competition in all areas in which the Company conducts its business. The Company competes with banks and other financial institutions, including savings and loan associations, savings banks, finance companies and credit unions. Many of these competitors have substantially greater resources and lending limits and provide a wider array of banking services. To a limited extent, the Company also competes with other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies and insurance companies. Competition is based on a number of factors, including prices, interest rates, service, availability of products and geographic location.

The Company regularly evaluates acquisition opportunities and conducts due diligence activities in connection with possible acquisitions. As a result, acquisition discussions, and in some cases negotiations, regularly take place and future acquisitions could occur.

While the domestic economy continued to show moderate improvement during the 2012 third quarter, the pace was not consistent month-to-month and the rate of expansion also varied across regions of the country. Recent economic conditions during 2012, such as the stable to modest increase in residential real estate values in the principal markets the Company serves, have increased demand for residential real estate lending. The Company also believes there are opportunities to prudently expand its loan portfolio, particularly in the corporate and commercial real estate sectors, under current economic conditions. If some of the positive economic trends observed during the third quarter of 2012 were not to continue, the Company would expect its income from real estate lending to decrease from the current levels in the near term. In addition, due to the geographic concentration of the Company's loan portfolio in the New York metropolitan area, representing approximately 69.9% of total loans at September 30, 2012, an adverse change in market conditions in that geographic area could result in a decrease in our income from residential and commercial real estate lending. A significant prolonged decrease in income from our lending segments, if realized, may have a severe adverse impact on the operations of the Company.


INCOME STATEMENT ANALYSIS

Net interest income, which represents the difference between interest earned on interest-earning assets and interest incurred on interest-bearing liabilities, is the Company's primary source of earnings. Net interest income can be affected by changes in market interest rates as well as the level and composition of assets, liabilities and shareholders' equity. Net interest spread is the difference between the average rate earned, on a tax-equivalent basis, on interest-earning assets and the average rate paid on interest-bearing liabilities. The net yield on interest-earning assets ("net interest margin") is calculated by dividing tax-equivalent net interest income by average interest-earning assets. Generally, the net interest margin will exceed the net interest spread because a portion of interest-earning assets are funded by various noninterest-bearing sources, principally noninterest-bearing deposits and shareholders' equity. The increases (decreases) in the components of interest income and interest expense, expressed in terms of fluctuation in average volume and rate, are provided in the Rate/Volume Analyses shown beginning on page 58. Information as to the components of interest income and interest expense and average rates is provided in the Average Balance Sheets shown beginning on page 56.

Comparison of the Three Months Ended September 30, 2012 and 2011

The Company reported net income available to common shareholders for the three months ended September 30, 2012 of $5.3 million, representing $0.17 per share calculated on a diluted basis, compared to $4.4 million, or $0.14 per share calculated on a diluted basis, for the third quarter of 2011. The increase in net income available to common shareholders was primarily due to a $1.2 million increase in net interest income and a $1.0 million decrease in provision for loan losses. Those benefits were partially offset by a $0.2 million decrease in noninterest income, a $0.7 million increase in noninterest expenses and a $0.3 million increase in the provision for income taxes.

Net Interest Income
Net interest income, on a tax-equivalent basis, was $24.6 million for the third quarter of 2012 compared to $23.5 million for the corresponding 2011 period. Net interest income benefitted from higher average loan balances, lower average balances for interest-bearing liabilities and lower cost of interest-bearing deposits. Net interest income also benefitted from the reclassification from accounts receivable management/factoring commissions and other fees into interest income from loans of revenues related to one of the Company's lending products, thereby more appropriately reflecting the characteristics of the product. Those benefits were partially offset by the impact of lower yields on loans and lower average investment securities balances. The net interest margin, on a tax-equivalent basis, was 4.02% for the third quarter of 2012 compared to 3.90% for the corresponding 2011 period. As discussed in detail below, the net interest margin was impacted by the mix of earning assets and funding, including the higher level of noninterest-bearing demand deposits.

Total interest income, on a tax-equivalent basis, aggregated $27.4 million for the third quarter of 2012, up $0.6 million from the corresponding 2011 period as the benefit of higher average loan balances more than offset the impact of lower average investment securities balances and lower yields. Total interest earning assets were $2,432.5 million for the third quarter of 2012 compared to $2,417.7 million in the prior year period. The tax-equivalent yield on interest-earning assets was 4.47% for both the 2012 and 2011 periods.

