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Sterling Bancorp

(STL) - Get Report

has been firing on all cylinders, by growing its loans, and lowering its funding costs, growing its pre-tax fourth-quarter earnings by 58% in a tough operating environment.

Sterling is the holding company for

Sterling National Bank

, which is a commercial lender based in New York, which also operates in some specialized niches, including payroll financing for staffing companies, warehouse mortgage lending and factoring. The company had $2.7 billion in total assets as of Dec. 31, with 14 branches in Manhattan, Queens, Nassau County and Westchester County in New York. The company in September acquired Universal Mortgage of Brooklyn, and also plans soon to open another Brooklyn office.

Sterling on Thursday reported fourth-quarter net income available to common shareholders of $5.2 million, or 17 cents a share, declining from $5.3 million, or 17 cents a year earlier. However, the bottom-line results for the fourth-quarter of 2011 included a tax benefit of $1.9 million. Pre-tax earnings for the fourth quarter were $7.1 million, increasing from $4.5 million in the fourth quarter of 2011.

For all of 2012, with no adjustment for taxes, Sterling Bancorp reported earnings available to common shareholders of $20.0 million, or 65 cents a share, increasing from $15.5 million in 2011.

A major highlight for the company was its success in growing its net interest income and expanding its

net interest margin

, which is the difference between the average yield on loans and securities investments and the average cost for deposits and borrowings. Fourth-quarter net interest income totaled $24.8 million, increasing from $22.8 million in the fourth quarter of 2011. The net interest margin expanded to 4.00% in the fourth quarter from 3.90% a year earlier.

For all of 2012, net interest income increased by 8% to $93.9 million, while the net interest margin widened to 4.17% to 4.01%.

Sterling managed to improve its net interest income and margin, despite the headwinds from a difficult interest rate environment by "redeploying assets from lower yielding investments into higher yielding loans," according to CEO Louis Cappelli. Average loans, net of unearned discount, grew by 15% year-over-year to $1.6 billion.

Hand-in-hand with Sterling's loan-growth strategy is its focus on growing non-interest bearing deposits, which increased 19% year-over-year to $849.1 million as of Dec. 31, and made up over 40% of total deposits as of Dec. 31, which the company said was "among the highest ratios of demand to total deposits in the industry."

Sterling CFO John Tietjen says the growth in non-interest bearing deposits is "directly connected" to the company's growing commercial loan portfolio. "In our business model, part of our loan pricing is a compensating balance requirement, which we have on all of our lending relationships. That and our business development activities in non-lending areas have resulted in a big pickup in non-interest bearing deposits."

Sterling's fourth-quarter noninterest income totaled $9.6 million in the fourth quarter, increasing from $9.2 million in the fourth quarter of 2011. With the Universal Mortgage acquisition completed in September, Sterling's mortgage banking income nearly tripled year-over-year to $3.0 million in the fourth quarter. The increased mortgage income was partially offset by a decline in accounts receivable management and other fees, to $3.9 million in the fourth quarter from $5.6 million a year earlier.

Tietjen says "there were two factoring clients that were large users of letters of credit who no longer need those services, and as a result that line was impacted rather dramatically. If you look at trade finance income, which is the fees we charge for non-factoring clients, they are flat for the quarter and down slightly from a year earlier. There is not a dramatic change for the letter of credit business, other than these two factoring clients."

The company's return on average assets (ROA) for 2012 was 0.78% and its return on average tangible equity (ROE) was 9.80%. When discussing the company's goals, Tietjen says "there was a time in a normal rate environment, before many institutions, including ourselves, raised additional equity, when we were delivering a very nice ROA over 1% and ROE over 15%. We are going to get an ROA closer a 1% level and an ROE closer to or over 10%."

Regarding the company's move into Brooklyn, Tietjen says "the area of Brooklyn that we are going into has a large concentration of professional firms, especially lawyers. We do have a fair amount of business with lawyers, accountants and other professional firms now. The CFO also expects the Universal Mortgage acquisition to give it an additional advantage because of the mortgage group's existing customer relationships. "They are going to be a source of deposits for us, even though their principal business is to originate and sell off mortgages."

Sterling Bancorp's shares rose over 2% on Thursday to close at $9.73.

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Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.