Sterling National Fights the Banking Trend

NEW YORK ( TheStreet) -- John Millman, the president and CEO of Sterling National Bank -- the main subsidiary of Sterling Bancorp ( STL) of New York -- says the bank is "willing to go countertrend," and has achieved success by focusing on "niches that other banks may not be competing in."

Sterling Bancorp on Tuesday reported second-quarter net income available to common shareholders of $4.9 million, or 16 cents a share, increasing from $4.6 million, or 15 cents a share, in the first quarter, and nearly doubling from $2.5 million, or eight cents a share, during in the second quarter of 2011.

Sterling's second-quarter net interest income increased to $22.9 million, from $22.4 million the previous quarter, and $21.4 million a year earlier, which "primarily reflected the Company's execution of its strategy to shift the asset mix toward higher loan balances and lower investment securities balances, with a resulting increase in yields, while also taking a disciplined approach to reducing funding costs."

The company's second-quarter net interest margin -- the spread between the average yield on loans and securities and its average cost for deposits and borrowings -- was 4.04%, narrowing slightly from 4.07% in the first quarter, but improving from 3.90% in the second quarter of 2011, running counter to the trend for most U.S. banks, as short-term rates remain near zero while long-term rates continue to decline.

Noninterest income during the second quarter totaled $10.7 million, increasing from $10.4 million the previous quarter and also during the prior-year quarter. The sequential improvement reflected increases in revenue from accounts receivable management, factoring commissions and other fees, as well as an increase in service charges on deposit accounts and income from life insurance policies, which more than offset a decline in gains on securities to $329,000 during the second quarter, from $879,000 in the first quarter.

The year-over-year improvement mainly reflected an increase in mortgage banking income to $2.4 million from $1.6 million, as well as a 13% increase in deposit account service charges, to $1.6 million, greatly offsetting a 12% year-over-year decline in revenue from accounts receivable management, factoring commissions and other fees, to $5.1 million.

While Sterling Bancorp's total assets declined slightly year-over-year, to $2.56 billion as of June 30, the company's total portfolio loans grew 8% sequentially and 15% year-over-year, to $1.57 billion.

Sterling Bancorp CEO Louis Cappelli said that the company has "a depth of expertise in an array of products, including categories that are often overlooked or underserved by competitors, which gives us many opportunities for growth," with a "relatively high level of noninterest income, at approximately 30% of total revenues, providing balance and consistency at a time when loan yields are affected by the low interest rate environment."

Sterling Bancorp's second-quarter return on average tangible equity was 9.68%, increasing from 7.65% a year earlier.

The company's asset quality was very strong, with a ratio of nonperforming assets to total assets of 0.28% as of June 30.

Sterling reported a tangible common equity ratio of 8.09% as of June 30, declining slightly from 8.17% at the end of the first quarter, but increasing from 7.67% in June 2011.

In an interview with TheStreet on Tuesday, John Millman discussed the bank's unique product and service offerings.

TheStreet: Can you describe the bank's products and services that Mr. Cappelli said "are often overlooked or underserved by competitors?"

John Millman: We're really a business bank, so the overwhelming majority of what we do is provide an array of services to small and medium sized businesses and entrepreneurial entities. Businesses that at various points in the cycle have been overlooked by competitors include payroll processing, commercial real estate lending, and warehouse lending.

We have been very active since 2006 in financing staffing companies. It is one of the largest industries in America, particularly at this time when the economy is picking up in a tentative way. All over the country, there are many of these relatively small staffing companies that have limited balance sheet resources or capital, but have excellent accounts receivable from major companies. Right now it is a booming industry that a lot of banks aren't particularly active in.

Before the financial crisis, many banks were rushing to make commercial real estate loans, and the values were overheated. All of these banks ended up with very large commercial real estate portfolios, and the concentration for those banks relative to capital was very high. So the regulators took the position that they had to lower their concentrations in that kind of loan.

Many banks have been constrained from making commercial real estate loans. Meanwhile, loan-to-value ratios have come down, so our opinion is that at this point in the cycle, this has presented an opportunity for us.

The third area is the warehouse lending business. We lend to mortgage bankers who themselves are originating mortgage loans on 1-4 family homes. Again, during the financial crisis, many banks stopped their lending warehouse activities and stopped lending to mortgage bankers. We have a history of asset-based lending and know how to manage collateral.

TheStreet: Can you describe Sterling's factoring business?

Millman: Factoring is a little bit different from lending collateralized by accounts receivable. You actually buy the receivable from a company. The company is essentially outsourcing the credit and collections functions to the bank. If for some reason we don't collect the accounts receivable, it is our risk, and not the client's risk.

There aren't too many community banks in the factoring business.

TheStreet: Can you provide any color on the seasonal swings in the receivables management and factoring revenue?

Millman: Typically, we see more activity in that business in the third and fourth quarter, as the businesses accumulate more inventory and their borrowings go up.

TheStreet: What about trade financing? We have seen a sequential and year-over-year decline in revenue.

Millman: Our letter of credit business serves importers, and a couple of large clients are now able to get imports on open credit, meaning they no longer have to post letters of credit to the exporters in other countries. As the world becomes more interconnected, people overseas are becoming much more comfortable with American companies.

Sterling Bancorp's shares rose over 4% on Tuesday to close at $9.44. The shares have returned 11% year-to-date, following a 14% decline during 2011.

STL Chart STL data by YCharts

Based on a quarterly payout of nine cents, the shares have a dividend yield of 3.81%.

Sterling's shares trade 1.3 times their reported June 30 book value of $7.36, and for 13 times the consensus 2013 EPS estimate of 72 cents, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is 64 cents.

Interested in more on Sterling Bancorp? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

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.

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