Interest earned on the loan portfolio increased to $21.5 million for the third quarter of 2012 from $19.7 million in the prior year period. Average loan balances amounted to $1,632.9 million for the third quarter of 2012, an increase of $178.9 million from an average of $1,454.0 million in the prior year period. The increase in average loans, primarily due to the Company's business development activities, accounted for a $2.7 million increase in interest earned on loans. The yield on the loan portfolio decreased to 5.26% for the third quarter of 2012 from 5.54% for the corresponding 2011 period, which was primarily attributable to the mix of average outstanding balances among the components of the loan portfolio.

Interest earned on the securities portfolio, on a tax-equivalent basis, decreased to $5.8 million for the third quarter of 2012 from $7.0 million in the corresponding 2011 period. Average outstandings decreased to $735.1 million (30.2% of average earning assets) for the third quarter of 2012 from $888.0 million (36.7% of average earning assets) in the third quarter of 2011. The average yield on investment securities was 3.13% for both the 2012 and the 2011 periods. The decrease in balances reflects the Company's decision to replace a portion of medium term (approximate 5 year original maturities), lower yielding U.S. Government Agency Securities that were called by the issuer with longer term (approximate 10-15 year original maturities) U.S. Government Agency securities having approximately the same or slightly higher yield thereby maintaining a pool of pledgable collateral. Management's Asset/Liability strategy continues to be designed to maintain a portfolio of corporate securities with a relatively short-term average life positioning the Company for higher interest rates in future periods. This strategy was implemented through the sale of available for sale securities, principally longer dated corporate securities.


Total interest expense decreased by $0.6 million for the third quarter of 2012 from $3.3 million for the corresponding 2011 period, primarily due to the impact of lower balances of interest-bearing liabilities and and lower rates paid for those funds.

Interest expense on deposits decreased to $1.7 million for the third quarter of 2012 from $2.2 million for the corresponding 2011 period, due to decreases in the cost of those funds coupled with the impact of lower balances. The average rate paid on interest-bearing deposits was 0.50%, which was 12 basis points lower than the prior year period. The decrease in average cost of deposits reflects the impact of deposit pricing strategies for NOW, Money market and certificates of deposit that are rolled over at their maturity date and the Company's purchase of certificates of deposit from various listing services and investments advisors which provided certificate of deposit balances at lower rates. Average interest-bearing deposits were $1,349.8 million for the third quarter of 2012 compared to $1,417.5 million for the prior year period, reflecting the impact of the Company's business development activities on its noninterest-bearing demand deposits that increased $173.4 million from the prior year period.

Provision for Loan Losses
Based on management's continuing evaluation of the loan portfolio (discussed under "Asset Quality" beginning on page 48), the provision for loan losses for the third quarter of 2012 was $2.0 million, compared to $3.0 million in the prior year period. Factors affecting the provision for the third quarter of 2012 included current economic conditions during the quarter and a lower level of net charge-offs and lower nonaccrual loan balances.

The level of the allowance reflects changes in the size of the portfolio or in any of its components as well as management's continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality and economic, political and regulatory conditions. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management's judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company's control, including the performance of the Company's loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

As of September 30, 2012, the allowance for loan losses increased to $22.2 million from $20.0 million at December 31, 2011, primarily due to an increase in the level of commercial and industrial and residential real estate nonaccrual loans and higher commercial and industrial loan net charge-offs partially offset by a lower level of commercial real estate nonaccrual loans and lower equipment finance net charge-offs.

Noninterest Income
Noninterest income was $10.5 million for the third quarter of 2012 compared to $10.7 million in the corresponding 2011 period. The decrease was principally due to lower accounts receivable management/factoring commissions and other related fees and securities gains partially offset by higher mortgage banking income. Accounts receivable management/factoring commissions and other related fees was also negatively impacted by the level and mix of sales volume and by lower trade finance volume. Mortgage banking income increased principally due to higher volume of loans sold.

Noninterest Expense
Noninterest expenses were $24.5 million for the third quarter of 2012, compared to $23.8 million for the prior year period. Higher compensation and occupancy costs, reflecting the Company's continued investment in the franchise, were partially offset by lower professional fees.

Provision for Income Taxes
Reflecting an increase in pre-tax income of $1.3 million, the provision for income taxes for the third quarter of 2012 was $2.5 million, reflecting an effective tax rate of 31.7%, compared with a provision for income taxes of $2.2 million for the third quarter of 2011, reflecting an effective tax rate of 33.4%. The decrease in the effective tax rate was primarily due to the impact of changes in the estimate of the annual effective tax rate for the third quarter of 2012 compared to the 2011 period partially offset by the impact of higher pre-tax income for the 2012 period compared to the 2011 period.


Comparison of the Nine Months Ended September 30, 2012 and 2011

The Company reported net income available to common shareholders for the nine months ended September 30, 2012 of $14.8 million, representing $0.48 per share calculated on a diluted basis, compared to $10.2 million, or $0.35 per share calculated on a diluted basis, for the first nine months of 2011. The increase in net income available to common shareholders was primarily due to a $5.2 million increase in net interest income, a $1.3 million decrease in the provision for loan losses and a $2.1 million decrease in dividend and accretion on the preferred shares, resulting from the repurchase in the second quarter of 2011 of all of the preferred shares and the warrant issued under the TARP Capital Purchase Program. Those benefits were partially offset by a $0.5 million decrease in noninterest income, a $1.8 million increase in noninterest expenses and a $1.6 million increase in the provision for income taxes.

Net Interest Income
Net interest income, on a tax-equivalent basis, was $71.7 million for the first nine months of 2012 compared to $66.4 million for the corresponding 2011 period. Net interest income benefitted from higher average loan balances, lower interest-bearing liabilities balances and lower cost of funding. Net interest income also benefitted from the reclassification from accounts receivable management/factoring commissions and other fees into interest income from loans of revenues related to one of the Company's lending products, thereby more appropriately reflecting the characteristics of the product. Those benefits were partially offset by the impact of lower yields on loans and lower average investment securities balances. The net interest margin, on a tax-equivalent basis, was 4.12% for the first nine months of 2012 compared to 3.96% for the corresponding 2011 period. As discussed in detail below, the net interest margin was impacted by the mix of earning assets and funding, including the higher level of noninterest-bearing demand deposits.

Total interest income, on a tax-equivalent basis, aggregated $80.0 million for the first nine months of 2012, up $3.7 million from the corresponding 2011 period as the benefit of higher average loan balances more than offset the impact of lower investment securities balances and lower yields. Total interest earning assets increased to $2,363.0 million for the first nine months of 2012 compared to $2,291.3 million in the prior year period. The tax-equivalent yield on interest-earning assets was 4.61% for the first nine months of 2012 compared to 4.55% for the corresponding 2011 period.

Interest earned on the loan portfolio increased to $61.2 million for the first nine months of 2012 from $55.0 million in the prior year period. Average loan balances amounted to $1,530.4 million for the first nine months of 2012, an increase of $185.5 million from an average of $1,344.9 million in the prior year period. The increase in average loans, primarily due to the Company's business development activities, accounted for a $8.2 million increase in interest earned on loans. The yield on the loan portfolio decreased to 5.52% for the first nine months of 2012 from 5.72% for the corresponding 2011 period, which was primarily attributable to the mix of average outstanding balances among the components of the loan portfolio.

Interest earned on the securities portfolio, on a tax-equivalent basis, decreased to $18.4 million for the first nine months of 2012 from $20.9 million in the corresponding 2011 period. Average outstandings decreased to $767.8 million (32.5% of average earning assets) for the first nine months of 2012 from $884.4 million (38.6% of average earning assets) in the first nine months of 2011. The average yield on investment securities increased to 3.19% for the first nine months of 2012 from 3.15% in the corresponding 2011 period. The decrease in balances and increase in yield reflect the Company's decision to replace a portion of medium term (approximate 5 year original maturities), lower yielding U.S. Government Agency Securities that were called by the issuer with longer term (approximate 10-15 year original maturities) U.S. Government Agency securities having approximately the same or slightly higher yield thereby maintaining a pool of pledgable collateral. Management's Asset/Liability strategy continues to be designed to maintain a portfolio of corporate securities with a relatively short-term average life positioning the Company for higher interest rates in future periods. This strategy was implemented through the sale of available for sale securities, principally longer dated corporate securities and selected obligations of states and political subdivisions with longer average lives.

Total interest expense decreased by $1.5 million for the first nine months of 2012 from $9.8 million for the corresponding 2011 period, due to the impact of lower balances and rates paid for interest-bearing liabilities.


Interest expense on deposits decreased to $5.1 million for the first nine months of 2012 from $6.4 million for the corresponding 2011 period, due to decreases in the cost of those funds, coupled with the impact of changes in the mix. The average rate paid on interest-bearing deposits was 0.53%, which was 12 basis points lower than the prior year period. The decrease in average cost of deposits reflects the impact of deposit pricing strategies for NOW, Money market and certificates of deposit that are rolled over at their maturity date and the Company's purchase of certificates of deposit from various listing services and investment advisors which provided certificate of deposit balances at lower rates. Average interest-bearing deposits were $1,273.0 million for the first nine months of 2012 compared to $1,299.6 million for the prior year period.

Interest expense on borrowings decreased to $3.3 million for the first nine months of 2012 from $3.5 million for the corresponding 2011 period, primarily due to lower average balances. Average borrowings decreased to $212.6 million for the first nine months of 2012 from $238.1 million in the prior year period, reflecting a lesser reliance by the Company on wholesale borrowed funds.

Provision for Loan Losses
Based on management's continuing evaluation of the loan portfolio (discussed under "Asset Quality" beginning on page 48), the provision for loan losses for the first nine months of 2012 was $7.8 million, compared to $9.0 million in the prior year period. Factors affecting the provision for the first nine months of 2012 included current economic conditions during the quarter and a lower level of net charge-offs and lower nonaccrual loan balances.

The level of the allowance reflects changes in the size of the portfolio or in any of its components as well as management's continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality and economic, political and regulatory conditions. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management's judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company's control, including the performance of the Company's loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

As of September 30, 2012, the allowance for loan losses increased to $22.2 million from $20.0 million at December 31, 2011, primarily due to an increase in the level of commercial and industrial and residential real estate nonaccrual loans and higher commercial and industrial and commercial real estate loan net charge-offs partially offset by a lower level of commercial real estate nonaccrual loans and lower equipment finance net charge-offs.

Noninterest Income
Noninterest income decreased to $31.6 million for the first nine months of 2012 from $32.1 million in the corresponding 2011 period. The decrease principally resulted from lower accounts receivable management/factoring commissions and other related fees and securities gains partially offset by higher mortgage banking income. Accounts receivable management/factoring commissions and other related fees was also negatively impacted by the level and mix of sales volume and by lower trade finance volume. Mortgage banking income increased principally due to higher volume of loans sold.

Noninterest Expense
Noninterest expenses were $71.5 million for the first nine months of 2012, compared to $69.7 million for the prior year period. Higher compensation expense, reflecting the Company's continued investment in the franchise, were partially offset by reductions in deposit insurance premiums.

Provision for Income Taxes
Reflecting an increase in pre-tax income of $4.2 million, the provision for income taxes for the first nine months of 2012 was $6.7 million, reflecting an effective tax rate of 31.0%, compared with $5.1 million for the first nine months of 2011, reflecting an effective tax rate of 29.2%. The increase in the effective tax rate was primarily due to a higher level of pre-tax income in the 2012 period compared to the 2011 period.


BALANCE SHEET ANALYSIS

Securities
At September 30, 2012, the Company's portfolio of securities totaled $699.8 million, of which obligations of U.S. government corporations and government sponsored enterprises amounted to $284.2 million, which is approximately 40.6% of the total portfolio. The Company has the intent and ability to hold to maturity securities classified as held to maturity, at which time it expects to receive full value for these securities. These securities are carried at cost, adjusted for amortization of premiums and accretion of discounts. The gross unrealized gains and losses on held to maturity securities were $18.8 million and $0.1 million, respectively. Securities classified as available for sale may be sold in the future, prior to maturity. These securities are carried at fair value. Net aggregate unrealized gains or losses on these securities are included, net of taxes, as a component of shareholders' equity. Given the generally high credit quality of the portfolio, management expects to realize all of its investments upon market recovery or the maturity of such instruments, and thus believes that any impairment in value is related to either interest rates or market conditions and therefore temporary. Available for sale securities included gross unrealized gains of $6.1 million and gross unrealized losses of $0.8 million. As of September 30, 2012, management does not have the intent to sell any of the securities classified as available for sale in the table on page 9 and management believes that it is not more likely than not that the Company would be required to sell any such securities before a recovery of cost.

In connection with an asset-liability management strategy described under Net Interest Income on page 42, during the third quarter 2012, the Company sold approximately $18.3 million of securities with a weighted average life of about 1.7 years. A significant portion of the proceeds was used to fund loan growth.

The following table presents information regarding the average life and yields of certain available for sale ("AFS") and held to maturity ("HTM") securities:

September 30, 2012                   Weighted Average Life                 Weighted Average Yield
                              AFS (Years)           HTM (Years)          AFS                    HTM
Residential mortgage-backed
securities                             2.0                    3.1           1.21 %                4.48 %
Agency notes (with original
call dates ranging  between
3 and 36 months)                       0.9                    5.0           1.68 %                1.30 %
Corporate debt securities              1.3                      -           2.30 %                   - %
Obligations of state and
political subdivisions
-  New York Bank Qualified             5.4                    6.1           5.94 %   [1]          6.00 %  [1]

[1] tax equivalent

. . .

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